10QSB: IDI GLOBAL INC
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Edgar Online
11:48 a.m. 08/20/2007
(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in our consolidated financial statements and accompanying notes. Critical accounting policies are defined as those which are most important to the portrayal of the financial condition and results of operations and which also require a company to make its most difficult and subjective judgments. Based on this definition, we have identified the critical accounting policies and judgments addressed below. Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.
Metrics: As an internet retailer, we consider growth in revenue to be a key indicator of our overall financial performance. We examine our revenue by using several key metrics, including: overall change in net sales; gross margin percent; gross profit; and operating income. Our strategy for growth includes not only increasing our market share by expanding sales in existing channels, but also taking advantage of strategic opportunities for acquisitions. Ensuring adequate financing is central to the success of our growth strategy. As a result, we have entered into a variety of financing arrangements which we believe will contribute to the long-term success of IDI Global.
Reserves: The reserve for refunds and chargebacks is maintained at a level that, in management's judgment, is sufficient to absorb any anticipated refunds or chargebacks as of the balance sheet date. The reserve is not specifically associated with individual sales transactions, but is a general reserve set aside to accommodate any future refunds or disputed transactions with an original transaction date prior to December 31, 2004. We review the appropriateness of the reserve quarterly and have developed what management believes is a reasonable methodology for projecting the needed reserve that is based on our historical refund and chargeback data.
Income Taxes: We record a tax provision for the anticipated tax consequences of our reported results of operations. In accordance with SFAS No. 109, Accounting for Income Taxes, the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
Executive Overview
IDI Global is a holding company which, until most recently, operated through its wholly owned subsidiary, Internet Development, Inc. ("Internet Development").
Professional Consulting Services ("PCS"), located in St. George, Utah, is a wholly owned subsidiary of Chief Financial which previously sold add-on services and products to customers and other lead suppliers. These products were are focused on the small office and home office marketplace and include self-replicating web site tools, individual web sites, e-commerce solutions, and coaching and training services for small office/home office customers. Pursuant to the settlement agreement between the IDI Debtors and the Mentoring Parties, the Mentoring Parties are purchasing a call center in St. George, Utah, in which PCS previously was involved.
On April 17, 2006, IDI Global, Inc., as well as two of its wholly owned subsidiaries, IDI Small Business, Inc., and Chief Financial, Inc., along with the wholly owned subsidiary of Chief Financial, Professional Consulting Services, filed for Chapter 11 bankruptcy protection under Title 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Utah (the "Bankruptcy Court"). Although the Company has endeavored to maximize its value for the benefit of creditors and shareholders, as of the date of this report, it was unknown whether the Company would be able to continue as a going concern. As of the date of this report, the Company was entertaining offers from third parties for a potential merger and was working to formulate a plan of reorganization, which will include its divestment of certain assets. However, there can be no guarantee that the Company's negotiations will be successful or will enable the Company to continue as a going concern.
IDI Global, Inc., entered into a Stock Purchase Agreement with Solution X International, Inc. ("Solution X"), dated as of June 6, 2007, relating to the sale by IDI Global of all of the issued and outstanding shares of common stock of Internet Development. The consummation of the Stock Purchase Agreement and sale of the shares was subject to higher and better offers and approval of the Bankruptcy Court. No higher and better offers were submitted to the Company, and as a result the Stock Purchase Agreement was submitted to the Bankruptcy Court for approval. On August 1, 2007, after an evidentiary hearing, the Bankruptcy Court entered an order approving the Stock Purchase Agreement, and the sale has closed. Pursuant to this Agreement, Solution X International, Inc. has paid the Company $40,000, the lawsuit against Internet Development, Inc. was dismissed, resulting in the release to the Company of approximately $166,000 held in trust while the suit was pending, and all of Internet Development, Inc.'s claims against the Company and its subsidiaries, totaling over $500,000 were released. That transaction has been ordered by the bankruptcy as of the date of this report, and it is anticipated that transaction will be consummated in August 2007.
As a result of Stock Purchase Agreement and the settlement with the Mentoring Parties, discussed above, IDI Global currently has no operating subsidiaries.
During 2006 and early 2007, we continued our efforts to try to grow the business of our primary subsidiary, Internet Development, Inc. ("IDI") through strategic partnerships and focused sales & marketing efforts. However, as referenced in previous filings, Internet Development received notice in early 2007 that one of its significant clients, Internet Services Corporation (ISC), planned to transition away from the ARRAY software and not remain a client of Internet Development Inc. ("IDI")'s. ISC gave sufficient notice required by contract and continued using the ARRAY software on a month to month basis through the end of May of 2007. As of June, 2007, ISC is no longer an IDI client using the ARRAY software and the related revenue has been lost. ISC contributed just over $139,254 in revenue in the first six months of 2006 and just over $114,192 in the first six months of 2007.
IDI has also received notice from another significant client, Univera, that it intends to transition away from using the ARRAY software as well, and will not remain a client of IDI's. It is anticipated, based on contractual requirements, that Univera will stop using the ARRAY software no later than October 1st of this year. Univera contributed just over $114,636 in revenue during the first six months of 2007.
IDI has been unable so far this year to replace the lost revenue from the loss of these ARRAY clients with comparable and equivalent new clients and revenue.
IDI also had an in-house sales call center that marketed and sold a variety of small business packages, including the QuickSite Builder, coaching programs, and other products and services, to a variety of internal and third-party lead sources within the small office / home office sector. As of October, 2006, the sales call center ceased operations due to cash flow and management challenges, and is not a functional revenue component of IDI. On February 2, 2007, the Bankruptcy Court entered an order authorizing certain expenses of IDI Global, Inc. Chief Financial, Inc. and Professional Consulting Services, Inc. to be paid from funds held by IDI Small Business, Inc. Prior to this time, and as authorized by the Bankruptcy Court, most expenses of the IDI Debtors were being paid with funds provided by Internet Development, Inc. In October 2006, however, with the loss of the call center, Internet Development informed the IDI Debtors that it would no longer have funds to pay any expenses or charges related to the Debtors and Bankruptcy proceedings.
For the six-month period ended June 30, 2007, we recorded total revenues on a consolidated basis of $2,673,133, compared to total revenues of $5,862,394 for the six-month period ended June 30, 2006. We recorded net loss of $(602,445) for the six-month period in 2007 compared to net income (loss) of $(130,146) for 2006. The change of almost $472,229 from 2006 to 2007 was caused by no income from the Mentoring contract and the closing of our SOHO operations.
Filing of Bankruptcy under Chapter 11
On April 17, 2006, IDI Global, Inc., as well as two of its wholly owned subsidiaries, IDI Small Business, Inc., and Chief Financial, Inc., along with the wholly owned subsidiary of Chief Financial, Professional Consulting Services, filed for bankruptcy protection in the United States Bankruptcy Court for the District of Utah (the "Bankruptcy Court"). We are not certain that each entity will remain as "debtor in possession," subject to the jurisdiction of the supervision and orders of the Bankruptcy Court.
Settlement and Sale Agreement with Mentoring Parties. IDI Global, IDI Small Business, and Professional Consulting Services (the "IDI Debtors") entered into an Agreement for Purchase and Sale of Assets and for Settlement of Disputes dated March 16, 2007 (the "Settlement and Sale Agreement"), with HG Marketing, Inc. and Mentoring of America, LLC (the "Mentoring Parties"). The Bankruptcy Court approved the Settlement and Sale Agreement following hearing on April 11, 2007. The Settlement and Sale Agreement contemplated the possibility of a party other than the Mentoring Parties, bidding for at auction and purchasing the rights of the IDI Debtors in a call center located in St. George, Utah (the "St. George Call Center"). No competing bids were received, and the IDI Debtors and Mentoring Parties are close to closing the Settlement and Sale Agreement.
Pursuant to the Settlement and Sale Agreement, the Mentoring Parties will pay the IDI Debtors $171,409.10, in addition to other funds previously paid, in settlement of all disputes between the parties, and will also pay $337,500 for all of the IDI Debtors' rights in the St. George Call Center.
Although the Company has endeavored to maximize its value for the benefit of creditors and shareholders, as of the date of this report, it was unknown whether the Company would be able to continue as a going concern. As of the date of this report, the Company was entertaining offers from third parties for a potential merger and was working to formulate a plan of reorganization, which will include its divestment of certain assets. However, there can be no guarantee that the Company's negotiations will be successful or will enable the Company to continue as a going concern.
In March of 2006, IDI Global or one of its affiliates transferred $597,000 to ABD Development or one of its affiliates to develop an infomercial to use to generate leads to be used on the sales and marketing floor of the St. George Call Center. IDI Global understood that these funds would be used by ABD to develop an infomercial, and the remainder of the funds was to be used to pay for the testing and tuning and the eventual media time to run the infomercial on television stations through out the country. It was anticipated that the leads to be generated by the infomercial would replace the leads that Mentoring of America, LLC threatened to pull from the Call Center floor by no later than July 2006.
ABD continually delayed the creation of the infomercial, and eventually IDI Global was informed that ABD had run out of money, and would not test the infomercial. In addition, ABD sent invoices to IDI Global many months after services had been rendered indicating that IDI Global in fact owed ABD an additional $83,400. The invoices are not representative of what was contracted to be accomplished.
At the request of IDI Global, the Bankruptcy Court authorized the Committee to commence legal action against ABD and its affiliates to attempt to recover the money transferred to it. IDI Global will cooperate in that litigation. As part of any such action, it is anticipated that the $83,400 claim asserted by ABD will be disputed in full.
On February 6, 2007, Internet Development filed a Complaint in the Bankruptcy Court against the IDI Debtors, seeking to impose a constructive trust on certain funds that are being held on behalf of the IDI Debtors in a trust account. On April 11, 2007, the Bankruptcy Court granted a motion authorizing the Official Committee of Unsecured Creditors ("Committee") to defend this lawsuit on behalf of the IDI Debtors' estates. Since that time, this lawsuit has been dismissed.
On February 12, 2007, the "exclusivity period" for the IDI Debtors to file a plan of reorganization, as set forth in section 1121 of title 11 of the United States Code, expired and, as a result, any party in interest, including the IDI Debtors, may file a plan of reorganization in the IDI Debtors' Chapter 11 Cases.
On or about March 8, 2007, MCB Printing, Inc. dba Excel Graphics, Inc. provided to the IDI Debtors and the Committee an offer to purchase Internet Development and to merge with IDI Global, Inc. This offer was not accepted by the IDI Debtors. This offer expired and any negotiations with MCB have been terminated.
On February 2, 2007, the Bankruptcy Court entered an order authorizing certain expenses of IDI Global, Inc. Chief Financial, Inc. and Professional Consulting Services, Inc. to be paid from funds held by IDI Small Business, Inc. Prior to this time, and as authorized by the Bankruptcy Court, most expenses of the IDI Debtors were being paid with funds provided by Internet Development. In October 2006, however, with the loss of the sales call center, Internet Development informed the IDI Debtors that it would no longer have funds to pay any expenses or charges related to the Debtors and Bankruptcy proceedings.
IDI Global, Inc., entered into a Stock Purchase Agreement with Solution X International, Inc., dated as of June 6, 2007, relating to the sale by IDI Global of all of the issued and outstanding shares of common stock of Internet Development, Inc., a wholly owned subsidiary of the Company to Solution X. The consummation of the Stock Purchase Agreement and sale of the shares was subject to higher and better offers and approval of the Bankruptcy Court. No higher and better offers were submitted to the Company, and as a result the Stock Purchase Agreement was submitted to the Bankruptcy Court for approval. On August 1, 2007, after an evidentiary hearing, the Bankruptcy Court entered an order approving the Stock Purchase Agreement, and the sale has closed. Pursuant to this Agreement, Solution X International, Inc. has paid the Company $40,000, the lawsuit against Internet Development, Inc. was dismissed, resulting in the release to the Company of approximately $166,000 held in trust while the suit was pending, and all of Internet Development, Inc.'s claims against the Company and its subsidiaries, totaling over $500,000 were released. That transaction has been ordered by the bankruptcy as of the date of this report, and it is anticipated that transaction will be consummated in August 2007.
As a result of Stock Purchase Agreement and the settlement with the Mentoring Parties, discussed above, IDI Global currently has no operating subsidiaries.
Liquidity and Capital Resources
We are currently able to support our recurring day-to-day cash operating expenses with recurring cash inflows and existing cash balances. However, we are unable to satisfy our total current liabilities with cash on hand. Also, we are dependent on the efforts of our subsidiaries and other third parties to increase sales and, thus, increase our cash balances.
Our revenues are primarily from product sales, Internet applications, and website hosting and training services.
Our monthly cash outflow is mostly related to cost of sales (product cost) and general and administrative expenses. Net cash provided (used) by operations for the 2007 six-month period was $6,898 compared to net cash by operating activities of $(552,663) for the 2006 six-month period. The increase in net cash provided by operations was mainly due to the writing off of a prepaid expense.
Net cash provided by investing activities was $(6,459) for the 2007 six-month period compared to $(0.00) for the 2006 six-month period.
Financing
Net cash provided by financing activities was $0.00 for the 2007 six-month period compared to net cash provided by financing activities of $0.00 for the 2006 six-month period.
Commitments and Contingent Liabilities
Our principal commitments consist of operating leases for office space in Orem, Utah, and repayment of the Credit Agreement and our total current liabilities.
As of March 30, 2006, we owed $1,750,000, plus 2% interest, or an aggregate of $1,785,000, under the Credit Agreement. The interest for this was stayed by the bankrupt for April 2006 though June 2007.
At June 30, 2007, we had total current liabilities of $4,602,573, and had notes payable totaling $2,281,442, which included notes payable of $1,750,000 to SBI Brightline, a third party, notes payable of $26,915 to Chisholm Bierwolf and Nilson, a third party and $504,527 in notes payable to Kevin R. Griffith, our CEO.
At June 30, 2007, our total current liabilities also included accrued expenses of $1,374,438, primarily related to deferred compensation, accrued interest, and payroll liabilities. Accounts payable of $889,609, Derivatives of 7,084, Customer Deposit of $35,000 and reserves for refunds and charge-backs of $15,000 added to our total current liabilities.
Off-balance Sheet Arrangements - None
Results of Operations
The following discussions are based on the consolidated financial statements of IDI Global, and its subsidiaries: Internet Development, Sports Media, IDISB, and Chief Financial. These discussions summarize our financial statements for the six-month periods ended June 30, 2006 and 2007, and should be read in conjunction with the financial statements, and notes thereto, included with this report at Item I, Part I, above.
Summary Comparison of 2006 and 2007 Six and Six month Periods Six months ended June 30, 2007 June 30, 2006 Total revenue $ 2,673,133 $ 5,862,394 Total cost of sales 2,078,852 3,438,587 Gross profit 594,281 2,423,807 Total operating expenses 1,144,796 2,398,852 Net operating income (loss) (550,515) 24,955 Total other income (expense) (51,930) (155,101) Total income tax Expense 0.00 0.00 Net income $ (602,445) $ (130,146) Net earnings (loss) per share $ (0.03) $ (0.01)
Total revenues decreased to $2,673,133 for the six month period ended June 30, 2007, from $5,862,394 for the six month period ended June 30, 2006. This change was a decrease of approximately $3.2 million, due in part, by HG marketing not following through on their contract. This alone accounted for a decrease of $650,000, and the other $2.55 million decrease was in relation to the Internet Development Inc. SOHO sales floor closing.
Cost of sales decreased along with total revenues for the six month period ended June 30, 2007. Cost of sales includes commissions for outsourced sales and our in-house sales force, costs of merchant accounts, fulfillment, and other third party products and services. For 2007, total cost of sales was 77.8% of total revenues, compared to 58.7% of total revenues for 2006.
As a result of decreased revenues, our gross profit decreased to $594,281 for the six month period ended June 30, 2007 from $2,423,807 for the six month period ended June 30, 2006.
Total operating expenses include salaries and benefits, rental of office space, professional fees, and other general office expenses. These operating expenses decreased to $1,144,796 for the six-month period ended June 30, 2007, from $2,398,852 for six-month period ended June 30, 2006. This decrease was due, in part, to the closing of the SOHO sales floor.
Total other income and expense for 2006 was primarily related to interest expenses from the SBI note. We had a net loss of $(602,445) for the six-month period ended June 30, 2007 as compared to a net loss of $(130,146) for the six-month period ended June 30, 2006. This is the result of the loss of income from HG marketing not following through on their contract and the closing of the SOHO sales floor. Net loss per share was $(0.03) per share for the six-month period ended June 30, 2007 compared to $(0.01) net loss per share for the six month period ended June 30, 2006.
The following chart and related discussions summarize our consolidated balance sheet for the years ended December 31, 2006, and the six-month period ended June 30, 2007, and should be read in conjunction with the financial statements and notes to the financial statements.
Aug 20, 2007
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