Friday, March 28, 2008 10:30:02 AM
COPI news:
28-Mar-2008
Annual Report
Item 6. Management's Discussion and Analysis or Plan of Operations.
Overview and Recent Developments
During fiscal year 2007, the Company significantly strengthened its financial
position by exchanging existing material debt obligations for equity and raising
$2.5 million via a preferred stock offering. Following is a condensed
presentation of our balance sheet as of December 31, 2007, derived from our
audited financial statements included in Item 7 of this annual report, together
with comparable information derived from our December 31, 2006 balance sheet as
previously reported.
Condensed Balance Sheet Data
December 31, 2007 and 2006
2007 2006
Current Assets:
Cash $ 921,082 $ 46,697
Accounts receivable, net 93,399 157,445
Other current assets 136,971 66,922
Total Current Assets 1,151,452 271,064
Property and Equipment, Net 150,635 244,583
Intangible and Other Assets 39,885 675,377
Total Assets $ 1,341,972 $ 1,191,024
Current Liabilities:
Short-term and demand notes payable, including current
maturities of principally related party long-term debt $ 397,810 $ 3,068,744
Accounts payable and accrued expenses 341,687 427,673
Accrued officer's salaries 60,000 310,000
Total Current Liabilities 799,497 3,806,447
Secured convertible debentures and accrued interest thereon - 1,190,202
Other non-current liabilities 107,917 239,955
Total Liabilities 907,414 5,236,604
Total Stockholders' Equity (Deficit) $ 434,558 $ (4,045,580 )
Working Capital (Deficit) $ 351,955 $ (3,535,383 )
In December 2007, the Company successfully restructured its balance sheet when the holders of existing material debt obligations totaling $3,135,709 agreed to exchange their debt for equity. In addition, the Company sold and issued a new series of preferred stock for cash proceeds of $2,500,000, thereby enabling the Company to retire $1,247,668 of debt, principally related to its secured convertible debentures. As a result, working capital at December 31, 2007 was $351,955, an increase of $3,887,338 from a December 31, 2006 working capital deficit of $3,535,383. Stockholders' equity at December 31, 2007 was $434,558, an increase of $4,480,138 from a December 31, 2006 stockholders' deficit of $4,045,580. These changes transpired
as follows.
On December 26, 2007, the Company filed an amendment to its articles of incorporation increasing its authorized common shares from 500 million to 2 billion shares and authorizing up to 10,000,000 shares of $0.001 par value serial preferred stock. These amendments were the subject of an information statement filed December 4, 2007 with the SEC and contemporaneously mailed to the Company's stockholders.
Of the ten million preferred shares authorized, six million shares were designated in three series of preferred stock as follows:
· Series A Senior Convertible Voting Non-Redeemable Preferred Stock - 2,500,000 shares;
· Series B Senior Subordinated Convertible Voting Redeemable Preferred Stock - 1,500,000 shares; and
· Series C Senior Subordinated Convertible Voting Redeemable Preferred Stock - 2,000,000 shares.
Each share of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock is convertible, at any time, into 100 shares of our common stock. The serial preferred stock has liquidation rights as follows: The Series A is senior in liquidation preference to all other series or classes of capital stock, preferred or common; the Series B is senior in liquidation preference to all series or classes of capital stock, preferred or common, other than the Series A; the Series C is senior in liquidation preference to all classes of common stock, but is junior to the Series A and B Preferred Stock.
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A total of 2,500,000 shares of Series A preferred stock were sold and issued to accredited investors at a purchase price of $1.00 per share, or total consideration of $2,500,000; $1,239,276 of such proceeds were used to prepay the Company's secured convertible debentures, resulting in a small cash gain of $8,392 on the extinguishment of such debt, before the write-off of related unamortized loan and registration costs. The Company sold and issued 1,250,000 shares of Series B to one of its executive officers/principal stockholders and a company affiliated with such individual in exchange for the cancellation of Company debt in the amount of $1,250,000, or $1.00 per Series B share. The Company also sold and issued 1,885,709 shares of Series C to a total of six persons and entities, including three of its affiliates, in exchange for the cancellation of $1,885,709, or $1.00 per Series C share, of debt, accrued interest and deferred officers' compensation.
Critical Accounting Policies
The Company's consolidated financial statements and related public information are based on the application of generally accepted accounting principles in the United States ("GAAP"). The Company's significant accounting policies are summarized in Note 2 to its annual consolidated financial statements. While all of these significant accounting policies impact its financial condition and results of operations, the Company views certain of them as critical. Policies determined to be critical are those policies that have the most significant impact on our consolidated financial statements. The Company's critical accounting policies are discussed below.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. The Company believes its use of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied. It bases its estimates on historical experience and on various assumptions that management believes are reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions.
Revenue Recognition
The Company earns a fee for each telephone solicitor's call attempt (whether or not the call is completed) which generates a query to a data base of Do-Not-Call telephone numbers. Through its principal subsidiary, the Company has an annually renewable contract with its data base distributor to perform the following functions:
Provide connectivity to the telephone companies and access data base information from the data base that the Company manages, updates and maintains, as required to operate the telephone call processing platform. This platform is where the telephone call queries are routed from the telemarketers over various telephone carrier networks.
Contract with telephone carriers to sell our TeleBlock service to their end users.
Provide billing and collection services.
As compensation for the distributor's services, the Company pays the distributor contractually determined amounts on a per query basis. The distributor submits monthly remittances together with the related monthly activity reports. The Company has a contractual right to audit such reports. Revenue is accrued based upon the remittances and reports submitted. Any adjustments to revenue resulting from these audits are recorded when earned if significant. Historically, these adjustments have not been significant. In the event that such adjustments do become material in the future, it is possible that, at times, the Company may have to revise previously reported interim results. The telephone carriers in turn sell the TeleBlock service to their customers. The carriers bill their customers for TeleBlock and assume all credit risk with regard to their customers. The Company has no credit risk with respect to the end-users.
Impairment of Long-Lived Assets
Long-lived assets, including our property, equipment, capitalized software and patents are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets used in operations, an impairment loss is only recorded if the asset's carrying amount is not recoverable through its undiscounted, probability-weighted cash flows, including estimated net proceeds if the Company were to sell the long-lived asset. When applicable, the Company measures the impairment loss based on the difference between the carrying amount and estimated fair value.
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The Company periodically reviews its long-lived assets, in light of our history of operating losses, but under the methodology described above, it has not been required to record any impairment losses. Should applicable external factors such as competition, governmental regulations or other market conditions change in such a way as to be materially adverse to its business, impairment losses might be required in the future.
Prior Year Financial Statements for the Year ended December 31, 2006.
The auditors for the years ended December 31, 2006 and 2005 were BP Audit Group, PLLC, our former auditors. BP Audit Group, PLLC has not reissued its audit report for the year ended December 31, 2006 and the financial statements for 2006 have not been re-audited. Readers of the 2006 financial statements are cautioned that there are certain inherent risks in relying upon said results in that there is limited recourse available against our former auditors should readers rely to their detriment upon their prior report.
Results of Operations for Year Ended December 31, 2007 Compared to the Year
Ended December 31, 2006:
The table below presents the Company's consolidated results of operations for
the applicable periods as a percentage of sales:
Years Ended
December 31,
2007 2006
Revenues 100.0 100.0
Cost of revenues 49.5 41.5
Gross margin 50.5 58.5
Operating expenses:
Selling, general and administrative expenses 68.3 95.6
Interest expense 27.5 32.9
Loan cost amortization and related financing expense 17.0 14.3
Loss on extinguishment of debt 3.3 -
Total operating expenses 116.1 142.8
Net loss (65.6 ) (84.3 )
Beneficial conversion cost of issuing Series A Preferred Stock 17.7 -
Loss attributable to common stockholders (83.2 ) (84.3 )
Total revenues for the year ended December 31, 2007 were $1,814,884 compared to revenues of $1,473,775 for the corresponding period in 2006. This increase of $341,109, or 23.2%, was principally attributable to increased revenues from VeriSign, the Company's principal TeleBlock distributor. Revenues from VeriSign comprised 85.1% and 71.9% of the Company's total revenues for 2007 and 2006, respectively. An increase in call counts of approximately 53% or 189 million call counts for TeleBlock service increased the Company's 2007 TeleBlock revenues from VeriSign by $442,374; the Company also generated additional revenue of $121,875 from other revenue sources including its new product, Enhanced Caller ID, the online guides, and VoIP services. The Company's introduction of its new product, Enhanced Caller ID, to its existing TeleBlock customers in May 2007 accounted for 35.4% of this increase in other revenues. In July of 2006, the Company began charging a data base administration fee to TeleBlock subscribers. The fee covers customer database maintenance and upgrades. Additionally, the Company premiered its online Registration Guide in August 2006. This guide streamlines completion of state Do-Not-Call commercial registration requirements for telemarketers and supplements the Company's existing online Regulatory Guide.
The substantial increase in revenues from VeriSign for the year was partially offset by a decline in revenues earned from a former TeleBlock distributor, VarTec Communications Inc., of $223,140, or 91.0%. This decline was a consequence of VarTec's prior bankruptcy filing. In August 2006, the remaining TeleBlock customers on the VarTec platform were transferred to VeriSign's platform.
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Cost of revenues for the 2007 year totaled $897,731, an increase of $285,798, or 46.7%, compared to $611,933 for the 2006 year, as the percentage increase in cost of sales significantly outstripped the percentage increase in sales, due to the change in applicable cost structures. In dollar terms, fees payable to the Company's principal distributor, VeriSign, increased by $189,026 as a result of the above-mentioned additional 189 million call count increase to our database on VeriSign's platform. In addition, fees charged for production and back-up site hosting increased by approximately $52,169. Other costs of revenues - for increased software amortization expense and higher costs associated with the revenue gains for online guides, VoIP services and its new caller ID product - increased by an aggregate of $44,603.
As a percentage of sales, cost of revenues increased to 49.5% in the 2007 year from 41.5% in the 2006 year. This increase of 8.0% reflects the current cost structure of the Company's TeleBlock business, and the effect of the virtual elimination of revenue directly from VarTec, which revenue had a significantly lower related cost of sales. As a percentage of revenue, costs of sales related to VeriSign-sourced revenue increased slightly to 53.6% in 2007 from 52.4% in 2006, due to the increased hosting fees referenced above.
Selling, general, and administrative expenses decreased by $169,568, or 12.0%, to $1,239,453 for the 2007 year compared to $1,409,021 for the 2006 year. Certain operating expenses decreased as a direct result of Company-wide cost cutting measures applicable to salaries and benefits, travel and reimbursed expenses, consulting fees, commissions and advertising. Salaries and benefits decreased by $184,734 of which $124,065 was attributable to the executive officers' voluntary one year salary reduction by one-half beginning in July 2007, and $60,669 was due to the elimination of sales and administrative personnel offset by an increase in salaries to key personnel and the addition of an operations employee. In addition, when comparing the two annual periods, travel and reimbursed expenses decreased by $30,732; consulting fees were reduced by $38,912; sales commissions decreased by $16,849; and advertising decreased by $14,147, due to reduced expenses for advertising sponsorships and trade shows. Other expenses in this category decreased by a net amount of $14,341. These decreases were largely offset by an increase in professional fees of $130,147, principally due to increased legal and auditing fees associated with public reporting requirements. Fees of this nature in 2006 were in large part capitalized as deferred loan and registration costs.
As a percentage of sales, selling, general, and administrative expenses for the year were 68.3% in 2007 and 95.6% in 2006, principally reflecting the significant sales gains and reductions in the expense category. When comparing these percentages to the respective gross margins of 50.5% and 58.5%, the net shortfall in these ratios has decreased to 17.8% from 37.1%, reflecting net improvements of 19.3% for the 2007 year. Thus, although the gross margins have decreased, principally due to the change in the mix of costs of revenues, the decrease in selling, general and administrative expenses as a percentage of gross revenue has more than offset that decrease. In dollar amounts, the shortfalls have decreased for the year by $224,879, or 41.1%, to $322,300 in 2007, down from $547,179 in 2006.
Annual interest expense increased by $14,406, or 3.0%, to $498,880 in 2007 from $484,474 in 2006. The principal reasons for the increases were due to the following: the additional $400,000 of debentures borrowed in March 2006, increases in certain short-term borrowings in the later half of 2006, the March 2007 $150,000 debentures, and a new related party loan of $57,500 in 2007. Decreased interest charges related to capitalized leases and the financed purchase of treasury stock; also on December 24, 2007, $3,135,709 of debt was exchanged for equity, which will significantly reduce interest expense in 2008. Lastly, a $100,000 line of credit, which was collateralized by an executive officer's assets, was repaid on December 21, 2007 further decreasing current and future interest expense and also eliminating imputed interest related to this debt.
As a percentage of sales, interest expense decreased in 2007 by 5.4% to 27.5% in 2007 from 32.9% in 2006. Approximately 50% of the interest expense for the 2007 year did not require cash payment. Accrued interest of $547,111 that was expensed in 2007 and in prior years was exchanged for Series C Preferred Stock in December 2007.
Loan cost amortization and related financing expense, including loan penalties, increased in the 2007 year by $97,955, or 46.5%, to $308,833 from $210,878 in 2006. Registration costs of $543,557 related to the Company's SB-2 filing were deferred until the SB-2 became effective; amortization of these costs began on February 13, 2007, the effective date of the Company's registration statement. Amortization totaled $153,155 in 2007; an additional $352,414 of deferred registration costs were charged directly against paid-in capital as an equivalent amount of the debenture was exchanged for equity. In addition, loan cost amortization increased for the 2007 year due to the write-off of additional loan costs related to the portion of the March 2006 debenture that was converted into shares of the Company's common stock.
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This increase in loan cost amortization was partially offset by decreased penalties during the 2007 year. The Company incurred loan penalties of $44,605 and $104,081 for the 2007 and 2006 years, respectively. These penalties resulted from the late effectiveness of the registration statement. The Registration Rights Agreement with the debenture holder required the Company to pay liquidated damages on the secured convertible debentures in the amount of 2% of the note principal for every thirty-day period until the registration statement became effective. Loan penalties ceased to accrue when the Company's registration statement became effective on February 13, 2007.
As a percentage of sales, loan cost amortization and related financing expense increased during the year by 2.7% to 17.0% in 2007 from 14.3% in 2006. As discussed in the preceding paragraphs, the expense increases in this category were directly related to the March 2006 and 2007 debentures.
During 2007, the Company reported a net loss on extinguishment of debt totaling $60,140. A net loss of $88,776 was incurred on the early extinguishment of the March 2006 and 2007 debentures. These debentures were fully repaid in December 2007 and the unamortized loan and registrations costs of $97,168 were written off as a loss on extinguishment of debt. This loss was offset by $8,392, the amount by which the recorded liability exceeded the amount paid.
The loss on early extinguishment of the debentures was partly offset by a gain of $28,636 on the settlement of certain accrued liabilities in exchange for newly issued common shares of the Company. The Company and one of its law firms agreed that the Company would issue and the law firm would accept 2,500,000 new unregistered common shares in exchange for outstanding legal fees of $53,636. As the closing price of the Company's common stock on the preceding day was $0.001, the Company recorded a gain of $28,636 on the settlement of this liability.
The Company assesses its current prospects for future profitability by separating its statement of operations into two principal components: (a) its business operations, represented by the gross margin to selling, general and administrative expense shortfall and (b) its total business financing expense, represented by the total of interest expense, loan cost amortization and other financing charges as well as the net loss on extinguishment of debt. Total business financing expense increased during 2007 by $172,501, or 24.8%, to $867,853 in 2007 from $695,352 in 2006. As a percentage of sales, total business financing expense increased slightly for the 2007 year by 0.6% to 47.8% in 2007 from 47.2% in 2006. This expense had a significant impact on the Company's 2007 operating results. This ratio is expected to dramatically improve during 2008. The balance of loan costs and related financing costs were fully expensed during 2007 as the March 2006 and 2007 debentures were repaid on December 24, 2007. Accordingly, these costs will not impact 2008 operating results. In addition, interest expense attributable to approximately $3.1 million of other Company debt was eliminated for the 2008 year, due to repayment of $897,586 of debt principal and the exchange of $2,218,598 of debt principal for Series B and Series C Preferred Stock.
While the expenses related to the extinguished debentures will not impact 2008 operating results, the Company is seeking new financing for the expansion of its marketing efforts and, as required, in connection with possible acquisitions of companies that would diversify and broaden the Company's service offerings and product base. Therefore, while new financing costs are expected to be a factor in 2008, they should not be as significant a factor as in 2007. There can be no assurance that the Company will be able to obtain new financing or if such financing will be on terms advantageous to the Company, nor that the Company will acquire any other business entity, or, if acquisitions are made, that any acquisition will result in increased revenues or profits to the Company.
The Company's fiscal year net loss decreased by $52,378, or 4.2%, to $1,190,153 in 2007 from $1,242,531 in 2006. As a percentage of sales, the net loss for the 2007 fiscal year decreased significantly by 18.7% to 65.6% from 84.3% for the 2006 fiscal year. This substantial improvement in the net loss as a percentage of sales, compared to the reduction in the gross margin to selling, general and administrative expense shortfall previously discussed, underscores the effect of total business financing expense on the Company's net loss.
The Company was required to recognize a beneficial conversion cost upon its sale and issuance of 2.5 million shares of Series A Preferred Stock because each subscriber has the right to convert the Series A Preferred Stock into 100 common shares at a conversion price of $.01 per share. This beneficial conversion cost only was a factor when the prior day's market closing price per share of common stock was higher than the $0.01 per share conversion price on a particular subscription date. At various dates from December 12, 2007 through December 31, 2007, the market closing price of the common stock was greater than the $0.01 conversion price, thereby resulting in the recognition of an aggregate beneficial conversion cost of $320,661. The 2007 loss of $1,510,814 includes this beneficial conversion cost and is taken into account when calculating loss per common share.
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For the years ended December 31, 2007 and 2006, the Company's annual effective tax rate was estimated to be 0%. Accordingly, no tax benefit or charge was recognized in either period. The Company and its subsidiaries had all been electing S-Corporations and therefore had not been subject to federal or state income taxes prior to the Company's downstream merger in February 2006. Absent such elections, the Company's losses would not have resulted in reported tax benefits, due to the uncertainty of future taxable income. Effective with the downstream merger, the Company and its subsidiaries all became C-Corporations. Future taxable losses, as well as those incurred from February 10, 2006 through December 31, 2007, will now be available to offset subsequent future taxable income, if any.
Liquidity and Capital Resources
Cash used in operations was $182,143 in fiscal 2007 and cash provided from operations was $46,078 in fiscal 2006. These amounts comprise the net loss, reduced by non-cash items of $858,872 in 2007 and $715,415 in 2006, plus or minus the effect of changes in assets and liabilities. The net loss as adjusted for non-cash items was $331,281 for the 2007 fiscal year, compared to $527,116 for the 2006 fiscal year. This decrease of $195,835 was due to an increase in loan cost amortization of $157,518 in 2007; the net loss on debt extinguishment of $60,140 in 2007; and a lower net loss from operations of $52,378 in 2007, offset by a decrease in depreciation and other amortization of $21,123 as well as a lower amount of interest that was effectively financed of $53,078. The other changes in assets and liabilities decreased the Company's net cash used in operations by $149,138 and $573,194 for the years ending December 31, 2007 and 2006, respectively.
Cash used in investing activities was $26,548 in 2007 and $7,664 in 2006, reflecting a net increase of $18,884 and was due to offsetting flows. In 2006 the Company's $20,000 bond and minor accrued interest thereon was returned as the bond was no longer required by the State of Louisiana for the Company to access the state-specific DNC list. In 2007, the Company's prepaid lease deposits of $5,948 were repaid upon the expiration of certain capitalized leases. Expenditures for property and equipment increased by $4,798 to $32,496 in 2007 from $27,698 in 2006.
Cash provided from financing activities was $1,083,076 in 2007 and cash used in financing activities was $88,589 in 2006, an increase of $1,171,665. Cash from financing activities in 2007 was principally generated from the issuance and sale of 2.5 million shares of Series A Preferred Stock for $2,500,000, resulting in net proceeds to the Company of $2,454,384 net of related costs, the new $150,000 secured debenture and a related party loan of $57,500. Long-term debt proceeds in 2006 were $395,946, net of accrued interest deducted. The payments for deferred loan and related costs decreased by $334,027 to $72,866 in 2007 from $406,893 in 2006. Cash provided from financing activities was significantly . . .
28-Mar-2008
Annual Report
Item 6. Management's Discussion and Analysis or Plan of Operations.
Overview and Recent Developments
During fiscal year 2007, the Company significantly strengthened its financial
position by exchanging existing material debt obligations for equity and raising
$2.5 million via a preferred stock offering. Following is a condensed
presentation of our balance sheet as of December 31, 2007, derived from our
audited financial statements included in Item 7 of this annual report, together
with comparable information derived from our December 31, 2006 balance sheet as
previously reported.
Condensed Balance Sheet Data
December 31, 2007 and 2006
2007 2006
Current Assets:
Cash $ 921,082 $ 46,697
Accounts receivable, net 93,399 157,445
Other current assets 136,971 66,922
Total Current Assets 1,151,452 271,064
Property and Equipment, Net 150,635 244,583
Intangible and Other Assets 39,885 675,377
Total Assets $ 1,341,972 $ 1,191,024
Current Liabilities:
Short-term and demand notes payable, including current
maturities of principally related party long-term debt $ 397,810 $ 3,068,744
Accounts payable and accrued expenses 341,687 427,673
Accrued officer's salaries 60,000 310,000
Total Current Liabilities 799,497 3,806,447
Secured convertible debentures and accrued interest thereon - 1,190,202
Other non-current liabilities 107,917 239,955
Total Liabilities 907,414 5,236,604
Total Stockholders' Equity (Deficit) $ 434,558 $ (4,045,580 )
Working Capital (Deficit) $ 351,955 $ (3,535,383 )
In December 2007, the Company successfully restructured its balance sheet when the holders of existing material debt obligations totaling $3,135,709 agreed to exchange their debt for equity. In addition, the Company sold and issued a new series of preferred stock for cash proceeds of $2,500,000, thereby enabling the Company to retire $1,247,668 of debt, principally related to its secured convertible debentures. As a result, working capital at December 31, 2007 was $351,955, an increase of $3,887,338 from a December 31, 2006 working capital deficit of $3,535,383. Stockholders' equity at December 31, 2007 was $434,558, an increase of $4,480,138 from a December 31, 2006 stockholders' deficit of $4,045,580. These changes transpired
as follows.
On December 26, 2007, the Company filed an amendment to its articles of incorporation increasing its authorized common shares from 500 million to 2 billion shares and authorizing up to 10,000,000 shares of $0.001 par value serial preferred stock. These amendments were the subject of an information statement filed December 4, 2007 with the SEC and contemporaneously mailed to the Company's stockholders.
Of the ten million preferred shares authorized, six million shares were designated in three series of preferred stock as follows:
· Series A Senior Convertible Voting Non-Redeemable Preferred Stock - 2,500,000 shares;
· Series B Senior Subordinated Convertible Voting Redeemable Preferred Stock - 1,500,000 shares; and
· Series C Senior Subordinated Convertible Voting Redeemable Preferred Stock - 2,000,000 shares.
Each share of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock is convertible, at any time, into 100 shares of our common stock. The serial preferred stock has liquidation rights as follows: The Series A is senior in liquidation preference to all other series or classes of capital stock, preferred or common; the Series B is senior in liquidation preference to all series or classes of capital stock, preferred or common, other than the Series A; the Series C is senior in liquidation preference to all classes of common stock, but is junior to the Series A and B Preferred Stock.
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A total of 2,500,000 shares of Series A preferred stock were sold and issued to accredited investors at a purchase price of $1.00 per share, or total consideration of $2,500,000; $1,239,276 of such proceeds were used to prepay the Company's secured convertible debentures, resulting in a small cash gain of $8,392 on the extinguishment of such debt, before the write-off of related unamortized loan and registration costs. The Company sold and issued 1,250,000 shares of Series B to one of its executive officers/principal stockholders and a company affiliated with such individual in exchange for the cancellation of Company debt in the amount of $1,250,000, or $1.00 per Series B share. The Company also sold and issued 1,885,709 shares of Series C to a total of six persons and entities, including three of its affiliates, in exchange for the cancellation of $1,885,709, or $1.00 per Series C share, of debt, accrued interest and deferred officers' compensation.
Critical Accounting Policies
The Company's consolidated financial statements and related public information are based on the application of generally accepted accounting principles in the United States ("GAAP"). The Company's significant accounting policies are summarized in Note 2 to its annual consolidated financial statements. While all of these significant accounting policies impact its financial condition and results of operations, the Company views certain of them as critical. Policies determined to be critical are those policies that have the most significant impact on our consolidated financial statements. The Company's critical accounting policies are discussed below.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. The Company believes its use of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied. It bases its estimates on historical experience and on various assumptions that management believes are reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions.
Revenue Recognition
The Company earns a fee for each telephone solicitor's call attempt (whether or not the call is completed) which generates a query to a data base of Do-Not-Call telephone numbers. Through its principal subsidiary, the Company has an annually renewable contract with its data base distributor to perform the following functions:
Provide connectivity to the telephone companies and access data base information from the data base that the Company manages, updates and maintains, as required to operate the telephone call processing platform. This platform is where the telephone call queries are routed from the telemarketers over various telephone carrier networks.
Contract with telephone carriers to sell our TeleBlock service to their end users.
Provide billing and collection services.
As compensation for the distributor's services, the Company pays the distributor contractually determined amounts on a per query basis. The distributor submits monthly remittances together with the related monthly activity reports. The Company has a contractual right to audit such reports. Revenue is accrued based upon the remittances and reports submitted. Any adjustments to revenue resulting from these audits are recorded when earned if significant. Historically, these adjustments have not been significant. In the event that such adjustments do become material in the future, it is possible that, at times, the Company may have to revise previously reported interim results. The telephone carriers in turn sell the TeleBlock service to their customers. The carriers bill their customers for TeleBlock and assume all credit risk with regard to their customers. The Company has no credit risk with respect to the end-users.
Impairment of Long-Lived Assets
Long-lived assets, including our property, equipment, capitalized software and patents are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets used in operations, an impairment loss is only recorded if the asset's carrying amount is not recoverable through its undiscounted, probability-weighted cash flows, including estimated net proceeds if the Company were to sell the long-lived asset. When applicable, the Company measures the impairment loss based on the difference between the carrying amount and estimated fair value.
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The Company periodically reviews its long-lived assets, in light of our history of operating losses, but under the methodology described above, it has not been required to record any impairment losses. Should applicable external factors such as competition, governmental regulations or other market conditions change in such a way as to be materially adverse to its business, impairment losses might be required in the future.
Prior Year Financial Statements for the Year ended December 31, 2006.
The auditors for the years ended December 31, 2006 and 2005 were BP Audit Group, PLLC, our former auditors. BP Audit Group, PLLC has not reissued its audit report for the year ended December 31, 2006 and the financial statements for 2006 have not been re-audited. Readers of the 2006 financial statements are cautioned that there are certain inherent risks in relying upon said results in that there is limited recourse available against our former auditors should readers rely to their detriment upon their prior report.
Results of Operations for Year Ended December 31, 2007 Compared to the Year
Ended December 31, 2006:
The table below presents the Company's consolidated results of operations for
the applicable periods as a percentage of sales:
Years Ended
December 31,
2007 2006
Revenues 100.0 100.0
Cost of revenues 49.5 41.5
Gross margin 50.5 58.5
Operating expenses:
Selling, general and administrative expenses 68.3 95.6
Interest expense 27.5 32.9
Loan cost amortization and related financing expense 17.0 14.3
Loss on extinguishment of debt 3.3 -
Total operating expenses 116.1 142.8
Net loss (65.6 ) (84.3 )
Beneficial conversion cost of issuing Series A Preferred Stock 17.7 -
Loss attributable to common stockholders (83.2 ) (84.3 )
Total revenues for the year ended December 31, 2007 were $1,814,884 compared to revenues of $1,473,775 for the corresponding period in 2006. This increase of $341,109, or 23.2%, was principally attributable to increased revenues from VeriSign, the Company's principal TeleBlock distributor. Revenues from VeriSign comprised 85.1% and 71.9% of the Company's total revenues for 2007 and 2006, respectively. An increase in call counts of approximately 53% or 189 million call counts for TeleBlock service increased the Company's 2007 TeleBlock revenues from VeriSign by $442,374; the Company also generated additional revenue of $121,875 from other revenue sources including its new product, Enhanced Caller ID, the online guides, and VoIP services. The Company's introduction of its new product, Enhanced Caller ID, to its existing TeleBlock customers in May 2007 accounted for 35.4% of this increase in other revenues. In July of 2006, the Company began charging a data base administration fee to TeleBlock subscribers. The fee covers customer database maintenance and upgrades. Additionally, the Company premiered its online Registration Guide in August 2006. This guide streamlines completion of state Do-Not-Call commercial registration requirements for telemarketers and supplements the Company's existing online Regulatory Guide.
The substantial increase in revenues from VeriSign for the year was partially offset by a decline in revenues earned from a former TeleBlock distributor, VarTec Communications Inc., of $223,140, or 91.0%. This decline was a consequence of VarTec's prior bankruptcy filing. In August 2006, the remaining TeleBlock customers on the VarTec platform were transferred to VeriSign's platform.
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Cost of revenues for the 2007 year totaled $897,731, an increase of $285,798, or 46.7%, compared to $611,933 for the 2006 year, as the percentage increase in cost of sales significantly outstripped the percentage increase in sales, due to the change in applicable cost structures. In dollar terms, fees payable to the Company's principal distributor, VeriSign, increased by $189,026 as a result of the above-mentioned additional 189 million call count increase to our database on VeriSign's platform. In addition, fees charged for production and back-up site hosting increased by approximately $52,169. Other costs of revenues - for increased software amortization expense and higher costs associated with the revenue gains for online guides, VoIP services and its new caller ID product - increased by an aggregate of $44,603.
As a percentage of sales, cost of revenues increased to 49.5% in the 2007 year from 41.5% in the 2006 year. This increase of 8.0% reflects the current cost structure of the Company's TeleBlock business, and the effect of the virtual elimination of revenue directly from VarTec, which revenue had a significantly lower related cost of sales. As a percentage of revenue, costs of sales related to VeriSign-sourced revenue increased slightly to 53.6% in 2007 from 52.4% in 2006, due to the increased hosting fees referenced above.
Selling, general, and administrative expenses decreased by $169,568, or 12.0%, to $1,239,453 for the 2007 year compared to $1,409,021 for the 2006 year. Certain operating expenses decreased as a direct result of Company-wide cost cutting measures applicable to salaries and benefits, travel and reimbursed expenses, consulting fees, commissions and advertising. Salaries and benefits decreased by $184,734 of which $124,065 was attributable to the executive officers' voluntary one year salary reduction by one-half beginning in July 2007, and $60,669 was due to the elimination of sales and administrative personnel offset by an increase in salaries to key personnel and the addition of an operations employee. In addition, when comparing the two annual periods, travel and reimbursed expenses decreased by $30,732; consulting fees were reduced by $38,912; sales commissions decreased by $16,849; and advertising decreased by $14,147, due to reduced expenses for advertising sponsorships and trade shows. Other expenses in this category decreased by a net amount of $14,341. These decreases were largely offset by an increase in professional fees of $130,147, principally due to increased legal and auditing fees associated with public reporting requirements. Fees of this nature in 2006 were in large part capitalized as deferred loan and registration costs.
As a percentage of sales, selling, general, and administrative expenses for the year were 68.3% in 2007 and 95.6% in 2006, principally reflecting the significant sales gains and reductions in the expense category. When comparing these percentages to the respective gross margins of 50.5% and 58.5%, the net shortfall in these ratios has decreased to 17.8% from 37.1%, reflecting net improvements of 19.3% for the 2007 year. Thus, although the gross margins have decreased, principally due to the change in the mix of costs of revenues, the decrease in selling, general and administrative expenses as a percentage of gross revenue has more than offset that decrease. In dollar amounts, the shortfalls have decreased for the year by $224,879, or 41.1%, to $322,300 in 2007, down from $547,179 in 2006.
Annual interest expense increased by $14,406, or 3.0%, to $498,880 in 2007 from $484,474 in 2006. The principal reasons for the increases were due to the following: the additional $400,000 of debentures borrowed in March 2006, increases in certain short-term borrowings in the later half of 2006, the March 2007 $150,000 debentures, and a new related party loan of $57,500 in 2007. Decreased interest charges related to capitalized leases and the financed purchase of treasury stock; also on December 24, 2007, $3,135,709 of debt was exchanged for equity, which will significantly reduce interest expense in 2008. Lastly, a $100,000 line of credit, which was collateralized by an executive officer's assets, was repaid on December 21, 2007 further decreasing current and future interest expense and also eliminating imputed interest related to this debt.
As a percentage of sales, interest expense decreased in 2007 by 5.4% to 27.5% in 2007 from 32.9% in 2006. Approximately 50% of the interest expense for the 2007 year did not require cash payment. Accrued interest of $547,111 that was expensed in 2007 and in prior years was exchanged for Series C Preferred Stock in December 2007.
Loan cost amortization and related financing expense, including loan penalties, increased in the 2007 year by $97,955, or 46.5%, to $308,833 from $210,878 in 2006. Registration costs of $543,557 related to the Company's SB-2 filing were deferred until the SB-2 became effective; amortization of these costs began on February 13, 2007, the effective date of the Company's registration statement. Amortization totaled $153,155 in 2007; an additional $352,414 of deferred registration costs were charged directly against paid-in capital as an equivalent amount of the debenture was exchanged for equity. In addition, loan cost amortization increased for the 2007 year due to the write-off of additional loan costs related to the portion of the March 2006 debenture that was converted into shares of the Company's common stock.
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This increase in loan cost amortization was partially offset by decreased penalties during the 2007 year. The Company incurred loan penalties of $44,605 and $104,081 for the 2007 and 2006 years, respectively. These penalties resulted from the late effectiveness of the registration statement. The Registration Rights Agreement with the debenture holder required the Company to pay liquidated damages on the secured convertible debentures in the amount of 2% of the note principal for every thirty-day period until the registration statement became effective. Loan penalties ceased to accrue when the Company's registration statement became effective on February 13, 2007.
As a percentage of sales, loan cost amortization and related financing expense increased during the year by 2.7% to 17.0% in 2007 from 14.3% in 2006. As discussed in the preceding paragraphs, the expense increases in this category were directly related to the March 2006 and 2007 debentures.
During 2007, the Company reported a net loss on extinguishment of debt totaling $60,140. A net loss of $88,776 was incurred on the early extinguishment of the March 2006 and 2007 debentures. These debentures were fully repaid in December 2007 and the unamortized loan and registrations costs of $97,168 were written off as a loss on extinguishment of debt. This loss was offset by $8,392, the amount by which the recorded liability exceeded the amount paid.
The loss on early extinguishment of the debentures was partly offset by a gain of $28,636 on the settlement of certain accrued liabilities in exchange for newly issued common shares of the Company. The Company and one of its law firms agreed that the Company would issue and the law firm would accept 2,500,000 new unregistered common shares in exchange for outstanding legal fees of $53,636. As the closing price of the Company's common stock on the preceding day was $0.001, the Company recorded a gain of $28,636 on the settlement of this liability.
The Company assesses its current prospects for future profitability by separating its statement of operations into two principal components: (a) its business operations, represented by the gross margin to selling, general and administrative expense shortfall and (b) its total business financing expense, represented by the total of interest expense, loan cost amortization and other financing charges as well as the net loss on extinguishment of debt. Total business financing expense increased during 2007 by $172,501, or 24.8%, to $867,853 in 2007 from $695,352 in 2006. As a percentage of sales, total business financing expense increased slightly for the 2007 year by 0.6% to 47.8% in 2007 from 47.2% in 2006. This expense had a significant impact on the Company's 2007 operating results. This ratio is expected to dramatically improve during 2008. The balance of loan costs and related financing costs were fully expensed during 2007 as the March 2006 and 2007 debentures were repaid on December 24, 2007. Accordingly, these costs will not impact 2008 operating results. In addition, interest expense attributable to approximately $3.1 million of other Company debt was eliminated for the 2008 year, due to repayment of $897,586 of debt principal and the exchange of $2,218,598 of debt principal for Series B and Series C Preferred Stock.
While the expenses related to the extinguished debentures will not impact 2008 operating results, the Company is seeking new financing for the expansion of its marketing efforts and, as required, in connection with possible acquisitions of companies that would diversify and broaden the Company's service offerings and product base. Therefore, while new financing costs are expected to be a factor in 2008, they should not be as significant a factor as in 2007. There can be no assurance that the Company will be able to obtain new financing or if such financing will be on terms advantageous to the Company, nor that the Company will acquire any other business entity, or, if acquisitions are made, that any acquisition will result in increased revenues or profits to the Company.
The Company's fiscal year net loss decreased by $52,378, or 4.2%, to $1,190,153 in 2007 from $1,242,531 in 2006. As a percentage of sales, the net loss for the 2007 fiscal year decreased significantly by 18.7% to 65.6% from 84.3% for the 2006 fiscal year. This substantial improvement in the net loss as a percentage of sales, compared to the reduction in the gross margin to selling, general and administrative expense shortfall previously discussed, underscores the effect of total business financing expense on the Company's net loss.
The Company was required to recognize a beneficial conversion cost upon its sale and issuance of 2.5 million shares of Series A Preferred Stock because each subscriber has the right to convert the Series A Preferred Stock into 100 common shares at a conversion price of $.01 per share. This beneficial conversion cost only was a factor when the prior day's market closing price per share of common stock was higher than the $0.01 per share conversion price on a particular subscription date. At various dates from December 12, 2007 through December 31, 2007, the market closing price of the common stock was greater than the $0.01 conversion price, thereby resulting in the recognition of an aggregate beneficial conversion cost of $320,661. The 2007 loss of $1,510,814 includes this beneficial conversion cost and is taken into account when calculating loss per common share.
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For the years ended December 31, 2007 and 2006, the Company's annual effective tax rate was estimated to be 0%. Accordingly, no tax benefit or charge was recognized in either period. The Company and its subsidiaries had all been electing S-Corporations and therefore had not been subject to federal or state income taxes prior to the Company's downstream merger in February 2006. Absent such elections, the Company's losses would not have resulted in reported tax benefits, due to the uncertainty of future taxable income. Effective with the downstream merger, the Company and its subsidiaries all became C-Corporations. Future taxable losses, as well as those incurred from February 10, 2006 through December 31, 2007, will now be available to offset subsequent future taxable income, if any.
Liquidity and Capital Resources
Cash used in operations was $182,143 in fiscal 2007 and cash provided from operations was $46,078 in fiscal 2006. These amounts comprise the net loss, reduced by non-cash items of $858,872 in 2007 and $715,415 in 2006, plus or minus the effect of changes in assets and liabilities. The net loss as adjusted for non-cash items was $331,281 for the 2007 fiscal year, compared to $527,116 for the 2006 fiscal year. This decrease of $195,835 was due to an increase in loan cost amortization of $157,518 in 2007; the net loss on debt extinguishment of $60,140 in 2007; and a lower net loss from operations of $52,378 in 2007, offset by a decrease in depreciation and other amortization of $21,123 as well as a lower amount of interest that was effectively financed of $53,078. The other changes in assets and liabilities decreased the Company's net cash used in operations by $149,138 and $573,194 for the years ending December 31, 2007 and 2006, respectively.
Cash used in investing activities was $26,548 in 2007 and $7,664 in 2006, reflecting a net increase of $18,884 and was due to offsetting flows. In 2006 the Company's $20,000 bond and minor accrued interest thereon was returned as the bond was no longer required by the State of Louisiana for the Company to access the state-specific DNC list. In 2007, the Company's prepaid lease deposits of $5,948 were repaid upon the expiration of certain capitalized leases. Expenditures for property and equipment increased by $4,798 to $32,496 in 2007 from $27,698 in 2006.
Cash provided from financing activities was $1,083,076 in 2007 and cash used in financing activities was $88,589 in 2006, an increase of $1,171,665. Cash from financing activities in 2007 was principally generated from the issuance and sale of 2.5 million shares of Series A Preferred Stock for $2,500,000, resulting in net proceeds to the Company of $2,454,384 net of related costs, the new $150,000 secured debenture and a related party loan of $57,500. Long-term debt proceeds in 2006 were $395,946, net of accrued interest deducted. The payments for deferred loan and related costs decreased by $334,027 to $72,866 in 2007 from $406,893 in 2006. Cash provided from financing activities was significantly . . .
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