UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006 |
OR |
| [_] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 2-80891-NY
MODERN TECHNOLOGY CORP
(Exact name of registrant as specified in its charter)
Nevada | | 11-2620387 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer Identification No.) |
1420 N. Lamar Blvd.
Oxford, MS 38655
(Address of principal executive offices)
Registrant's telephone number, including area code: (662) 236-5928
Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class | | Outstanding at March 31, 2006 |
Common stock, $0.001 par value | | 69,259,230 |
MODERN TECHNOLOGY CORP.
Table of Contents
2
Item 1. Consolidated Financial Statements (unaudited)
PART I -- FINANCIAL INFORMATION
MODERN TECHNOLOGY CORP.
Consolidated Balance Sheet
The accompanying notes are an integral part of these consolidated financial statements.
MODERN TECHNOLOGY CORP.
Consolidated Statements of Operations
(unaudited)
The accompanying notes are an integral part of these consolidated financial statements.
MODERN TECHNOLOGY CORP.
Consolidated Statements of Operations
(unaudited)
The accompanying notes are an integral part of these consolidated financial statements.
MODERN TECHNOLOGY CORP.
Consolidated Statements of Cash Flows
(unaudited)
The accompanying notes are an integral part of these consolidated financial statements
MODERN TECHNOLOGY CORP
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2006
(unaudited)
NOTE 1: ORGANIZATION AND NATURE OF OPERATIONS
Modern Technology Corp (Modern) is a Nevada Corporation.
We are engaged in aiding both private and public companies in the areas of business development, financing, product development, corporate strategy, corporate image and public relations, product distribution and marketing, and executive management consulting. We collectively refer to companies in which we own an equity position, our majority owned subsidiaries, corporate customers and clients as "portfolio companies". We charge for our services in cash or equity in the portfolio company. We may also exchange our services for revenue sharing of future sales of products or sharing of proceeds from the sale of licenses and technologies owned by our portfolio companies. We seek to grow through strategic acquisitions in addition to generating income from our services.
We seek to build revenues by a model continuous growth, strategic acquisitions, and commercialization of nascent technology. We seek to improve operating efficiencies among our portfolio companies through elimination of cost redundancies and realized synergy between subsidiaries. We also seek to commercialize new technology and provide to our portfolio companies and subsidiaries new product lines, operations infrastructure, and significant intellectual capital.
Modern's office was located in New York, but has been relocated to Mississippi, with its administrative offices being located in Jackson, Mississippi.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING POLICIES
Modern Technology Corp's accounting policies conform to U. S. generally accepted accounting principles. Significant policies followed are described below.
The consolidated financial statements include the accounts of the company and all of its subsidiaries in which a controlling interest is maintained. All consolidated financial statements have been prepared in United States Dollars.
On January 24, 2005, the Company purchased 51% of Sound City for $2,000,000 with an option to acquire the remaining 49%. The option is valid through December 31, 2009, and can be exercised for $3,500,000, which is payable in cash, stock or a combination of cash or stock. During the year ending June 30, 2005, the Company has filed current reports on Form 8-K, containing additional pro forma, historical financials and other exhibits.
The financial statements reflect various purchase price allocations. In accordance with SFAS No. 141, Business Combinations ("SFAS No. 141"), the total purchase price was allocated to the tangible and intangible assets of Sound City based upon their estimated fair values at the acquisition date with the excess purchase price allocated to goodwill. The purchase accounting adjustments made are based upon currently available information. Accordingly, the actual adjustment recorded in connection with the final purchase price allocation may be updated according to SFAS No. 141, and any such changes may be material.
Sound City accounts were properly included in the consolidated financial statements for the nine months ended March 31, 2006.
On December 20, 2005, the Company purchased 51% of InMarketing Group for $1,000,000 in cash and $1,210,000 in the form of Series B Convertible stock of the Company, with an option to acquire the remaining 49%. The option is valid through December 19, 2007.
In accordance with SFAS No. 141, Business Combinations ("SFAS No. 141"), the total purchase price was allocated to the tangible and intangible assets of InMarketing Group based upon their estimated fair values at the acquisition date with the excess purchase price allocated to goodwill. The purchase accounting adjustments made are based upon currently available information. Accordingly, the actual adjustment recorded in connection with the final purchase price allocation may be updated according to SFAS No. 141, and any such changes may be material.
InMarketing Group accounts for the period January 1, 2006 through March 31, 2006 were properly included in the consolidated financial statements for the nine months ended March 31, 2006.
STOCK BASED COMPENSATION
The Company has adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." In accordance with SFAS No. 123, Modern has elected the disclosure-only provisions related to employee stock options and follows the intrinsic value method in Accounting Principals Board Opinion (APB) No. 25 in accounting for stock options issued to employees. Under APB No. 25, compensation expense, if any, is recognized as the difference between the exercise price and the fair value of the common stock on the measurement date, which is typically the date of grant, and is recognized over the service period, which is typically the vesting period.
RECLASSIFICATIONS
Certain items from prior periods within the financial statements have been reclassified to conform to current period classifications.
CASH AND CASH EQUIVALENTS
Cash Equivalents consist of highly liquid, short-term investments with original maturities of 90 days or less. The carrying amount reported in the accompanying balance sheets approximates fair value.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market (net realized value) and consists principally of finished goods.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation of property and equipment is provided using straight-line and accelerated methods. The estimated useful lives are as follows:
Years
Furniture, fixtures and equipment 5 - 7
Transportation equipment 5
Leasehold improvements 8 - 10
Buildings 39
Expenditures for major renewals and betterment that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation expense for the nine months ended March 31, was $36,192 and $7,567 for 2006 and 2005, respectively.
ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with U. S. generally accepted accounting principals requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
INCOME TAXES
The company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" SFAS 109 has as its basic objective the recognition of current and deferred income tax assets and liabilities based upon all events that may have been recognized in the financial statements as measured by the provisions of the enacted tax laws.
Valuation allowances are established when necessary to reduce deferred tax assets to the estimated amount to be realized. Income tax expense represents the tax payable for the current period and the change during the period in the deferred tax assets and liabilities.
IMPACT OF NEW ACCOUNTING STANDARDS
In December 2003, the FASB issued Interpretation No. 46R, "Consolidation of Variable Interest Entities" (revised December 2003) - an interpretation of ARB No. 51. A variable interest entity ("VIE") is one where the contractual or ownership interest in an entity change with changes in the entity's net asset value. This interpretation requires the consolidation of a VIE by the primary beneficiary, and also requires disclosure about VIEs where an enterprise has a significant variable interest but is not the primary beneficiary. Sound City leases a facility from a Limited Liability Company ("LCC") owned by the minority shareholders. The term of this lease is 10 years, commencing on July 1, 2004 and ending June 30, 2014. Under FIN 46R, the LLC is a VIE and the Company has consolidated the LLC in its consolidated financial statements. The consolidation of this VIE has added $597,920 of assets and $369,824 of liabilities to our consolidated balance sheet as of March 31, 2006.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 establishes accounting and reporting standards for derivative instruments and for hedging activities. This statement is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a material effect on the Company's financial position or results from operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS 150 changes the accounting for certain financial instruments that, under previous guidance, were accounted for as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after September 15, 2003. The adoption of SFAS No. 150 did not have a material effect on the Company's financial position or results from operations.
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which codifies, revises, and rescinds certain sections of SAB No. 101, "Revenue Recognition," in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes in SAB No. 104 did not have a material impact on the Company's financial position or results of operations.
On March 31, 2004, the FASB issued an exposure draft, "Share-Based Payment, an Amendment of SFAS No. 123 and 95." The exposure draft proposes to expense the fair value of share-based payments to employees beginning in 2005. We are currently evaluating the impact of this proposed standard on our financial statements.
REVENUE RECOGNITION
The Company generally recognizes revenue upon shipment when the collect-ability of the resulting receivable is reasonably assured. The Company allows credit for products returned within its policy terms. Such returns are estimated and an allowance for product returns is recorded at the time of sale, as necessary.
Revenues associated with rewards programs are recorded when the customer is entitled to utilize such rewards. The Company simultaneously records the costs of these rewards. Rewards can be used by customers for one year. After one year, unused rewards are recorded as revenue.
IMPAIRMENT OF LONG-LIVED ASSETS
The company regularly reviews long-lived assets for indicators of impairment. Management's judgments regarding the existence of impairment indicators are based on performance. Future events could cause management to conclude that impairment indicators exist and that the value of long-lived assets is impaired. When events or circumstances indicate that the carrying amount of an asset may not be recoverable, the fair value of the asset is compared to its carrying value. Impairment losses are measured as the amount by which the carrying value of an asset exceeds its estimated fair value.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense for the three months and nine months ended March 31, 2006 was $(2,987) and $69,273.00.
SHIPPING AND HANDLING COSTS
Amounts billed to customers for shipping costs resulting from a sales transaction are included in Revenues, while costs incurred by the Company for shipping and handling are included in cost of goods sold.
INTERIM REPORTING
The accompanying unaudited consolidated financial statements for the nine months ended March 31, 2006 and March 31, 2005, have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals, unless otherwise indicated) considered necessary for a fair presentation of the results of operations for the indicated periods have been included. Certain amounts recorded in previous periods have been reclassified to conform to the current period presentation. Operating results for the nine months ended March 31, 2006 are not necessarily indicative of the results for the full fiscal year.
NOTE 3: CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash. The Company does not require collateral or other security to support customer receivables of rewards programs. The exposure to credit risk associated with the nonperformance of customers in fulfilling their contractual obligations can be directly impacted by a decline in economic or industry conditions, which could impair the customer's ability to satisfy its obligations. Credit procedures have been established whereby detailed analyses are performed to control the granting of credit to high-risk customers of rewards programs.
NOTE 4: MARKETABLE SECURITIES
During the year ended June 30, 2003, the investment in 117,250 shares of common stock of MediCor Ltd. was considered a trading security in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities ("SFAS No. 115")" MediCor Ltd. shares are traded on the NASD over-the-counter bulletin board system. The cost of these shares is $82,520. The Company sold all the shares of MediCor Ltd. As of March 31, 2004, the Company recognized $41,714 realized gain. As of March 31, 2004, the Company had liquidated all of its marketable securities or written off all securities deemed worthless. During May 2004, Mr. Welch, CEO and President, contributed $57,677 of marketable securities investment pursuant to Modern's plan for reorganization.
On January 24, 2005, the Company entered into a Purchase Agreement whereby we purchased a $1,500,000 DeMarco Convertible Debenture. The Company follows SFAS No. 115 and has considered these securities to be trading securities. During the quarter ended September 30, 2005 the Company converted approximately $11,000 of DeMarco Convertible Debenture into 3,200,000 shares of DeMarco common stock. On January 24, 2006 we sold these debentures to Shield Investments, Inc. for a purchase price of $500,000, payable in a promissory note bearing 5% annual interest and a term of 5 years.
NOTE 5: INVESTMENT EQUITY SECURITIES (AT COST)
As of June 30, 2004, the Company wrote off $1,431 of Daine Common Stock investment of 360,000 restricted shares to realized loss when Daine declared bankruptcy. As of June 30, 2004, all shares of Pharmavet were returned and cancelled. The costs of these shares ($5,000) were credited against Deferred Registration costs. The Company has established a valuation allowance of $100,000 against its investment in Interactive Medicine Inc. to reflect the uncertainty of the fair market value of the investment. The net investment value in Interactive Medicine Inc. is zero as of March 31, 2006.
NOTE 6: STOCK BASED COMPENSATION
During the 12 months ended June 30, 2005, the Company issued 2,067,000 shares of Modern Technology Corp. Common Stock for legal and consulting services rendered or to be rendered in the coming year. During the three months ended March 31, 2006, the Company issued 875,000 shares of common stock for various consulting services. During the 9 months ended March 31, 2006, the Company issued 3,965,000 shares for consulting services. $142,634 was shown as Deferred Compensation in the equity section of the balance sheet at March 31, 2006. The amount expensed in the three months and nine months ended March 31, 2006 was $157,469 and $475,448 respectively, as a result of all deferred compensation plans. During the twelve months ended June 30, 2005, the Company issued 13,000,000 shares of Common Stock to Anthony Welch pursuant to the Reorganization Agreement. The compensation portion of this agreement was valued at $1,300 and charged to expense. All stock based compensation is accounted for in accordance with SFAS No. 123.
NOTE 7: INCOME TAX EXPENSE (BENEFIT)
The provision for income taxes is comprised of the following:
03/31/06 03/31/05
Current $-0- $-0-
Deferred -0- -0-
$-0- $-0-
The provision for income taxes differs form the amount computed by applying the statutory federal income rate as follows:
03/31/06 03/31/05
Expected statutory amount $ -0- $ -0-
Net operating loss - -0- - -0-
State income taxes, net
Of federal benefit -0- -0-
$ -0- $ -0-
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities or financial reporting purposes and amounts used for income tax purposes and the impact of available net operating loss carryforwards.
The tax effects of significant temporary differences, which comprise the deferred tax assets, are as follows:
03/31/2006 6/30/05
Deferred tax assets:
Net operating loss
Carryforwards $ 2,317,635 $293,231
Gross deferred tax assets 2,317,635 293,231
Valuation allowance 2,317,635 (293,231)
Net deferred tax assets $----0---- $----0----
The net operating loss of approximately $6,229,940 begins to expire in the year ended June 30, 2025. The tax benefits have been fully reserved due to a lack of consistent operating profitability and substantial losses.
NOTE 8: POSTRETIREMENT BENEFITS
The Company does not maintain any employee benefits currently. The Company does not maintain a plan for any Postretirement employee benefits; therefore, no provision was made under FAS's 106 and 112.
NOTE 9: RELATED PARTY TRANSACTIONS
Robert Church, our CFO, is also a Partner of Church, Devoe & Associates to which we expensed $0 in accounting fees during the three months ended March 31, 2006 and $43,314.59 during the nine months ended March 31, 2006.
Our principal office at 1420 N. Lamar Blvd., Oxford, Mississippi 38655 is provided to us at no charge by Mr. Church, our CFO and Director. We lease 1,500 square feet of executive and administrative offices at 1237 State Rd 30 E, Oxford MS 38655, for $850.00 per month from Mr. Welch, our CEO. Under the terms of this lease, we are responsible for payment of all utilities furnished to the premises, as well as expenses for maintenance and repairs.
During the three months and nine months ended March 31, 2006, we expensed $163,500 and $247,500, respectively, in consulting fees paid to Anthony Welch and $21,000 and $54,000, respectively, in consulting fees paid to Robert Church.
On January 24, 2005, we utilized $1.5 million of financing we received from four institutional investors to purchase a $1.5 million convertible debenture in DeMarco Energy Systems of America, Inc. Anthony K. Welch, our Chief Executive Officer and majority shareholder, is the Chief Executive Officer and Chairman of the Board of Directors of DeMarco Energy Systems.
Sound City leases a facility from its shareholders. The lease expires June 30, 2014. Sound City is responsible for taxes and other expenses on an annual basis.
Rent expense under this related party lease for the three months and nine months ended March 31, 2006 totaled $48,000.00 and $132,000. Future minimum annual rent payable to the minority shareholders of our Sound City Inc subsidiary is as follows:
2006 192,000
2007 197,760
2008 203,693
2009 209,804
Thereafter 1,147,292
$ 1,950,549
At March 31, 2006, Sound City had a Demand Promissory Note (the "Note") payable to its shareholders in the amount of $ 1,121,422. The note is unsecured, subordinated, non-interest bearing and is payable upon demand. Sound City also had loans payable to related parties in the amount of $91,314. These loans are unsecured, subordinated, non-interest bearing and are payable demand. The loans payable to related parties are classified as non-current in the Balance Sheet at March 31,2006, because repayment is not anticipated during the next year.
In the normal course of business, Sound City purchases from, and sells to Sammans Electronics Inc (Sammans). Sammans is owned by a relative of Sound City's shareholders. For the three months and nine months ended March 31, 2006, purchases from Sammans totaled $0 and $9,986.40, and sales to Sammans totaled 27,308 and $47,893.40 respectively.
Pursuant to the stock sale agreement dated January 24, 2005, Sound City entered into an employment agreement with Kamel Yassin, President and Shareholder of Sound City, for a $200,000 annual salary for a five-year term.
NOTE 10: LETTER OF AGREEMENT
On March 10, 2004, prior management through its desire and plan to provide continuing value and future growth to shareholders executed a plan of reorganization. The Company entered into a Letter of Agreement with current President and CEO, Anthony Welch, wherein the Company's plans for reorganization and ongoing plans for operations would be realized through the subsequent actions of new management. The terms of this Agreement provided for the appointment of a new Board of Directors, marketable securities to be deposited in the Company's brokerage account, a Reverse split of the Company's Common Stock, an application for OTCBB listing, issuance of shares to Mr. Welch, and ongoing acquisitions and business development to pursue growth.
NOTE 11: OPERATIONS AND LIQUIDITY
The Company has incurred substantial losses in 2005 and 2004. Until such time that the Company's products and services can be successfully marketed the Company will continue to need to fulfill working capital requirements through the sale of stock and/or the issuance of debt. The inability of the Company to continue its operations as a going concern would impact the recoverability and classification of recorded asset amounts.
The ability of the company to continue in existence is dependent on its having sufficient financial resources to bring products and services to market for marketplace acceptance. As a result of its significant losses, negative cash flows from operations, and accumulated deficits for the periods ending March 31, 2006, there is doubt about the Company's ability to continue as a going concern.
Management believes that its current available working capital, anticipated revenues, further planned reductions in operating expenses, and subsequent sales of stock and/or placement of debt instruments will be sufficient to meet its projected expenditures for a period of at least twelve months from March 31, 2006.
NOTE 12: OTHER DEVELOPMENTS
Acquisitions
Sound City
On January 24, 2005, the Company purchased 51% of Sound City for $2,000,000 with an option to acquire the remaining 49%. The option is valid through December 31, 2009, and can be exercised for $3,500,000, which is payable in cash, stock or a combination of cash or stock. During the year ending June 30, 2005, the Company has filed current reports on Form 8-K, containing additional pro forma, historical financials and other exhibits.
H-NET Acquisition
On July 10, 2005, Modern Technology Corp. ("MOTG") entered into an Asset Purchase Agreement ("Agreement") with Anton Stephens, Dba H-NET ("Hnet"). No material relationship exists between the parties, other than in respect of the Agreement. Under the terms of the Agreement, MOTG agreed to purchase all of the rights, title and interest in, to certain assets owned by Hnet. In exchange for assets delineated under the Agreement, Hnet will receive $500,000 payable in the form of 350,000 shares of MOTG restricted common stock and a Convertible Debenture in the amount of $400,000 payable to Anton Stephens. This transaction was filed under a From 8-K on August 2, 2005 and is hereby incorporated by reference.
INmarketing
On December 20, 2005, the Company entered into and completed a Stock Purchase Agreement (the "Agreement") with David Weiss and Andrew Perlmutter ("Sellers"). Under the terms of the agreement, the company purchased 51% of the issued and outstanding shares of InMarketing Group, Inc. Under the terms of the Agreement, the Company paid to Sellers $1,000,000 in cash and $1,210,000 in the form of Series B Convertible Stock of the company. The company purchased 51 shares of InMarketing, which represents 51% of the issued and outstanding stock, with an option to purchase the additional 49%.. The option to purchase additional shares of stock expires on December 19, 2007. As a result of the acquisition of InMarketing Group Inc., the company recorded the following:
The following table summarizes the components of the total purchase price and the preliminary allocation as of the date of acquisition:
In accordance with SFAS No. 142, goodwill will not be amortized and will be tested for impairment at least annually.
The following adjustments have been reflected in the balance sheet.
(a) To reflect the purchase price and the elimination of previous owners' shareholders' equity
The following unaudited pro-forma financial information reflects the condensed consolidated result of operations of the Company as if the acquisition had taken place on July 1, 2004. The pro-forma financial information is not necessarily indicative of the results of operations had the transaction taken been effected on July 1, 2004.
For the 9 months ended
March 31,2006 March 31, 2005
Net sales $ 13,386,590 $ 9,273,599
Net Income (loss) (5,675,691) (526,501)
Diluted (loss) earnings per common share (.14) (.04)
Capital Raise
On August 31, 2005, the Company, pursuant to a Securities Purchase Agreement of the same date, entered into Callable Secured Convertible Notes. Under the terms of the notes, the Company borrowed an aggregate of $1,500,000.00 from the Holders of the Notes. The Notes each bear a Maturity Date of August 31, 2008, with interest accruing on any unpaid principal at 9% per annum from the date the Notes were issued, until due and payable on the Maturity Date. Any unpaid amounts after that date bear an interest of 15% per annum. Interest is payable quarterly and shall commence at December 31, 2005. Holder has the right to convert any amounts due to Common Stock, at its discretion, at the conversion price, as set forth under the terms of the Notes. This transaction was filed under a Form 8-K on September 19, 2005 and is hereby incorporated by reference. The company issued 2,000,000 warrants to purchase common stock as part of the issuance of the Callable Secured Convertible Notes.
On December 16, 2005, the Company, pursuant to a Securities Purchase Agreement of the same date, entered into Callable Secured Convertible Notes. Under the terms of the notes, the Company borrowed an aggregate of $700,000 from the Holders of the notes. The notes each bear a maturity date of December 16, 2008, with interest accruing on any unpaid principal at 9% per annum from the date the Notes were issued, until due and payable on the Maturity date. Any unpaid amounts after that date earn an interest of 15% per annum. Interest is payable quarterly and shall commence at December 31, 2005. Holder has the right to convert any amounts due to Common Stock, at its discretion, at the conversion price, as set forth under the terms of the Notes.
On March 27, 2006, the Company, pursuant to a Securities Purchase Agreement of the same date, entered into Callable Secured Convertible Notes. Under the terms of the notes, the Company borrowed an aggregate of $350,000 from the Holders of the notes. The notes each bear a maturity date of March 27, 2009, with interest accruing on any unpaid principal at 6% per annum from the date the notes were issued, until due and payable on the Maturity date. Any unpaid amounts after that date earn an interest of 15% per annum. Interest is payable quarterly and shall commence at June 30, 2006. Holder has the right to convert any amounts due to Common Stock, at its discretion, at the conversion price, as set forth under the terms of the Notes. The Company issued 20,000,000 warrants to purchase common stock as part of the issuance of the Callable Secured Convertible Notes.
NOTE 13: COMMON STOCK AND PREFERRED STOCK
Common Stock
March 2004 as part of our plan of reorganization and ongoing plan for operations we applied for listing of our Common Stock on the Over-The-Counter-Bulletin Board. We received approval on July 19, 2004 and trade under the symbol MOTG.
On July 31, 2004 as part of our plan of reorganization and ongoing plan for operations we effected a Reverse Split of the Company's Common Stock on a 1 for 15 Basis. These financial statements retroactively reflect the change to the Company's common stock as a result of the reverse split.
On August 17, 2004, 13 million shares were issued to Anthony Welch.
Preferred Stock
We are authorized to issue up to 20,000,000 shares of Preferred Stock, par value $.0001. As of March 31, 2006, there were 1,500 shares of preferred stock issued and outstanding.
SERIES A CONVERTIBLE PREFERRED STOCK
To obtain funding for our ongoing operations, we entered into a Securities Purchase Agreement with four accredited investors on January 24, 2005 for the sale of (i) $2,000,000 in secured convertible notes; (ii) 1,500 shares of series A convertible preferred stock at $1,000 per share and (iii) warrants to buy 3,000,000 shares of our common stock. Each share of series A convertible preferred stock is convertible into $1,000 of our common stock, at 85% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including the conversion date.
The holders of the series A preferred stock are entitled to receive, when, if and as declared by the Board of Directors, cumulative dividends in the amount of six percent (6%) per annum, payable quarterly in arrears. We are obligated to repurchase the shares of series A convertible preferred stock at 130% of the stated value, plus accrued but unpaid dividends, upon written notice from the holders of a majority of the series A convertible preferred stock upon the occurrence of any of the following events of default: our failure to issue shares of common stock upon conversion by the holder, our failure to timely file a registration statement or have such registration statement declared effective, the assignment or appointment of a receiver to control a substantial part of our property or business, the commencement of a bankruptcy, insolvency, reorganization or liquidation proceeding against our company or the delisting of our common stock, if the default is not cured with the specified grace period.
All shares of series A convertible preferred stock issued and outstanding on January 24, 2008 shall automatically convert into shares of our common stock in accordance with the conversion price calculation.
SERIES B CONVERTIBLE PREFERRED STOCK
As part of our acquisition of InMarketing Group we agreed to issue to the sellers 1,210,000 shares of Series B convertible preferred stock at $1 per share. Each share of Series B convertible preferred stock is convertible into a number of shares of our common stock according to the following calculation: 60% multiplied by the "Market Price" (the average of the three lowest intraday trading prices for the common stock on a principle market for the 20 trading days before but not including the conversion date).
The holders of the Series B convertible preferred stock are entitled to receive, when, if and as declared by the Board of Directors, cumulative dividends in the amount of four percent (4%) per annum, payable quarterly in arrears. As of March 31, 2006 these series B preferred shares had not been issued.
NOTE 14: LONG-TERM AND SHORT-TERM DEBT
Long-term debt consists of the following: March 31, 2006
Note payable to Valley National Bank
in the original amount of $300,000,
payable in monthly installments of
$5,742.46 including interest at 5.5%.
The loan is secured by the personal
Guarantee of the shareholders and a
mortgage on property owned by the
shareholders. The note will be fully
paid May, 2008. 141,387
Note payable to BMW Financial in the
original amount of $20,741, payable
in monthly installments of $419.53
Including interest at 3.9%. The loan is
secured by transportation equipment. The
note will be fully paid May, 2008. 11,575
Note payable to Renasant Bank in the
Original amount of $38,334, payable in
Monthly installments of $726.91 including
Interest at 4.53% for 48 months. The loan
Is secured by a Modern Certificate of Deposit
In the amount of $40,000 33,134
&n bsp; 186,096
Less: current portion 74,635
&n bsp; $111,461
Short-term debt consists of the following:
Note payable to Kamel Yassin in the
Original amount of $400,000 bearing
Interest at a rate of 5% per annum will
Be due and payable on December 31,
2006 &nbs p; 400,000
Note payable to Mervet Yassin in the
Original amount of $400,000 bearing
Interest at a rate of 5% per annum will
Be due and payable on December 31,
2006. &nb sp; 400,000
&n bsp; $800,000
NOTE 15: INVENTORY LINE OF CREDIT
As of March 31, 2005, Sound City had a $750,000 Inventory Security Agreement with GE Capital. Under the Agreement the Company may apply to GE Capital for an extension of credit to purchase inventory. Advances are repaid without interest 90 days after the Company receives the funds. Late payments are subject to finance charges. GE Capital has a security interest in all Company assets. As of May 2, 2005 this line of credit has been reduced to $200,000.
NOTE 16: SECURITIES PURCHASE AGREEMENT
On January 24, 2005, the Company entered into a Securities Purchase Agreement with AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New Millennium Capital Partners II, LLC for the sale of (i) $2,000,000 in secured convertible notes and (ii) warrants to purchase 3,000,000 shares of our common stock and (iii) entered into a Purchase Agreement whereby we purchased a $1,500,000 DeMarco Convertible Debenture in exchange for 1,500 shares of our Series A Convertible Preferred Stock.
The secured convertible notes bear interest at 8%, mature two years from the date of issuance, and are convertible into Modern common stock, at the investors' option, at the lower of $0.44 or 40% of the average of the three lowest intraday trading prices for the common stock on the Over-The-Counter Bulletin Board for the 20 trading days before but not including the conversion date. The secured convertible notes are secured by the personal guarantee of the shareholder with a collateral of 5.5 million shares of Modern Technology common stock.
The warrants are exercisable until five years from the date of issuance at a purchase price of $0.40 per share. The investors may exercise the warrants on a cashless basis if the shares of common stock underlying the warrants are not then registered pursuant to an effective registration statement.
The DeMarco convertible debenture is fully matured and bears interest at a rate of 10% per annum with interest payments due quarterly. Modern has the option to convert any unpaid principal into shares of DeMarco common stock at any time after the original issue date. We sold this debenture on January 24, 2006 for a purchase price of $500,000.
On August 31, 2005, the Company, pursuant to a Securities Purchase Agreement of the same date, entered into Callable Secured Convertible Notes. Under the terms of the notes, the Company borrowed an aggregate of $1,500,000.00 from the Holders of the Notes. The Notes each bear a Maturity Date of August 31, 2008, with interest accruing on any unpaid principal at 9% per annum from the date the Notes were issued, until due and payable on the Maturity Date. Any unpaid amounts after that date bear an interest of 15% per annum. Interest is payable quarterly and shall commence at December 31, 2005. Holder has the right to convert any amounts due to Common Stock, at its discretion, at the conversion price, as set forth under the terms of the Notes. This transaction was filed under a Form 8-K on September 19, 2005 and is hereby incorporated by reference. The company issued 2,000,000 warrants to purchase common stock as part of the issuance of the Callable Secured Convertible Notes.
On December 16, 2005, the Company, pursuant to a Securities Purchase Agreement of the same date, entered into Callable Secured Convertible Notes. Under the terms of the notes, the Company borrowed an aggregate of $700,000 from the Holders of the notes. The notes each bear a maturity date of December 16, 2008, with interest accruing on any unpaid principal at 9% per annum from the date the Notes were issued, until due and payable on the Maturity date. Any unpaid amounts after that date earn an interest of 15% per annum. Interest is payable quarterly and shall commence at December 31, 2005. Holder has the right to convert any amounts due to Common Stock, at its discretion, at the conversion price, as set forth under the terms of the Notes.
On March 27, 2006, the Company, pursuant to a Securities Purchase Agreement of the same date, entered into Callable Secured Convertible Notes. Under the terms of the notes, the Company borrowed an aggregate of $350,000 from the Holders of the notes. The notes each bear a maturity date of March 27, 2009, with interest accruing on any unpaid principal at 6% per annum from the date the notes were issued, until due and payable on the Maturity date. Any unpaid amounts after that date earn an interest of 15% per annum. Interest is payable quarterly and shall commence at June 30, 2006. Holder has the right to convert any amounts due to Common Stock, at its discretion, at the conversion price, as set forth under the terms of the Notes. The Company issued 20,000,000 warrants to purchase common stock as part of the issuance of the Callable Secured Convertible Notes.
NOTE 17: STOCK PURCHASE AGREEMENT
On January 24, 2005, the Company entered into a Stock Purchase Agreement with Sound City, Inc. The agreement is to purchase 51% of the issued and outstanding shares of common stock of Sound City, Inc. for an aggregate purchase price of $2,000,000 and to provide $700,000 in funding to Sound City, Inc. As part of the agreement, the Company also issued promissory notes in the amounts of $400,000 each to Kamel Yassin, President of Sound City and Mervet Yassin, CFO of Sound City. The promissory notes bear interest from the date of issuance at the rate of 5% per annum simple interest. Interest accrued to December 31, 2005 will be payable in full on December 31, 2005. Thereafter, interest accrued on the unpaid principal during the calendar quarter will be payable quarterly on the last day of each calendar quarter during the term of the note, with the first such quarterly interest payment being payable on September 30, 2005. The principal and accrued interest will be due and payable on December 31, 2006.
On December 20, 2005, the Company entered into and completed a Stock Purchase Agreement (the "Agreement") with David Weiss and Andrew Perlmutter ("Sellers"). Under the terms of the agreement, the company purchased 51% of the issued and outstanding shares of InMarketing Group, Inc. Under the terms of the Agreement, the Company paid to Sellers $1,000,000 in cash and $1,210,000 in the form of Series B Convertible Preferred Stock of the company. The company received 51 shares of InMarketing, which represents 51% of the issued and outstanding stock. The option to purchase an additional amount of shares equally to 49% of the issued and outstanding stock. The option to purchase additional shares of stock expires December 19, 2007.
NOTE 18: EARNINGS PER SHARE
A reconciliation of weighted average shares outstanding, used to calculate basic loss per share, to weighted average shares outstanding assuming dilution, used to calculate diluted loss per share, follows:
74,976,804 and 9,085,193 common equivalent shares have been excluded from the computation of diluted earnings per share for the period ending 3/31/06 and 3/31/05 respectively, because their effect would be anti-dilutive.
NOTE 19: COMMITMENTS AND CONTINGENCIES
Sound City guarantees the mortgage debt of Yassin & Company, LLC, a real estate holding company owned by the stockholders. The amount of outstanding mortgage debt at March 31, 2006 was $369,824.
In addition, Sound City also guarantees the mortgage debt of Kamel Yassin, President and Shareholder of Sound City, and Mervet Yassin, CFO and Shareholder of Sound City, on commercial property owned by them. The amount of outstanding mortgage at March 31, 2006 was approximately $141,387.
As part of our InMarketing Group, Inc acquisition (see Note 12), we are obligated to issue the sellers $1,210,000 in the form of series B convertible preferred stock of the company. As of March 31, 2006, this preferred stock had not been created.
InMarketing Group leases an office in Mahwah, New Jersey which expires on December 31, 2008 under an operating lease. The lease requires additional rent for certain operating expenses as defined in the lease and is subject to future minimum annual rental payments of $30,708. In addition, the Company rents storage space in a nearby facility on a month to month basis.
Sound City leases a 3,000 square foot building in Newton, NJ. The term of the lease is 5 years, beginning June 1, 2005 and expiring May 31, 2010. The fixed minimum rent is $51,000 annually.
Sound City also leases a 4,470 square foot retail store space with a 494 square feet warehouse area in Franklin, NJ. The space is located in a shopping center. The duration of the lease is 5 years and 2 months. It commenced on May 1, 2005 and terminates on June 30, 2010. The annual rent for the initial 2 months of the lease is 0. Annual rent for the next 30 months is $73,755 increasing to $80,460 annually for the last 30 months of the lease. In addition, Sound City pays supplemental rent on taxes, insurance, and repairs and maintenance on the building. This supplemental rent is based on the percentage of floor space leased in relation to the total rentable floor space of the shopping center.
NOTE 20: ASSET ACQUISITION
H-NET
On July 10, 2005, Modern Technology Corp. ("MOTG") entered into an Asset Purchase Agreement ("Agreement") with Anton Stephens, Dba H-NET ("Hnet"). No material relationship exists between the parties, other than in respect of the Agreement. Under the terms of the Agreement, MOTG agreed to purchase all of the rights, title and interest in, to certain assets owned by Hnet. In exchange for assets delineated under the Agreement, consisting of software, Hnet will receive $500,000 payable in the form of 350,000 shares of MOTG restricted common stock and a Convertible Debenture in the amount of $400,000 payable to Anton Stephens. This transaction was filed under a Form 8-K on August 2, 2005 and is hereby incorporated by reference. MOTG has recorded $500,000 as software on the balance sheet at September 30, 2005 as a result of this asset acquisition. It is estimated that the software has a 5-year life and is being amortized ratably over its estimated useful life.
H-NET has no revenue at present and is not expected to have any revenue for the following nine months. It is anticipated that H-NET assets will be fully developed and revenue producing within the next twelve months.
NOTE 21: CONVERTIBLE NOTES
| Secured convertible notes payable to AJW Offshore, Ltd, AJW | | | |
| Qualified Partners, LLC, AJW Partners, LLC and New Millennium | | | |
| Capital Partners II, LLC in the amount of $2,000,000. | | | | |
| The notes were issued with Warrants to purchase 3,000,000 | | | |
| shares of our common stock. The secured conversion notes bear | | | |
| interest at 8% mature January 24, 2007 and are convertible into | | | |
| Modern common stock. | | | | | | $2,000,000 |
| | | | | | | | |
| Less conversions | | | | | | | (1,012,809) |
| | | | | | | | |
| TOTAL | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Secured convertible notes payable to AJW Offshore, Ltd, AJW | | | |
| Qualified Partners, LLC, AJW Partners, LLC and New Millennium | | | |
| Capital Partners II, LLC in the amount of $700,000. The secured | | | |
| notes bear interest at 9% and mature December 16, 2008 and are | | | |
| convertible into Modern stock | | | | | | $700,000 |
| | | | | | | | |
| Less Conversions | | | | | | | 0 |
| | | | | | | | |
| TOTAL | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Secured convertible notes payable to AJW Offshore, Ltd, AJW | | | |
| Qualified Partners, LLC, AJW Partners, LLC and New Millenium | | | |
| Capital Partners II, LLC in the amount of $1,500,000. The secured | | |
| notes bear interest at 9%, mature 8/31/2007 and are convertible into | | |
| Modern stock. We issued 2,000,000 warrants as part of the | | | | | | | |
| issuance of this secured convertible note | | | | | | | $ 1,500,000 |
| | | | | | | | |
| | | | | | | | |
| Less Conversions | | | | | | | |
| | | | | | | | |
| TOTAL | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Convertible note payable to Anton Stevens for the purchase of | | | |
| HNET Software. Interest shall be at a rate of 4% per annum and | | | | | | | $400,000 |
| shall be due and payable pursuant to the conversion rights or, | | | | | | | |
| at the election of MOTG, paid in cash. The note is due upon | | | | | | | |
| demand. | | | | | | | |
| | | | | | | |
| Less Conversions | | | | | | | 0 |
| | | | | | | | |
| TOTAL | | | | | | | |
| | | | | | | | |
| No interest bearing additional note payable to Anton | | | | | | | |
| Stephens for the purchase of HNET software, | | | | | | | |
| payable only in shares of Modern stock. The note is due | | | | | | | $ 100,000 |
| upon demand. | | | | | | | |
| | | | | | | | |
| Less Conversions | | | | | | | 0 |
| | | | | | | | |
| TOTAL | | | | | | | |
| | | | | | | | |
| Secured convertible notes payable to AJW Partners, AJW | | | | | | | |
| Qualified, AJW Offshore, and New Millenium Capital Partners | | | | | | | |
| in the amount of $350,000. The secured notes bear interest | | | | | | | |
| at a rate of 6%, mature 3/27/09 and are convertible into | | | | | | | |
| Modern common stock. We issued 20,000,000 warrants to | | | | | | | |
| purchase common stock as part of the issuance of these callable | | | | | | | |
| secured convertible notes | | | | | | | |
| | | | | | | | |
| Less Conversions | | | | | | | 0 |
| | | | | | | | |
| TOTAL | | | | | | | $ 350,000 |
| | | | | | | | |
| NOTE 22: MORTGAGE PAYABLE | | | | | |
| Mortgages payable consists of the following: | | | | |
| | | | | | March 31 | |
| | | | | | 2006 | | |
| Mortgage payable to Valley National Bank | | | | | |
| in the amount of $535,000 payable in monthly | | | | |
| installments of $4,993.21 including interest | | | | | |
| at 5.5%. Pursuant to the loan agreement the | | | | |
| interest rate may change November 1, 2008. | | | | |
| The loan is secured by Sound City's guarantee | | | | |
| and the personal guarantee of the members of | | | | |
| Yassin & Company and a mortgage on property | | | | |
| owned by the members. The note will be paid | | | | |
| on November 1, 2009. | | | $ | 369,824 | | |
| | | | | | | | |
| Less current portion | | | | $ | (37,000) | | |
| | | | | | | | |
| | | | | $ | 332,824 | | |
NOTE 23: GOODWILL
The changes in the carrying amount of goodwill for the 9 months ended 3/31/06 are as follows:
Balance as of June 30, 2005 2,126,983
Goodwill acquired during the 9 months 819,117
Impairment losses (2,126,983)
Balance as of March 31, 2006 819,117
Due to working capital deficiencies and continuing losses, the goodwill of our Sound City subsidiary appears to be permanently and totally impaired. As a result, we are recognizing an impairment charge of $ 2,126,983 during the quarter ended March 31,2006. Until Sound City can be independently valued, we consider the approach of writing down goodwill in the amount of $2,126,983 the most appropriate measure for this quarter's financial statement presentation.
NOTE 24: SUBSEQUENT EVENTS
On May 15, 2006 as part of our ongoing plan for operations, we effected another Reverse Split of the Company's Common Stock on a 1 for 20 basis.
On June 5, 2006 we received a Termination Notice from InMarketing Group alleging defaults under Sections 4.9 and 6.1 of the Stock Purchase Agreement. The Company disputes that it is in default, and is responding to the communication accordingly.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Controls and Procedures
Based on their evaluation as of a date within 90 days of the filing date of this Quarterly Report on Form 10-QSB, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the Exchange Act) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation and up to the filing date of this Quarterly Report on Form 10-QSB. We received a letter from our auditor citing a material weakness in our internal accounting procedures and controls. Since receipt of this letter we have improve and corrected our accounting procedures and controls through the following measures: Increased education in accounting rules and requirements arising from the new accounting requirements created through our acquisition activity, formal written procedures for monthly accounting consolidation from our subsidiaries, advance drafting of SEC reports, and allocation of operational resources to verify procedures are being followed and required information has been obtained from all subsidiaries. Since our corrective measures , we believe there are no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken in this quarter. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements regarding the Company's expectations, beliefs, intentions or future strategies that are signified by the words "expects," "anticipates," "intends," "believes," or similar language. These forward-looking statements, including those with respect to our operating results for 2004, are based upon current expectations and beliefs of the Company's management and are subject to risks and uncertainties that could cause results to differ materially from those indicated in the forward-looking statements. Some, but not all, of the factors, which could cause actual results to differ materially include those set forth in the risks discussed below under the subheading "Risk Factors" and elsewhere in this report. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements, or to explain why actual results differ. Readers should carefully review the risk factors described in this section below and in any reports subsequently filed with the Securities and Exchange Commission.
Overview
We were incorporated in Nevada in 1982 as a for-profit corporation. We have never experienced any bankruptcy or similar proceeding. We are engaged in aiding both private and public companies in the areas of business development, financing, product development, corporate strategy, corporate image and public relations, product distribution and marketing, and executive management consulting. We collectively refer to companies in which we own an equity position as well as our customers and clients as "portfolio companies". We charge for our services in cash or equity in the portfolio company. We may also exchange our services for revenue sharing of future sales of products or sharing of proceeds from the sale of licenses and technologies owned by our portfolio companies. We seek to grow through strategic acquisitions in addition to generating income from our services.
Our sources of revenue are primarily from:
* Consolidated revenues of our portfolio companies which we own in majority;
* Management and consulting fees we may charge our portfolio companies;
* Revenue sharing agreements we may have with our portfolio companies;
* Royalty and licensing proceeds from the sale of technology rights we may own in whole or in part with our portfolio companies;
* Proceeds from the sale of securities we may own in our portfolio companies;
* Proceeds from the interest and payment of debt we may hold in our portfolio companies; and
* Proceeds from the conversion of debt we may hold in our portfolio companies into marketable securities and subsequent sale of same.
OUR PORTFOLIO COMPANIES
Sound City
We presently own 51% of Sound City with an option to acquire the remaining 49%. The option is valid through December 31, 2009, and can be exercised for $3,500,000, which is payable in cash, stock or a combination of cash or stock. Sound City, Inc. is a consumer electronics company with customers across the U.S. Sound City markets audio and video solutions for home and mobile environments, including the HD-TV, Plasma TV and LCD TV market segments. As a full service dealer, Sound City provides a wide range of custom home installations addressing numerous applications. With a customer base of over 900,000 customers, Sound City is a large electronics mail order companies in the U.S., who distributes its products and solutions through its direct mail and Web site channels. Consumers can also find the latest audio, video, car stereo and home theatre products in Sound City's retail locations, including 12 custom showrooms. Sound City operates a web site at the following address: http://www.soundcity.com.
INmarketing Group
INmarketing is an Incentive Marketing Company creates and administers customized programs specifically designed to motivate and recognize corporate and client personnel for increased business related performances and rewards achievement with selections of merchandise, services and travel opportunities. INmarketing operates a web site at the following address: http://www.inmarketinggroup.com
On December 20, 2005, the Company entered into a Stock Purchase Agreement with David Weiss and Andrew Perlmutter ("Sellers'). Under the terms of the Stock Purchase Agreement, the company purchased 51% of the issued and outstanding stock of InMarketing Group, Inc, a corporation organized and existing under the laws of New Jersey, with an option to purchase an additional 49% of the outstanding stock.
On December 20, 2005, the Company entered into and completed a Stock Purchase Agreement (the "Agreement") with David Weiss and Andrew Perlmutter ("Sellers"). Under the terms of the agreement, the company purchased 51% of the issued and outstanding shares of InMarketing Group, Inc. Under the terms of the Agreement, the Company paid to Sellers $1,000,000 in cash and $1,210,000 in the form of Series B Convertible Stock of the company. The company received 51 shares of InMarketing, which represents 51% of the issued and outstanding stock. We have the option to purchase an additional amount of shares equal to 49% of the issued and outstanding stock. The option to purchase additional shares of stock expires December 19, 2007.
H-NET
H.NET is a global digital solutions provider for the Vision and Health Care industry. With its multi-service Internet portal, web hosting services, business applications services and Internet-based transaction processing services, H-Net provides products and services to hospitals, clinics, retail opticians, chains home offices, Optometrists, Ophthalmologists and Optical Laboratories. For More information about H-Net visit www.h-net.net.
On July 10, 2005, Modern Technology Corp. ("MOTG") entered into an Asset Purchase Agreement ("Agreement") with Anton Stephens, Dba H-NET ("Hnet"). No material relationship exists between the parties, other than in respect of the Agreement. Under the terms of the Agreement, MOTG agreed to purchase all of the rights, title and interest in, to certain assets owned by Hnet. In exchange for assets delineated under the Agreement, Hnet will receive $500,000 payable in the form of 350,000 shares of MOTG restricted common stock and a Convertible Debenture in the amount of $400,000 payable to Anton Stephens. This transaction was filed under a From 8-K on August 2, 2005 and is hereby incorporated by reference.
DeMarco Energy Systems of America, Inc.
DeMarco Energy's primary mission is to provide energy efficient technologies to commercial and institutional markets through the application of the DeMarco 'Systems' patent. The company owns a systems patent that was granted on September 3, 1985, known as the Energy Miser System. The company is primarily focusing on providing heating and air conditioning powered by the thermal properties of managed water systems, which include gray-water, re-use water and potable water systems. DeMarco has exclusive rights to the patented technology.
We are the holder of an outstanding convertible debenture in the amount of $1,500,000 issued by DeMarco Energy Systems of America. The debenture is convertible into shares of common stock of DeMarco. The convertible debentures bear interest at 10%, matured on March 25, 2003, and are convertible into shares of Demarco common stock, at the selling stockholders' option, at the lower of (i) $0.15 or (ii) 60% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 10 trading days before but not including the conversion date. As of May 2, 2005, the $1,500,000 convertible debenture was convertible into 250,000,000 shares of DeMarco common stock.
We have no formal agreements with this portfolio company outside our being a holder of the convertible debenture. We have an informal agreement to assist them where practicable to further their plans and efforts, although there are no written agreements to this effect and we are not obligated to perform any services for them.
We sold this debenture on January 24, 2006.
Selecting Portfolio Companies
We may purchase an equity position, whether minority or majority, in various companies from time to time. We offer our services to new customers, also referred to as portfolio companies, for cash payment. We may elect to take equity in the portfolio company as payment for our services.
We also seek to grow our revenues and assets by acquisitions. We seek to obtain a majority equity position in any company we acquire. If we acquire a minority position in a company, we will seek to enter into agreement with that company whereby we will generate income from our services. If we acquire a minority position in a company, we value that equity using a good-faith estimation of its value based on generally accepted accounting principles combined with our internal judgment based on industry and economic factors not encompassed by traditional accounting principles.
We acquire majority or minority equity positions in portfolio companies by purchasing the equity with cash, debt, or purchasing the equity by issuing stock in our company. We may pay for the equity position with a combination of both cash and stock and debt.
When presented with a prospective acquisition, we make a good-faith valuation for the business to be acquired and its future prospects. If the assessment of the prospective acquisition appears to offer a good or reasonable chance to increase our revenues and assets both in the short-term and the long-term, we will seek to acquire the prospective company.
We find new customers and prospective companies to acquire through out network of relationships within the business community.
EMPLOYEES
We currently have three full time employees and three part-time employees, including two in management, two in business development, one in business advisory and one administrative position. In our subsidiary, Sound City, we currently have 33 full time and 2 part time employees, including eight in management three in administrative, 10 in sales, three in advertising, five in warehousing and six in installations. In our subsidiary InMarketing Group, we currently have 6 full time and three part-time employees, including three in management, one in sales, and five in administrative positions. There exist no organized labor agreements or union agreements between our employees and us. We believe that our relations with our employees are good.
Results of Operations:
For the nine months ended March 31, 2006, the Registrant had total net revenues of $7,871,185 as compared with total net revenues of $1,547,793 for the nine months period ended March 31, 2005. This increase is attributable to the expansion of our subsidiary Sound City and the acquisition of our subsidiary InMarketing Group.
For the nine months ended March 31, 2006, the Registrant had gross margin of $1,767,521 as compared with $503,304 for the nine months period ended March 31, 2005. The gross margin increase is attributable to Sound City's expansion and our InMarketing Group purchase.
During the nine months ended March 31, 2006, the Registrant had net loss applicable to common shareholders of $5,582,783 as compared with $572,869 for the nine months ended March 31, 2005.
The net loss for the nine months ended March 31, 2006 is attributable primarily to expenses incurred as part of our acquisition efforts, activities related to locating and securing new portfolio companies, and the adjustment for Sound City goodwill impairment.
During the nine months ended March 31, 2006, expenses amounted to $7,194,876, attributable to general and administrative expenses of $2,389,947, salaries and benefits of $1,432,971, goodwill impairment of $2,126,983, investment losses of $989,000 and other expenses of $255,975. For the nine months ended March 31, 2005, expenses amounted to $1,072,528 consisting of general and administrative expenses of $507,533, salaries of $386,138, and other expenses of $178,857. The increase in general and administrative expenses for the nine months ended 3/31/06 can be attributed primarily to consulting expenses, rent, accounting and legal fees, and expenses related to Sound City business expansion and InMarketing acquisition. Salary expenses increased primarily from the acquisition of InMarketing Group.
Related Party Transactions
We lease an administrative office from our CEO, Anthony Welch for $850 per month.
Sound City leases a facility from its shareholders. This lease expires on June 30, 2014. Sound City is responsible for taxes and other expenses on an annual basis. Rent expensed under this lease was $53,100 for the nine months ended 3/31/06.
Our CFO, Robert Church is also a partner of Church, Devoe and Associates to which we expensed $43,315 during the 9 months ended 3/31/06.
Liquidity and Capital Resources
The cash and cash equivalent balance of the Registrant was $511,139 and $262,609 as of March 31, 2006 and March 31,2005, respectively.
Sound City guarantees the mortgage debt of Yassin & Company, LLC, a real estate holding company owned by the stockholders. The amount of outstanding mortgage debt at March 31, 2006 was $369,824.
In addition, Sound City also guarantees the mortgage debt of Kamel Yassin, President and Shareholder of Sound City, and Mervet Yassin, CFO and Shareholder of Sound City, on commercial property owned by them. The amount of outstanding mortgage at March 31, 2006 was approximately $141,387.
As part of our InMarketing Group, Inc acquisition (see Note 12), we are obligated to issue the sellers $1,210,000 in the form of series B convertible preferred stock of the company. As of March 31, 2006, this preferred stock had not been created.
The Company has incurred substantial losses through March 31, 2006. Until such time that the Company's products and services can be successfully marketed, the Company will continue to need to fulfill working capital requirements through the sale of stock and/or the issuance of debt. The inability of the Company to continue its operations as a going concern would impact the recoverability and classification of recorded asset amounts.
The ability of the company to continue in existence is dependent on its having sufficient financial resources to bring products and services to market for marketplace acceptance. As a result of its significant losses, negative cash flows from operations, and accumulated deficits for the periods ending March 31, 2006, there is doubt about the Company's ability to continue as a going concern.
Management believes that its current available working capital, anticipated revenues, further planned reductions in operating expenses, and subsequent sales of stock and/or placement of debt instruments will be sufficient to meet its projected expenditures for a period of at least twelve months from March 31, 2006.
Item 3. Controls and Procedures
Disclosure Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.
Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits are incorporated herein by reference or are filed with this report as indicated below:
Exhibit
Number | | Description |
| | | |
| 31.1* | | Certificate of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated May 19, 2005. |
| 31.2* | | Certificate of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated May 19, 2005. |
| 32* | | Certificate of Chief Executive Officer and Chief Financial Officer pursuant to section 18 U.S.C. section 1350 dated May 19, 2004. |
* Filed herewith.
b. Reports on Form 8-K:
On August 2, 2005, the Company filed a Current Report on Form 8-K.
On November 19, 2005, the Company filed a Current Report on Form 8-K.
Signatures
In accordance with the requirements of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | MODERN TECHNOLOGY CORP. |
| | |
| | By: | /s/ Anthony K. Welch |
| Dated: June 7, 2006 | | Anthony K. Welch
Chairman and Chief Executive Officer |
| | | |
| | By: | /s/ Robert Church |
| Dated: June 7, 2006 | | Robert Church
Director and Chief Accounting Officer |
