UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2010
NOTE A – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Unilava Corporation, a Wyoming corporation, was formerly known as IWI Holding Limited (“IWI”), and was engaged in the international jewelry business through a US subsidiary. IWI went public via an initial public offering in 1994, and disposed of the subsidiary on December 31, 2007. On September 21, 2009, IWI entered into an Agreement pursuant to which IWI acquired all of the outstanding shares of Telava Networks, Inc., a Nevada corporation (“TelavaNV”), in exchange for 55 million shares of common stock. In addition, preferred stock of IWI which had been issued in 1994 totaling 3,644,880 shares were converted into 45 million shares of common stock. In connection with the closing of the acquisition, the Telava management was appointed as the members of IWI management, the name of IWI was chan ged to Unilava, Corporation (“Unilava”) and the corporation was reincorporated from the British Virgin Islands to Wyoming via Articles of Continuation.
Telava Networks, Inc., a privately owned company, was incorporated in Nevada on July 23, 2003 as Local Area Yellow Pages to provide advertising and directory listings for small and medium sized businesses on its Internet website in a “ Yellow Pages ” format. The Company provides those services to its subscribers for a monthly fee. These services are provided primarily to small and medium sized businesses throughout the United States. On July 10, 2007, Local Area Yellow Pages amended its Articles of Incorporation to change the name of the corporation to Telava Networks, Inc. (“TelavaNV”) for the purpose of launching its network to provide the next generation fixed and mobile WiMAX broad band solutions to small a nd medium businesses, public safety organizations, and others in various markets through its network. TelavaNV continues its Yellow Pages operations while, at the same time, expanding its WiMAX network. Through December 31, 2009, nearly 55% of the Company’s revenues have been generated by its Yellow Pages business.
On January 19, 2006, the Telava Networks Inc. (NV) formed Local Info Pages, Inc. (“LIP”), headquartered in Seoul, South Korea, as a wholly owned subsidiary of Telava Networks, Inc. LIP is one of the leading direct marketing and business service companies in Korea. LIP connects advertisers to targeted audiences through its network advertising products and services. On January 3, 2007, the Company acquired a website which brings value to the Company because of its large customer base and they can target market those customers. Another division of LIP is the second largest coupon company in South Korea which enables advertisers to directly reach consumers with branded media products, coupons and other advertisements. Consumers trust the Company to deliver the best values in town via direct and online coupons. For adverti sers, LIP offers business advertising solutions by enabling them to sell their products and services in person, online or through the mail.
On May 17, 2006, the Telava Networks Inc. (NV) formed Telava Wireless, Inc. (“Telava Wireless”) as a subsidiary for the purpose of entering the mobile WiMAX broad band solutions market. On November 6, 2006, the Company acquired 40 microwave towers in exchange for 25% of Telava Wireless.
On September 11, 2007, Telava Networks Inc. (NV) formed Telava Acquisitions, Inc. as a wholly owned subsidiary for the purpose of acquiring other related businesses.
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2010
NOTE A – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Going Concern
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which contemplate continuation of the Company as a going concern. The Company has recently sustained operating losses and has an accumulated deficit of $1,882,438 at June 30, 2010. In addition, the Company has negative working capital of $4,057,550 at June 30, 2010.
The Company has and will continue to use significant capital to grow and acquire market share. These factors raise substantial doubt about the ability of the Company to continue as a going concern. In this regard, management is proposing to raise any necessary additional funds not provided by operations through loans or through sales of their common stock. There is no assurance that the Company will be successful in raising this additional capital or in achieving profitable operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty.
Summary of Significant Accounting Principles
Principles of consolidation
The consolidated financial statements include the accounts of Unilava Corporation and its subsidiaries, Telava Networks, Inc. (100% owned), Telava Acqusitions, Inc. (100% owned), Telava Wireless, Inc. (75% owned), Telava Mobile, Inc. (80% owned), Local Info Pages, Inc. (100% owned Korean based entity) and IBFA Acqusitions LLC (100% owned) which are 100% consolidated in the financial statements as adjusted for various minority interests. All material inter-company accounts and transactions have been eliminated.
Financial Instruments
Financial instruments consist primarily of cash, accounts receivable, advances to affiliates and obligations under accounts payable, accrued expenses and notes payable. The carrying amounts of cash, accounts receivable, accounts payable, accrued expenses and notes payable approximate fair value because of the short maturity of those instruments. The carrying amount of the advances to affiliates approximates fair value because the Company charges what it believes are market rate interest rates for comparable credit risk instruments. The Company has applied certain assumptions in estimating these fair values. The use of different assumptions or methodologies may have a material effect on the estimated of fair values.
Foreign Currency Adjustments
The financial position and results of operations of the Company’s foreign subsidiary, LIP, is measured using the foreign subsidiary’s local currency as the functional currency. Revenues and expenses of the subsidiary have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded as a separate component of stockholders’ equity, unless there is a sale or complete liquidation of the underlying foreign investments.
Cash and Cash Equivalents
This includes all short-term highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less. At times cash deposits may have exceeded government insured limits.
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2010
NOTE A – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Accounts receivable
Accounts receivable are reported at the customers' outstanding balances less any allowance for doubtful accounts. Interest is not accrued on overdue accounts receivable. The Company evaluates receivables on a regular basis for potential reserve.
Fixed Assets
Fixed assets are stated at cost. Major renewals and improvements are charged to the asset accounts while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed. At the time property and equipment are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are credited or charged to income.
The Company depreciates its fixed assets on a straight line basis at the following rates:
Microwave towers 25 years
Computer equipment 5 years
Furniture and equipment 7 years
Software 3 years
Leasehold improvements 5 years
Long-lived assets
Accounting for the Impairment or Disposal of Long-Lived Assets requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may not be recovered. The Company assesses recoverability of the carrying value of an asset by estimating the fair value of the asset. If the fair value is less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value. The Company has never recognized an impairment charge.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets arising from an acquisition of a business are periodically assessed for impairment rather than amortized on a straight-line basis. Accordingly, the Company annually reviews the carrying value of this goodwill and other intangible assets to determine whether impairment, as measured by fair market value, may exist. Specifically, goodwill and other intangible asset impairment is determined using a two-step process. The first step of the goodwill and other intangible asset impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount. If the fair value of a reporting unit exceeds its carrying amount, then the goodwill and other intangible assets of the reporting unit are not considered to be i mpaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step of the impairment test compares the implied fair value of the reporting unit's goodwill and other intangible assets with their carrying amount. If the carrying amount of the reporting unit's goodwill and other intangible assets exceeds their implied fair value, then an impairment loss is recognized in an amount equal to that excess.
Accounting for Share-Based Compensation
The Company accounts for all compensation related to stock using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period. Stock issued for compensation is valued using the market price of the stock on the date of the related agreement.
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2010
NOTE A – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Revenue Recognition
Telava NV and LIP: The Company’s revenue is generated by customer subscriptions of directory and advertising services. Revenue is billed and recognized monthly for services subscribed in that specific month. The Company utilizes outside billing companies to transmit billing data, much of which is forwarded to Local Exchange Carriers (“LEC’s”) that provide loc al telephone service.
LEC Billing: When a customer subscribes to the Company’s service, an electronic customer file is created which is the basis for the billing. The Company submits gross billings electronically to third party billing aggregators. These billing aggregators compile and format electronic customer files and forward the billing records to the appropriate LEC’s. The billing for our service flows through to monthly bills of the individual LEC customers. The LEC’s collect the Company’s billing and remit amounts to the billing aggregators, which in turn remit funds to the Company. The following are significant accounting estimates and assumptions used in the revenue recognition process with respect to these billings.
Customer refunds: The Company’s customer refund policy allows the customer to request a refund if they are not satisfied with the service within the first 30 days of the subscription. The Company accrues for refunds based on historical experience of refunds as a percentage of new billings in that 30-day period. Customer refunds are reserved and charged against gross revenue.
Non-paying customers: There are customers who may not pay the fee for our services even though the Company believes they are valid subscribers. Included in cost of services is an accrual for estimated non-paying customers that are recorded at the time of billing.
Dilution: The Company recognizes revenue during the month for which the service is provided based on net billings accepted by the billing aggregators and recognizes revenue only for accepted records. However, subsequent to this acceptance, there are instances in the LEC billing process where a customer cannot be billed due to changes in telephone numbers, telephone carriers, data synchronization issues, etc. These amounts that ultimately cannot be billed, as well as certain minor billing adjustments by the LEC’s, are commonly referred to as “dilution.” Such unbillable accounts and chargebacks are estimated at the time of billing an d charged against net revenues.
Fees: Both the billing aggregator and the LEC charge processing fees. Additionally, the LEC charges fees for responding to billing inquiries by its customers, processing refunds, and other customer-related services. Such fees are estimated at the time of billing and charged to cost of services.
Revenue for billings to certain customers are billed directly by the Company and not through the LEC’s, is recognized based on estimated future collections. The Company continuously reviews this estimate for reasonableness based on its collection experience.
Telava Wireless: Leasing revenue for towers are recognized on a monthly basis based on the terms and conditions of the lease agreements.
LIP: Printing revenue for coupon books are recognized as services are performed.
Advertising Costs: The Company incurs advertising costs that are not considered direct response advertising and are expensed when incurred. For the six months ended June 30, 2010 and June 30, 2009, the Company incurred approximately $3,260 and $1,101 in marketing and advertising expense.
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2010
NOTE A – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Income taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on differences between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition. In the event the Company were to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax provisions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods.
Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Earnings per common share
The Company reports both basic and diluted earnings per share. Basic earnings per share are calculated using the weighted average number of common shares outstanding in the period. Diluted earnings per share includes potentially dilutive securities such as outstanding options and warrants using the “treasury stock” method and convertible securities using the “if-converted” method.
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 and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates made in connection with the accompanying financial statements include the estimate of dilution and fees associated with LEC billings and the estimated reserve for doubtful accounts receivable.
Other Comprehensive Income (Loss)
Comprehensive income/(loss) consists of net income and other gains and losses affecting stockholders’ equity that, under generally accepted accounting principles are excluded from net income. For the Company, such items consist solely of foreign currency translation gains and losses.
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2010
NOTE A – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Recent Accounting Pronouncements
In July 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-20 (ASU 2010-20), Receivables (Topic 310): Foreign Currency Issues: Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effecting for interim and annual reporting periods beginning on or after December 15, 2010. The Company does not expect the provisions of ASU 2010-20 to have a material effect on the financial position, results of operations or cash flows of the Company.
In May 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-19 (ASU 2010-19), Foreign Currency (Topic 830): Foreign Currency Issues: Multiple Foreign Currency Exchange Rates. The amendments in this Update are effective as of the announcement date of March 18, 2010. The Company does not expect the provisions of ASU 2010-19 to have a material effect on the financial position, results of operations or cash flows of the Company.
In April 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-18 (ASU 2010-18), Receivables (Topic 310): Effect of a Loan Modification When the Loan is Part of a Pool That Is Accounted for as a Single Asset-a consensus of the FASB Emerging Task Force. The amendments in this Update are effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The amendments are to be applied prospectively. Early application is permitted. The Company does not expect the provisions of ASU 2010-18 to have a material effect on the financial position, results of operations or cash flows of the Company.
In April 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-17 (ASU 2010-17), Revenue Recognition-Milestone Method (Topic 605): Milestone Method of Revenue Recognition. The amendments in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity should apply the amendments retrospectively from the beginning of the year of adoption. The Company does not expect the provisions of ASU 2010-17 to have a material effect on the financial position, results of operations or cash flows of the Company.
In April 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-15 (ASU 2010-15), Financial Services-Insurance (Topic 944): How Investments held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments-a consensus of the FASB Emerging Issues Task Force. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2010. Early adoption is permitted. The amendments in this Update should be applied retrospectively to all prior periods upon the date of adoption. The Company does not expect the provisions of ASU 2010-15 to have a material effect on the financial position, results of operations or cash flows of the Company.
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2010
NOTE A – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Recent Accounting Pronouncements - continued
In April 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-13 (ASU 2010-13), Compensation-Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Earlier application is permitted. The Company does not expect the provisions of ASU 2010-13 to have a material effect on the financial position, results of operations or cash flows of the Company.
In April 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-12 (ASU 2010-12), Income Taxes (Topic 740): Accounting for Certain Tax Effects of the 2010 Health Care Reform Acts. After consultation with the FASB, the SEC stated that it “would not object to a registrant incorporating the effects of the Health Care and Education Reconciliation Act of 2010 when accounting for the Patient Protection and Affordable Care Act”. The Company does not expect the provisions of ASU 2010-12 to have a material effect on the financial position, results of operations or cash flows of the Company.
In March 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-11 (ASU 2010-11), Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives. The amendments in this Update are effective for each reporting entity at the beginning of its first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of each entity’s first fiscal quarter beginning after issuance of this Update. The Company does not expect the provisions of ASU 2010-11 to have a material effect on the financial position, results of operations or cash flows of the Company.
In February 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-10 (ASU 2010-10), Consolidation (Topic 810): Amendments for Certain Investment Funds. The amendments in this Update are effective as of the beginning of a reporting entity’s first annual period that begins after November 15, 2009 and for Interim periods within that first reporting period. Early application is not permitted. The Company does not expect the provisions of ASU 2010-10 to have a material effect on the financial position, results of operations or cash flows of the Company.
In February 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-09 (ASU 2010-09), Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. This amendment addresses both the interaction of the requirements of this Topic with the SEC’s reporting requirements and the intended breadth of the reissuance disclosure provision related to subsequent events (paragraph 855-10-50-4). All of the amendments in this Update are effective upon issuance of the final Update, except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The Company does not expect the provisions of ASU 2010-09 to have a material effect on the financial position, result s of operations or cash flows of the Company.
In January 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-06 (ASU 2010-06), Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This amendment to Topic 820 has improved disclosures about fair value measurements on the basis of input received from the users of financial statements. This is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early adoption is permitted. The C ompany does not expect the provisions of ASU 2010-06 to have a material effect on the financial position, results of operations or cash flows of the Company.
Concentrations of credit risk
The Company has maintained balances in excess of federally insured limits from time to time during the fiscal year. Management periodically reviews the adequacy and strength of the financial institutions and deems this to be an acceptable risk.
For the six months ended June 30, 2010 and 2009, approximately 4.3% and 6.7% of the Company's net sales were made to customers outside the United States.
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2010
NOTE B – ACCOUNTS RECEIVABLE
The Company provides billing information to a third party billing company for the majority of its monthly billings. Billings submitted are “filtered” by this billing company and the LEC’s. Net accepted billings are recognized as revenue and accounts receivable. The billing company remits payments to the Company on the basis of cash ultimately received from the LEC’s by the billing company. The billing company and LEC’s charge fees for services, which are netted against the gross accounts receivable balance. The billing companies also apply holdbacks to the remittance for potentially uncollectible accounts. These dilution amounts will vary due to numerous factors and the Company may not be certain as to the actual amounts of dilution on any specific billing submittal until sever al months after that submittal. The Company estimates the amount of these charges and holdbacks based on historical experience and subsequent information received from the billing companies. The Company also estimates uncollectible account balances and provides an allowance for such estimates. As of June 30, 2010 and December 31, 2009, the amount reserved for uncollectible account balances is $250,747 and $48,911.
The billing companies retain certain holdbacks that may not be collected by the Company for a period extending beyond one year. The balances are charged to bad debt expense. However, when true-up balances occur with the LEC after six to eighteen months, the money received will be classified as revenue to offset current bad debt expenses.
The Company experiences significant dilution of its gross billings by the billing company. The Company negotiates collections with the billing companies on the basis of the contracted terms and historical experience. The Company’s cash flow may be affected by holdbacks, fees, and other matters, which are determined by the LEC’s and the billing company. The Company processes its billings through the primary billing company.
NOTE C – FIXED ASSETS
Property and equipment consisted of the following at June 30, 2010 and December 31, 2009:
Depreciation expense for the six months ended June 30, 2010 and 2009 were $84,272 and $102,257, respectively.
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2010
NOTE D – INTANGIBLE ASSETS AND GOODWILL
Goodwill and Other Intangible Assets
Goodwill and other intangible assets arising from an acquisition of a business are periodically assessed for impairment rather than amortized on a straight-line basis. Accordingly, the Company annually reviews the carrying value of this goodwill and other intangible assets to determine whether impairment, as measured by fair market value, may exist. Specifically, goodwill and other intangible asset impairment is determined using a two-step process. The first step of the goodwill and other intangible asset impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount. If the fair value of a reporting unit exceeds its carrying amount, then the goodwill and other intangible assets of the reporting unit are not considered to be i mpaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step of the impairment test compares the implied fair value of the reporting unit's goodwill and other intangible assets with their carrying amount. If the carrying amount of the reporting unit's goodwill and other intangible assets exceeds their implied fair value, then an impairment loss is recognized in an amount equal to that excess.
Goodwill consisted of $1,835,873 as of June 30, 2010 and December 31, 2009 as a result of the IBFA purchase as disclosed in the December 31, 2009 10K.
NOTE E – STOCKHOLDERS’ EQUITY DEFICIT
Preferred Stock
The Company has authorized 5,000,000 shares of no par value preferred stock available for issuance. No shares of preferred stock are outstanding as of June 30, 2010. Commensurate with the merger (See Note G), the Company converted the former IWI Holdings outstanding Preferred Stock of 3,664,880 shares into 45,000,000 shares of common stock.
Common Stock
The authorized common stock is 120,000,000 shares at no par value. As of June 30, 2010 and December 31, 2009, the Company had 100,051,107 and 100,051,107 shares of common stock issued and outstanding, respectively.
During the year ended December 31, 2009, the Company issued 51,107 shares of common stock and 3,644,880 shares of preferred related to the reverse merger with IWI Holding Limited (See Note K, REVERSE MERGER WITH IWI HOLDING LIMITED)
NOTE F – SEGMENT REPORTING
Our segments are various subsidiaries that offer different products and services over various technology platforms and are managed accordingly. We analyze our various operating segments based on segment income before income taxes. The customers and assets of our reportable segments are predominantly in the United States. We have four reportable segments: (1) Advertising Solutions, (2) Wireless, (3) Wireline, and (4) Other.
The Advertising Solutions segment includes the operations of Telava Networks, Inc. (100% owned) and Local Info Pages, Inc. (100% owned Korean based entity).
The Wireless segment includes the operations of Telava Wireless, Inc. (75% owned) and Telava Mobile, Inc. (80% owned).
The Wireline segment includes the operations of IBFA Acquisitions (100% owned).
The Other segment includes results from all corporate operations.
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2010
NOTE F – SEGMENT REPORTING - continued
In the following tables, we show how our segment results are reconciled to our consolidated results reported in accordance with GAAP. The Advertising Solutions, Wireless and Wireline and Other columns represent the segment results of each such operating segment. The consolidation and elimination column adds in those line items that we manage on a consolidated basis only. This column also eliminates any intercompany transactions included in each segment’s results. In the Segment assets line item, we have eliminated the value of our investments in our fully consolidated subsidiaries and the intercompany financing assets as these have no impact to the segments’ operations.
| For the six months ended June 30, 2010 | |
| | | Advertising | | | | | | | | | | | | | | | | |
| | | Solutions | | | Wireless | | | Wireline | | | Other | | | Elimination | | | Consolidated | |
| | | | | | | | | | | | | | | | | | | |
| Revenue from external customers | | $ | 732,245 | | | $ | 8,789 | | | $ | 673,883 | | | $ | - | | | $ | - | | | $ | 1,414,917 | |
| Cost of revenue | | | 189,636 | | | | 28,041 | | | | 374,396 | | | | - | | | | - | | | | 592,073 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross profit | | | 542,609 | | | | (19,252 | ) | | | 299,487 | | | | - | | | | - | | | | 822,844 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Operations and support expenses | | | 709,992 | | | | 38,058 | | | | 286,496 | | | | 6,947 | | | | - | | | | 1,041,493 | |
| Depreciation and amortization | | | 22,310 | | | | 19,988 | | | | - | | | | - | | | | - | | | | 42,298 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total segment operating expenses | | | 732,302 | | | | 58,046 | | | | 286,496 | | | | 6,947 | | | | - | | | | 1,083,791 | |
| Segment operating income (loss) | | | (189,693 | ) | | | (77,298 | ) | | | 12,991 | | | | (6,947 | ) | | | - | | | | (260,947 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total other income and (expense) | | | (53,269 | ) | | | 91,120 | | | | 17 | | | | - | | | | - | | | | 37,868 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment income before income taxes | | $ | (242,962 | ) | | $ | 13,822 | | | $ | 13,008 | | | $ | (6,947 | ) | | $ | - | | | $ | (223,079 | ) |
| Segment assets | | | 1,275,048 | | | | 1,800,874 | | | | 2,206,053 | | | | 2,443 | | | | (13,392 | ) | | | 5,271,026 | |
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2010
NOTE G_- REVERSE MERGER WITH IWI HOLDING LIMITED
On August 18, 2009 (the “Effective Date”), IWI Holding Limited, a British Virgin Islands shell corporation (“IWI”), and Telava Networks, Inc., a Nevada corporation (“Telava”) closed their Agreement and Plan of Reorganization (“the Plan”). In accordance with the Plan, Telava became a wholly-owned subsidiary of IWI. The Telava Stockholders received restricted IWI Common Stock at the rate of 7.4324 shares for each of their 7,400,000 shares issued and outstanding. As a result, IWI issued 55,000,000 restricted shares in exchange for 100 percent of the outstanding capital stock of Telava. As of the date of the merger, IWI had outstanding 2,554,700 shares of common stock and 3,644,880 shares of preferred stock. Following the closing of the m erger and as agreed to pursuant to the Plan, the common stock was subject to a 50:1 reverse split into 51,107 shares and 3,644,880 shares of preferred stock was converted into 45,000,000 shares of common stock. In total 100,051,107 shares are outstanding following the Effective Date of the Plan.
The merger was accounted for as a “reverse merger,” as the stockholders of Telava owned a majority of the outstanding shares of IWI common stock immediately following the Plan. Telava was deemed to be the acquirer in the reverse merger. Consequently, the assets and liabilities and the historical operations of Telava prior to the Merger are reflected in the financial statements and have been recorded at the historical cost basis of Telava. Our consolidated financial statements after completion of the merger include the assets and liabilities of both IWI and Telava, historical operations of Telava and our IWI operations from the Effective Date of the Plan.
NOTE H – SUBSEQUENT EVENTS
The Company had signed a Memorandum of Understanding on December 7, 2009 to acquire 80% interest in China Dragon Telecom Limited and its affiliates based in Hong Kong, China. The negotiations and execution of definitive agreements, regulatory approval and other customary conditions is expected to be completed in mid 2010.
UNILAVA CORPORATION AND ITS SUBSIDIARIES
JUNE 30, 2010
Item 2. Management's Discussion and Analysis of Fianancial Condition and Results of Operations
RESULTS OF OPERATIONS
For ease of reading, Unilava Corporation is referred to as “we,” “Unilava,” or the “Company” throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. Unilava is a holding company whose subsidiaries and affiliates operate in the communications services industry in both the United States and internationally, providing wireless and wireline telecommunications services and equipment as well as advertising services. You should read this discussion in conjunction with the consolidated financial statements, accompanying notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2009. A reference to a & #8220;Note” in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash.
Overview
Operating revenues Our operating revenues decreased $965,405, or 25%, during the six months ended June 30, 2010 compared to the six months ended June 30, 2009. This decrease was primarily due to lower growth rate in wireline service revenue due to our acquisition. These decreases were largely offset by the continuing decline in directory revenue driven by lower wireline revenue.
The declines in our advertising revenue reflect continuing economic pressures on our customers as well as increasing competition. We also continue to expand our VoIP service for customers.
Cost of sales expenses decreased $761,802, or 38%, during the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease was primarily due to lower cost of goods sold related to the growth in advertising cost associated with sales. These decreases were partially offset by call center marketing costs.
Selling, general and administrative expenses decreased by $233,671 or 18%, during the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease was primarily due to a reduction in employee-related costs.
Depreciation and amortization expense decreased $16,932, or 17%, during the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease was due to lower amortization of intangibles related to the website since it was fully amortized.
Interest expense increased $69,581, or 48%, during the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase in interest expense was due to wireline acquisition.
Segment Results
Our segments represent strategic business units that offer different products and services over various technology platforms and are managed accordingly. We analyze our various operating segments based on segment income before income taxes, reviewing operating revenues, expenses (depreciation or non-depreciation) and equity income for each segment. Interest expense and other income (expense) – net are managed only on a total company basis and are, accordingly, reflected only in consolidated results. We have four reportable segments: (1) Wireless, (2) Wireline, (3) Advertising Solutions and (4) Other.
The Wireless segment uses our nationwide network to provide consumer and business customers with wireless voice and advanced data communications services.
The Wireline segment uses our regional, national and global network to provide consumer and business customers with landline voice communications services.
The Advertising Solutions segment publishes online business directory listing service.
The Other segment includes results from customer information services and all corporate and other operations.
| Unilava | | | | | | |
| Segment Reporting | | | | | | |
| 06/30/09 | | | | | | |
| | | | | | | |
| | LAYP & LIP | TelWire & Tel Mob | Tel Acq & IBFA | UNLA | | |
| | | | | | | |
| | Advertising Solutions | Wireless | Wireline | Other | Elimination | Consolidated |
| Revenue from external customers | 2,152,381 | 15,473 | 1,658,267 | - | - | 3,826,121 |
| Cost of revenue | 917,022 | 56,771 | 1,030,148 | - | - | 2,003,941 |
| Gross profit | 1,235,359 | (41,298) | 628,119 | - | - | 1,822,180 |
| | | | | | | |
| Operations and support expenses | 1,767,320 | 75,602 | 571,525 | - | - | 2,414,448 |
| Depreciation and amortization | 61,230 | 39,975 | - | - | - | 101,205 |
| | | | | | | |
| Total segment operating expenses | 1,828,550 | 115,578 | 571,525 | - | - | 2,515,653 |
| | | | | | | |
| Segment operating income | (593,191) | (156,876) | 56,594 | - | - | (693,472) |
| | | | | | | |
| Total other income (expense) | (111,495) | 24,105 | (55) | - | - | (87,444) |
| | | | | | | |
| Segment income before income taxes | (704,685) | (132,770) | 56,539 | - | - | (780,917) |
| | | | | | | |
| Segment assets | 4,174,740 | 1,860,757 | 2,971,338 | - | (2,363,381) | 6,643,455 |
UNILAVA CORPORATION AND ITS SUBSIDIARIES
JUNE 30, 2010
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None.
Item 4. Controls and Procedures
The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The chief executive officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures as of June 30, 2010. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant’s disclosure controls and procedures were not effective as of June 30, 2010.
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and actual results could differ materially. Many of these factors are discussed in more detail in the “Risk Factors” section. We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.
The following factors could cause our future results to differ materially from those expressed in the forward-looking statements:
| · | Adverse economic and/or capital access changes in the markets served by us or in countries in which we have significant investments, including the impact on customer demand and our ability and our suppliers’ ability to access financial markets. |
| · | Changes in available technology and the effects of such changes, including product substitutions and deployment costs. |
| · | Increases in our benefit plans’ costs, including increases due to adverse changes in the U.S. and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates, and adverse medical cost trends and unfavorable health care legislation and regulations. |
| · | The final outcome of Federal Communications Commission and other federal agency proceedings and reopenings of such proceedings and judicial review, if any, of such proceedings, including issues relating to access charges, broadband deployment, E911 services, competition, net neutrality, unbundled loop and transport elements, wireless license awards and renewals and wireless services. |
| · | The final outcome of regulatory proceedings in the states in which we operate and reopenings of such proceedings and judicial review, if any, of such proceedings, including proceedings relating to Interconnection terms, access charges, universal service, unbundled network elements and resale and wholesale rates, broadband deployment including our U-verse services, net neutrality, performance measurement plans, service standards and traffic compensation. |
| · | Enactment of additional state, federal and/or foreign regulatory and tax laws and regulations pertaining to our subsidiaries and foreign investments, including laws and regulations that reduce our incentive to invest in our networks, resulting in lower revenue growth and/or higher operating costs. |
| · | Our ability to absorb revenue losses caused by increasing competition, including offerings that use alternative technologies (e.g., cable, wireless and VoIP) and our ability to maintain capital expenditures. |
| · | The extent of competition and the resulting pressure on access line totals and wireline and wireless operating margins. |
| · | Our ability to develop attractive and profitable product/service offerings to offset increasing competition in our wireless and wireline markets. |
| · | The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including state regulatory proceedings relating to unbundled network elements and nonregulation of comparable alternative technologies (e.g., VoIP). |
| · | The timing, extent and cost of deployment of our U-verse services; the development of attractive and profitable service offerings; the extent to which regulatory, franchise fees and build-out requirements apply to this initiative; and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings. |
| · | Our continued ability to attract and offer a diverse portfolio of devices, some on an exclusive basis. |
| · | The availability and cost of additional wireless spectrum and regulations relating to licensing and technical standards and deployment and usage, including network management rules. |
| · | Our ability to manage growth in wireless data services, including network quality. |
| · | The outcome of pending or threatened litigation, including patent and product safety claims by or against third parties. |
| · | The impact on our networks and business from major equipment failures, our inability to obtain equipment/software or have equipment/software serviced in a timely and cost-effective manner from suppliers, severe weather conditions, natural disasters, pandemics, energy shortages, wars or terrorist attacks. |
| · | The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards. |
| · | The issuance by the Internal Revenue Service and/or state tax authorities of new tax regulations or changes to existing standards and actions by federal, state or local tax agencies and judicial authorities with respect to applying applicable tax laws and regulations and the resolution of disputes with any taxing jurisdictions. |
| · | Our ability to adequately fund our wireless operations, including payment for additional spectrum; network upgrades and technological advancements. |
| · | Changes in our corporate strategies, such as changing network requirements or acquisitions and dispositions, to respond to competition and regulatory, legislative and technological developments. |
Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially affect our future earnings.
UNILAVA CORPORATION AND ITS SUBSIDIARIES
PART II – OTHER INFORMATION
Item 1A. Risk Factors
We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. For the six months ended June 30, 2010, there were no such material developments.
Exhibits identified in parentheses below, on file with the Securities and Exchange Commission, are incorporated by reference as exhibits hereto. Unless otherwise indicated, all exhibits so incorporated are from File No. _____________.
| | |
| 31 | Rule 13a-14(a)/15d-14(a) Certifications 31.1 Certification of Principal Executive Officer 31.2 Certification of Principal Financial Officer |
| 32 | Section 1350 Certifications |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | Unilava Corporation | |
| | | | |
| August 23, 2010 | By: | /s/ Baldwin Yung | |
| | | Baldwin Yung | |
| | | President and Chief Financial Officer | |
| | | | |
