UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended August 31, 2008
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 333-57818
MODAVOX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 20-0122076
-------- ----------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
4636 EAST UNIVERSITY DRIVE, SUITE 275
PHOENIX, AZ 85034-7417
(Address of principal executive offices)
(Zip Code)
(602) 648-6080
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer," and "large accelerated filer" and "smaller reporting company" in Rule
12b-2 of the Exchange Act. (Check one):
Large accelerated filer _____ Accelerated filer _____
Non-accelerated filer _____ Smaller reporting company X
---
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes _____ No X
As of October 10, 2008 the issuer had 41,848,263 shares of common stock, par
value $.0001, issued and outstanding.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of August 31, 2008 and
February 28, 2008 (unaudited) 3
Consolidated Statements of Operations for the three months
ended August 31, 2008 and 2007 (unaudited) 4
Consolidated Statements of Operations for the six months
ended August 31, 2008 and 2007 (unaudited) 5
Consolidated Statement of Stockholders' Equity for the
six months ended August 31, 2008 (unaudited) 6
Consolidated Statements of Cash Flows for the six months
ended August 31, 2008 and 2007 (unaudited) 7
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis or Plan of Operation 12
Item 3. Controls and Procedures 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits 19
SIGNATURES 20
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MODAVOX, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
AUGUST 31, FEBRUARY 29,
2008 2008
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 690,026 $ 657,174
Accounts receivable, net of allowance for
doubtful accounts of $245,000 1,338,687 1,120,456
Prepaid expenses and other current assets 165,664 18,019
------------ ------------
Total current assets 2,194,377 1,795,649
Property and equipment net of accumulated depreciation of
$466,170 and $315,267, respectively 540,789 507,514
Goodwill 1,115,746 1,115,746
Software and patents, net of accumulated amortization of
$1,062,884 and $790,652, respectively 2,738,435 2,464,841
------------ ------------
TOTAL ASSETS $ 6,589,347 $ 5,883,750
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
$ 837,704 $ 672,641
Accrued liabilities 322,555 150,987
Line of credit -- 19,590
Deferred revenue 425,715 874,622
Related party note payable 1,118 23,867
------------ ------------
Total current liabilities 1,587,092 1,741,707
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value; 100,000,000 shares authorized;
41,848,263 and 39,750,622 shares issued and
outstanding, respectively 4,185 3,975
Additional paid-in capital 18,123,132 16,688,798
Stock subscription receivable (32,159) (107,159)
Accumulated deficit (13,092,903) (12,443,571)
------------ ------------
Total stockholders' equity 5,002,255 4,142,043
------------ ------------
$ 6,589,347 $ 5,883,750
============ ============
See accompanying notes to the consolidated financial statements.
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MODAVOX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
AUGUST 31, AUGUST 31,
------------------------------
2008 2007
------------ ------------
REVENUE $ 985,826 $ 1,131,882
COSTS AND EXPENSES
Operating expenses 188,492 531,817
Selling, general, and administrative 905,547 342,281
Depreciation and amortization 216,928 115,427
------------ ------------
Total costs and expenses 1,310,967 989,525
------------ ------------
OPERATING INCOME (LOSS) (325,141) 142,357
------------ ------------
OTHER INCOME
Interest income, net 2,951 15,656
------------ ------------
NET INCOME (LOSS) $ (322,190) $ 158,013
============ ============
NET LOSS PER SHARE - basic and diluted $ (0.01) $ 0.00
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 41,518,704 37,580,940
============ ============
Diluted 41,518,704 44,583,944
============ ============
See accompanying notes to the consolidated financial statements.
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MODAVOX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
------------------------------
2008 2007
------------ ------------
REVENUE $ 1,846,461 $ 1,734,220
COSTS AND EXPENSES
Operating expenses 559,027 668,905
Selling, general, and administrative 1,540,507 1,036,205
Depreciation and amortization 403,135 224,862
------------ ------------
Total costs and expenses 2,502,669 1,929,972
------------ ------------
OPERATING LOSS (656,208) (195,752)
------------ ------------
OTHER INCOME (EXPENSES)
Interest income, net 6,876 23,598
Other expense -- (7,664)
------------ ------------
NET LOSS $ (649,332) $ (179,818)
============ ============
NET LOSS PER SHARE - basic and diluted $ (0.02) $ (0.00)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and diluted 40,945,860 37,349,900
============ ============
See accompanying notes to the consolidated financial statements.
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MODAVOX, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED AUGUST 31, 2008
(UNAUDITED)
COMMON PAR PAID IN STOCK ACCUMULATED
SHARES VALUE CAPITAL SUBSCRIPTION DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------ ------------
Balance -
February 29, 2008 39,750,622 $ 3,975 $ 16,688,798 $ (107,159) $(12,443,571) $ 4,142,043
Common stock issued
for purchase of Avalar assets 150,000 15 277,485 -- -- 277,500
Common stock issued
for cash 1,561,329 156 990,726 -- -- 990,882
Common stock issued for
warrant cashless exercise 296,312 30 (30) -- -- --
Shares issued to
placement agent 60,000 6 (6) -- -- --
Contingent shares issued for
purchase of WTR assets 30,000 3 52,497 -- -- 52,500
Employee stock option expense -- -- 70,898 -- -- 70,898
Warrants granted for services -- -- 42,764 -- -- 42,764
Proceeds from subscription
receivable -- -- -- 75,000 -- 75,000
Net loss -- -- -- -- (649,332) (649,332)
------------ ------------ ------------ ------------ ------------ ------------
Balance -
August 31, 2008 41,848,263 $ 4,185 $ 18,123,132 $ (32,159) $(13,092,903) $ 5,002,255
============ ============ ============ ============ ============ ============
See accompanying notes to the consolidated financial statements.
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MODAVOX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
--------------------------
2008 2007
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (649,332) $ (179,818)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 403,135 224,862
Stock option expense 70,898 70,898
Warrants granted for services 42,764 --
Changes in operating assets and liabilities:
Receivables (218,231) (571,103)
Prepaid expenses and other current assets (147,645) (117,644)
Accounts payable and accrued expenses 214,130 50,671
Deferred revenue (448,907) 133,002
----------- -----------
Net cash used in operating activities (733,188) (389,132)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (164,177) (144,141)
Cash paid for purchase of intangible assets (93,326) (25,138)
----------- -----------
Net cash used in investing activities (257,503) (169,279)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued for cash 990,882 247,633
Proceeds from subscription receivable 75,000 --
Payments on line of credit (19,590) (410)
Payments for related party note payable (22,749) --
----------- -----------
Net cash provided by financing activities 1,023,543 247,223
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 32,852 (311,188)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 657,174 1,220,592
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 690,026 $ 909,404
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ -- $ 576
Income taxes paid -- --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
Common stock issued to placement agent 6 --
Purchase of Avalar assets with common stock 277,500 --
Purchase of World Talk Radio assets with common stock -- 1,260,000
Contingent shares issued for purchase of World Talk Radio
assets 175,000 --
See accompanying notes to the consolidated financial statements.
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MODAVOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Modavox, Inc. have
been prepared in accordance with accounting principles generally accepted in the
United States of America and the rules of the Securities and Exchange
Commission, and should be read in conjunction with the audited financial
statements and notes thereto contained in Modavox's Annual Report filed with the
SEC on Form 10-KSB. In the opinion of management, all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of financial
position and the results of operations for the interim periods presented have
been reflected herein. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year. Notes to
the financial statements that would substantially duplicate the disclosures
contained in the audited financial statements for fiscal year 2008 as reported
in the Form 10-KSB has been omitted.
NOTE 2 - GOING CONCERN
Modavox incurred operating losses since inception, including a loss for the
three months ended August 31, 2008. Modavox believes that additional losses may
be incurred as it develops and executes a sales and distribution strategy for
its products and expands the number of sales locations. These potential losses
and capital expenditures needed for Modavox to expand its sales locations and
fund increases in revenue will likely require Modavox to raise additional
capital through the issuance of equity and/or debt. These conditions raise
substantial doubt as to Modavox's ability to continue as a going concern. The
financial statements do not include any adjustments that might be necessary if
Modavox is unable to continue as a going concern.
NOTE 3 - COMMON STOCK
In March, Modavox issued 60,000 shares to a placement agent for services related
to a future equity offering.
In March, Modavox issued 30,000 shares to World Talk Radio with a fair value of
$52,500 pursuant to contingent items that were completed. The remaining 70,000
contingent shares have been accrued for as of August 31, 2008 with a fair value
of $122,500.
In April, Modavox sold 400,000 shares at $1.25 for cash of $500,000.
In April, Modavox approved the addition of 1 million additional shares to the
employee stock option plan for current and future employees.
In May, Modavox issued 275,000 shares in connection with the exercise of
warrants for cash of $68,750.
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In May, Modavox issued 151,470 shares plus 309,859 shares for a total of 461,329
shares in connection with the exercise of warrants at $0.197 for cash of
$90,882. These warrants were granted pursuant to an anti-dilution provision in a
prior period financing transaction and caused the exercise price to be reduced
from $0.60 to $0.197.
In May, Modavox issued 150,000 shares with a fair value of $277,500 to purchase
intangible assets from Avalar. Modavox will hold 100,000 shares in escrow for
six months while Modavox implements the software and integrates the systems.
Please see Note 4 for more details.
In June, Modavox issued 210,692 shares in connection with the cashless exercise
of 250,000 options at $1.59 per share.
In June, Modavox issued 100,000 shares in connection with the exercise of
warrants for cash of $50,000.
In July, Modavox sold 160,000 shares at $1.25 for cash of $200,000.
In July, Modavox issued 25,000 shares in connection with the exercise of
warrants for cash of $6,250.
In August, Modavox sold 40,000 shares at $1.25 for cash of $50,000.
In August, Modavox issued 100,000 shares in connection with the exercise of
warrants for $25,000.
In August, Modavox issued 85,620 shares in connection with the cashless exercise
of 150,000 warrants at $1.53 per share.
In August, Modavox received cash of $75,000 from a prior year subscription
receivable.
STOCK OPTIONS
No options were granted during the six months ended August 31, 2008.
During the six months ended August 31, 2008, Modavox recognized $70,898 for
vesting of employee stock option expense for stock options granted in prior
years.
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The summary of activity for Modavox's stock options is presented below:
Weighted Average
Exercise Price
-----------------
August 31, August 31,
2008 2008
------------------------------
Options outstanding at February 29, 2008 5,228,000 $ 0.33
Granted -- --
Exercised 210,692 $ 0.25
Terminated/Expired 39,308 $ 0.25
Options outstanding at August 31, 2008 4,978,000 $ 0.33
Options exercisable at August 31, 2008 4,469,444 $ 0.28
Price per share of options outstanding $ 0.25 - 0.62
Weighted average remaining contractual lives 6.21 years
The intrinsic value of the exercisable options at August 31, 2008 was
$6,315,150.
WARRANTS
During the six months ended August 31, 2008, Modavox recognized $42,764 for
warrants that were granted for services in prior years.
The summary of activity for Modavox's warrants is presented below:
Weighted Average
Exercise Price
-----------------
August 31, August 31,
2008 2008
------------------------------
Warrants outstanding at February 29, 2008 6,857,595 $ 0.87
Granted 461,329 $ 0.20
Exercised 1,046,949 $ 0.26
Terminated/Expired 64,380 $ 0.75
Warrants outstanding at August 31, 2008 6,207,595 $ 0.92
Warrants exercisable at August 31, 2008 6,031,545 $ 0.90
Price per share of warrants outstanding $ 0.20 - 2.00
Weighted average remaining contractual lives .90
The intrinsic value of the exercisable warrants at August 31, 2008 was
$3,962,548.
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NOTE 4 - ASSET PURCHASE
In May, Modavox purchased certain assets from Avalar, Inc., a Washington based
internet radio software developer to enhance Modavox's current BoomBox Radio
offering. Modavox acquired the internet radio assets and enhancement platform
for 250,000 shares and $50,000 cash. The purchase provides Modavox with all of
the intangible assets and no liabilities of Avalar. These shares were valued at
their fair value of $1.85 per share for a share value of $277,500 for the
150,000 issued immediately, while the purchase agreement provides that Modavox
will hold in escrow 100,000 common shares for six months while Modavox
implements the software and integrates the systems. At the time of the purchase,
Avalar had one employee who will provide front line support of the system
integration and texting through October 15, 2008. In addition, the technology,
marketing, and operational activities, where they exist, will be abandoned
following integration and replaced with Modavox versions. As a result, Modavox
will account for the transaction as an asset purchase and not an acquisition of
a business.
NOTE 5 - CONTINGENCIES
Through August 31, 2008, Modavox received demands from former employees and
consultants requesting that Modavox issue common stock and/or common stock
warrants that purportedly were due to these former employees and consultants
based upon formal and informal agreements made by previous management. Modavox
has reviewed each demand as received, and has either rejected such requests or
requested additional support for the demands as follows:
In March 2007, a former consultant claimed that he is entitled to receive
250,000 shares and warrants to purchase 300,000 shares pursuant to a consulting
agreement. Modavox rejected the consultant's demand on the grounds that he
failed to provide the required full-time services. To date, the matter remains
unresolved.
On September 4, 2007, a former Chief Executive Officer and Chairman began AAA
arbitration proceedings against Modavox in Atlanta, GA citing breach in the
settlement agreement between both parties on March 21, 2006.
On March 20, 2008, a former investor began AAA arbitration proceedings seeking
enforcement of terms pursuant to the former Chief Executive Officer and Chairman
stock option assignment presumably in late 2007. To date, the individual has not
provided the requested documentation by our corporate counsel, and the matter
remains unresolved.
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NOTE 6 - LINE OF CREDIT
At February 29, 2008, Modavox had a line of credit with an unpaid balance of
$19,590, which was due on demand and bears interest at prime plus 4.25%. During
the six months ended August 31, 2008, Modavox repaid the bank note.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF
OUR OPERATIONS SHOULD BE READ IN CONJUNCTION WITH FINANCIAL STATEMENTS AND THE
NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT. THIS DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS REFLECTING OUR CURRENT EXPECTATIONS THAT
INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS AND THE TIMING OF EVENTS MAY
DIFFER MATERIALLY FROM THOSE CONTAINED IN THESE FORWARD-LOOKING STATEMENTS DUE
TO A NUMBER OF FACTORS, INCLUDING THOSE DISCUSSED UNDER BUSINESS- RISK FACTORS
NOTED IN OUR 10KSB FOR THE YEAR ENDED FEBRUARY 29, 2008 AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
Modavox, Inc. is the successor to SurfNet Media Group, Inc., a corporation
founded in 1999 and InnerSpace Corporation. On February 28, 2006, we acquired,
through merger, Kino Interactive LLC, which owned the rights to proprietary
software ("Kino Software") utilized in the creation of platforms that distribute
audio/visual streaming over the internet ("Modavox Platforms"). Until the merger
with Kino, we produced and distributed online talk radio programming,
principally through our VoiceAmerica Network through our Patented Internet Radio
and Internet Advertising System. As a result of the merger with Kino, we have
used the Kino Software to create a new platform for VoiceAmerica to distribute
talk radio over the internet and have used the Modavox Platforms to develop
customized audio & video streaming products utilized for online applications,
destinations, geographical and database driven solutions, websites that contain
online interactive advertising and enterprise level online interactive
communication products, and website enhancements that create or upgrade audio
and video streaming. We operate our Company in two distinctive product lines,
our Interactive Agency Division and our Interactive Network Division. On March
3, 2007, Modavox purchased certain equipment and intangible assets from World
Talk Radio LLC (WTR), a San Diego based internet talk Radio Company, for 900,000
shares of common stock valued at $1,260,000 based upon the market price at the
date of purchase. The purchase agreement provides that another 100,000 common
shares be retained in escrow for one year. Of these escrow shares, 30,000 have
been issued as of and the remaining 70,000 are accrued as of August 31, 2008. In
addition, we incurred $25,138 of fees associated with the transaction. We
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purchased property and equipment valued at $35,000 and certain intangible
assets, consisting of the trade name, domain name and various archived internet
radio programs valued at $1,250,138. At the time of the purchase, WTR had two
employees and minimal operating activity. In addition, the technology,
marketing, and operating activities were abandoned and replaced with a Modavox
version. As a result, we accounted for this transaction as an asset purchase and
not an acquisition of a business. On May 15, 2008, Modavox purchased certain
assets from Avalar, Inc., a Washington based internet radio software developer
to enhance our current BoomBox Radio offering. We agreed to acquire the internet
radio assets and enhancement platform for 250,000 shares and $50,000 of cash.
The purchase provides us with all of the intangible assets and no liabilities of
Avalar, Inc. These shares were valued at $1.85 per share for a share value of
$277,500 for the 150,000 issued immediately, while the purchase agreement
provides that Modavox will hold in escrow 100,000 common shares for six months
while Modavox implements the software and integrates the systems. At the time of
the purchase, Avalar had one employee who will provide front line support of the
system integration and texting through October 15, 2008. In addition, the
technology, marketing, and operational activities, where they exist, will be
abandoned following integration and replaced with Modavox versions. As a result,
we will account for the transaction as an asset purchase and not an acquisition
of a business.
You can learn more about us by visiting our website at www.modavox.com. Our
offices are at 4636 E University Dr., Suite 275, Phoenix, AZ 80354, telephone
(602) 648-6080. On January 30, 2002, our common stock began trading on the OTC
Bulletin Board Service. Our stock symbol is MDVX.
Historically, however, the Company's revenues have been less than its expenses.
As a result, the Company has been dependent on raising capital to continue its
operations.
Results of Operations
The discussion of the results of operations compares the quarter ended August
31, 2008 with the quarter ended August 31, 2007, and the six months ended August
31, 2008 with August 31, 2007, and is not necessarily indicative of the result
which may be expected for an subsequent periods. Our limited operating history
makes predicting future operating results very difficult. Our prospects should
be considered in light of the risks, expenses and difficulties encountered by
companies in similar positions. We may not be successful in addressing these
risks and difficulties.
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THREE MONTHS ENDED AUGUST 31, 2008 VS. 2007
For the quarter ended August 31, 2008, revenues were $985,826 compared to
$1,131,882 for the quarter ended August 31, 2007. Revenues for the quarter ended
August 31, 2008 included $322,277 from the Interactive Media Division and
$475,943 from the Broadcast Media Division, and deferred revenue in the amount
of $187,606. The Broadcast Media division revenues in 2008 include $21,003 from
RadioPilot which was acquired on May 15, 2008 and $18,230 from World Talk Radio
which was acquired on March 3, 2007. Revenues from the Interactive Media
division in 2008 included an aggregate of $21,495 from hosting services and
$300,782 from other services compared to $125,748 in 2007. The decrease in
revenue for the Broadcast Media division is related to the reduction of the
sales team for World Talk Radio and to the significant downturn of the economy.
The increase in revenue for the Interactive Media division is related to the
change in business direction from hosting activities to website development.
Operating expenses were $188,492 for the August 31, 2008 quarter compared to
$531,817 in the quarter ended August 31, 2007 reflecting expense decreases
related to telephone and hosting to support our decreases in our Broadcast Media
Division, and sales commissions paid to Network Division Executive Producers
related to decreased sales.
Selling, general, and administrative expenses were $905,547 for the quarter
ended August 31, 2008 compared with $342,281 for the quarter ended 2007. The
increase of $563,266 was the result of legal fees of $341,086, as the Company
continues to manage through the various legacy legal challenges by former
management, focus on our patent strategies, and layers of sales and fulfillment
management added to support the growth goals of the organization.
Depreciation and amortization expense was $216,928 in the 2008 quarter compared
with $115,427 in the 2007 quarter. The increase in depreciation and amortization
relates to the increased capitalization of internal software and assets
purchased in the asset purchases of World Talk Radio and RadioPilot.
During the quarter ended August 31, 2008, the Company had loss of $322,190
compared to the profit of $158,013 in the 2007 quarter. This is due to the
increase in legal costs associated with our various outstanding matters,
decrease of revenues from our World Talk Radio Division, and the increased
depreciation and amortization expense.
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SIX MONTHS ENDED AUGUST 31, 2008 VS. 2007
For the six months ended August 31, 2008 revenues were $1,846,461 compared to
$1,734,220 for the six months ending August 31, 2007. Revenues for the six
months ended August 31, 2008 included $453,481 from the Interactive Media
Division and $944,073 from the Broadcast Media Division, and Deferred revenue in
the amount of $448,907 compared to $425,765 from the Interactive Media Division
and $1,308,455 from the Broadcast Media Division respectively for the six months
ended August 31, 2007. The Broadcast Media Division revenues in 2008 included
$98,122 from World Talk Radio which was acquired on March 3, 2007 and $30,658
from RadioPilot which was acquired on May 15, 2008. Revenues from the
Interactive Media Division in 2008 included an aggregate of $65,933 from hosting
services and $387,548 from other services compared to $183,610 from hosting
services and $242,155 from other services in 2007.
Operating expense were $559,027 for the six months ended August 31, 2008
compared to $668,905 in 2007. This decrease of $109,878 in operating expense
reflects decreased expense related to distribution of Radio content associated
with World Talk Radio.
Selling, general and administrative expenses were$ 1,540,507 for the six months
ended August 31, 2008 compared with $1,036,205 for 2007, an increase of
$504,302. The difference is due to increases in payroll costs to key managers
and associates, and additional support staff for the Interactive Radio Division
and the Broadcast Media Divisions.
Depreciation and amortization expense was $403,135 for the six months ended
August 31, 2008 compared with $224,862 in 2007. The increase is due to
depreciation of additional property and equipment and amortization of additional
software purchases, the Avalar asset purchase, and internally capitalized
software.
During the six months ended August 31, 2008, the Company had a net loss of
$649,332 compared to a net loss of $179,818 in 2007. The loss is due to the
decrease in revenues produced by the Company over 2007 which for quarter ended
August 31, 2008 were $985,826 compared to $1,131,882 for the quarter ending
August 31, 2007.
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LIQUIDITY AND CAPITAL RESOURCES
During the six months ended August 31, 2008, cash generated from revenues was
not adequate to pay the Company's operating expenses, fund research and
development, and fund the Avalar, Inc. asset purchase.
During the six months ended August 31, 2008, we raised $990,882 through the
issuance of common stock. These proceeds were used in part, to provide payment
to non-operational activities such as the investigation involving the former
Chief Executive Officer and Chairman, fund out patent strategies, increase our
product offering through the acquisition of the Avalar assets, and resolve legal
matters. As of August 31, 2008, Modavox has no outstanding debt other than the
related party note payable of $1,118 and has closed the credit line opened by
former management in 2003.
The Company believes that its required capital expenditures for fiscal year 2009
will exceed $500,000.
As noted above, the Company has not historically had adequate cash or projected
cash flow to fund its operations and continuation of its operations. Until the
Company is able to achieve sustainable positive cash flow, it is dependent upon
its ability to raise additional capital through equity and debt issuance. While
the Company is making progress in achieving sustainable positive cash flow, the
future growth of the Company may require that the Company raise additional
capital.
RISK FACTORS
PLEASE SEE FORM 10KSB FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE
13, 2008 FOR COMPANY RISK FACTORS.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based on current expectations, estimates and
projections about our industry, management's beliefs, and certain assumptions
made by management. Words such as "anticipate," "expect," "intend", "plans,"
"believe," "seek," "estimate" and similar expressions are intended to identify
forward-looking statements. These statements are not guarantees of future
performance and actual actions or results may differ materially. These
statements are subject to certain risks, uncertainties and assumptions that are
difficult to predict, including those noted in the documents incorporated herein
by reference. Particular attention should also be paid to the cautionary
language appearing elsewhere in this report. We undertake no obligation to
update publicly any forward-looking statements as a result of new information,
future events or otherwise, unless required by law. Readers should, however,
carefully review the risk factors included in other reports or documents we file
from time to time with the Securities and Exchange Commission, including in our
Annual Report Form 10-KSB for our fiscal year ended February 29, 2008.
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ITEM 4T. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by an
issuer in the reports that it files or submits under the Securities Exchange Act
of 1934, as amended (the "Act") is accumulated and communicated to the issuer's
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. It should be noted that the design of
any system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote. As of the end of the period covered by this Report, we
carried out an evaluation, under the supervision and with the participation of
our Chief Executive Officer and Corporate Controller, both serving as our
Principal Financial entities, of the effectiveness of the design and operation
of our disclosure controls and procedures. Based on this evaluation, our Chief
Executive Officer has concluded that the Company's disclosure controls and
procedures are not effective because of the identification of a material
weakness in our internal control over financial reporting which we view as an
integral part of our disclosure controls and procedures. The material weakness
relates to the lack of segregation of duties in financial reporting, as our
financial reporting and several of our accounting functions are performed by
internal employees with limited oversight by a professional with accounting
expertise. Our Chief Executive Officer is not a Certified Public Accountant.
This weakness is due to the Company's lack of working capital to hire additional
staff. To remedy this material weakness, we have entered into a service
agreement with a local CPA firm who is acting as a part time CFO, intend to
pursue another accountant, preferably to fill the role of Corporate Controller,
and intend to hire additional accounting support staff to assist with financial
reporting and proper segregation of duties as soon as our finances will allow.
Changes in Internal Controls over Financial Reporting
We have not yet made any changes in our internal controls over financial
reporting that occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 2007, another former consultant claimed that he is entitled to receive
250,000 shares and warrants to purchase 300,000 shares pursuant to a consulting
agreement. Modavox rejected the consultant's demand on the grounds that he
failed to provide the required full-time services. To date, the matter remains
unresolved.
On September 4, 2007, a former Chief Executive Officer and Chairman initiated
AAA arbitration proceedings against Modavox in Atlanta, GA citing breach of the
March 21, 2006 settlement agreement between both parties. Specifically, the
former CEO and Chairman alleges breach of contract, conversion, defamation and
punitive damages, and Modavox filed a counter-claim to declare rescinded and of
no further force and effect the settlement agreement, for damages arising out of
breaches of fiduciary duties, for return and recovery of all compensation paid,
and to declare void and of no force and effect a "Nonqualified Stock Option
Agreement". The former Chief Executive Officer and Chairman asserts that he is
entitled to stock options entitling him to purchase 3,000,000 shares of Modavox
common stock, but neither he nor the Company has been able to find or produce an
original signed copy of the option agreement or original signed document
reflecting compliance with the corporate formalities necessary to cause issuance
of the option agreement. Modavox continues to seek appropriate remedies to
insure that shareholders and the Company are not affected adversely by the
demands of the claim. To date, the former Chief Executive Officer and Chairman
has refused to provide the information necessary to comply with federal law
related to the income tax withholding or securities holding date requirements
surrounding the purported Employee Stock Options in question. An adverse outcome
to the arbitration would affect the company adversely from both regulatory and
federal income tax perspectives and substantially dilute shareholder interests.
The matter remains unresolved.
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On March 20, 2008 a former investor initiated AAA arbitration proceedings
seeking enforcement of a purported assignment, in late 2007, of stock options by
the former Chief Executive Officer and Chairman to the investor under the same
stock option agreement that the former Chief Executive Officer and Chairman is
attempting to enforce through the Atlanta arbitration proceeding. To date, the
investor has not provided the requested documentation by our corporate counsel,
including evidence of the consideration and the actual transfer of
consideration. Modavox believes that all these demands are without merit, and an
adverse determination on these claims could materially affect Modavox and
substantially dilute shareholder interests and value. The matter remains
unresolved.
While Modavox currently believes that all these demands are without merit, an
adverse determination on these claims could materially affect Modavox or
substantially dilute shareholder interests.
On May 16, 2008, Modavox served a Cease and Desist letter to the AOL, LLC
President & Chief Operating Officer. Modavox advised of the possible expansion
of our current action against Tacoda to include AOL, LLC if they intend to
utilize the Tacoda Advertising process throughout the AOL, LLC "Platform A" as
described in recent publications and news releases. Modavox has informed AOL,
LLC that a non-exclusive license to the patents-in-suit is available; however in
the absence of a license AOL, LLC's published intention to make the Tacoda
solution available across the Platform-A Network will in fact infringe upon well
identified patents. To date, the matter remains unresolved.
On May 23, 2008, Modavox issued a Cease and Desist letter to AOL, LLC related to
its Trademark Registration No. 2,397,385 for the word-mark BOOMBOX RADIO in
connection with "entertainment services featuring music, news, talk shows, video
and computer games, movies, and television shows, provided via a global computer
network". The use of BOOMBOX for entertainment services is an infringement of
Modavox's rights in the BOOMBOX RADIO mark for identical services. AOL's use of
the near identical mark may cause confusion or deceive the public into thinking
AOL's services originate or are somehow related to Modavox's, or have the
sponsorship or approval of Modavox. This falsehood is reinforced by the adoption
of the large dominant BOOMBOX cursive. The remedies available to Modavox include
an injunction or court order prohibiting use of the mark, an award of profits
from use of the mark, monetary damages above and beyond profits, seizure,
impoundment and destruction of any infringing forms, documents, signage,
literature, and material bearing the mark, and costs of the action. To date, the
matter remains unresolved.
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On June 6, 2008, Modavox issued a Cease and Desist letter to Sirius Satellite
Radio related to its Trademark Registration No. 2,397,385 for the word-mark
BOOMBOX RADIO in connection with "entertainment services featuring music, news,
talk shows, video and computer games, movies, and television shows, provided via
a global computer network". The use of BOOMBOX for entertainment services is an
infringement of Modavox rights in the BOOMBOX RADIO mark for identical services.
Sirius Satellite Radio's use of the near identical mark may cause confusion or
deceive the public into thinking Sirius services originate or are somehow
related to Modavox, or have the sponsorship or approval of Modavox. This
falsehood is reinforced by the adoption of the large dominant BOOMBOX cursive.
The remedies available to Modavox include an injunction or court order
prohibiting use of the mark, an award of profits from use of the mark, monetary
damages above and beyond profits, seizure, impoundment and destruction of any
infringing forms, documents, signage, literature, and material bearing the mark,
and costs of the action. To date, the matter remains unresolved.
In August 2007, Modavox's Management, with the full consent and approval of the
Board of Directors, engaged an independent law firm to serve as Special Counsel
to investigate allegations of possible violations of the federal securities and
other laws in connection with securities-related transactions during the period
2003 through 2005 undertaken and authorized by prior management. In February
2008, the Board of Directors appointed a Special Committee of the Board,
comprised of those directors who were not apparent beneficiaries of any of the
transactions at issue, to oversee and consider the findings of the
investigation. Special Counsel reported preliminary findings to the Special
Committee, and the report included findings of possible violations of law,
including federal securities and tax laws. Special Counsel did not find any
violations of law by any member of current management. Additionally, the
officers of Modavox and most directors cooperated fully with the investigation.
The Special Committee authorized voluntary disclosure to the SEC and Department
of Justice regarding the findings of the investigation, and the preliminary
results of the investigation have been disclosed to the SEC. The Special
Committee has directed Special Counsel to prepare and provide a written summary
of Special Counsel's findings and recommendations. As a direct result of recent
requests for the removal of restricted legends from shares issued to one
director and related stock transfers, and for information regarding a
transaction that occurred in 2002, Management has directed Special Counsel to
determine whether these issues merit inclusion in the written summary of
findings. As a result, the Special Committee does not consider the investigation
yet to be complete and awaits submission of the written summary.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In April, Modavox issued 400,000 shares in connection with the accredited
investor investment of 400,000 shares issued at $1.25 for aggregate
consideration of $500,000. The funds raised were used to provide necessary
payments to legal related matters including but not limited to the current
patent infringement litigation with Tacoda. In addition, the use of proceeds
enabled our company to increase our intellectual property, through the Avalar,
Inc. software purchase, and other internal software development. During the
Quarter Ended August 31, 2008 we increased our sales associate count and added
new sales team members to our Las Vegas location.
In July and August, Modavox issued 200,000 shares in connection with the
accredited investment of 200,000 shares issued at $1.25 for aggregate
consideration of $250,000. The funds raised were used to provide necessary
payments to legal related matters, including but not limited to the current
patent infringement litigation with Tacoda.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
EXHIBIT NUMBER DOCUMENT
31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL
OFFICER PURSUANT TO SEC RULE 15D-14
32 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL
OFFICER PURSUANT TO 18 USC SECTION 1350(2)
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Modavox, Inc. (Registrant)
By: /S/ DAVID IDE
-------------
David Ide
Chief Executive Officer
Principal Executive Officer
Date: October 17, 2008
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