UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
1900 WEST UNIVERSITY DRIVE, SUITE 230
TEMPE, AZ 85281
(Address of principal executive offices)
(Zip Code)
(480) 553-5750
(Registrant's telephone number, including area code)
4636 EAST UNIVERSITY DRIVE, SUITE 275, PHOENIX AZ 85034
- --------------------------------------------------------------------------------
(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 |_| (Do not check if a smaller reporting company)
Smaller reporting company |X|
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 January 15, 2009 the issuer had 42,855,763 shares of common stock, par
value $.0001, issued and outstanding.
EXPLANATORY NOTE
This Amendment No. 1 amends the Quarterly Report on Form 10-Q for the periods
ended November 30, 2008 of Modavox, Inc. ("Modavox" or the "Company"), which was
filed with the Securities and Exchange Commission (the "SEC") on January 20,
2009 (the "Original Filing"). Modavox is filing this Amendment No. 1 for the
sole purpose of including amended Exhibit 31.1. The Certifications included in
Exhibit 31.1 to the Original Filing erroneously omitted the introductory
language of paragraph 4 and the language of paragraph 4(b) of Item 601(b)(31) of
Regulation S-K.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of November 30, 2008 and 3
February 29, 2008 (unaudited)
Consolidated Statements of Operations for the three months 4
ended November 30, 2008 and 2007 (unaudited)
Consolidated Statements of Operations for the nine months 5
ended November 30, 2008 and 2007 (unaudited)
Consolidated Statement of Stockholders' Equity for the nine 6
months ended November 30, 2008 (unaudited)
Consolidated Statements of Cash Flows for the nine months 7
ended November 30, 2008 and 2007 (unaudited)
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis or Plan of Operation 14
Item 3. Controls and Procedures 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits 20
SIGNATURES 21
2
MODAVOX, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
NOVEMBER 30, FEBRUARY 29,
2008 2008
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 471,232 $ 657,174
Accounts receivable, net of allowance for
doubtful accounts of $245,000 1,386,616 1,120,456
Prepaid expenses and other current assets 176,064 18,019
------------ ------------
Total current assets 2,033,912 1,795,649
Property and equipment net of accumulated depreciation of
$523,801 and $315,267, respectively 562,523 507,514
Goodwill 1,115,746 1,115,746
Software and patents, net of accumulated amortization of
$1,208,153 and $790,652, respectively 2,733,974 2,464,841
------------ ------------
TOTAL ASSETS $ 6,446,155 $ 5,883,750
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 914,055 $ 672,641
Accrued liabilities 468,371 150,987
Line of credit -- 19,590
Deferred revenue 315,674 874,622
Related party note payable 17,069 23,867
------------ ------------
Total current liabilities 1,715,169 1,741,707
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value; 100,000,000 shares authorized;
42,455,763 and 39,838,122 shares issued and
outstanding, respectively 4,246 3,984
Additional paid-in capital 19,150,450 17,384,633
Stock subscription receivable -- (107,159)
Accumulated deficit (14,423,710) (13,139,415)
------------ ------------
Total stockholders' equity 4,730,986 4,142,043
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,446,155 $ 5,883,750
============ ============
See accompanying notes to the consolidated financial statements.
3
MODAVOX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
2008 2007
------------ ------------
REVENUE $ 718,695 $ 797,559
COSTS AND EXPENSES
Operating expenses 312,324 65,912
Selling, general, and administrative 820,449 1,124,782
Depreciation and amortization 222,900 89,997
------------ ------------
Total costs and expenses 1,355,673 1,280,691
------------ ------------
OPERATING LOSS (636,978) (483,132)
------------ ------------
OTHER INCOME (EXPENSES)
Interest income (expense), net 2,015 12,743
------------ ------------
NET LOSS $ (634,963) $ (470,389)
============ ============
NET LOSS PER SHARE - basic and diluted $ (0.02) $ (0.01)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and diluted 42,024,652 37,823,019
============ ============
See accompanying notes to the consolidated financial statements.
4
MODAVOX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
2008 2007
------------ ------------
REVENUE $ 2,565,156 $ 2,531,779
COSTS AND EXPENSES
Operating expenses 871,351 734,817
Selling, general, and administrative 2,360,956 2,160,987
Depreciation and amortization 626,035 314,859
------------ ------------
Total costs and expenses 3,858,342 3,210,663
------------ ------------
OPERATING LOSS (1,293,186) (678,884)
------------ ------------
OTHER INCOME (EXPENSES)
Interest income (expense), net 8,891 36,341
Other expense -- (7,664)
------------ ------------
NET LOSS $ (1,284,295) $ (650,207)
============ ============
NET LOSS PER SHARE - basic and diluted $ (0.03) $ (0.02)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and diluted 41,362,479 37,506,459
============ ============
See accompanying notes to the consolidated financial statements.
5
MODAVOX, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2008
(UNAUDITED)
COMMON PAR PAID IN STOCK ACCUMULATED
SHARES VALUE CAPITAL SUBSCRIPTION DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------ ------------
Balance -
February 29, 2008 39,838,122 $ 3,984 $ 17,384,633 $ (107,159) $(13,139,415) $ 4,142,043
Common stock issued
for purchase of Radio
Pilot assets 150,000 15 277,485 -- -- 277,500
Common stock issued
for cash 2,081,329 208 1,265,674 -- -- 1,265,882
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 -- -- 106,347 -- -- 106,347
Warrants granted for
services -- -- 63,850 -- -- 63,850
Proceeds from subscription
receivable -- -- -- 107,159 -- 107,159
Net Loss -- -- -- -- (1,284,295) (1,284,295)
------------ ------------ ------------ ------------ ------------ ------------
Balance -
November 30, 2008 42,455,763 $ 4,246 $ 19,150,450 $ -- $(14,423,710) $ 4,730,986
============ ============ ============ ============ ============ ============
See accompanying notes to the consolidated financial statements.
6
MODAVOX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
2008 2007
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,284,295) $ (650,207)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 626,035 314,859
Stock option expense 106,347 106,347
Warrants granted for services 63,850 56,861
Changes in operating assets and liabilities:
Receivables (266,160) (715,539)
Prepaid expenses and other current assets (158,045) (158,553)
Accounts payable and accrued expenses 314,297 199,095
Deferred revenue (558,948) 209,859
------------ ------------
Net cash used in operating activities (1,156,919) (637,278)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (263,542) (232,423)
Cash paid for purchase of intangible assets (112,134) (25,138)
------------ ------------
Net cash used in investing activities (375,676) (257,561)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued for cash 1,265,882 716,383
Proceeds from subscription receivable 107,159 --
Payments on line of credit (19,590) (800)
Payments for related party note payable (6,798) --
------------ ------------
Net cash provided by financing activities 1,346,653 715,583
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (185,942) (179,256)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 657,174 1,220,592
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 471,232 $ 1,041,336
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ -- $ 576
Income taxes paid $ -- $ --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
Common stock issued to placements 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 for purchase of World talk radio assets
(30,000 issued and 70,000 accrued) 175,000 --
Contingent shares for purchase of Avalar assets 122,000 --
Common shares issued for subscription receivable -- 100,000
See accompanying notes to the consolidated financial statements.
7
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 November 30, 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 - NEW REVENUE RECOGNITION POLICY
Modavox developed an updated product consisting of a software and a hosting
service together in one individual sale. These two items meet the criterion
provided in EITF 00-21 for separation of these two items and recognition of the
revenue as separate components. The revenue related to the software product is
recognized when the customer takes delivery and the revenue related to the
hosting service is recognized over the life of the service contract as services
are provided.
NOTE 4 - 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.
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 5 for more details.
8
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.
In September, Modavox sold 20,000 shares at $1.25 for cash of $25,000.
In September, Modavox received cash of $32,159 from a prior year subscription
receivable.
In November, Modavox issued 500,000 shares in connection with the exercise of
warrants for $250,000.
STOCK OPTIONS
No options were granted during the nine months ended November 30, 2008.
During the nine months ended November 30, 2008, Modavox recognized $106,347 for
vesting of employee stock option expense for stock options granted in prior
years.
The summary of activity for Modavox's stock options is presented below:
Weighted Average
Stock Options Exercise Price
---------------------------------
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 November 30, 2008 4,978,000 $ 0.33
Options exercisable at November 30, 2008 4,775,756 $ 0.29
Price per share of options outstanding $ 0.25 - 0.62
Weighted average remaining contractual lives 5.95 years
The intrinsic value of the exercisable options at November 30, 2008 was
$7,227,350.
9
WARRANTS
During the nine months ended November 30, 2008, Modavox recognized $63,850 for
warrants that were granted for services in prior years.
The summary of activity for Modavox's warrants is presented below:
Weighted Average
Warrants Exercise Price
---------------------------------
Warrants outstanding at February 29, 2008 7,032,595 $ 0.89
Granted 461,329 $ 0.20
Exercised (1,546,949) $ 0.35
Terminated/Expired (64,380) $ 0.75
Warrants outstanding at November 30, 2008 5,882,595 $ 0.98
Warrants exercisable at November 30, 2008 5,748,166 $ 0.96
Price per share of warrants outstanding $ 0.20-2.00
Weighted average remaining contractual lives 1.72 years
The intrinsic value of the exercisable warrants at November 30, 2008 was
$4,823,197.
NOTE 5 - 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. These shares have not been
issued as of November 30, 2008. An accrual has been set up for the future
issuance of these 100,000 common shares. 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 existed, were abandoned following integration
and replaced with Modavox versions. As a result, Modavox accounted for the
transaction as an asset purchase and not an acquisition of a business.
NOTE 6 - CONTINGENCIES
Through November 30, 2008, Modavox received several 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 from March 2004. In December, Modavox settled this matter with a
former consultant and issued 87,500 shares of Modavox Common Stock to the
consultant and granted a warrant that vests immediately to purchase 175,000
shares of Modavox Common stock as follows: (a) 50,000 shares on of before March
17, 2009 at a price of $1.75 per share; (b) 62,500 shares on or before March 17,
2010 at a price of $1.75 per share; (c) 62,500 shares on or before March 17,
2011 at a price of 1.75 per share. Modavox assessed the error on prior years for
not recording the common shares and warrants pursuant to the 2004 agreement
based on SEC Staff Accounting Bulleting (SAB) 99 and SAB 108. The error was
determined to be immaterial for a restatement of any prior filing and too
material to account for as a 2009 fiscal year transaction. Pursuant to SAB 108,
the common shares outstanding, common shares fair value and the warrant fair
value have been adjusted into Modavox's beginning balances as of February 28,
2008 in this filing to reflect the error.
10
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. This matter remains
unresolved wothout new updates.
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 and the matter remains unresolved.
On January 9, 2009, Modavox was named as a defendant in a direct lawsuit filed
by a group of six Modavox shareholders in the United States District Court,
District of Arizona. The suit seeks injunctive relief and damages relating to
allegedly fraudulent securities-related transactions during the period 2003
through 2005 undertaken and authorized by prior management, including Modavox's
former Chief Executive Officer and Chairman, Robert Arkin. The suit also claims
that plaintiffs have suffered damages resulting from new management's handling
of information learned from its investigation of prior management. Modavox's
response to the court is due on January 26, 2009. This matter remains unresolved
with out new updates.
NOTE 7 - 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 nine months ended November 30, 2008, Modavox repaid the bank note.
NOTE 8 - SUBSEQUENT EVENTS
In December, Modavox issued 200,000 shares in connection with the exercise of
warrants for $100,000.
In December, Modavox granted a warrant for services to purchase 700,000 common
at an exercise price of $0.50 cents per common share. These warrants vest
immediately and expire on July 6, 2009.
In December, Modavox entered in to a new office lease agreement that commences
in December 2008 and has a term of 39 months. The lease has a security deposit
of $11,911 and the monthly payment is $11,911 for the first 15 months with four
months being free. The monthly payment increases to $12,233 from months 16
through 27, and $12,555 from months 28 through 39.
In December, Modavox issued 200,000 shares as a non refundable deposit pursuant
to an amended letter of intent to acquire a 60% interest in the assets,
software, technology and operations of another company. To close the acquisition
of 60% of the target Company, Modavox will need to pay $1,000,000 in cash and
issue another 1,733,333 shares to the other company.
11
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 28, 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 November 30, 2008.
In addition, we incurred $25,138 of fees associated with the transaction. We
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 acquired the internet radio
assets and enhancement platform for 250,000 shares and $50,000 of cash. The
purchase provided 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
provided that Modavox will hold in escrow 100,000 common shares for six months
while Modavox implements the software and integrates the systems. At November
30, 2008, an accrual has been set up for the 100,000 shares. At the time of the
purchase, Avalar had one employee who provided front line support of the system
integration and texting through October 15, 2008. In addition, the technology,
marketing, and operational activities, where they existed, were abandoned
following integration and replaced with Modavox versions. As a result, we
accounted for the transaction as an asset purchase and not an acquisition of a
business.
12
You can learn more about us by visiting our website at www.modavox.com. Our
offices are at 1900 W University Dr, Suite 230, Tempe, AZ 85281 (480) 553-5795.
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 three months ended
November 30, 2008 with the three months ended November 30, 2007 and is not
necessarily indicative of the results which may be expected for any 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 risk and difficulties.
THREE MONTHS ENDED NOVEMBER 30, 2008 VS. 2007
For the quarter ended November, 2008, revenues were $718,695 compared to
$797,559 for the quarter ended November 30, 2007. Revenues for the quarter ended
November 30, 2008 included $79,313 from the Interactive Media Division and
$529,342 from the Broadcast Media Division, and deferred revenue in the amount
of $110,040. The Broadcast Media division revenues in 2008 include $36,866 from
Avalar which was acquired on May 15, 2008 and $15,900 from World Talk Radio
which was acquired on March 3, 2007. Revenues from the Interactive Media
division in 2008 included an aggregate of $48,875 from hosting services and
$12,535 from website development compared to $117,867 in monthly hosting and
$81,650 in website development 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 decrease in
revenue for the Interactive Media division is related to the significant
downturn in the economy, our production time lines and product delivery.
Operating expenses were $312,324 for the November 30, 2008 quarter compared to
$65,912 in the quarter ended November 30, 2007 reflecting expense increases
related to telephone, hosting, and rent to support additional locations in our
Interactive Media Department and sales commissions paid to Network Division
Executive Producers related to increased sales, and hosting of our various
Internet Based Assets.
Selling, general, and administrative expenses were $820,449 for the quarter
ended November 30, 2008 compared with $1,124,782 for the quarter ended 2007.
This reduction resulted from better control over costs and a reduction of
various expenses, although the 2008 quarter included legal fees of $244,306, as
the Company continues to manage through the various legacy legal challenges by
former management and focus on our patent strategies.
Depreciation and amortization expense was $222,900 in the 2008 quarter compared
with $89,997 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, Kino Interactive, and
Avalar.
During the quarter ended November 30, 2008, the Company had loss of $636,978
compared to the loss of $483, 132 in the 2007 quarter.
NINE MONTHS ENDED NOVEMBER 30, 2008 VS. 2007
For the nine months ended November 30, 2008 revenues were $2,565,156 compared to
$2,531,779 for the nine months ending November 30, 2007. Revenues for the nine
months ended November 30, 2008 included $532,794 from the Interactive Media
Division and $1,473,415 from the Broadcast Media Division, and deferred revenue
in the amount of $558,947 compared to $603,414 from the interactive media
division, $1,928,365 from the Broadcast Media Division, respectively for the
nine months ended November 30, 2007. The Broadcast Media Division revenues in
2008 included $114,022 from World Talk Radio which was acquired on March 3, 2007
and $45,170 from Avalar which was acquired on May 15, 2008. Revenues from the
Interactive Media Division in 2007 included an aggregate of $114,809 from
hosting services and $417,985 from other services compared to $301,477 from
monthly hosting services in 2007.
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Operating expenses were $871,351 for the nine months ended November 30, 2008
compared to $734,817 in 2007. The increase in operating expense reflects
increased expense related to distribution of radio and interactive content.
Selling, general and administrative expenses were $2,360,956 for the nine months
ended November 30, 2008 compared with $2,160,987 for 2007. 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 $626,035 for the nine months ended
November 30, 2008 compared with $314,859 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 nine months ended November 30, 2008, the company had a net loss of
$1,293,186 compared to a net loss of $650,207 in 2007. The loss is due to the
increase of operating, selling, and general and administration expenses without
the corresponding increase in revenue.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended November 30, 2008, cash generated from revenues was
not adequate to pay the Company's operating expenses, fund research &
development, and fund the Avalar, Inc. Asset Purchase.
During the nine months ended November 30, 2008, we raised $1,265,882 through the
issuance of common stock. These proceeds were used in part, to provide payment
to non-operational activities such as the investigation of the former Chief
Executive Officer & Chairman, fund out patent strategies, increase our product
offering through the acquisition of the Avalar assets, and resolve legal
matters. As of November 30, 2008, Modavox has no outstanding debt other than the
related party note payable of $17,069, has paid off the outstanding bank note,
and intends to close 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, 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 and negative cash flow until sustainable positive
cash flow is achieved 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. IN ADDITION, THE COMPANY BELIEVES THAT THE
CREDIT CRISIS AND ECONOMY BOTH HAVE WORSENED AND THIS MAY AFFECT MODAVOX BOTH BY
NEGATIVELY IMPACTING REVENUE AND BY MAKING IT MORE DIFFICULT OR IMPOSSIBLE TO
GET ACCESS TO ADDITIONAL CAPITAL.
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FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB 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 all accounting functions are performed by an internal
employee with no 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 intend to pursue another accountant, preferably to
fill the role of Chief Financial Officer, to assist with financial reporting 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. This matter remains
unresolved without new updates.
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.
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.
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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.
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.
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.
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 an oral summary in the near future.
On January 9, 2009, Modavox was named as a defendant in a direct lawsuit filed
by a group of six Modavox shareholders in the United States District Court,
District of Arizona. The suit seeks injunctive relief and damages relating to
allegedly fraudulent securities-related transactions during the period 2003
through 2005 undertaken and authorized by prior management, including Modavox's
former Chief Executive Officer and Chairman, Robert Arkin. The suit also claims
that plaintiffs have suffered damages resulting from new management's handling
of information learned from its investigation of prior management. Modavox's
response to the court is due on January 26, 2009. This matter remains unresolved
without new updates.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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)
18
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: March 19, 2009
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