UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Amendment Number 1
(Mark One)
|X| Quarterly Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2005.
|_| Transition Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ______________________
to _________.
Commission File No. 000-30294
DIALOG GROUP, INC.
(Name of Small Business Issuer in its Charter)
Delaware 87-0394290
- ------------------------------- -----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
Twelfth Floor, 257 Park Avenue South, New York, NY 10010
- -------------------------------------------------- ----------------
(Address of Principal Executive Offices) (Zip Code)
212.254.1917
- ---------------------------
(Issuer's Telephone Number)
- ---------------------------
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12
months (or 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 |_|
Check whether the registrant filed all documents and reports required to be
filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes |X| No |_|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
At November 17, 2005 there were 177,578,039 shares of common stock, par
value $.001 per share outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
DIALOG GROUP, INC. AND SUBSIDIARIES
INDEX
Page
Number
Part I - Financial Information
Item 1 Financial Statements
F-1 Condensed Consolidated Balance Sheets as of December 31, 2004
(audited) and September 30, 2005 (unaudited)
F-2 Condensed Consolidated Statements of Operations and Comprehensive
Loss for the Three Months Ended September 30, 2005 (unaudited) and
September 30, 2004 (unaudited)
F-3 Condensed Consolidated Statements of Operations and Comprehensive
Loss for the Nine Months Ended September 30, 2005 (unaudited) and
September 30, 2004 (unaudited)
F-4 Condensed Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 2005 (unaudited) and September 30, 2004
(unaudited)
F-5 to
F-35 Notes to Condensed Consolidated Financial Statements (unaudited)
3-12 Item 2. Management's Discussion and Analysis or Plan of Operation
13 Item 3. Controls and Procedures
Part II - Other Information
14 Item 1 Legal Proceedings
15 Item 2 Recent Unregistered Sales of Equity Securities and Use
of Proceeds
17 Item 6. Exhibits
DIALOG GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS September December 31
2005 2004
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash $ -- 131,690
Accounts receivable (Net) 924,324 608,985
Prepaid expenses and other current assets 133,829 68,114
Total current assets 1,058,153 808,789
-----------------------------
PROPERTY AND EQUIPMENT, NET 44,343 42,087
OTHER ASSETS:
Data assets (net) 456,049 521,478
Website (net) 70,522 106,364
Affiliate web platform (net) 230,993 --
Security deposits 59,320 75,338
Goodwill 1,026,823 0
-----------------------------
Total other assets 1,843,707 703,180
-----------------------------
-----------------------------
TOTAL ASSETS 2,946,203 1,554,056
=============================
and STOCKHOLDERS' EQUITY(DEFICIENCY)
CURRENT LIABILITIES:
Bank overdraft 3,977 $ --
Accounts payable 2,270,845 1,615,925
Accrued expenses 1,249,262 880,547
Deferred revenue 509,219 808,490
Notes and loans payable 452,889 226,915
Current liabilities due to related parties 145,000 113,011
Other current liabilities 94,973 18,139
-----------------------------
Total current liabilities 4,726,165 3,663,027
-----------------------------
LONG TERM DEBT:
Pearl Street 5% convertible notes - related party 1,105,000 510,000
Convertible notes- related parties 26,000 --
Convertible notes - related parties employees 218,045 118,045
-----------------------------
TOTAL LONG TERM DEBT: 1,349,045 628,045
-----------------------------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock 307 313
Common stock 249,115 116,673
Additional paid-in-capital 7,061,084 5,912,491
Accumulated deficit (10,296,451) (8,765,993)
Dividends-preferred stock (119,400) --
Forein currency translation adjustment (23,662) --
-----------------------------
Total stockholders' equity (deficiency) (3,129,007) (2,736,516)
-----------------------------
- ----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 2,946,203 $ 1,554,556
========================================================================================
DIALOG GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(Unaudited)
2005 2004
-------------- --------------
REVENUES $ 1,927,227 $ 2,079,684
COST OF REVENUES 1,080,041 796,830
-------------- --------------
GROSS PROFIT $ 847,186 $ 1,282,854
OPERATING EXPENSES:
Selling, General and Administrative Expenses 1,394,620 1,261,797
-------------- --------------
Total Operating Expenses 1,394,620 1,261,797
-------------- --------------
INCOME/( LOSS) FROM OPERATIONS (547,434) 21,057
OTHER INCOME (EXPENSES):
Interest expense (60,627) (11,195)
Other (Expenses) (7,971) --
Forgiveness of Debt 81,771 168,898
Litigation settlement income 122,710
Other income -- 10,581
-------------- --------------
Net Other Income (Expenses) 13,173 290,994
-------------- --------------
INCOME/(LOSS)FROM CONTINUING OPERATIONS (534,261) 312,051
INACTIVE & DISCONTINUED OPERATIONS 0 (190,430)
--------------
NET INCOME/( LOSS) (534,261) 121,621
OTHER COMPREHENSIVE INCOME/(LOSS) (12,555) 0
Foreign currency translation adjustments
-------------- --------------
TOTAL COMPREHENSIVE INCOME/(LOSS) ($ 546,816) $ 121,621
============== ==============
Preferred E Series share dividends (39,800) (37,000)
Interest paid on convertible notes 15,683 (4,503)
-------------- --------------
Income/(loss) applicable to common shareholders from continuing operations (558,378) 270,548
Inactive and discontinued operations 0 (190,430)
-------------- --------------
Net Income/(loss) applicable to common shareholders ($ 558,378) $ 80,118
============== ==============
EARNINGS/( LOSS) PER SHARE, BASIC AND DILUTED ON NET INCOME/(LOSS) ($ 0.004) $ 0.002
FROM CONTINUING OPERATIONS
EARNINGS/(LOSS) PER SHARE ON DISCONTINUED OPERATIONS, BASIC AND DILUTED $ 0.000 ($ 0.002)
NET EARNINGS/( LOSS) PER SHARE, BASIC AND DILUTED ($ 0.004) $ 0.001
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, 153,417,666 109,646,719
BASIC AND DILUTED
DIALOG GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(Unaudited)
2005 2004
-------------- --------------
REVENUES $ 5,063,311 $ 6,162,369
COST OF REVENUES 2,371,192 2,594,804
-------------- --------------
GROSS PROFIT $ 2,692,119 $ 3,567,565
OPERATING EXPENSES:
Selling, General and Administrative Expenses 3,984,095 4,074,627
-------------- --------------
Total Operating Expenses 3,984,095 4,074,627
-------------- --------------
INCOME/( LOSS) FROM OPERATIONS (1,291,976) (507,062)
OTHER INCOME (EXPENSES):
Interest expense (190,014) (43,751)
Other (Expenses) (7,971) (1,403)
Forgiveness of Debt 94,960 424,945
Litigation settlement income -- 122,710
Other income -- --
-------------- --------------
Net Other Income (Expenses) (103,025) 502,501
-------------- --------------
INCOME/(LOSS)FROM CONTINUING OPERATIONS (1,395,001) (4,561)
INACTIVE & DISCONTINUED OPERATIONS (58,265) (254,877)
--------------
NET INCOME/( LOSS) (1,453,266) (259,438)
OTHER COMPREHENSIVE INCOME/(LOSS)
Foreign currency translation adjustments (12,555) --
-------------- --------------
TOTAL COMPREHENSIVE INCOME/(LOSS) ($ 1,465,821) ($ 259,438)
============== ==============
Preferred E Series share dividends (119,400) (110,200)
Interest paid on convertible notes 38,213 1,124
-------------- --------------
Income/(loss) applicable to common shareholders from continuing operations (1,476,188) (113,637)
Inactive and discontinued operations (58,265) (254,877)
-------------- --------------
Net Income/(loss) applicable to common shareholders ($ 1,534,453) ($ 368,514)
============== ==============
EARNINGS/( LOSS) PER SHARE, BASIC AND DILUTED ON NET INCOME/(LOSS) ($ 0.011) ($ 0.001)
FROM CONTINUING OPERATIONS
EARNINGS/(LOSS) PER SHARE ON DISCONTINUED OPERATIONS, BASIC AND DILUTED ($ 0.000) ($ 0.003)
NET EARNINGS/( LOSS) PER SHARE, BASIC AND DILUTED ($ 0.011) ($ 0.004)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, 140,313,708 95,074,262
BASIC AND DILUTED
DIALOG GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDING SEPTEMBER 30, 2005 & 2004
2005 2004
------------ ------------
Cash Flows from Operating Activities:
Net Income/( Loss) from continuing operations $ (1,395,001) $ (4,561)
Gain/(Loss) from inactive/discontinued operations (58,265) (254,877)
Forign currency translation adjustments (12,555) --
------------ ------------
Income/( Loss) from Operations $ (1,465,821) $ (259,438)
Adjustments to reconcile net loss
to net cash used in operating activities of continuing operations:
Gain on debt settlement (94,960) (424,945)
Depreciation and amortization 327,514 255,825
Bad debt expense 23,554 (143,912)
Common stock, warrants and stock options issued for services 133,155 --
Changes in operating assets and liabilities: (Increase) Decrease
Accounts receivable (544,297) 91,950
Prepaid and other current assets (65,715) 50,822
Security deposits 16,018 12,029
Accounts payable and accrued expenses: Increase (Decrease) 1,136,640 (213,684)
Other current liabilities 76,834 85,045
Deferred revenues (299,271) 131,421
------------ ------------
Net Cash Used in Operating Activities (756,349) (414,887)
------------ ------------
Cash Flows from Investing Activities of Continuing Operations:
Purchase of property and equipment (16,282) (20,032)
Loss of property and equipment 1,566 0
Purchase of database (174,368) (4,564)
Net cash acquired in acquisition of Advaliant 49,795 0
Upgrade of website (17,000) (25,000)
Purchase of web platform (251,992) --
------------ ------------
Net Cash Used in Investing Activities (408,281) (49,596)
------------ ------------
Cash Flows from Financing Activities of Continuing Operations:
Bank overdraft 3,977 --
Current liabilities - due to related parties 31,989 --
Proceeds from issuance of convertible debt to related parties 621,000 250,000
Proceeds from issuance of convertible debt to employees 100,000 --
Short term borrowing, net 225,974 (37,660)
Proceeds from sale of common stock 50,000 0
Note receivable - Findstar -- 100,000
Proceeds from sale of preferred stock -- 35,000
------------ ------------
Net Cash Provided by Financing Activities 1,032,940 347,340
------------ ------------
Increase (decrease) in cash ($ 131,690) (117,143)
Cash at Beginning of Period $ 131,690 $ 147,246
------------ ------------
Cash at End of Period $ -- $ 30,103
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
------------ ------------
Interest paid during the period $ 129,387 $ 43,751
------------ ------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
------------ ------------
Conversion of accrued expenses to common tock $ 64,982 $ 0
------------ ------------
Conversion of accounts payable to common stock $ 7,500 $ 179,504
------------ ------------
Conversion of notes payable to common stock $ 25,000 $ 75,000
------------ ------------
Conversion of class E dividends payable to common stock $ 79,600 $ 71,000
------------ ------------
Conversion of accrued expenses to Series E preferred stock $ 0 $ 143,959
------------ ------------
Exchangeable shares issued in acquisition of Advaliant $ 909,051
------------
Class F voting preferred shares $ 0
------------
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND CAPITALIZATION
On June 30, 2005, Company finalized the acquisition of AdValiant Inc. and the
merger was consummated. It became effective June 30, 2005. As a result of the
merger, the AdValiant Inc. Exchangeable Shares are now exchangeable for a total
of 336,685,584 shares of Dialog Group common stock. In addition, 400 shares of
Class F Special Votes Preferred Stock were issued to the former owners of
AdValiant. Certificates for 300 shares of Class F Voting Stock and Exchangeable
Shares exchangeable for 242,514,188 shares of Dialog Group common stock will be
held in escrow pending their distribution pursuant to the merger agreement. The
Class F Special Voting Shares do not have a share in the equity of the Company.
They pay no dividend and have a liquidation preference of $0.001 per share. They
only substitute for the voting power of the shares to be issued for the
Exchangeable shares. Each voting share has the voting power is equal to 841,714
shares of Dialog Group common stock. As the Exchangeable Shares are exchanged
for common stock, the Class F is cancelled as it is no longer necessary. Their
value is strictly nominal. There were no cash proceeds derived from these
transactions. The formula provides for release of Exchangeable Shares
exchangeable 3,366,856 shares of Dialog Group common stock along with four
shares of Class F Special Voting Stock for each $24,000 of gross profit
generated by AdValiant. There were no cash proceeds to be derived from these
transactions either.
Dialog Group, Inc. was incorporated under the laws of the State of Delaware on
October 4, 2002. The Company's authorized capital stock consisted of 1,000
shares with no par value.
IMX Pharmaceuticals, Inc., formerly IMX Corporation, was organized under the
laws of the State of Utah on June 2, 1982. The Company changed its name to IMX
Pharmaceuticals, Inc. on June 30, 1997.
On November 12, 2002, IMX Pharmaceutical, Inc. and Dialog Group, Inc. merged
into a single Delaware corporation (the "Company") for the sole purpose of
reincorporating IMX Pharmaceutical, Inc. in Delaware. The name of the surviving
corporation is Dialog Group, Inc.
In conjunction with the merger, the Company's Certificate of Incorporation was
restated to increase the total number of shares of capital stock that the
Company has the authority to issue to 101,000,000. The total number of
authorized shares of common stock, $0.001 par value, was 100,000,000 and the
total number of authorized preferred stock, $0.001 par value, was 1,000,000. The
Board of Directors is authorized to establish the preferred stock in one or more
series and to fix the rights, preferences, privileges, and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting each
series or the designation of such series.
On May 23, 2003, the Company further increased the total number of shares of
capital stock of authorized shares of $0.001 par value common stock available
for issuance to
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
175,000,000 and the total number of authorized $0.001 par value preferred stock
available for issuance to 1,500,000.
Further, on June 18, 2004, the Company increased the total number of shares of
capital stock of authorized shares of $0.001 par value common stock available
for issuance to 200,000,000 and the total number of authorized $0.001 par value
preferred stock available for issuance to 1,500,000. And, on June 18, 2004, the
Company eliminated its Class C preferred stock. Also, on June 18, 2004 the terms
of the Company's Class E preferred stock were restated. The number of shares of
authorized Class E preferred stock is 200 shares. In the event of liquidation,
dissolution or winding-up or sale of more than 50% of the voting securities of
the Company, holders of the Class E preferred stock shall be entitled to
Liquidation Rights equivalent to $10,000 per share plus any accumulated but
unpaid dividends.
BUSINESS ACTIVITY
The Company, which is headquartered in New York, NY, has offices in Valencia,
California, Sunrise, Florida, and Toronto, Canada. The Company's three business
segments, On Line Services, Data Services, and Communication Services, provide a
combination of traditional advertising (print, broadcast) and marketing services
(broadcast, new media, and internet-based promotional venues), as well as a
broad spectrum of proprietary and exclusive databases for healthcare,
pharmaceutical, consumer and business-to-business market clients.
Additionally, the Company maintains exclusive contracts with leading
multi-national pharmaceutical companies to operate maintain and provide content
for their consumer-directed Web sites.
Dialog Group's three business segments currently market their product and
service offerings through branded, business organizations. The On-Line Services
Segment includes AdValiant, Adialogin, and MyMedCenter. The Communications
Services Segment includes creative and strategic services. The Data Services
Segment includes Data Dialog Marketing, Data Dialog Management, iData, and Mail
Mogul.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash.
The Company maintains cash balances at several banks. Accounts at each United
States institution are insured by the Federal Deposit Insurance Corporation up
to $100,000. From time to time, the Company had cash in financial institutions
in excess of federally insured limits. With the acquisition of Advaliant Inc.,
the Company maintains cash balances at a bank in Canada. The accounts are
insured by the Government of Canada up to C$60,000 per account.
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
FOREIGN CURRENCY TRANSLATION
Advaliant Inc's functional currency is the Canadian dollar, its local currency.
Accordingly, the balance sheet accounts are translated at the exchange rate in
effect at the end of the period and income statement accounts have been
translated at the average exchange rate in effect at the end of each period.
Translation gains and losses are included as a separate component of
stockholders' equity (deficiency) as Foreign Currency Translation and included
in Other Comprehensive Income in the income statement.
ACCOUNTS RECEIVABLE
The Company conducts business and extends credit based on the evaluation of its
customers' financial condition, generally without requiring collateral. Exposure
to losses on receivables is expected to vary by customer due to the financial
condition of each customer. The Company monitors credit losses and maintains
allowances for anticipated losses considered necessary under the circumstances.
Recoveries of accounts previously written off are recognized as income in the
periods in which the recoveries are made. At September 30, 2005, the allowance
for doubtful accounts is $367,034. Of this amount, $226,737 is related to the
accounts receivable of the acquired company, Advaliant Inc. This amount is based
upon Management's estimation of the collectiblity of the acquired accounts
receivable, in particular, one client for approximately $100,000 is fully
reserved for. $132,500 is related to an agreement and issuance of non-qualified
stock options (see Note 6- Non-Trade Accounts Receivable) and the Company's
collection efforts.
During the third quarter, the Company increased from $350,000 to $500,000 the
line of credit it has with a commercial asset-backed lender. The term is two
years beginning August 2004. It is secured by the Company's accounts
receivables, equipment, and inventory.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful life of the assets, which range
from three years to five years. Expenditures for major betterments and additions
are capitalized, while replacement, maintenance and repairs, which do not extend
the lives of the respective assets, are charged to expense currently. Any gain
or loss on disposition of assets is recognized currently.
The Company has a $500,000 line of credit with a commercial asset-backed lender
with a term of two years beginning August 2004. It is secured by the Company's
accounts receivables, equipment, and inventory.
GOODWILL AND OTHER ASSETS
Goodwill
The Company tests goodwill and other assets for impairment annually. The
provisions of SFAS No. 142 require the completion of an annual impairment test,
with the impairments recognized in current earnings.
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
Databases
The databases consist of the one acquired from Healthcare Horizons and other
acquired from Azimuth Target Marketing along with the costs of expanding the
databases through the use of telephone surveys. As the databases, along with
current telephone surveys, are generating revenue streams and are expected to do
so in the future, no impairment charge is required. The databases are amortized
over a three period, while the telephone surveys which are current in nature,
are amortized over five years.
Websites
The Company accounts for website development and maintenance costs in accordance
with the guidance of EITF 00-2 "Accounting for Website Development Costs" and
Statement of Position 98-1 "Software Developed or Obtained for Internal Use".
Costs incurred in the planning stage are expensed as incurred. Costs incurred in
connection with the development stage are capitalized during the application
development stage and amortized over a three year period. Costs incurred during
the post-implementation operation stage, and fees incurred for web hosting, are
expensed as incurred
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs to
sell.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable, other receivable, accounts payable, accrued expenses, current
liabilities and debt. The carrying amounts of such financial instruments
approximate their respective estimated fair value due to the short-term
maturities and approximate market interest rates of these instruments. The
estimated fair value is not necessarily indicative of the amounts the Company
would realize in a current market exchange or from future earnings or cash
flows.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
the reported amount of revenues and expenses during the reported period. Actual
results could differ from those estimates.
COMPENSATED ABSENCES
The Company only accrues for compensated absences of employees with employment
agreements with the Company that require the Company to provide for this
benefit. Accordingly, the liability, if any, for such absences has been recorded
in the accompanying consolidated financial statements.
REVENUE RECOGNITION
The Company recognizes revenues in accordance with SAB 101, which reflects the
basic principles of revenue recognition in existing generally accepted
accounting principles. Accordingly, revenues are recognized in the
Communications Services Division upon a monthly review by management of each
agreement to determine the percentage of the goods, or services actually
delivered, or provided to customers. In the Data Services Division revenues
derived from the sale of twelve-month subscriptions to the Company's mailing
lists are deferred and included in income on a monthly basis as revenues are
earned. Revenues are earned on other goods or services when actually delivered
or provided to the customer. In the Online Services Division, revenues are
earned when the goods are delivered to the client.
SHIPPING AND HANDLING COSTS
The Company records shipping and handling costs in the cost of sales in the
statement of operations.
NET LOSS PER COMMON SHARE AND DILUTIVE SECURITIES
Earnings (loss) per share are computed in accordance with SFAS No. 128,
"Earnings per Share". Basic earnings per share is computed by dividing net
income, after deducting preferred stock dividends accumulated during the period,
by the weighted-average number of shares of common stock outstanding during each
period. Diluted earnings (loss) per share is computed by dividing net income
(loss) by the weighted-average number of shares of common stock, common stock
equivalents and other potentially dilutive securities outstanding during the
period.
The following is a summary of the securities that could potentially dilute basic
earning (loss) per share in the future. These were not included in the
computation of the diluted earnings (loss) per share because their exercise or
conversion would be anti-dilutive.
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
Period Period
Ended Ended
September September
30, 30,
2005 2004
------------ ------------
Preferred stock 61,984,320 21,076,634
Warrants 5,241,640 2,991,640
Stock options 3,477,500 3,477,500
Convertible notes 134,904,500 454,545
------------ ------------
Exchangeable shares- purchase of Advaliant 336,685,584 0
------------ ------------
Total 542,239,544 28,000,319
============ ============
Three Months Ended
September 30,
2005 2004
-------------- --------------
Numerator:
Income/(loss) from continuing operations ($ 534,261) $ 312,051
Preferred E Series share dividends (39,800) (37,000)
Interest paid on convertible notes 15,683 625
-------------- --------------
Income/(loss) applicable to common shareholders
from continuing operations (558,378) 275,676
Inactive and discontinued operations 0 (190,430)
-------------- --------------
Other comprehensive income/(loss) (12,555) 0
-------------- --------------
Net Income/(loss) applicable to common shareholders (570,933) 85,246
Denominator:
Basic earning(loss) per share-weighted average shares 153,417,666 109,646,719
Effect of dilutive securities:
Convertible notes 0 0
Preferred stock 0 0
Share options 0 0
Warrants 0 0
-------------- --------------
Diluted earning(loss) per share-adjusted weighted average shares 153,417,666 109,616,719
and assumed conversions
Earnings(loss) per share data:
Basic-continuing operations ($ 0.004) $ 0.002
Basic-inactive and discontinued operations 0 ($ 0.002)
-------------- --------------
Basic ($ 0.004) $ 0.001
Diluted-continuing operations ($ 0.004) $ 0.002
Diluted-inactive and discontinued operations 0 ($ 0.002)
-------------- --------------
Diluted ($ 0.004) $ 0.001
The conversion of convertible notes, preferred stock, share options, and
warrants are anti-dilutive (assuming conversion into common shares would
increase earnings per share or decrease loss per share) and, therefore, not
included in the calculation of diluted earnings/(loss) per share
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
Nine Months Ended
September 30,
2005 2004
-------------- --------------
Numerator:
Income/(loss) from continuing operations ($ 1,395,001) ($ 4,561)
Preferred E Series share dividends (119,400) (110,200)
Interest paid on convertible notes 38,213 6,252
-------------- --------------
Income/(loss) applicable to common shareholders
from continuing operations (1,476,188) (108,509)
Inactive and discontinued operations (58,,265) (254,877)
Other comprehensive income/(loss) (12,555) 0
-------------- --------------
Net Income/(loss) applicable to common shareholders (1,488,743) (363,386)
Denominator:
Basic earning(loss) per share-weighted average shares 140,313,708 95,074,262
Effect of dilutive securities:
Convertible notes 0 0
Preferred stock 0 0
Share options 0 0
Warrants 0 0
-------------- --------------
Diluted earning(loss) per share-adjusted weighted average shares
and assumed conversions 140,313,708 95,074,262
Earnings(loss) per share data:
Basic-continuing operations ($ 0.011) ($ 0.001)
Basic-inactive and discontinued operations ($ 0.000) ($ 0.003)
-------------- --------------
Basic ($ 0.011) ($ 0.004)
Diluted-continuing operations ($ 0.011) ($ 0.001)
Diluted-inactive and discontinued operations ($ 0.000 ($ 0.000)
-------------- --------------
Diluted ($ 0.011) ($ 0.004)
The conversion of convertible notes, preferred stock, share options, and
warrants are anti-dilutive (assuming conversion into common shares would
increase earnings per share or decrease loss per share) and, therefore, not
included in the calculation of diluted earnings/(loss) per share
INCOME TAXES
The Company accounts for income taxes using SFAS No. 109, "Accounting for Income
Taxes," which requires recognition of deferred tax liabilities and assets for
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. A
valuation allowance is recorded for deferred tax assets if it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
ADVERTISING COSTS
Advertising costs are expensed as incurred. The Company incurred $23,801and $750
in advertising costs for the three month period ended September 30, 2005 and
September 30, 2004, respectively. The Company incurred $40,835 and $11,509 in
advertising costs for nine months ended September 30, 2005 and September 30,
2004, respectively.
STOCK-BASED COMPENSATION
On August 31, 2005, the FASB issued FSP FAS 123(R)-1, Classification and
Measurement of Freestanding Financial Instruments Originally Issued in Exchange
for Employee Services under FASB Statement No. 123(R). The Board directed the
FASB staff to issue this FASB Staff Position (FSP) to defer at this time the
requirement of FASB Statement No 123 (revised 2004), Share-Based Payment, that a
freestanding financial instrument originally subject to Statement 123(R) becomes
subject to recognition and measurement requirements of other applicable
generally accepted accounting principles (GAAP) when the rights conveyed by the
instrument are no longer dependent on the holder being an employee of the entity
The guidance in this FSP supersedes FSP EITF 00-19-01, " Application of EITF
Issue No. 00-19 to Freestanding Financial Instruments Issued as Employee
Compensation," and amends paragraph 11(b) of FASB Statement No.133, Accounting
for Derivative Instruments and Hedging Activities, and Statement 133
Implementation Issue No. C3 ", Scope Exceptions: Exception Related to
Share-Based Payment Arrangements." The Company does not expect that FSP FAS
123(R)-1 to have material affect on its financial statements.
In December 2004, the FASB issued SFAS No. 123R, "Accounting for Stock-Based
Compensation". This statement is a revision to SFAS No. 123, "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No.25, "Accounting for
Stock Issued to Employees". This statement requires a public entity to measure
the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited
exceptions). That cost will be recognized over the period during which an
employee is required to provide service, the requisite service period (usually
the vesting period). The grant-date fair value of employee share options and
similar instruments will be estimated using option-pricing models.
In addition, a public entity is required to measure the cost of employee
services received in exchange for an award of liability instruments based on its
current value. The fair value of that award will be re-measured subsequently at
each reporting date through the settlement date. Changes in fair value during
the requisite service period will be recognized as compensation cost over the
period.
For public entities that file as small business issuers, this statement is
effective as of the beginning of the first interim or annual reporting period
that begins after December 15, 2005.
At the required effective date, all public entities that used the fair value
method for either recognition or disclosure under Statement 123 are required to
apply this statement using a modified version of prospective application. Under
that transition method,
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
compensation cost is recognized on or after the required effective date for the
portion of outstanding awards for which the requisite service has not yet been
rendered, based on the grant-date fair value of those awards calculated under
Statement 123 for either recognition or pro-forma disclosures. For periods
before the required effective date, those entities may elect to apply the
modified version of retrospective application under which financial statements
for prior periods are adjusted on a basis consistent with the pro forma
disclosures required for those periods by Statement 123. The Company does not
expect SFAS No. 123R to have a material effect on its financial statements.
PRINCIPLES OF CONSOLIDATION
In the opinion of the Company, the accompanying unaudited consolidated financial
statements prepared in accordance with instructions for Form 10-QSB, include all
adjustments (consisting only of normal recurring accruals) which are necessary
for a fair presentation of the results for the periods presented. It is
suggested that these consolidated financial statements be read in conjunction
with the Company's Annual Report for the year ended December 31, 2004. The
balance sheet as of December 31, 2004 was derived from audited financial
statements as of that date. The results of operations for the three months ended
September 30, 2005 along with nine months ended September 30, 2005 are not
necessarily indicative of the results to be expected for the full year.
The consolidated financial statements include the accounts of the Company,
Dialog Group, Inc., and its wholly-owned subsidiaries; Advaliant, Inc.,
Advaliant USA, Inc. Data Dialog, Inc. Healthcare Dialog, Inc., IP2M, and Mail
Mogul, Inc. All material intercompany transactions and balances have been
eliminated in consolidation.
REPORTING PERIOD
The accompanying condensed consolidated financial statements for the three
months and nine months ended September 30, 2005.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On October 6, 2005, the FASB issued FAS 13-1, Accounting for Rental Costs
Incurred during a Construction Period. The FASB staff position is rental cots
incurred during and after a construction period are for the right to control the
use of the leased asset during and after the construction of a lessee asset.
Therefore, rental costs associated with ground or building operating leases that
are incurred during a construction period shall be recognized as rental expense.
The rental cots shall be included in income from continuing operations. At this
time, this FAS does not have a material effect on the financial statements of
the Company. The Company does include rental costs in income for continuing
operation in it statement of operations.
On August 31, 2005, the FASB issued FSP FAS 123(R)-1, Classification and
Measurement of Freestanding Financial Instruments Originally Issued in Exchange
for Employee Services under FASB Statement No. 123(R). The Board directed the
FASB staff to issue this FASB Staff Position (FSP) to defer at this time the
requirement of FASB Statement No 123 (revised 2004), Share-Based Payment, that a
freestanding
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
financial instrument originally subject to Statement 123(R) becomes subject to
recognition and measurement requirements of other applicable generally accepted
accounting principles (GAAP) when the rights conveyed by the instrument are no
longer dependent on the holder being an employee of the entity. The guidance in
this FSP supersedes FSP EITF 00-19-01, " Application of EITF Issue No. 00-19 to
Freestanding Financial Instruments Issued as Employee Compensation," and amends
paragraph 11(b) of FASB Statement No.133, Accounting for Derivative Instruments
and Hedging Activities, and Statement 133 Implementation Issue No. C3 ", Scope
Exceptions: Exception Related to Share-Based Payment Arrangements." The company
does not expect that FSP FAS 123(R)-1 to have a material affect on its financial
statements.
On July 14, 2005, Financial Accounting Standards Board issued FASB Staff
Position (FSP) SOP 78-9-1, Interaction of AICPA Statement of Position 78-9 and
EFIT Issue No. 04-5. This SOP amends AICPA Statement of Position 78-9,
Accounting for Investments in Real Estate Ventures. This FSP does not apply to
the Company.
On July 12, 2005, Financial Accounting Standards Board issued FASB Staff
Position (FSP) APB-18-1, Accounting by an Investor for its Proportionate Share
of Accumulated Other Comprehensive Income of an Investee Accounted for under the
Equity Method in Accordance with APB Opinion No. 18 upon a Loss of Significant
Influence, which provides guidance on how an investor should account for its
proportional share of an investee's equity adjustments for other comprehensive
income (OCI) upon a loss of significant influence as detailed in paragraph 121
of FASB Statement No. 130, Reporting Comprehensive Income. This FSP does not
apply to the Company.
On June 29, 2005, Financial Accounting Standards Board issued FASB Staff
Position (FSP) FAS 150-5, address whether freestanding warrants and other
similar instruments on shares that are redeemable (either puttable or
mandatorily redeemable) would be subject to the requirements of FASB Statement
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity, regardless of the regardless of the timing of the
redemption feature or the redemption price.
FSP FAS 150-1 explains that warrants for shares that are puttable are
liabilities under paragraph 11 of Statement 150 because the warrants embody
obligations to repurchase the issuer's shares and may require a transfer of
assets. Similarly, as stated in FSP FAS 150-1, warrants for mandatorily
redeemable shares are classified as liabilities under paragraph 11 of Statement
150 because the warrants embody obligations to repurchase the issuer's shares
that, if exercised, will require a transfer of assets.
The guidance in this FSP shall be applied to the first reporting period
beginning after June 30, 2005. If the guidance in this FSP results in changes to
previously reported information, the cumulative effect shall be reported
according to the transition provisions of Statement 150 in the first reporting
period after June 30, 2005. This FSP does not apply to the Company
On May 31, 2005, Financial Accounting Standards Board issued FASB Staff Position
(FSP) to clarify the application of EITF Issue No.00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock", to freestanding financial instruments originally issued as
employee compensation that can
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
be settled only by delivering registered shares. This FSP clarifies that a
requirement to deliver registered shares, in and of itself, will not result in a
liability classification for freestanding financial instruments originally
issued as employee compensation. This clarification is consistent the Board's
intent in issuing FASB Statement No. 123 (revised December 2004), Share-Based
Payment. This FSP does not apply to the Company.
In May 2005, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3. This
Statement provides guidance on accounting for reporting of accounting changes
and error corrections. It establishes, unless impracticable, retrospective
application as the required method for reporting a change in accounting
principle in the absence of explicit transition requirements specific to the
newly adopted accounting principle. This Statement also provides guidance for
determining whether retrospective application of a change in accounting
principle is impracticable and for reporting a change when retrospective
application is impracticable. This Statement also provides guidance on the
correction of an error by restating previously issued financial statements. This
Statement shall effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. The Company does not expect
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 154, Accounting Changes and Error Corrections to have a material
effect on its financial statements.
On March 29, 2005, the SEC published Staff Accounting Bulletin No. 107. The
interpretations in this staff accounting bulletin ("SAB") express the views of
the staff regarding the interaction between the Statement of Financial
Accounting Standards Statement No. 123 (revised 2004), Share-Based Payment
("Statement 123R" or the Statement") and certain Securities and Exchange
Commission ("SEC") rules and regulations and provide the staff's views regarding
the valuation of share-based payment arrangements for public companies. In
particular, this SAB provides guidance related to share-based payment
transactions with non-employees, the transition from nonpublic to public entity
status, valuation methods (including assumptions such as expected volatility and
expected term), the accounting for certain redeemable financial instruments
issued under share-based payment arrangements, the classification of
compensation expense, non-GAAP financial measures, first-time adoption of
Statement 123R in an interim period, capitalization of compensation cost related
to share-based payment arrangements, the accounting for income tax effects of
share-based payment arrangements upon adoption of Statement 123R, the
modification of employee share options prior to adoption of Statement 123R and
disclosures in Management's Discussion and Analysis ("MD&A") subsequent to
adoption of Statement 123R. The Company does not expect Staff Accounting
Bulletin No. 107 to have a material effect on its financial statements.
NOTE 2- ACTUAL RESULTS OF OPERATIONS
The following set forth the Company's actual results of operations for the three
months ended September 31 2005, with comparative actual results for the three
months ended September 30, 2004.
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(Unaudited) (Unaudited)
Three months Three months
Ending Ending
September 30, September 30,
2005 2004
------------ ------------
REVENUE $ 1,927,227 $ 2,079,684
COST OF REVENUES 1,080,041 796,830
------------ ------------
GROSS PROFIT 847,186 1,282,854
OPERATING EXPENSES:
Selling, General, and Administrative Expenses 1,394,621 1,261,797
------------ ------------
TOTAL OPERATING EXPENSE 1,394,621 1,261,797
------------ ------------
INCOME (LOSS) FROM OPERATIONS (547,435) 21,057
------------ ------------
Other Income (Expenses):
Interest expenses (60,627) (11,195)
Other expenses (7,971)
Other income 10,581
Forgiveness of Debt 81,771 168,898
Litigation Settlement 122,710
------------ ------------
Total other income (expenses) 13,174 290,994
------------ ------------
Net Income/(Loss) From Continuing Operations (534,261) 312,051
Inactive/ Discontinued Operations (190,430)
------------ ------------
Net Income/( Loss) (534,261) 122,621
Other Comprehensive Income/(loss)
Foreign currency translation adjustments (12,555) 0
------------ ------------
Comprehensive Income/(Loss) $ (546,816) $ 122,621
============ ============
The following set forth the Company's actual results of operations for the nine
months ended September 30, 2005, with comparative actual results for the
September months ended September 30, 2004
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(Unaudited) (Unaudited)
Nine months Nine months
Ending Ending
September 30, September 30,
2005 2004
------------ ------------
REVENUE $ 5,063,311 $ 6,162,369
COST OF REVENUES 2,371,192 2,594,804
------------ ------------
GROSS PROFIT 2,692,119 3,567,565
OPERATING EXPENSES:
Selling, General, and Administrative Expenses 3,984,095 4,074,627
------------ ------------
TOTAL OPERATING EXPENSE 3,984,095 4,074,627
------------ ------------
INCOME (LOSS) FROM OPERATIONS (1,291,976) (507,062)
------------ ------------
Other Income (Expenses):
Interest expense (190,014) (43,751)
Other expenses (7,971) (1,403)
Forgiveness of Debt 94,960 424,945
Litigation Settlement 0 122,877
------------
Total other income (expenses) (103,025) 502,501
Net Income/(Loss) from Continuing Operations (1,395,001 (4,561)
------------ ------------
Inactive/ Discontinued Operations (58,265) (254,877)
Net Income/( Loss) (1,453,266) (259,438)
Other Comprehensive Income/(Loss)
Foreign currency translation adjustments (12,555) 0
------------ ------------
Comprehensive Income/(Loss) $ (1,465,821) ($ 259,438)
============ ============
NOTE 3- ACQUISTIONS
ACQUISITION OF ADVALIANT INC.
On June 30, 2005, Company finalized the acquisition of AdValiant Inc. and the
merger was consummated. It became effective June 30, 2005. As a result of the
merger, the AdValiant Inc. Exchangeable Shares are now exchangeable for a total
of 336,685,584 shares of Dialog Group common stock. In addition, 400 shares of
Class F Special Votes Preferred Stock were issued to the former owners of
AdValiant. Certificates for 300 shares of Class F Voting Stock and Exchangeable
Shares exchangeable for 242,514,188 shares of Dialog Group common stock will be
held in escrow pending their distribution pursuant to the merger agreement. The
Class F Special Voting Shares do not have a share in the equity of the Company.
They pay no dividend and have a liquidation preference of $0.001 per share. They
only substitute for the voting power of the shares to be issued for the
Exchangeable shares. Each voting share has the voting power is equal to 841,714
shares of Dialog Group common stock. As the Exchangeable Shares are exchanged
for common stock, the Class F is cancelled as it is no longer necessary. Their
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
value is strictly nominal. There were no cash proceeds derived from these
transactions. The formula provides for release of Exchangeable Shares
exchangeable 3,366,856 shares of Dialog Group common stock along with four
shares of Class F Special Voting Stock for each $24,000 of gross profit
generated by AdValiant. There were no cash proceeds to be derived from these
transactions either. The consideration also included $214,572 of estimated
transaction costs.
The table presented below sets forth the maximum consideration to be paid by the
Company, which may be subject to certain adjustments as described below.
Exchangeable shares (336,685,584 at $0.011 per share) $3,636,204
Class F voting preferred stock (400 at $0.000 per share) 0
Estimated transaction costs 214,572
----------
Total Maximum Purchase Price $3,850,776
==========
The table presented below sets forth the preliminary allocation of the purchase
price of Advaliant Inc. tangible and intangible assets and liabilities assumed
at June 30, 2005. The Company is still in the process of obtaining a third-party
valuation of the affiliate web platform, an intangible asset. Accordingly,
allocation of the purchase price is subject to modification in the future. Any
such modification is not expected to significant.
Under terms of the acquisition agreement, former shareholders of Advaliant Inc.
are entitled additional consideration in the form of the Company's common stock
if certain future operating performance targets are met. If those operating
targets are met, the value of the consideration ultimately paid will be added to
the cost of the acquisition, which will increase the amount of goodwill arising
from the acquisition.
The table presented below sets forth the initial consideration paid by the
Company, which may be subject to certain adjustments as described below. Under
terms of the acquisition agreement, the Company was required to issue shares
equal to 25% of the maximum purchase price of $3,636,204.
Exchangeable shares (336,685,584 at $0.011 per share) at 25% $ 909,051
Class F voting preferred stock (400 at $0.000 per share) 0
Estimated transaction costs 214,572
-----------
Total Maximum Purchase Price $ 1,123,623
===========
Allocation of initial consideration is presented below
Cash $ 15,291
Accounts receivable, net of reserves of $241,160 180,121
Other receivables 130,934
Prepaid expenses and other current assets 2,822
Property and equipment 11,984
Affiliate web platform 251,991
Goodwill 1,026,823
Accounts payable (464,054)
Accrued expenses (13,133)
Other current liabilities (19,154)
-----------
Total $ 1,123,622
===========
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
UNAUDITED PRO-FORMA RESULTS OF OPERATIONS
The following table sets forth the Company's results of operation for three
months ending September 30, 2005 and the nine months ending September, 2005 with
comparative results of operations for the three months ending September 30, 2004
and nine months ending September 30, 2004, as if the acquisition of Advaliant
Inc. had taken place on January 1, 2005.
Three Three Nine Nine
Months Months Months Months
Ending Ending Ending Ending
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
-------------- -------------- -------------- --------------
REVENUE $ 1,927,227 $ 2,079,684 $ 6,544,672 $ 6,162,369
INCOME/(LOSS)FROM OPERATIONS $ (547,435) $ 21,057 $ (1,440,866) $ (507,062)
COMPREHENSIVE INCOME/(LOSS) $ (546,816) $ 121,621 $ (1,631,987) $ (259,438)
PRO FORMA COMPRENSIVE INCOME/(LOSS)
BASIC AND DILUTED PER SHARE ($ 0.004) $ 0.001 ($ 0.011) ($ 0.004)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUSTANDING,
BASIC ANS DILLUTED 153,417,666 109,646,719 140,313,708 95,074,262
NOTE 4-INACTIVE AND DISCONTINUED SUBSIDARIES
For 2004, the costs directly relate to ThinkDirectMarketing supplier litigation
settlement expenses and TDMI supplier related expenses along with HCH supplier
litigation expenses and HCH supplier related expenses. For 2005, the costs
relate to ThinkDirectMarketing supplier litigation expenses.
NOTE 5 - GOING CONCERN CONSIDERATIONS
The accompanying condensed consolidated financial statements have been presented
assuming the continuity of the Company as a going concern. However, the Company
has incurred substantial losses resulting in an accumulated deficit of
$10,296,451 as of September 30, 2005. These conditions raise substantial doubt
as to the ability of the Company to continue as a going concern.
Management's plans with regards to this issue are as follows:
LIQUIDITY
For the short term, less than twelve months, Management continues to review
means of raising funds including issuing debentures and equity instruments, but
at this time has no investor interest. The Company is also reviewing the sale of
non-core assets. While no new commitments are under review at this time, in the
past, Management and key executives have guaranteed notes for the company and
used their personal credit to meet company obligations.
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
In addition, some managers have converted salary to stock in an effort to reduce
overhead. No one has offered to take these kinds of steps for the next twelve
months at this point.
Management's plans concerning funding long-term obligations and needs are as
follows:
Management has hired a company to inform potential investors and the public
about the company in the hopes of raising capital. This approach is new and
Management has no results as of this date and is not depending on this approach
for the capital it needs. Management has had an initial meeting with a potential
investment group and made a presentation, but is not depending on this investor.
No potential source of capital has been identified at this time for either the
long or short term obligations of The Company. While Management makes no
guarantees they will be successful it will continue these strategies.
For three months and nine months ending September, 30, 2005, the Company raised
$50,000 in new equity by issuing 5,000,000 shares of common stock at $0.01 for
$50,000 in a sale for cash. See Note 10, Equity Common Stock for further
details.
For three months and nine months ending September, 30, 2005, the Company
converted approximately $110,000 and $178,000, respectively of debt and accrued
expenses. See Note 10, Equity Conversion of Debt for further details.
For the nine months ending September 30, 2005, the Company arranged for the
payment various goods and services provided by employees and suppliers in
stock-based compensation transactions valued at approximately $154,000. See Note
8, Stock-Based Compensation for further details
In April, 2005, the Company issued a 5% convertible note in the amount of
$550,000 in a related party transaction. The Company obtained the $500,000 in
April. In connection with arranging the sale of this note, the Company paid
$50,000 to a company whose president is a member of the board of directors of
the Company.
In April, 2005, the Company and the holder of $555,000 of convertible notes sold
them to another related party. As part of transaction, the accrued interest was
forgiven, the warrants originally issued with the notes were cancelled, and the
conversion price was changed. A new note, for $555,000 was issued to replace the
four notes that were cancelled.
The Company reduced its current obligations of approximately $133,000 which
consisted of accounts payable, accrued payroll, and accrued vacation. The
President and C.E.O. along with the C.O.O. and C.F.O. amended their employment
contacts for 2005 with the Company that reduced the Company's payroll
requirements. Additionally, the President and C.E.O., C.O.O. and C.F.O, and a
related party converted approximately $52,000 of accrued compensation to common
stock, while a supplier converted approximately $8,000 of open invoices to
common stock.
PROFITABILITY
The Company intends to develop new and increased revenues and gross margins in
all areas of operations. Specifically, the Company intends to:
o Restructure its sales organization to allow for more effective sales
processes. These steps include, among others, consolidating sales
operations, and the expansion of sales organization.
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
o Reduce expenses through improved labor utilization.
o Enter into strategic relationships with data suppliers that will return
higher levels of match rate with a better quality of data.
o Reduce operating costs through improved procurement procedures.
Presently, the Company cannot ascertain the eventual success of management's
plans with any degree of certainty. The accompanying condensed consolidated
financial statements do not include any adjustments that might result from the
eventual outcome of the risks and uncertainty described above.
NOTE 6- NON-TRADE RECEIVABLE
On November 19, 2004, the Company amended a prior agreement pursuant to which a
non-qualified stock option had been issued. On November 19, 2004, the optionee
executed its rights to purchase $200,000 of Dialog Group, Inc. common stock at
the price of $0.06 per share for a total of 3,333,333 immediately upon the
registration and delivery of shares. The Company complied with the requirements
of Notice of Option Purchase. The optionee, to date, has provided only
approximately $67,000 of the $200,000 that it is committed to pay to the
Company. The Company has reserved for the entire unpaid balance of $132,500 due
to the uncertainty of collection. The Company has hired an attorney In March to
pursue collection of the unpaid balance. The Company has received a default
judgment for the full amount of $132,500 owed to it. The Company is aggressively
pursuing collections efforts to enforce the judgment.
NOTE 7- LETTER OF CREDIT
In connection with a supplier agreement of Healthcare Dialog, the Company
arranged for a Standby Letter of Credit in the amount of $90,000 in February of
2005. The Letter of Credit is in effect for one year from February 2005. As the
Company did not have the required financial assets to collateralize the Letter
of Credit, the collateral for the Letter of credit is secured by personal assets
of the Company's President and C.E.O. (See Note 15-Related Party
Transactions).The agreement with the supplier requires Healthcare Dialog to
replenish any draws by the supplier against the Standby Letter of Credit. During
the period ending June 30, 2005, as was the case for the period ending March 31,
2005, the supplier did not draw against the Letter of Credit. In July 2005, the
supplier did draw approximately $36,000 against the Letter of Credit. The
Company replenished the original value of the Letter of Credit with the in the
agreement with the supplier. Also, in the third quarter, the supplier drew down
against the Letter of Credit. In this case, the Company did not replenish the
original value of the Letter of Credit. The bank, then liquidated the underlying
collateral.
NOTE 8- STOCK-BASED COMPENSATION
For the nine months ending September 30, 2005, the Company entered into
stock-based compensation transactions valued at approximately $154,000.
During the three month period ending September 30, 2005, the Company's Board of
Directors authorized it to issue an additional 500,000 shares of common stock
valued at $2,500 to the President and C.E.O. as consideration for personally
guaranteeing certain obligations of the Company.
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
The table presented below provides additional information on the stock-based
compensation for the three month period ending September 30, 2005.
Number of Value Value
Shares Per of the
Transaction Issued Share Transaction
- ----------- ------ ----- -----------
Guarantee and credit extension by President/C.E.O. 500,000 $0.0050 $2,500
Total 3rd quarter 500,000 2,500
The transactions were recorded during the period three month ending September
30, 2005 as,
Operating expenses on the Statement of Operations $ 2,500
----------
Total $ 2,500
==========
During the period ending June 30, 2005, the Company entered into the following
stock-based compensation transactions.
The Company issued 2,000,000 shares in connection with a consulting agreement to
provide the Company with investor relations advice. An employee agreed to be
paid his accrued payroll less insurance expenses in stock. The Company will
issue 761,839 shares related to this transaction.
The table presented below provides additional information on the stock-based
compensation for the three month period ending June 30, 2005.
Number of Value Value
Shares Per of the
Transaction Issued Share Transaction
- ----------- ------ ----- -----------
Employee Payroll 761,839 $0.00475 $3,619
Consulting 2,000,000 $0.00475 $9,500
Total 2nd quarter 2,761,839 $13,119
The transactions were recorded during the three month period ending June 30,
2005 as,
Prepaid expense on the Balance Sheet $ 9,500
Operating expenses on the Statement of Operations 3,619
----------
Total $ 13,119
==========
The value of the transaction is based upon the price per share of the common
stock on the date of the transaction along with a valuation factor, reflecting
the trading restrictions placed upon the stock and size of the block relative to
the average daily trading volume of the stock during immediate thirty trading
days prior to date the stock is issued along with trading restrictions placed
upon the stock
During the period ending March 31, 2005, the Company entered into the following
stock-based compensation transactions.
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
As consideration for personally guaranteeing certain obligations of the Company,
the Board of Directors authorized the Company to issue 4,750,000 shares of
common stock worth $23,750 to the President and C.E.O. and 350,000 shares of
common stock worth $1,750 to the C.O.O. and C.F.O.
In connection with amending their employment contracts with the Company for the
balance of 2005, the President and C.E.O agreed to a salary reduction of
$100,000, while the C.O.O. and C.F.O agreed to a salary reduction of $65,000,
the Board of Directors authorized 10,000,000 and 6,500,000 shares of common
stock to be issued to the President and C.E.O and to the C.O.O. and C.F.O,
respectively.
For performing additional services that are not included in his employment
contract, the Company agreed to issue 2,000,000 shares of common stock worth
$10,000, to the Secretary of the Corporation.
The Company amended one existing consulting services agreement to limit its
obligation to 1,456,398 shares and entered into new consulting services
agreement for 1,000,000 shares, worth $13,835 and $7,000, respectively. The
consultants will, or have provided general investor relations and marketing
services.
The Company offered potential stock awards to two employees. The Company will
provide 350,000 shares valued at $3,500. To receive the award, the employees
must be employed at the Company at December 31, 2005. The Company has issued the
shares but placed them with an escrow agent. The Company accounted for the
transactions in accordance with FASB 123R as issued in December 2004.
The table presented below provides additional information on the stock-based
compensation for the period ending March 31, 2005.
Number of Value Value
Shares Per of the
Transaction Issued Share Transaction
- ----------- ------ ----- -----------
Consulting 1,456,398 $0.010 $13,836
Employee stock awards 350,000 0.010 3,500
Consulting 1,000,000 0.007 7,000
Employee compensation 2,000,000 0.005 10,000
Guarantee and credit extension by President/C.E.O. 4,750,000 0.005 23,750
Guarantee and credit extension by C.O.O./C.F.O 350,000 0.005 1,750
Employment contract reduction by President/C.E.O. 10,000,000 0.005 50,000
Employment contract reduction by C.O.O./C.F.O 6,500,000 0.005 32,500
Total 1st quarter 26,406,398 $142,336
At the end of the three months ending March 31, 2005, the transactions are
recorded as,
Prepaid expenses on the Balance Sheet $ 71,500
Operating expenses on the Statement of Operations 70,836
----------
Total $ 142,336
==========
The value of the transaction is based upon the price per share of the common
stock on the date of the transaction along with a valuation factor for the size
of the block of stock relative to the average daily trading volume of the stock
during immediate thirty trading days prior to date the stock is issued along
with trading restrictions placed upon the stock
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE 9- ACCRUED LIABILITES
As of September 30, 2005, accrued liabilities consisted of the following:
Accrued professional fees and other expenses $ 233,102
Accrued payroll and payroll taxes 658,808
Accrued interest 26,440
Accrued settlements and contingencies 330,913
----------
Total $1,249,262
==========
See Note 16-Litigation for the specific items that comprise the $330,913 in
Accrued settlements and contingencies.
NOTE 10 - EQUITY
COMMON STOCK
During the three months and nine months ending September 30, 2005, the President
of Advaliant USA, Inc. who is also a director of Dialog Group, Inc. purchased
5,000,000 shares of the Company's shares at $0.01 per share for $50,000 in a
cash transaction. The Company used the proceeds of the sale for working capital
and other corporate requirements.
During the three months ending September 30, 2005, the Company transacted the
following. In all cases, no cash proceeds were derived from these transactions.
The Company issued 260,560 shares in connection of the conversion of 6,514
shares of B-1 Convertible Preferred Stock. The Company issued 1,984,048 shares
in connection with conversion of a Convertible Promissory Note of IP2M, Inc.
along with accrued interest on the Note. The Company issued 3,960,198 shares in
connection with the payment of the series E Preferred Stock dividends accrued
during 2005. During the three month period ending September 30, 2005, the
Company's the Board of Directors authorized It to issue an additional 500,000
shares of common stock valued at $2,500 to the President and C.E.O. as
consideration for personally guaranteeing certain obligations of the Company.
During the period ending June 30, 2005, the Company issued 2,000,000 shares in
connection with a consulting agreement to provide the Company with investor
relations advice.
During the period ending March 31, 2005, the Company issued 2,839,076 shares in
connection with the payment of the series E Preferred Stock dividends accrued in
2004. As a result of non completion of an agreement in the 1st quarter, the
Company cancelled 799,999 shares.
EXCHANGEABLE SHARES
On June 30, 2005, Company finalized the acquisition of Advaliant Inc. and the
merger was consummated. It became effective June 30, 2005. As a result of the
merger, the Advaliant Inc. exchangeable shares are exchangeable for a maximum
not to exceed of 336,685,584 shares of Dialog Group; Certificates for
Exchangeable Shares exchangeable for 242,514,188 shares of Dialog Group common
stock will be held in escrow pending their distribution pursuant to the
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
merger agreement. The formula provides for release of Exchangeable Shares
exchangeable of a maximum of 3,366,856 shares of Dialog Group common stock along
with four shares of Class F Special Voting Stock for each $24,000 of gross
profit generated by Advaliant. There were no cash proceeds derived from these
transactions.
PREFERRED STOCK
CLASS F VOTING PREFERRED STOCK
In connection with the acquisition of Advaliant Inc., the Company issued 400
shares of class F. The class F shares of stock do not have a share in the equity
of the Company. They pay no dividends and have a liquidation preference of
$0.001 per share. They only substitute for the voting power of the shares to be
issued for the Exchangeable shares. The voting power of each share is equal to
841,714 shares of Dialog Group common stock. As the shares are exchanged, the
Class F is cancelled. The value is strictly nominal and, together with the
Exchangeable Shares, can be converted into the stated number of Dialog Group,
Inc. common shares. There were no cash proceeds derived from these transactions.
CLASS B AND B-1 PREFERRED STOCK
Each share of the Company's Class B and Class B-1 Preferred Stock can be
converted into 40 shares of Common Stock and each share of the Class E Common
Stock can be converted into 83,333 shares of Common Stock. Each Class B or B-1
share casts 40 votes for the election of directors and one vote on all other
matters. Each Class E share casts one vote for each share of Common Stock into
which it could be converted. The preferred stock does not contain unconditional
obligations requiring the Company to redeem the instruments by transferring
assets at a specified or determinable date or upon an event to occur.
During the three month ending September 30, 2005, 6514 shares of B-1 Preferred
Stock were converted to 260,560 shares of common stock.
During the nine months ending September 30 2005, no debt was converted into
preferred stock.
STOCK OPTIONS
For the three month ending September 30, 2005, the Company did not grant any
stock, while no stock options were exercised and approximately 347,000 options
were forfeit.
For the three month period ending June 30, 2005, the Company did not grant any
stock options, while no stock options were exercised or forfeited.
For the three month period ending March 31, 2005, the Company granted 100,000
stock options to an unrelated party, while no options were exercised.
STOCK WARRANTS
In connection with issuance of a $45,000 convertible note, convertible into
common stock at price of $0.025 per share, warrants provide holders to purchase
the common stock at the price of $0.025. Warrants to purchase 540,000 shares
have been issued to the holder of this convertible note. The warrants are
exercisable until September 30, 2009. Warrants to
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
purchase a total of 6,381,865 shares have been issued to all convertible note
holders. Pursuant to discussions in April 2005 with the convertible note
holders, they agreed that all warrants are cancelled.
CLASS E PREFERRED STOCK DIVIDENDS
The dividends accrue at the rate of $400 per share per quarter. Pursuant to the
provisions of the Class E Preferred Stock Declaration, shares of common stock,
based on the average closing price for the shares during the last 20 trading
days before the dividends were due, may be paid in lieu of cash.
During the period ending September 30, 2005, quarterly dividends accrued on the
Company's Class E Preferred Stock at the rate of $400 per share, per quarter,
for a total of $39,800 accrued and unpaid. Additionally, the Company paid the
cumulative amount accrued and unpaid dividends at September 30, 2005 of $159,000
by issuing 9,313,498 shares of common stock of the Company. At September 30,
2005 the cumulative amount accrued and unpaid dividends is $39,800.
During the period ending June 30, 2005, quarterly dividends accrued on the
Company's Class E Preferred Stock at the rate of $400 per share, per quarter,
for a total of $39,800 accrued and unpaid. At June 30, 2005 the cumulative
amount accrued and unpaid dividends is $79,600.
During the period ending March 31, 2005, quarterly dividends accrued on the
Company's Class E Preferred Stock at the rate of $400 per share, per quarter,
for a total of $39,800 accrued and unpaid for at March 31, 2005.
CONVERSION OF PREFERRED STOCK INTO COMMON STOCK
During the three month period ending September 30, 2005, 6,514 shares of series
B-1 preferred stock was converted into 250,560 shares of common stock.
During the period ending June 30, 2005, no conversions took place.
During the period ending March 31, 2005, 247,120 shares of series B Preferred
stock was converted into 3,086,196 shares of common stock.
CONVERSION OF DEBT
During the nine months ending September 30, 2005, the Company has converted
approximately $178,000 of debt and accrued expenses into equity.
During the three month period ending September 30, 2005, approximately $110,000
of debt and accrued expenses were converted into common stock. The table
presented below provides additional information related to conversion of debt
during the three month period ending September 30, 2005.
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
Gain or
Loss
Number of Value Amount if any
Shares Per of the on the
Transaction Issued Share Conversion Transaction
Conversion of convertible note $25,000.00
Conversion of convertible note's accrued interest $5,157.53
---------------
Total for note and accrued interest 1,984,048 $0.0152 $30,157.53 None. Reduced liabilities
Conversion of 1st quarter accrued dividends 2,532,614 $0.0157 $39,800.00 None. Reduced liabilities
Conversion of 2nd quarter accrued dividends 2,822,696 $0.0141 $39,800.00 None. Reduced liabilities
Total 3rd Quarter 7,337,348 $109,758
During the six months ending June 30, 2005 approximately $67,000 of debt and
accrued expenses are converted into common stock.
During the three month period ending June 30, 2005, approximately $7,300 of debt
and accrued expenses were converted into common stock. The table presented below
provides additional information related to conversion of debt during the three
month period ending June 30, 2005
Number of Price Amount
Shares Per of the
Transaction Issued Share Conversion
- ----------- ------ ----- ----------
Conversion of payroll- employee/non related 761,839 $0.00495 $3,618.74
------- ---------
Total 2nd quarter 761,839 $3,618.74
The transactions for the three month period ending June 30, 2005 are recorded
as,
Equity on the Balance Sheet $ 3,319
Forgiveness of debt on the Statement of Operations 3,681
Operating expenses on the Statement of Operations 7,730
Total 3,619
==========
The value of the transaction is based upon the price per share of the common
stock on the date of the transaction along with a valuation factor based on the
trading restrictions placed upon the stock and the size of the block of stock
relative to the average daily trading volume of the stock along with during the
immediate thirty trading days prior to date the stock is issued along with
trading restrictions placed upon the stock.
During the three month period ending March 31, 2005, approximately $60,000 of
debt and accrued expenses were converted into common stock. The table presented
below provides additional information related to conversion of debt during the
period ending March 31, 2005
Number of Price Amount
Shares Per of the
Transaction Issued Share Conversion
- ----------- ------ ----- ----------
Conversion of accrued vacation- President/C.E.O 2,403,846 $0.010 $24,038.46
Conversion of accrued vacation- C.O.O./C.F.O 1,422,308 0.010 14,223.08
Conversion of accrued payroll-employee, related party 1,406,249 0.010 14,062.49
Conversion of accounts payable 750,000 0.010 7,500.00
--------- ----------
Total 1st quarter 5,982,403 $59,824.03
========== ==========
The transactions for the three month period ending March 31, 2005 are recorded
as,
Equity on the Balance Sheet $ 56,074
Forgiveness of debt on the Statement of Operations 3,750
----------
Total 59,824
==========
The value of the transaction is based upon the price per share of the common
stock on the date of the transaction along with a valuation factor for the size
of the block of stock relative to the average daily trading volume of the stock
along with during the immediate thirty trading days prior to date the stock is
issued along with trading restrictions placed upon the stock
NOTE 11 - STOCK OPTIONS
Effective January 1, 2003, the Company adopted the recognition provisions of
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure. Prior to 2002, the Company accounted for employee stock options
using the intrinsic value method under the provisions of APB No. 25 "Accounting
for Stock Issued to Employees". Upon adoption of FAS 148, the Company changed to
the fair value method and elected to recognize stock-based compensation for
awards granted after January 1, 2003 under the prospective method.
During the three month period ending September 30, 2005, the Company did not
grant any stock options.
Stock options activity for 2005 for nine months ending September 30, 2005 is as
follows:
Number Weighted Average
Of Shares Exercise Price
--------- --------------
Options Outstanding, December 31, 2004 3,366,898 $ 0.121
Options Granted 100,000 0.012
Options Forfeited (356,338) 0.235
Options Expired 0 0
Options Exercised 0 0
Options outstanding, September 30, 2005 3,110,560 $ 0.106
============ ============
During the three months ending September 30, 2005, zero options vested for a
total of 1,220,932 options vesting during the nine months ending September 30,
2005. Total number of options vested at September 30, 2005 is 2,568,893, while
541,667 options are non-vested.
During the quarter ended March 31, 2005, 100,000 stock options were granted to
employees, non-employee directors, officers, or consultants with an exercise of
$0.012 per common share and is immediately exercisable on the date of the grant,
March 30, 2005. 180,900 options vested in the three months ending March 31,
2005, while 9,504 options are forfeited by former employees during the first
quarter of 2005.
The table presented below provides additional information on the options based
compensation for the period ending March 31, 2005.
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
Number of Value Value
Shares Per of the
Transaction Issued Share Transaction
- ----------- ------ ----- -----------
Consulting 100,000 $0.012 $1,200
Total 1st quarter 100,000 1,200
The transaction was recorded to operating expense included in the Statement of
Operations.
The value of the transaction is based upon the price per share of the common
stock on the date of the transaction along with a valuation factor for the size
of the block of stock relative to the average daily trading volume of the stock
along with during the immediate thirty trading days prior to date the stock is
issued along with trading restrictions placed upon the stock
NOTE 12- COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has entered into five lease obligations for office space along with
a corporate apartment in New York City. The offices are located in California,
Florida, New York, and Texas.
California Lease
The California lease was executed on June 19, 2003. The term of the lease is
from August 1, 2003 through October 31, 2006. The lease contains an option for
the Company to extend the lease for an additional three-year period.
Florida Lease
The Florida lease was executed on April 15, 2003. The term of the lease is from
May 1, 2003 through April 30, 2008. The lease includes in addition to the office
space, various office furniture remaining from a prior lessee.
New York
The New York lease was executed on June 8, 2004. The term of the lease is from
June 1, 2004 through May 31, 2007.
The corporate apartment in New York City lease was renewed on January 1, 2005.
The term of the lease is from January 1, 2005 through December 31, 2007. The
rent is paid on a month-to-month basis until new lease is negotiated.
Texas Lease
The lease was amended on September 1, 2003 to extend the lease agreement period
to September 30, 2006. As a result of non-payment of the monthly lease payments
by the Company, the Landlord terminated the lease on June 28, 2005. The assets
at the office site were not moved to another Company location. The net book
value of the assets was zero.
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
EMPLOYMENT CONTRACTS
The Company has employment contracts with four employees. Employment contracts
at June 30, 2005 are as follows.
Annual
Position Compensation
- -------- ------------
President and C.E.O $ 250,000
C.O.O. and C.F.O $ 150,000
Corporate Secretary and General Council $ 36,000
Administrative Head of Healthcare Dialog $ 150,000
The employment contracts for the President and C.E.O, C.O.O. and C.F.O., and the
Administrative Head of Healthcare Dialog are for one year, with initial term
ending March 31, 2005, extendable for successive one year terms, unless
terminated at the end of the term by either party upon ninety days written
notice to the other party. Annual increases at the first of every year shall be
at least the percentage of the prior year's C.P.I. In negotiations with the
Company, the employees agreed to waive this clause for 2005. If for any reason,
the employee is not paid the employee's base salary for the year, the difference
between the base salary and the amount paid shall be paid to the employee prior
to payment of any year-end bonus to any other employee. Employee shall be
entitled to not less than five (5) weeks paid vacation for each full calendar
year prorated for any partial year. Employee shall accrue earned and unused
vacation. Employee shall receive all benefits and fringes made available to
other employees and officers of the Company including pension, medical, dental,
life, and disability insurance and other similar plans. Employee and spouse
shall receive these benefits fully paid by the Company. Health insurance for the
employee and family will be provided by the Company. Health club memberships for
the employee will be paid for by the company. Life insurance at a cost of at
least $1,000 per month will be paid by the Company. Long and short term
disability insurance for the employee will be paid by the Company. The employee
is entitled to a monthly automobile allowance of $1,500 per month.
The employment agreement with the Corporate Secretary and General Council is
effective June 1, 2005 to December 31, 2006. It does not contain a renewal
clause. If for any reason, the employee is not paid the employee's base salary
for the year, the difference between the base salary and the amount paid shall
be paid to the employee prior to payment of any year-end bonus to any other
employee. Health insurance for the employee is paid by the Company. Employee
shall accrue earned and unused vacation. Employee shall receive all benefits and
fringes made available to him from time to time by the Company. The work
required under this Agreement does not include that in connection with mergers,
acquisitions, and financings with gross values equal to or exceeding $500,000,
or security offerings. The compensation shall not cover work in connection with
merger, acquisitions, and major financings, or securities offering, which shall
be paid for by additional compensation on an agreed basis.
NOTE 13 - SEGMENT DISCLOSURES
With the acquisition of Advaliant, the Company realigned its business reporting
segments. Advaliant USA, Inc. includes the product lines Advaliant Affiliate
Network, Adialogin Digital, which previously known as Data Dialog Digital and
was included in the Data segment, and Publishing-MyMedCenter, which was
previously known as + Media and was included in the Healthcare segment. These
three product lines comprise the On-Line Services segment.
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
The Communications Services segment was previously known as the Healthcare
segment.
The Company's reportable operating segments are categorized in four components:
(1) Communications Services; which includes Healthcare Dialog, Inc., (2) On-Line
Services; which includes Advaliant Inc. along with Advaliant USA, Inc.(3) Data
Services; which includes Data Dialog, Inc. along with Mail Mogul, Inc., and (4)
Corporate which is Dialog Group, Inc.
COMMUNICATIONS SERVICES
Communication services designs, develops and distributes direct marketing and
customer relationship management products and services for the healthcare
industry.
Revenues are generated by Strategic and Creative Services:
o direct mail campaigns
o creation of sales representative training materials
o creation and dissemination of patient and professional education
materials
o consumer advertising
o creation and management of websites
o to place internet advertising
o for the use of our healthcare database
ON LINE SERVICES
Advaliant provides affiliate marketing and lead generation services based upon
cost-per-action along with cost- per-lead models. MyMedCenter, previously known
as + Media, provides, maintains and delivers healthcare information over the
internet and television. Adialogin Digital, previously known as Data Dialog
Digital, provides a product that automatically appends names and addresses to
telephone numbers on inbound calls to telephone service centers.
Revenues are generated from
o lead generation services for advertisers and publishers
o healthcare information provider on the internet
o a product that automatically appends names and addresses to
telephone numbers on inbound calls to telephone service centers and
on the internet
DATA SERVICES
Mail Mogul is an online market place primarily for sellers of direct mail
services, providing leads, website applications, mailing lists, mailing list
hygiene, mailing supplies as well as other products and services.
Revenues are generated from
o data from data dialog master database
o mail room supplies
o membership in "RFQ" an online marketplace for quoting direct mail
jobs
o sale of licensed databases and database products and services
o data hygiene services
Data Dialog provides online marketing list, direct mail programs and creates
target lists for specific direct marketing categories for small to medium sized
businesses. The company allocates the costs of revenues and direct operating
expenses to these segments.
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
Revenues are generated from
o data from the Dialog Group databases
o direct mail campaigns
CORPORATE
This is comprised of general and administrative functions and related expenses.
These costs are retained at corporate and are not allocated to the business
segments. Costs that are specifically attributable to a business unit are
charged to that unit. Management's philosophy is charging the units for specific
attributable costs, such as I.T services, rent, and depreciation or amortization
of assets owned by Corporate that have a benefit to the business unit more
accurately reflects the operating costs of Corporate and the matching of
revenues and costs of the respective business unit.
SIGNIFICANT CUSTOMERS
For the three month ending September 30, 2005, two customs of the Communication
Services segment account for approximately 5% and 11%, respectively of the
consolidated revenues. For the three months ending September 30, 2005, two
customers in the Online Services segment, each accounted for 7% of the
consolidated revenues. No customer in the Data Services segment accounted for
more than 1% of the consolidated revenues for the three month ending September
30, 2005
For the nine months ending September 30, 2005, two customers of Communication
Services account for 9% and 13%, respectively of the consolidated revenues. In
the Online Services segment, two customers each accounted for 4% of the
consolidated revenues for the nine months ending September 30, 2005. No customer
in the Data Services segment accounted for more than 1% of the consolidated
revenues for the nine month period ending September 30, 2005
This compares with two customers of the Communications Services segment
accounted for approximately 12% and 14% respectively for the three month period
ending September, 2004 and 15% and 7% for the nine months period ending
September 30, 2004, respectively. No customer in the Online Services segment
account for more than 3% of the consolidated revenues for the three and nine
months ending September 30, 2004. No customer in the Data Services segment
accounted for more than 1% in either period in 2004.
Management is not aware of any known trends, uncertainties, or circumstances
that are reasonably likely to have a material effect on composition or
percentages of significant customers for the balance of 2005.
Three months ended September 30, 2005 Actual Unaudited Results
Communication Online Data Consolidated
Corporate Services Services Services Total
--------- --------- ---------- ---------- ----------
REVENUE $0 $318,015 $1,019,549 $589,663 $1,927,227
COST OF REVENUES 0 261,390 632,238 186,413 1,080,041
--------- --------- ---------- ---------- ----------
GROSS PROFIT 0 56,625 387,312 403,250 847,186
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
OPERATING EXPENSES:
Selling, General, and Administrative
Expenses 390,193 81,448 388,268 534,711 1,394,621
TOTAL OPERATING EXPENSE 390,193 81,448 388,268 534,711 1,394,621
--------- --------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (390,193) (24,824) (957) (131,462) (547,435)
Other Income(Expenses)
Interest income
Interest expense (38,111) (20,357) (250) (1,908) (60,627)
Other (expense) (1,409) (6,562) (7,971)
Other income
Forgiveness of debt 30,857 22,871 28,044 80,771
--------- --------- ---------- ---------- ----------
Total other income(expenses) (8,663) 2,513 (250) 19,573 13,174
Income/(Loss) From Continuing Operations (398,855) (22,310) (1,207) (111,888) (534,261)
Inactive Operations
Discontinued operations
Net Income/(Loss) (398,855) (22,310) (1,207) (111,888) (534,261)
OTHER COMPREHENSIVE INCOME/(LOSS) (12,555) (12,555)
========== ==========
COMPREHENSIVE INCOME/(LOSS) $(398,855 $(22,310) $(13762) $(111,888) $(546,816)
========= ========= ========== ========== ==========
Total Net Assets 608,180 246,675 745,755 231,236 1,224,274
========= ========= ========== ========== ==========
Gross Fixed and Other Assets 1,194070 12,752 265,341 259,275 1,731,438
========= ========= ========== ========== ==========
Depreciation and Amortization Expense 83,979 0 22,669 20,690 127,338
========= ========= ========== ========== ==========
Accumulated Depreciation and Amortization 682,471 0 23,476 164,265 870,212
========= ========= ========== ========== ==========
Three months ended September 30, 2004 Actual Unaudited Results Restated
to be consistent with the New Segment Reporting Units.
Communication Online Data Consolidated
Corporate Services Services Services Total
---------- -------- ------- -------- --------
REVENUE $0 $556,142 $300,207 $1,223,334 $2,079,683
COST OF REVENUES 0 263,585 88,466 444,779 796,830
---------- -------- ------- -------- --------
GROSS PROFIT 0 292,557 211,741 778,555 1,282,853
OPERATING EXPENSES:
Selling, General, and Administrative
Expenses 533,270 97,954 121,135 508,616 1,260,975
TOTAL OPERATING EXPENSE 533,270 97,954 121,135 508,616 1,260,975
---------- -------- ------- -------- --------
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
INCOME (LOSS) FROM OPERATIONS (533,270) 194,603 90,606 269,939 21,878
Other Income(Expenses)
Interest income
Interest expense 3,729 (11,718) (4,028) (12,017)
Other (expense) 10,581 10,581
Other income
Forgiveness of debt 60,319 96,250 12,328 168,897
Settlement adjustment 122,710 122,710
---------- --------
Total other income(expenses) 186,758 95,113 0 8,300 167,463
Income/(Loss) from Continuing Operations (346,512) 289,716 90,606 278,239 312,051
Inactive Operations
Discontinued operations (176,081) (14,349) (190,430
-------- --------
Net Income/(Loss) $(522,591) $275,367 $90,606 $278,239 $121,621
---------- -------- ------- -------- --------
OTHER COMPREHENSIVE INCOME/(LOSS) 0 0 0 0 0
COMPREHENSIVE INCOME/(LOSS) (522,591) 275,367 90,606 278,239 121,621
========== ======== ======= ======== ========
Total Net Assets 654,635 492,524 0 356,135 1,503,294
========== ======== ======= ======== ========
Gross Fixed and Other Assets 869,695 28,495 0 217,943 1,161,133
========== ======== ======= ======== ========
Depreciation and Amortization Expense 68,605 0 0 20,800 89,404
========== ======== ======= ======== ========
Accumulated Depreciation and Amortization (364,081) 0 0 84,471 448,552
========== ======== ======= ======== ========
Nine months ended September 30, 2005 Actual Unaudited Results
Communication Online Data Consolidated
Corporate Services Services Services Total
------------ ------- ------- -------- ------------
REVENUE $0 $1,22,472 $1,595,693 $2,249,147 $5,063,311
COST OF SALES 0 773,095 903,557 694,541 2,371,192
------------ --------- ------- ---------- ------------
GROSS PROFIT 0 448,378 692,136 1,551,606 2,692,119
OPERATING EXPENSES:
Selling, general, and Administrative Expenses 1,278,610 337,030 660,092 1,708,363 3,984,095
TOTAL OPERATING EXPENSE 1,278,610 337,030 660,092 1,708,363 3,984,095
INCOME (LOSS) FROM OPERATIONS (1,278,610) 111,348 32,044 (156,757) (1,291,976)
Other Income(Expenses)
Interest income
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
Interest expense (127,287) (55,420) (250) (7,057) (190,014)
Other (expense) (1,409) (6,562) (7,971)
Other income
Forgiveness of debt 53,021 22,871 19,068 94,960
------------ --------- ------- ---------- ------------
Total other income(expenses) (75,675) (32,549) (250) 5,448 (103,025)
------------ --------- ------- ---------- ------------
Income /(Loss) From Continuing Operations (1,354,285) 78,799 31,794 (151,309) (1,395,011)
Inactive operations (290) (290)
Discontinued operations (57,975) (57,975)
Net Income/(Loss) (1,412,260) 78,509 31,794 (151,309) (1,478,376)
OTHER COMPREHENSIVE INCOME/(LOSS)
Foreign currency translation adjustments (12,555) (12,555)
COMPREHENSIVE INCOME/(LOSS) $(1,412,260) $78,509 $19,239 (151,309 $(1,465,821)
============ ========= ======= ========== ============
Total Net Assets 608,180 246,675 745,755 231,236 1,224,274
============ ========= ======= ========== ============
Gross Fixed and Other Assets 1,194070 12,752 265,341 259,275 1,731,438
============ ========= ======= ========== ============
Depreciation and Amortization Expense 242,776 0 22,669 62,069 327,514
============ ========= ======= ========== ============
Accumulated Depreciation and Amortization 682,471 0 23,476 164,265 870,212
============ ========= ======= ========== ============
Nine months ended September 30, 2004 Actual Unaudited Results Restated to be
consistent with the New Segment Reporting Units.
Communication Online Data Consolidated
Corporate Services Services Services Total
------------ ------- ------- -------- ------------
REVENUE $0 $1,712,031 $1,205,880 $3,244458 $6,162,369
COST OF SALES 0 983,626 249,994 1,361184 2,594,804
------------ ------- ------- -------- ------------
GROSS PROFIT 0 728,405 955,886 1,183,274 3,567,565
OPERATING EXPENSES:
Selling, General, and Administrative
Expenses 1,681,727 303,902 317,131 1,771,526 4,074,285
TOTAL OPERATING EXPENSE 1,681,727 303,902 317,131 1,771,526 4,074,,285
------------ ------- ------- -------- ------------
INCOME/(LOSS) FROM OPERATIONS (1,681,727) 424,503 638,755 111,748 (506,720)
Other Income(Expenses)
Interest income
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
Interest expense (12,177) (28,344) (3,985) (44,506)
Other (expense) (2,704)
Other income 1,712 1,702
Litigation settlement 122,710 122,710
Forgiveness of debt 162,471 207,331 55,163 424,945
------------ ------- ------- -------- ------------
Total other income(expenses) 270,300 178,967 0 52,890 379,447
Income/(Loss) from Continuing Operations (1,411,427) 603,470 638,755 164,638 (4,563)
Inactive Operations
Discontinued operations (215,106) (39,770) (254,876)
------------ ------- ------- -------- ------------
Net Income/(Loss) (1,626,533) 563,700 638,755 164,638 (259,439)
OTHER COMPREHENSIVE INCOME/(LOSS)
COMPREHENSIVE INCOME/(LOSS) $(1,626,533) $563,700 $638,755 $164,638 $(259,439)
============ ========= ======= ========== ============
Total Net Assets 654,635 492,524 0 356,135 1,503,294
============ ========= ======= ========== ============
Gross Fixed and Other Assets 869,695 28,495 0 217,943 1,161,133
============ ========= ======= ========== ============
Depreciation and Amortization Expense 204,764 0 0 51,061 255,825
============ ========= ======= ========== ============
Accumulated Depreciation and Amortization (364,081) 0 0 84,471 448,552
============ ========= ======= ========== ============
NOTE 14 - LOANS AND NOTES PAYABLE
Loans and notes payable due to non-related parties consisted of the following as
of September 30, 2005.
Convertible notes in the aggregate amount of $100,000 due to three former IP2M
note holders assumed by the Company. The notes are due August 31, 2004. The
notes bear interest at the rate of 10% per annum. The notes are convertible into
shares of the Company's common stock. The number of shares to be issued upon
conversion will be determined by the closing bid price of the Company's common
stock on the date of conversion. Each holder is entitled to convert up to 25% of
the initial balance of the note (including accrued interest) each month. During
the third quarter of 2005, $25,000 of principle of the remaining note along with
accrued interest was converted to common stock During the second quarter of 2004
$75,000.00 of Notes were converted to common stock. At September 30, 2005, all
of the convertible notes have been converted into common stock. $ 0
$115,000 revolving credit agreement with a commercial bank matured on October
13, 2004.The line of credit bears interest at prime plus 2% per annum and is
personally guaranteed by the Company's President and C.E.O. The outstanding
balance was paid from the net proceeds from the sale of a $550,000 convertible
note to a related party during the second quarter of 2005. The credit agreement
with this bank was not renewed by the Company.
$ 0
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
Small business loan assumed upon the purchase of Azimuth Target Marketing. The
loan bears interest at prime plus 2 1/4 % per annum, due in equal installments
over 36 months, maturing during 2006. During the third quarter of 2005, the
Company paid the loan in full.
$ 0
$500,000 line of credit with commercial asset-backed lender with a term of two
years beginning August 2004. The line of credit was increased during the third
quarter of 2005 from the original of $350,000 to the current amount of $500,000.
The line of credit bears interest at prime plus 4% per annum plus on-going fees.
It is secured by the Company's accounts receivables, equipment, inventory, and
up to $150,000 of the debt is personally guaranteed by the President and C.E.O.
of the Company and his spouse. An additional $150,000 of the debt is personally
guaranteed by the President of Advliant USA, Inc., a subsidiary of Dialog Group,
Inc. $ 452,889
Total loans and notes payable $ 452,889
Less: Current maturities $ (452,889)
----------
Long Term Debt $ 0
==========
Please see Note 15- Related Party Transactions Due to Related Parties for
information about additional Company debt.
NOTE15 - RELATED PARTY TRANSACTIONS
CONVERTIBLE NOTES DUE TO RELATED PARTIES
During 2004, the Company began issuing a Convertible Note. The notes all bear
interest at the rate of five (5%) percent per annum when initially issued and
were to mature on May 31, 2006. The holders of the notes may convert them into
Company common stock at a price of $0.06 per share. After the Company's shares
close over $0.12 per share for twenty trading days, the Company can compel the
holders to convert their notes and all accrued interest into shares of common
stock at the conversion price.
As a result of negotiations in April 2005 with the holders of the convertible
notes, the Company along with the note holders agreed to amend the notes as
such, all accrued interest up that date was forgiven, the related warrants were
cancelled, the conversion price was lowered $0.06 per common share to $0.01 per
share., and extended the maturity date to February 1, 2007.
Convertible Notes in the aggregate amount of $118,045 were issued to the
President and C.E.O, the C.O.O. and C.F.O., along with two employees for unpaid
payroll at December 31, 2004. In April 2005, these notes were also amended as
set forth above.
During the period ending June 30, 2005, the President and C.E.O. provided an
additional $100,000 of funds which is secured by a Convertible Note. Subtotal-
convertible notes related parties-employees
$ 218,045
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
Three notes, in the initial principal amounts of $250,000, $135,000, $125,000,
and $45,000 were issued to a fund through the efforts of an affiliated
broker-dealer. The Company paid an aggregate of approximately $55,000 to a
company whose president is a member of the board of directors of the Company for
arranging the sale of these notes. The aggregate of these notes, $555,000 was
sold by one related party to another.
In April 2005, one note was issued in the principle amount of $550,000 to the
related party that purchase purchased the four notes listed above. In connection
with transaction, the Company, paid $50,000 to an affiliated broker-dealer whose
president is a member of the board of directors of the Company.
In December 2004, a group of individuals, including a member of board of
directors provided approximately $113,000 directly to a supplier for unpaid
invoices. The advance is non-interest bearing and due on demand. In January of
2005, the Company paid $87,000, leaving a balance of $26,000.
This amount of $26,000 was converted in April 2005 by a company controlled by a
member of the board of directors of the Company into a convertible note with the
same terms and conditions as the other convertible notes.
Subtotal convertible notes-related parties-non employees $1,131,000
DUE TO RELATED PARTIES
In conjunction with the Company obtaining a Letter of Credit for the benefit of
a supplier of Healthcare Dialog (see Note-7 Letter of Credit), the President and
C.E.O. of the Company personally secured the Letter of Credit by pledging
personal assets in the amount of the Letter. Unless, the Letter of Credit is
drawn down on, no amount is due.
The President and C.E.O. of Company provided the Company with an additional
$100,000 during the three months ending June 30, 2005 of short-term,
interest-free, unsecured debt.
As the President and C.E.O. had to borrow funds in his name in the amount of
$325,000 in order to provide the amount that the Company required, the
Company has reimbursed him the $1,261 of interest charged by his lender. The
balance at September 30, 2005 is $145,000.
Subtotal other current liabilities-related parties $ 145,000
Total loans and notes payable due to related parties $1,494,045
Less: Current maturities $ (145,000)
----------
Long Term Debt due to related parties $1,131,000
==========
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
CONVERSION OF DEBT DUE TO RELATED PARTIES
For the nine months ending September 30, 2005, related parties converted
approximately $53,000 of debt, or accrued expenses.
No conversions of debt took place in the three month period ending September 30,
2005.
No conversions of debt took place in the three month period ending June 30,
2005.
During the period ending March, 31, 2005, related parties converted
approximately $53,000 of debt, or accrued expenses into equity of the Company.
RENT TO RELATED PARTIES
The Company leases an apartment from January 1, 2005 through December 31, 2007
from a company controlled by the C.O.O. and C.F.O. of the Company. Rent expense
paid to the company controlled by the related parties amounted to $6,000 for
three months ended September 30, 2005 and $18,000 for the nine months ended
September 30, 2005. The Company continues to pay the rent on a month-to-month
basis until a new lease is negotiated.
NOTE 16 -LITIGATION
SUPPLIERS
In late October, the Company received a letter from the Internal Revenue Service
stating that the IRS claims that Direct Mail Quotes did not file or pay its 4th
quarter 2002 payroll taxes. During 2002, Direct Mail Quotes was subsidiary of
ThinkDirectMarketing, a discontinued subsidiary sold by the Company in 2003. The
timeframe referenced in the letter from the I.R.S. is prior to the acquisition
of Direct Mail Quotes or ThinkDirectMarketing by the Company. The Company is
reviewing this matter and is in contact with the I.R.S to resolve the claims
made by the Internal Revenue Service. Due to the uncertainty of the claim, no
accrual has been made.
In late October, the Company received notice that the Plaintiff received a
default judgment against Mail Mogul in Superior Court, County of Los Angeles. In
September, 2005 the Company received a copy of the action filed by in Superior
Court of California, County of Los Angles on September 8, 2005 by American
Student List, a supplier of Mail Mogul, Inc. for unpaid invoices, accrued
interest, attorney's fees of $1000, costs of the suit, and such other relief the
Court deems just and equitable under the circumstances The amount of the claim,
for unpaid invoices of $5,672.25 is fully recorded in the accounts payable of
the Company. The balance at September 30, 2005 is $5,672.25.
In July, 2005 the Company heard from the collection agency representing Metro
Label, a supplier of Mail Mogul, Inc. requesting payment of unpaid invoices. The
Company has recorded $18,480 of invoices on the accounts payables of Mail Mogul,
Inc.
In late October, the Company received notice that the Plaintiff received a
default judgment against Mail Mogul in Superior Court, County of Los Angeles. In
July, 2005, the Company received a letter from the attorney representing
Courtenay Communications Corporation, a supplier of Mail Mogul, Inc. requesting
payment of unpaid invoices. The amount of the request, $4,200.00 is fully
recorded in the accounts payable of the Company at September 30, 2005.
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
In late June 2005, the Company received a copy of the action filed in early May
2005 by Brimar Industries, Inc., a supplier of Mail Mogul, Inc., for unpaid
invoices, interest, reasonable attorney's fees, costs of the suit, and such
other relief the Court deems just and equitable under the circumstances The
amount of the claim, for unpaid invoices of $25,105.74 is fully recorded in the
accounts payable of the Company. During May and June, the Company paid
approximately $7,800 by check towards the unpaid invoices. The balance at
September 30, 2005 is $13,567.13. In November, the Company has worked out a
payment plan with the supplier's attorney and reduced the amount owed by
$3,567.13. A payment of $5,000 by check was made in November with the final
payment of $5,000 due in December.
The New York State Department of Taxation in December 2004 provided a letter to
QD Corporation, a discontinued unit that the Department claims that QD
Corporation owes $7,936 in taxes and interest for corporate income taxes for the
period ending December 31, 2002.
After reviewing the consolidated tax return, QD Corporation is not required to
file a separate return. This information has been provided to New York State
Department of Taxation in response to its December 2004 letter. As the Company
believes it has properly reported the taxes to the State of New York, no accrual
for additional taxes and charges are recorded.
Collins Ink, in June 2004, obtained a judgment of $92,347 for unpaid invoices.
The full amount is recorded in the accounts payable of the Company. During the
six month ending June 30, 2005 the Company has paid $10,000 by checks toward the
balance of unpaid invoices. During the third quarter, the Company paid $5,000 by
check. The balance at September 30, 2005 is $28,108.50.
Label Source, in June 2004, obtained a judgment of $121,037 for unpaid invoices.
The full amount is recorded in the accounts payable of the Company. In May, the
Company signed a settlement agreement with this supplier. The payment schedule
is seventeen payments of $5,000 and one payment of $5,118.83 for a total of
$90,118.83. The Company made three payments of $5,000 each for a total of
$15,000 by check during the three month period ending September 30, 2005. The
balance at September 30, 2005 is $65,118.83
USA Direct, in April 2004 obtained a $39,025 judgment related to a discontinued
operation of the Company. This amount is recorded in the accounts payable of the
Company. In December 2004, the Company and USA Direct reached an agreement of
$20,000 and a payment plan. The balance at September 30, 2005 is $10,000. During
2005, one payment of $5,000 was made by check in August.
During July of 2003, Acxiom Corporation commenced an action against
ThinkDirectMarketing, Inc., a discontinued subsidiary. In September of 2005,
Acxiom amended its complaint, filed with Circuit Court of Faulkner County,
Arkansas, to include in addition to ThinkDirectMarketing, Inc.,
Dialog Group, Inc. along with Data Dialog, Inc., a subsidiary of Dialog Group,
Inc. was added. The compliant seeks $402,541 on a note payable, plus interest of
$179,079 as of September 23, 2005, $295,415 for unpaid data usage for calendar
year 2002, $570,000 for calendar 2003, and $684,000 for calendar 2004 using the
minimum fees outlined in the Data License between Acxiom and Data Asset
Management, the predecessor of ThinkDirectMarketing, Inc. In addition to filing
the amended complaint, the Plaintiff has also filed with the Court
Interrogatories and Requests for Production to Data Dialog.
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
The debts, if any, are those of the discontinued entity that was sold in
December 2003. This litigation is still in the preliminary stages. As the
obligations, if any, are those of ThinkDirectMarketing, Inc., a discontinued
subsidiary sold in December 2003 and Dialog Group, Inc. is highly confident that
no legal basis exists that would hold Dialog Group, Inc. responsibly. No amounts
have been recorded for the amounts listed in the action. In June, the Company
accrued $30,000 for legal expenses related to this action. The balance of this
accrual at September 30, 2005 is $28,960. The amount for anticipated legal costs
is fully accrued for in the financial statements of the Company. This amount is
included in accrued settlements and contingencies in note 9.
EMPLOYEES
In July 2005, two former employees of Mail Mogul, Inc. filed claims with the
California Labor Commission for unpaid wages. The first claim is in the amount
of $6,187 for unpaid commissions, bonus, and vacation pay. A settlement was
reached in the amount of $4,824 with a payment schedule one payment of $2,500
and the second of $2,324. The payments are to be made by September 6, 2005. The
payment of $2,500 was made. The second payment which should have been made in
September has been made. The amount of the settlement is recorded in July 2005.
The first payment of $2,500 was made in the third quarter. The balance at
September 30, 2005 is $2,324.29. This amount is included in accrued settlements
and contingencies in note 9.
The second claim, also filed with California Labor Commission is in the amount
of $10,031 for unpaid commissions. The Company presented its case in a hearing
in the Commissioner's office on July 19, 2005. The Commission determined that
the plaintiff was due $8,451.02 in unpaid commissions. No amount has been
recorded or payments made for this claim.
In April 2003, two former TDMI employees commenced arbitration proceeding
against the Company relating to their termination of employment. The employees
seek damages totaling $375,789. TDMI, a discontinued subsidiary, accrued
$147,000 against this potential liability. The Company has accrued for
additional legal fees to contest the claims. In January 2005, the Company
received notice from the American Arbitration Association Employment Arbitration
Tribunal that reviewed the claims. Its decision was to award the claimants a
total of approximately $478,000 including fees. In April, the Company and the
two former employees of TDMI executed a settlement agreement for $501,872 that
includes a schedule of payments over two and half years that includes
approximately $25,000 of interest. The settlement agreement's payment plan
stated the former employees be paid an initial amount of $100,000 and the
balance over the next thirty months. The $100,000 payment was made by check in
April 2005. An additional payment of $25,000 was paid made by check in June.
During the third quarter the Company made payments of $87,578 towards reducing
the outstanding amount. The balance at September 30, 2005 is $289,294. The
amount is fully accrued for in the financial statements of the Company. This
amount is included in accrued settlements and contingencies in note 9.
In April 2003, Dialog Group received a summons from a Colorado State District
Court seeking to enforce a former employee's termination agreement. A settlement
agreement was reached for $47,330. TDMI, a discontinued subsidiary, made
payments of approximately $45,000 during 2003 and 2004. The balance at March 31,
2005, is $2,000 and recorded as an accrual on the books of the Company. This
amount is included in accrued settlements and contingencies in Note 9. The
balance was paid in April, 2005 by check.
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
The Company reached a settlement with a former employee for claims against an
employment contract. It was settled by conversion to series E preferred stock in
2004.The Company accrued for a liability sufficient to cover the settlement. The
balance at September 30, 2005 is $5,856 and is included in accrued settlements
and contingencies in Note 9.
NOTE 17-FORGIVENESS OF DEBT
For the nine months ending September 2005, Management has arranged approximately
$104,000 in forgiveness of debt recorded in the Statement of Operations.
The transactions during the nine months period ending September 30, 2005 are
recorded as,
Forgiveness of debt on the Statement of Operations $ 103,936
Operating expenses on the Statement of Operations 3,619
Additional Paid in Capital on the Balance Sheet $ 29,912
During the three month period ending September 30, 2005, Management has arranged
approximately $82,000 in forgiveness of debt recorded in the Statement of
Operations.
The table presented below provides additional information on the forgiveness of
debt for the three month period ending September 30, 2005.
Number of Value Value
Shares Per of the
Transaction Issued Share Transaction
- ----------- ------ ----- -----------
Accounts payables write off N/A N/A $81,772.27
Total 3rd Quarter N/A N/A $81,772.27
The transactions during the three month period ending September 30, 2005 are
recorded as,
Forgiveness of debt on the Statement of Operations $81,773
During the period ending June 30, 2005, Management entered into negotiations
with holders of the Company's convertible notes to amend the notes to cancel the
accrued and future interest, the attached warrants, and reduce the conversion
price from $0.06 to $0.01 per common share.
The related party note holders agreed to amend the notes. In doing so,
Management arranged for approximately $14,700 in forgiveness of debt recorded in
the Statement of Operations.
In June, 2005, an employee agreed to convert his payroll and accrued payroll
into shares of common stock. This transaction resulted in approximately $3,700
in forgiveness of debt.
The table presented below provides additional information on the forgiveness of
debt for the three month period ending June 30, 2005.
Number of Value Value
Shares Per of the
Transaction Issued Share Transaction
- ----------- ------ ----- -----------
Accrued interest-employee notes N/A N/A $1,918.06
Accrued interest-related party notes N/A N/A $12,815.05
Employee payroll conversion to stock 761,839 $0.00475 $3,618.74
Total 2nd quarter 761,839 $18,351.85
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONCOLODATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
The transactions during the three month period ending June 30, 2005 are recorded
as,
Forgiveness of debt on the Statement of Operation $ 18,414
Operating expenses on the Statement of Operations 3,619
The value of the accrued interest transaction is the amount of accrued interest
based upon the terms of the convertible notes at April 30, 2005, the date the
Company and note holders agreed to amend the notes.
The value of the employee payroll conversion to stock transaction is based upon
the price per share of the common stock on the date of the transaction along
with a valuation factor for the size of the block of stock relative to the
average daily trading volume of the stock along with during the immediate thirty
trading days prior to date the stock is issued along with trading restrictions
placed upon the stock
During the period ending March 31, 2005, Management arranged the settlement of
accounts payable and other obligations resulting in approximately $3,800 in
forgiveness of debt recorded in the Statement of Operations. The table presented
below provides additional information on the forgiveness of debt for the period
ending March 31, 2005.
Number of Value Value
Shares Per of the
Transaction Issued Share Transaction
- ----------- ------ ----- -----------
Conversion of accrued vacation- President/C.E.O 2,403,846 $0.005 $12,019.23
Conversion of accrued vacation- C.O.O./C.F.O 1,422,308 0.005 $7,111.54
Conversion of accrued payroll-employee, related party 1,406,249 0.005 $7,031.25
Conversion of accounts payable 750,000 0.005 $3,750.00
Total 1st quarter 5,982,403 $29,912.02
The transactions during the three month period ending March 31, 2005 are
recorded as,
Additional Paid in Capital on the Balance Sheet $ 29,912
Forgiveness of debt on the Statement of Operations 3,750
The value of the transaction is based upon the price per share of the common
stock on the date of the transaction along with a valuation factor for the size
of the block of stock relative to the average daily trading volume of the stock
along with during the immediate thirty trading days prior to date the stock is
issued along with trading restrictions placed upon the stock.
Item 2. Management's Discussion and Analysis or Plan of Operation.
General
Dialog Group, Inc. (DGI) is a publicly traded corporation (OTCBB:DLGG),
headquartered at 257 Park Avenue South, Suite 1201, New York, New York 10010,
with offices in Valencia, California; Sunrise, Florida and, as of the end of the
second quarter, Toronto, Canada. (See below: Recent Acquisition) DGI provides a
suite of technology and databased solutions and services that enable marketers
to advertise, generate leads, and manage customers. DGI is an original compiler
and distributor of proprietary and licensed data products and online and
off-line marketing services. DGI also operates and manages an online affiliate
network, a convergent media platform, which includes TV, radio, Internet, as
well as a creative services support.
DGI has three operating divisions, Online Services, Data Services and
Communications Services. Online Services (New York and Toronto) offers its
clients an Online Affiliate and Advertising Network, Online Media Buying and
Publishing, and Adialogin, a proprietary online and off line data verification
and enhancement system. Data Services (New York, Valencia and Sunrise) offers
its customers Lead Generation, Data Compiling, Appending and Verification, List
Management, Broker and Direct Client services. Communications Services (New
York) offers its clients Creative, Strategy, Customer Relationship Management,
Website Development, and Account Services.
Recent Acquisition
As of the end of the second quarter of 2005, Dialog Group acquired control
of AdValiant Inc. a Canadian based company. The exact financial terms of the
transaction are set forth in the Current Report on Form 8-K filed with the
Commission on July 5th, 2005 and the amendment filed on July 11th and the
Current Report on Form 8-K filed on August 12, 2005. The assets of AdValiant
were included in the Balance Sheet as of June 30, 2005, while the results of its
operations during the periods before June 30th, 2005 are not included in the
nine month statements.
Description of the Divisions
Beginning in the third quarter, in response to the acquisition of
AdValiant, the Company was reorganized into three divisions to best reflect the
fit between the Dialog Group and AdValiant.
The analysis of the reports for the periods ending September 30th, 2005
therefore reflects Dialog Group's new division into three business-reporting
segments, each currently marketing its products and services through branded
business organizations.
Online Services is a convergent media and marketing company which offers
its clients an Online Affiliate and Advertising Network, Online Media Buying and
Publishing, and Adialogin, a propriety, realtime online and off line data
verification and enhancement system.
The AdValiant Affiliate Network, which is made up of over 1,000 affiliate
publishers in one network. The network combines performance based marketing (pay
for results), lead generation search and email marketing. AdValiant has recently
added AdVario, a real time contextual advertising application.
Adialogin is a real time consumer and business data delivery system for
online and off line marketers. This product can shortened the time from lead
generation to sale by utilizing a unique technology to collect, verify, and
enhance data and offers the option to communicate with the prospect. This data
integration product automatically appends name and address information, as well
as demographic & sociographic information, to telephone numbers on calls made by
consumer and business customers. The technology features lists containing over
150 million business, residential and government names. Adialogin primarily
markets its products to websites and call centers.
MyMedCenter platform provides, maintains, and delivers healthcare, beauty
and pet content across a national network of about 100 local affiliate TV and
radio station websites. The content, which includes over 15,000 text articles,
attracts health information seekers per day to websites for broadcast stations'
in markets including 75% of US household. On these sites, client public
relations, promotional material, and educational material are blended into a
unified presentation for maximum viewer impact.
Data Services offers its customers Lead Generation, Data Compiling,
Appending, and Verification, List Management, Broker, and Direct Client
services. Data Services products are:
Data Dialog Marketing serves the direct marketing needs of small- and
medium-sized businesses with systems and tools that generate business and
consumer prospect leads and provide data services. Data Dialog Marketing offers
a host of data-related services, such as targeted marketing lists, turnkey
direct mail programs, and data cleansing to multiple market segments including
insurance, financial planning, real estate, auto dealerships and other segments
that are users of direct mail and prospect marketing. Data Dialog Marketing also
offers a unique subscription-based product featuring limited selections of data
specifically designed for the small business segment. The unit markets an online
list creation tool, Data Dialog Select.
Mail Mogul brings one-stop shopping to the mail shop industry. Mail Mogul
helps mail shops improve their business opportunities through a
total-business-solutions approach. Proprietary and external lists are sold at
competitive prices both on and off line to mail shops. In addition, list hygiene
services are offered to mail shops that have customer lists which need to be
updated and or standardized. Its "Request for Quote" product was this market's
first online commerce center to link customers who need direct mail job quotes
with mail shops and direct marketing service organizations with letter-shop
capabilities. Mail Mogul offers consumable supplies to its customers for their
equipment and to round out its product offerings to mail shops.
iData uses proprietary technologies to support healthcare and
pharmaceutical clients in their direct marketing efforts, clinical trial
recruitment, and consumer/patient market research efforts. It offers unique
healthcare data on almost 2 million households, and serves as the foundation for
the highly targeted and efficient communication plans of pharmaceutical
companies, retailers, and other healthcare companies. Its exclusive data is
compiled from respondents who agree to telephone interviews. The primary
function of this business unit is to identify patient/consumer targets and
enhance patient/consumer databases.
Communications Services' consolidated Total Operating Expenses were
approximately $81,000 for the three months ended September 30, 2005, compared to
$98,000 for the same period a year ago.
For the three months ended September 30, 2005, Communications Services'
consolidated Net Loss from Operations was approximately $25,000 compared to an
income of $195,000 in the third quarter of 2004. For the period ending September
30, 2004, Not Other Income included imcome form forgivness of debt of $96,250
offset by a loss on discontinued operations of $14,000.
Nine Months Ended September 30, 2005
Dialog Group
---------------------------------------- ---------------------------- ------------------------------
Income Statement Item First Nine Months 2005 First Nine Months 2004
---------------------------------------- ---------------------------- ------------------------------
Revenue $ 5,063,311 $6,162,369
---------------------------------------- ---------------------------- ------------------------------
Cost of Revenue 2,371,192 2,594,804
---------------------------------------- ---------------------------- ------------------------------
Operating Expenses 3,984,095 4,074,627
---------------------------------------- ---------------------------- ------------------------------
Result of Operations (1,291,976) (506,720)
---------------------------------------- ---------------------------- ------------------------------
Net Other Income (161,290) 502,501
---------------------------------------- ---------------------------- ------------------------------
Other Comprehensive Income/(Loss) (12,555) 0
---------------------------------------- ---------------------------- ------------------------------
Total Comprehensive Income/Loss) (1,465,821) (259,438)
---------------------------------------- ---------------------------- ------------------------------
Revenues for the nine months ended September 30, 2005 were $5,063,000
compared with $6,162,000 for the nine months ended September 30, 2004. This
represents a decline of about $948,000 or 23% from the same period a year ago.
Revenue for each of the segments will be addressed in more detail below.
Cost of Revenues for the three quarters ended September 30, 2005 were
$2,371,000, some 47% of sales, compared with $2,595,000 or approximately 42% of
sales in the nine months ended September 30, 2004. The details are discussed in
the sections which follow.
Operating Expenses for the nine months ended September 30, 2005 were
$3,984,000 compared with $4,075,000 for the nine months ended September 30,
2004. The details are discussed in the sections which follow.
Losses from Operations were $1,292,000 for the nine months ended September
30, 2005, compared with $507,000 for the nine months ended September 30, 2004,
an increase of approximately $785,000. The contributing factors will be
discussed by operating unit.
Net Other Income/Expense was an expense of $161,000 for the nine months
ended September 30, 2005, compared with income in that category of $247,000 for
the nine months ended September 30, 2004, a total difference of about $408,000.
The company's other income/expense for this year included interest expenses of
approximately $190,000 and income of $95,000 arising from gain on forgiveness of
debt offset by $58,000 of expenses for discontinued operations. Last year
included Interest Expense of $44,000 and Other Income of $547,000 that arose
primarily from forgiveness of debt along a favorable settlement agreement offset
by losses from discontinued operation of $255,000.
The Net Loss for the nine months ended September 30, 2005 was $1,466,000,
compared with a Net Loss $259,000 in the nine months ended September 30, 2004,
representing an increased loss of $1,194,000
Online Services Segment
------------------------------------ -------------------------------- --------------------------------
Income Statement Item First Nine Months 2005 First Nine Months 2004
------------------------------------ -------------------------------- --------------------------------
Revenue $1,595,693 $1,205,880
------------------------------------ -------------------------------- --------------------------------
Cost of Revenue 903,557 249,994
------------------------------------ -------------------------------- --------------------------------
Operating Expenses 660,092 317,131
------------------------------------ -------------------------------- --------------------------------
Result of Operations 32,044 638,755
------------------------------------ -------------------------------- --------------------------------
Net Other Income (250) 0
------------------------------------ -------------------------------- --------------------------------
Other Comprehensive Income/(Loss) (12,555) 0
------------------------------------ -------------------------------- --------------------------------
Total Comprehensive Income/(Loss) 19,239 638,755
------------------------------------ -------------------------------- --------------------------------
These results include the results of AdValiant operations only since July
1, 2005.
Total Revenue for the Online Division was $1,596,000 for the first three
quarters of 2005 compared to $1,206,000 for the same period a year ago. Revenue
includes that of AdValiant Affiliate Network (since July 1, 2005) in addition to
MyMedCenter, formally reported as +Media in the then Healthcare Dialog Division
for the first three quarters 2004 and Adialogin formally reported as Data Dialog
Digital in the then Data Division. For the same period in 2004, only +Media and
Data Dialog Digital are included.
The Cost of Revenue for Online Services was $904,000 for this year to
date, or 57% of Revenue compared with $250,000 and 21% of revenue for the same
period 2004. The higher Cost of Revenue in 2005 was impacted by the
approximately 77% Cost of Revenue for the AdValiant Affiliate Network. This is
considerably higher than that of the other two products offered by this segment
MyMedCenter (approximately 57%) and Adialogin (approximately 15%).
Online Services' consolidated Total Operating Expenses were approximately
$660,000 year to date 2005, compared to $317,000 for the same period a year ago.
Expenses relating to the AdValiant business in the US and Canada are included
only from July 1, 2005.
For the 2005 year to date, the Online Services' Consolidated Net Income
from Operations was approximately $32,000 compared to a profit of $639,000 for
the same period of 2004.
Data Service Segment
------------------------------------ ---------------------------------- ----------------------------------
Income Statement Item First Nine Months 2005 First Nine Months 2004
------------------------------------ ----------------- ---------------- ----------------- ----------------
Data Dialog Mail Mogul Data Dialog Mail Mogul
------------------------------------ ----------------- ---------------- ----------------- ----------------
Revenue $ 1,050,098 $1,196,048 $734,919 $ 2,509,539
------------------------------------ ----------------- ---------------- ----------------- ----------------
Cost of Revenue 254,775 439,766 259,837 1,101,347
------------------------------------ ----------------- ---------------- ----------------- ----------------
Operating Expenses 1,014,505 777,858 897,029 942,997
------------------------------------ ----------------- ---------------- ----------------- ----------------
Result of Operations (219,182) (21,576) (421,947) 465,195
------------------------------------ ----------------- ---------------- ----------------- ----------------
Net Other Income (4,585) 10,033 10,152 42,738
------------------------------------ ----------------- ---------------- ----------------- ----------------
Net Result (233,766) (11,543) (411,795) 507,933
------------------------------------ ----------------- ---------------- ----------------- ----------------
Data Dialog had Revenues of $1,050,000 for the three quarters ending
September 30, 2005, compared to approximately $735,000 for the first nine months
of 2004. The addition of sales staff above the same period in 2004 contributed
to the increase.
Mail Mogul's Revenues were $1,196,000 for the nine months ended September
30, 2005, compared with $2,510,000 for the same period ended September 30, 2004.
The weak sales resulted from fewer experienced sales people on staff and
increased competition. In addition, the mail shop supply business, with its
lower margins and larger cash requirements, was not supported. A key data
supplier changed its pricing and marketing approach to Mail Mogul and other
brokers of its data. Until new pricing and a new contract could be worked out,
data from this key supplier was not available at prices Mail Mogul's customers
were willing to pay.
Data Dialog's Costs of Revenue for the first nine months of 2005 were
$255,000 or 24% of Revenues, compared with $260,000, or 35% of Revenues in the
first nine months of 2004. The change in Cost of Revenues percent resulted from
more favorable terms from one of Data Dialog's data vendors and the greater
utilization of DGI data assets by the Data Dialog Marketing sales staff this
year.
Mail Mogul's Costs of Revenue were $440,000 for the nine months ended
September 30, 2005, representing 37% of revenue, compared with $1,101,000 (44 %
of revenue) for the nine months ended September 30, 2004. The mix of Revenue and
greater utilization of Dialog Group owned data assets were the major reasons for
the reduction in the Cost of Revenues percent in the first nine months. Sales of
low margin mail shop consumable supplies were down significantly from a year ago
the same period, while sales of higher margin data made up a greater percentage
of the total Revenue for the period. During 2005, Mail Mogul's sales staff began
utilizing the Data Dialog Access Dialog data platform, with its lower cost
products to satisfy customer needs. This platform was not available for much of
the same period in 2004. Mail Mogul's Cost of Revenue reduction of approximately
$561,000 helped to partially offset the reduction in Revenue during the first
three quarters of 2005 compared to the same period a year ago.
Data Dialog's Operating Expenses for the nine month period ended September
30, 2005 were $1,015,000, an increase of approximately $118,000 from the same
period a year ago when the figure for Operating Expenses was $897,000. Operating
Expenses increased less from the first three quarters of 2004 to the first nine
months of 2005 than Revenues increased from the same period a year ago,
contributing to the overall profit improvement of this unit. Much of the
increase is attributable to allocations from Corporate in 2005 for IT and Data
Processing costs that in 2004 were recorded at Corporate.
Mail Mogul's Operating Expenses were $778,000 for the nine months ended
September 30, 2005 compared with $943,000 for the nine months ended September
30, 2004. The reduction of $185,000 is due primarily to reduced wages and
commissions paid to a smaller sales force than in 2004.
Data Dialog's Net Loss from Operations was $219,000 for the first three
quarters of 2005, compared to a loss of approximately $422,000 for the first
nine months of 2004. Investments made in the sales staff and an online platform
for Data Dialog Marketing is having a positive impact on Data Dialog. In
addition, Cost of Revenue were reduced in 2005 as the sales force made use of
the Company's owned assets rather than using outside suppliers.. This made it
possible for the Data Dialog to show an overall improvement for the first nine
month of 2005 when compared to the same period of 2004
Mail Mogul's Net Loss from Operations for the nine months ended September
30, 2005 was $22,000, compared with a net income of approximately $465,000 for
the same nine months in 2004. Management believes the results of the first nine
months of 2005 were attributable to the turnover of experienced sales people, a
key data supplier changing its marketing approach, a conscious effort to divert
resources away from lower margin categories, and the loss of the USPS
relationship. Mail Mogul's Net Other Income includes $47,000 of forgivness of
debt, offset by $4,000 of interest exzpense.
Communications Services Segment
---------------------------------- -------------------------------- --------------------------------
Income Statement Item First Nine Months 2005 First Nine Months 2004
---------------------------------- -------------------------------- --------------------------------
Revenue $ 1,221,472 1,712,031
---------------------------------- -------------------------------- --------------------------------
Cost of Revenue 773,095 983,626
---------------------------------- -------------------------------- --------------------------------
Operating Expenses 337,030 303,902
---------------------------------- -------------------------------- --------------------------------
Result of Operations 111,348 424,503
---------------------------------- -------------------------------- --------------------------------
Net Other Income (32,549) 139,197
---------------------------------- -------------------------------- --------------------------------
Net Result 78,509 563,700
---------------------------------- -------------------------------- --------------------------------
Total Revenue for Communications Services was $1,221,000 for the first
three quarters of 2005 compared to $1,712,000 for the same period a year ago. A
metamorphosis of Dialog Group into a company with products that are
broader-based and include clients other than pharmaceutical companies is taking
place. The company is less dependent on a few large pharmaceutical clients than
in the past and is marketing to non-Healthcare clients. A major pharmaceutical
client assigned fewer projects to Communications Services Segment in the first
nine months of 2005 than it did for the same period of 2004.
Communications Services' Cost of Revenue was $773,000 for the nine months
ended September 30, 2005, or 63% of Revenue compared with $984,000, and 57% of
Revenue for the nine months ended September 30, 2004. A larger percentage of
Revenue was from lower margin Media placement than the year before resulting in
a higher Cost of Revenue as a percent of sales.
The Communications Services' consolidated Total Operating Expenses were
approximately $337, 000 for the nine months ended September 30, 2005, compared
to $304,000 for the same period a year ago. In 2005, expenses that were
allocated to Communications Services from Corporate were not allocated in 2004.
These include, among other expenses, IT and administration. Management believes
the new approach more accurately presents operating results for each business
unit.
For the nine months ended September 30, 2005, Communication Services'
consolidated Net Income from Operations was approximately $111,000 compared to
$424,000 in the first nine months of 2004.
For the period ending September 30, 2005, Net Other Income included
$23,000 of forgiveness of debt, offset by $55,000 in interest expense. For the
same period last year, Net Other Income included $207,000 of forgiveness of debt
offset by $28,000 in interest expense and $39,000 from losses from discontinued
operations.
Liquidity & Capital Resources
DGI had a consolidated working capital deficit of approximately
($3,668,000) on September 30, 2005 as compared to a deficit of approximately
($2,854,000) at December 31, 2004. The increase of approximately $814, 000 is
the result of increases in accounts payable, accrued expenses and short-term
borrowing due to a reduced level of sales in the first nine months that did not
provide the level of accounts receivable required to fund operations. The
increase in accounts payable of approximately $655,000 is attributable to the
acquisition of AdValiant, Inc.
Inflation
Inflation rates in the United States have not had a significant impact on
operating results for the periods presented.
Item 2 Controls and Procedures.
Management continues its focus on the issue of internal control. To that
end, it is continuing the process of centralizing the accounting function and
developing policies and procedures that enhance the Company's internal controls,
Management continues to evaluate and test present measures while at the same
time reviewing areas that require improvement.
Part II. Other Information
Items 3 and 4 are omitted as they are either not applicable or have been
included in Part I.
Item 1. Legal Proceedings
Suppliers
During July of 2003, Axiom Corporation commenced an action against
ThinkDirectMarketing, Inc., a discontinued subsidiary. The complaint seeks
$400,000 on a note payable, interest of $180,000, and $295,000 for unpaid data
usage, and $1,250,000 for unpaid minimum usage requirements for 2003 and 2004.
In the third quarter of 2005 Acxiom served a new, amended complaint and added
Data Dialog, Inc. as a defendant. Data Dialog has answered the complaint and all
the defendants have filed a counterclaim. $28,960 has been accrued for legal
expenses.
Collins Ink, in June 2004, obtained a judgment of $92,347 for unpaid
invoices. The full amount is recorded in the financial statements of the
Company. The balance at September 30, 2005 is $28,109.
Label Source, in June 2004, obtained a judgment of $121,037 for unpaid
invoices. The full amount is recorded in the financial statements of the
Company. The balance at September 30, 2005 is $65,119. As payments are behind
the payment plan schedule, the Company was informed that plaintiff obtained a
lawyer in New York. Mail Mogul agreed to pay Label Source $5,000.00 to be
received on or before the 16th day of each month until the full amount is paid.
USA Direct, in April 2004 obtained a $39,025 judgment related to a
discontinued operation of the Company. This amount is fully accrued in the
financial statements of the Company. In December 2004, the Company and USA
Direct reached an agreement settling the debt for $20,000 and a payment plan.
The balance at September 30, 2005 is $10,000
In late June 2005, the Company received a copy of the action filed in
early May 2005 in the New Jersey Superior Court, Bergen County by Brimar
Industries, Inc., a supplier of Mail Mogul, Inc., for unpaid invoices, interest,
reasonable attorney's fees, costs of the suit, and such other relief the Court
deems just and equitable under the circumstances The amount of the claim, for
unpaid invoices of $25,105.74, is fully recorded in the accounts payable of the
Company. The balance at September 30, 2005 is $12,567.
In September, 2005 the Company received a copy of the action filed by in
Superior Court of California, County of Los Angles on September 8, 2005 by
American Student List, a supplier of Mail Mogul, Inc. for unpaid invoices,
accrued interest, attorney's fees of $1000, costs of the suit, and such other
relief the Court deems just and equitable under the circumstances The amount of
the claim, for unpaid invoices of $5,672.25 is fully recorded in the accounts
payable of the Company. The balance at September 30, 2005 was $5,672.25.
In July, 2005, the Company received a letter from the attorney
representing Courtenay Communications Corporation, a supplier of Mail Mogul,
Inc. requesting payment of unpaid invoices. In late October, the Company
received notice that the Plaintiff received a default judgment against Mail
Mogul in Superior Court, County of Los Angeles. The amount of the judgment,
$4,200 is fully recorded in the accounts payable of the Company at September 30,
2005.
Employees.
In April 2003, two former TDMI employees commenced arbitration proceeding
against the Company relating to their termination of employment. The employees
seek damages totaling $375,789. TDMI, a discontinued subsidiary, accrued
$147,000 against this potential liability. The Company has accrued for
additional legal fees to contest the claims. In January 2005, the Company
received notice from the American Arbitration Association Employment Arbitration
Tribunal that reviewed the claims. Its decision was to award the claimants a
total of approximately $478,000 including fees. The amount is fully accrued for
in the financial statements of the Company. In April, the Company and the two
former employees of TDMI executed a settlement agreement for $501,872 that
includes a schedule of payments over two and half years that includes
approximately $25,000 of interest. The balance at September 30, 2005 is
$289,294.
In July 2005, two former employees of Mail Mogul, Inc. filed claims with
the California Labor Commission for unpaid wages. The first claim is in the
amount of $6,187 for unpaid commissions, bonus, and vacation pay. A settlement
was reached in the amount of $4,824 with a payment schedule one payment of
$2,500 and the second of $2,324. The payments are to be made by September 6,
2005. The amount of the settlement is recorded in July 2005. The first payment
of $2,500 was made in the third quarter. The balance at September 30, 2005 is
$2,324.29
The second claim, also filed with California Labor Commission is in the
amount of $10,031 for unpaid commissions. The Company presented its case in a
hearing in the Commissioner's office on July 19, 2005. The commission determined
the plaintiff was due $8,451.02.
Others
The New York State Department of Taxation in December 2004 provided a
letter to QD Corporation, a discontinued unit that the Department claims that QD
Corporation owes $7,936 in taxes and interest for corporate income taxes for the
period ending December 31, 2002. After reviewing the consolidated tax return, QD
Corporation is not required to file a separate return. This information has been
provided to New York State Department of Taxation in response to its December
2004 letter. As the Company believes it has properly reported the taxes to the
State of New York, no additional taxes and charges are recorded.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Class E Preferred Stock Dividends
During the third quarter, the Board decided to pay additional quarterly
dividends on the Company's Class E Preferred Stock in shares of common stock.
The dividends, at a rate of $400 per share per quarter, for the first three
quarters of 2005 had not been paid. Pursuant to the provisions of the Class E
Preferred Stock Declaration, shares of common stock, based on the average
closing price for the shares during the last 20 trading days before the
dividends were due, maybe paid in lieu of cash. During September a total of
5,355,310 shares were issued to settle $79,600 of dividends due at that time. In
October, an additional 3,960,198 shares were issued to settle $39,800 of
additional dividends. The holders of the Class E Preferred Stock had represented
themselves in writing to be accredited investors who were purchasing those
shares and any shares issued as dividends for their own investment and agreed to
restrictions on resale placed with the Company's transfer agent and the printing
of a legend on his certificate. Because of these factors, this issuance is
exempt from registration under the Securities Act as not involving a public
distribution under section 4(2). Gary needs to review figures
Additional Guarantees
During the quarter, Peter DeCrescenzo, the company's president, increased
the amount of credit extended to DGI that he has guaranteed by $50,000. The
Board of Directors awarded him an additional 500,000 shares as compensation for
his guarantee. Mr. DeCrescenzo is an accredited investor who is holding these
shares for his own investment and agreed to restrictions on resale placed with
the Company's transfer agent and the printing of a legend on his certificate.
Because of these factors, this issuance is exempt from registration under the
Securities Act as not involving a public distribution under section 4(2).
Conversions
During the third quarter the holder of the last convertible note issued to
the holders of notes issued by IP2M before its acquisition converted all $25,000
of principal and 5,158 in interest into 1,984,048 shares of common stock. As the
note was issued more than two years age and the common stock was issued by
Dialog Group to with the holders of its pre-existing note and for interest
thereon exclusively and no commission or other remuneration is paid or given
directly or indirectly for soliciting the exchange, the conversion was exempt
from registration pursuant to Section 3(a)9 of the Securities Act of 1933 and
Rule 144(k) there under.
Also during the third quarter, 6,514 shares of Class B-1 Preferred Stock
were converted by their holders into 260,560 shares of common stock. The
certificates issued upon conversion bore Securities Act legends and stop orders
have been recorded with the transfer agent. These transactions were exempt from
registration under Section 3(a) (9) of the Securities Act of 1933 because they
were issued by Dialog Group to with the holders of its existing preferred stock
exclusively and no commission or other remuneration is paid or given directly or
indirectly for soliciting the exchange.
Other issues
During the third quarter, DGI sold a total of 5,000,000 shares for $50,000
in cash. In addition, warrants to purchase 2,000,000 shares at a price of $0.012
were issued to the purchaser, Peter Bordes, a company director and officer. He
is an accredited investor who has assured the company in writing that he was
purchasing these shares and any shares issued upon exercise of the warrants for
his own investment and agreed to restrictions on resale placed with the DGI's
transfer agent and to the printing of a legend on his certificate. Because of
these factors, this issuance is exempt from registration under the Securities
Act as not involving a public distribution under section 4(2).
The proceeds of all shares issued for cash were used for general business
purposes.
Item 6. Exhibits
Exhibits
Exhibit
Number Description Page
2.1 Third Amended Plan of Reorganization - Incorporated by X
reference from Report on Form 8-K filed on October 12,
2001
2.2 Amendment dated February 27, 2003 to an Agreement for X
Merger by and among IMX Pharmaceuticals, Inc., a Utah
corporation ("IMX") (for itself and for Dialog Group,
Inc., its successor by merger), HCD Acquisition, Inc.
("HCD Acquisition"), a Delaware corporation, Healthcare
Dialog, Inc., a Delaware corporation ("HCD"), and Peter
V. DeCrescenzo, Vincent DeCrescenzo, Sr., and Cindy
Lanzendoen, each an individual, (collectively, the
"Shareholders") and Cater Barnard, plc, an a corporation
of England and Wales ("CB") - Incorporated by reference
from Report on Form 8-K filed on March 15, 2003
2.3 Agreement for Merger dated February 24, 2003 among X
Dialog Group, Inc., a Delaware corporation ("DGI"), IP2M
Acquisition Corp. ("Acquisition"), a Delaware
corporation, IP2M, Inc., a Delaware corporation
("IP2M"), and Robin Smith, William Donovan, Five Don,
Ltd. (a/k/a 5 Don Ltd.), Cameron Bevis, and Art Sadin -
Incorporated by reference from Report on Form 8-K filed
on March 15, 2003
3(i).1 Amended and Restated Articles of Incorporation - X
Incorporated by reference from Interim Report on Form
8-K filed on March 14, 2003
3(i).2 Certificate of Designation of Class C-1 Preferred Stock X
- Incorporated by reference from the initial filing of
registration statement file number 333-106490
3(i).3 Certificate of Designation of Class C-2 Preferred Stock X
- Incorporated by reference from the initial filing of
registration statement file number 333-106490
3(i).4 Certificate of Designation of Class C-3 Preferred Stock X
- Incorporated by reference from the initial filing of
registration statement file number 333-106490
3(i).5 Certificate of Cancellation of Class C and Class D X
Preferred Stock - Incorporated by reference from the
initial filing of registration statement file number
333-106490
3(i).6 Certificate of Amendment for Increased Shares - X
Incorporated by reference from the initial filing of
registration statement file number 333-106490
3(i).7 Certificate of Designation of Class E Preferred Stock - X
Incorporated by reference from Amendment # 1 to Annual
Report on Form 10-KSB filed on September 30, 2005
3(i).8 Certificate of Elimination of Classes C-1, C-1, and C-3 X
Preferred Stock - Incorporated by reference from
Amendment # 1 to Annual Report on Form 10-KSB filed on J
September 30, 2005
3(i).9 Certificate of Amendment for Increased Shares - X
Incorporated by reference from Amendment # 1 to Annual
Report on Form 10-KSB filed on September 30, 2005
3(ii).1 By-laws - Incorporated by reference from Interim Report X
on Form 8-K filed on March 14, 2003
4.1 Instruments defining the rights of security holders - X
Incorporated by reference from Exhibit 3(i).1 through
Exhibit 3(i).10.
10 Material contracts
10.1 Employment Agreement for Peter V. DeCrescenzo X
Incorporated by reference from the Annual Report on Form
10-KSB filed on April 14, 2003
10.2 Employment Agreement for Vincent DeCrescenzo X
Incorporated by reference from the Annual Report on Form
10-KSB filed on April 14, 2003
10.3 Employment Agreement for Cindy Lanzendoen Incorporated X
by reference from the Annual Report on Form 10-KSB filed
on April 14, 2003
10.5 2002 Stock Option Plan, as amended- Incorporated by X
reference from the initial filing of registration
statement file number 333-106490
10.6 Amendment to Employment Agreement for Peter V. X
DeCrescenzo - Incorporated by reference from Amendment #
1 to Annual Report on Form 10-KSB filed on September 30,
2005
10.7 Amendment to Employment Agreement for Vincent X
DeCrescenzo, Sr. - Incorporated by reference from
Amendment # 1 to Annual Report on Form 10-KSB filed on
September 30, 2005
10.8 Guarantee Agreement with Peter DeCrescenzo - X
Incorporated by reference from Amendment # 1 to Annual
Report on Form 10-KSB filed on September 30, 2005
10.9 Guarantee Agreement with Vincent DeCrescenzo - X
Incorporated by reference from Amendment # 1 to Annual
Report on Form 10-KSB filed on September 30, 2005
21.1 Subsidiaries of the registrant - Incorporated by X
reference from Amendment # 1 to Annual Report on Form
10-KSB filed on September 30, 2005
31(i) 302 Certification of Chief Executive Officer E-1
31(ii) 302 Certification of Chief Financial Officer E-3
32(i) 906 Certification of Chief Executive Officer E-4
32(ii) 906 Certification of Chief Financial Officer E-4
SIGNATURES
In accordance with Section 13 or 15(d) 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.
DIALOG GROUP, INC.
Date: November 25, 2005
By: /s/ Peter V. DeCrescenzo
------------------------------------
Peter V. DeCrescenzo, President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed bellow by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Peter V. DeCrescenzo Chief Executive Officer November 25, 2005
- -------------------------
Peter V. DeCrescenzo
/s/ Vincent DeCrescenzo Chief Financial November 25, 2005
- ------------------------- and Accounting Officer
Vincent DeCrescenzo
INDEX TO EXHIBITS
Exhibit Page
Number Number Description
- --------- ----------- ------------------------------------------------
31(i) 19 302 Certification of Chief Executive Officer
31(ii) 21 302 Certification of Chief Financial Officer
32(i) 23 906 Certification of Chief Executive Officer
32(ii) 23 906 Certification of Chief Financial Officer