UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ Quarterly Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2006.
/_/ 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 May 16, 2004 there were 198,482,755 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 March 31, 2006 (unaudited)
F-2 Condensed Consolidated Statements of Operations and
Comprehensive Loss for the Three Months Ended March 31, 2006
(unaudited) and March 31, 2005 (unaudited)
F-3 Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2006 (unaudited) and March 31, 2005 (unaudited)
F- 4 to
F- 21 Notes to Condensed Consolidated Financial Statements (unaudited)
3 - 8 Item 2. Management's Discussion and Analysis or Plan of Operation
9 Item 3. Controls and Procedures
Part II - Other Information
10 Item 1 Legal Proceedings
11 Item 2 Recent Unregistered Sales of Equity Securities
and Use of Proceeds
13 Item 6. Exhibits
DIALOG GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
March 31,
2006
----
(Unaudited)
ASSETS
CURRENT ASSETS
Accounts receivable (net) $ 444,003
Prepaid expenses and other current assets 158,246
------------
Total current assets 602,249
------------
PROPERTY AND EQUIPMENT, NET 24,805
------------
OTHER ASSETS:
Data Assets (Net) 286,683
Website (Net) 34,773
Security Deposits 55,080
Note Receivable (Net) 111,164
------------
Total other assets 487,700
------------
TOTAL ASSETS $ 1,114,754
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Bank overdraft $ 154,456
Accounts payable 1,226,852
Accrued expenses 1,089,751
Deferred revenue 310,515
Notes and Loans Payable 276,182
Due to officer 50,000
Pearl Street Holdings Convertible Notes - Related Party 1,105,000
Convertible Notes - Related Parties 244,045
Other current liabilities 152,604
------------
Total current liabilities 4,609,405
------------
LONG TERM DEBT
Converible Debentures 279,778
Loans Payable - Commadore 340,389
------------
TOTAL LONG TERM DEBT 620,167
------------
STOCKHOLDERS' DEFICIENCY
Preferred stock, $.001 par value; 1,500,000 authorized
Class B, 305,858 shares issued and outstanding
Class E, 200 shares authorized,
99.5 shares issued and outstanding 306
Common stock, $.001 par value, 200,000,000 shares authorized;
198,482,75 shares issued and outstanding 198,483
Additional paid-in-capital 6,556,294
Accumulated deficit (10,869,901)
------------
Total stockholders' deficiency (4,114,818)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 1,114,754
============
F-1
DIALOG GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Unaudited)
2006 2005
------------- -------------
REVENUES $ 963,246 $ 1,195,232
COST OF REVENUES 309,377 468,428
------------- -------------
GROSS PROFIT 653,869 726,804
OPERATING EXPENSES
Selling, general and administrative expenses 919,133 1,080,456
------------- -------------
LOSS FROM OPERATIONS (265,264) (353,652)
OTHER INCOME (EXPENSES)
Interest income 5,073 --
Interest expense (73,473) (41,894)
Forgiveness of debt -- 3,750
------------- -------------
Net Other Income (Expenses) (68,400) (38,144)
------------- -------------
LOSS FROM CONTINUING OPERATIONS (333,664) (391,796)
INACTIVE & DISCONTINUED OPERATIONS
Income from discontinued operations 287,067 59,946
------------- -------------
NET LOSS $ (46,597) $ (331,850)
============= =============
(LOSS) PER SHARE, BASIC AND DILUTED ON NET (LOSS) ($ 0.001) ($ 0.002)
FROM CONTINUING OPERATIONS
(LOSS) PER SHARE ON DISCONTINUED OPERATIONS, BASIC AND DILUTED $ 0.001 $ 0.000
NET(LOSS) PER SHARE, BASIC AND DILUTED ($ 0.000) ($ 0.002)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, 198,482,755 193,200,806
BASIC AND DILUTED
F-2
DIALOG GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDING MARCH 31, 2006 AND 2005
2006 2005
------------ ------------
Cash Flows from Operating Activities:
Net Loss form Continuing Operations $ (333,664) $ (331,560)
Gain/(Loss)from Inactive Operations 287,067 (290)
------------ ------------
Loss from Operations (46,597) (331,850)
Adjustments to reconcile net loss
to net cash used in operating activities of continuing operations:
Gain on debt settlement -- (3,750)
Depreciation and amortization 99,813 99,223
Bad debt expense -- 6,212
Common stock, warrants and stock options issued for services -- 75,786
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 381,631 (229,348)
(Increase) decrease in prepaid and other current assets (9,894) (140,019)
(Increase) decrease in security deposits -- 2,250
Increase (decrease) in accounts payable and accrued expenses (533,721) 436,822
Increase (decrease) in current liabilities - Due to related parties -- (62,011)
Increase (decrease) in other current liabilities (51,276) 41,698
Increase (decrease) in deferred revenues (32,778) (194,290)
------------ ------------
Net Cash Used in Operating Activities (192,822) (299,277)
------------ ------------
Cash Flows from Investing Activities of Continuing Operations:
Purchase of property and equipment 2,207 (1,662)
Purchase of database -- (95,703)
------------ ------------
Net cash provided by (used in) Investing Activities 2,207 (97,365)
------------ ------------
Cash Flows from Financing Activities of Continuing Operations:
Bank overdraft (69,306) --
Short Term Borrowing, net 259,921 264,952
------------ ------------
Net Cash Provided by Financing Activities 190,615 264,952
------------ ------------
Increase (decrease) in cash -- (131,690)
Cash at Beginning of Period -- 131,690
------------ ------------
Cash at Period End $ -- $ --
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
------------ ------------
Interest Paid During the Period $ 73,473 $ 43,336
------------ ------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of Accounts Payable to Common Stock $ 0 $ 7,500
------------ ------------
Conversion of Accrued Expenses to Common Stock $ 0 $ 52,524
------------ ------------
F-3
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND CAPITALIZATION
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 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. In addition, on June 18,
2004, the Company eliminated its Class C preferred stock. In addition, 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 $10,000.00 per share plus any
accumulated but unpaid dividends.
BUSINESS ACTIVITY
Dialog Group, Inc. (DLGG) is a publicly traded corporation, headquartered
at 257 Park Avenue South, Suite 1201, New York, New York 10010, with an
administrative and sales office at 1571 Sawgrass Corporate Parkway, Suite 120
Sunrise, Florida, 33323. The company's two Segments, Data and Communications,
provide a broad spectrum of proprietary and exclusive databases for healthcare,
consumer and business-to-business market clients. The company also provides a
combination of traditional customer relationship management support applications
such as advertising and marketing services.
F-4
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
Description of the Segments
Both of Dialog Group's Segments each currently market its product and
service offerings through branded product lines. The Data Segment products are
Data Dialog Marketing, Data Dialog Data Management and Adialogin. The
Communications Segments are Healthcare Dialog Communications and MyMedCenter.
Data Segment
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, provide data services, and streamline the distribution
of data. Data Dialog Marketing offers a host of data-related services, such as
targeted marketing lists, lead generation, turnkey direct mail programs, and
data cleansing to multiple market segments including insurance, financial
planning, real estate, auto dealerships, printers, letter shops 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.
Data Dialog Data Management serves the database needs of list brokers and
managers marketing nearly 200 different lists created from both licensed and
proprietary databases. Data Dialog Management provides access to these lists via
its branded online platform; Access Dialog. Access Dialog in designed for use by
both our internal sales force and list professionals and requires registration
and training. It also promotes and markets list products via
DataDialogDataManagement.com where list and marketing professionals can learn
about its products and run counts and purchase list online after qualifying.
Adialogin is a customer data integration product that automatically
appends name and address information, as well as demographic, financial and
lifestyle information, to telephone numbers on calls made by consumer and
business customers to CTI Platforms. Adialogin initially marketed its products
executively to call centers and Interactive Voice Response system users
operating in-bound and blended call centers with 5 to 500 seats. Adialogin
currently has contracts and sub-contracts with 27 businesses in this market
segment and an additional 20 agreements with resellers which service this
market. The real time format of this unit's products gives customers instant
access to data, and speeds up their promotional efforts and improves customer
service. In 2005 and the first quarter of 2006 Adialogin developed a web
application for its technology which will be introduced during the second
quarter of 2006.
Communications Segment
Healthcare Dialog Communications delivers advertising, relationship
marketing and communications services to the healthcare industry. Clients use
its strategic and creative services to build comprehensive programs for
healthcare professionals, consumers, and sales representatives. These include
training materials development, patient and professional education materials
distribution, and targeted direct mail and advertising campaigns. Clients rely
on Healthcare Dialog Communications' interactive services to produce
sophisticated promotional Web sites, educational Web sites, interactive training
and educational CD-ROMs, Internet advertising, e-mail campaigns, and proprietary
marketing programs.
MyMedCenter platform provides, maintains, and delivers healthcare, beauty
and pet content across a national network of 87 local affiliate TV and radio
station Web sites. The content, which includes over 15,000 text articles,
attracts over a million unique health information seekers per day to the
broadcast stations' Web sites for a combined US household penetration of 75%. On
these sites client public relations, promotional material, and educational
material are blended into a seamless presentation for maximum viewer impact. To
maintain repeat traffic, features are refreshed daily.
F-5
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
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 March 31, 2006, the allowance for
doubtful accounts is $225,260. Of this amount, $78,501 is related to the
accounts receivable of AdValiant USA. This amount is based upon Management's
estimation of the collectiblity of the acquired accounts receivable. $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.
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 Healthcare
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 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.
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.
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 the reported amount of revenues and expenses during
the reported period. Actual results could differ from those estimates.
F-6
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
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 one bank. Accounts at this 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.
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.
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.
Databases
The databases consist of the one acquired from Healthcare Horizons an other
acquired from Azimuth Target Marketing along with the costs of expanding the
databases through the use of telephone surveys. As the databases, are generating
revenue streams and are expected to do so in the future, no impairment is
required. The databases are amortized over a three-year period, while the
telephone surveys are amortized over a five-year period.
Website
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.
F-7
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, 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.
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.
ADVERTISING COSTS
Advertising costs are expensed as incurred. The Company incurred approximately
$15,300 and $8,100 in advertising costs for the periods ended March 31, 2006 and
2005, respectively.
STOCK-BASED COMPENSATION
On December 2005, 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.
F-8
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
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, 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 the three months ended March 31, 2006 there were no new option
issues and no previously issued options were vested.
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 for such absences has been recorded in the
accompanying consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of the
Company, Dialog Group, Inc., and its wholly-owned subsidiaries; Healthcare
Dialog, Inc., Data Dialog, Inc. and AdValiant USA, Inc. All significant
inter-company balances and transactions have been eliminated in consolidation.
REPORTING PERIOD
The accompanying condensed consolidated financial statements for the three
months ended March 31, 2006 depict the results of operations and cash flows of
Dialog Group, Healthcare Dialog, Data Dialog and AdValiant USA the three months
ended March 31, 2006 and the three months ending March 31, 2005.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial statements
in order for them to be in conformity with the current year presentation.
NOTE -2 DISPOSITION OF SUBSIDIARY
Sale of Mail Mogul
On February 28, 2006 the Company sold the entire capital stock of its Mail
Mogul, Inc. subsidiary which consisting of 1,000 shares of common stock to an
unrelated third party. Mail Mogul results were reported in the Data Segment. The
Mail Mogul business consisted of sales of data and supplies and the provision of
business leads to the mail shop market. As part of its business, Mail Mogul
operated the Direct Mail Quotes platform.
As consideration of the sale of Mail Mogul released approximately $296,623
of the Company's and its subsidiaries' debt to Mail Mogul. The Company paid
approximately $3,000 of expenses in connection with the sale. The Company
enjoyed a gain on the sale of Mail Mogul of approximately $254,810.
F-9
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
After the transaction, Mail Mogul's new owner remained in debt to one of
the Company's subsidiaries, Data Dialog for about $319,100. In settlement of the
debt, the new owner of Mail Mogul sold the Direct Mail Quotes platform to Data
Dialog. As part of the transaction an additional consideration was made. Data
Dialog assumed the existing liability of Mail Mogul to the Direct Mail Quotes
customers of about $59,000.
NOTE -3 GOING CONCERN CONSIDERATIONS
The Company continues to review means of raising funds including issuing
additional debentures and other or equity instruments. If unsuccessful the
Company may not be able to meet its short-term capital needs.
In the past suppliers were prepared to extend the company payments terms
for larger dollars amounts over longer periods. As a result of the company's
poor payment history fewer suppliers than in the past are willing to give the
company the kind of payment terms it needs. In the past members of management
lent the company money. No reason exists to believe they will in the future.
In the past members of management have used their personal credit cards to
pay for company expenses, but there is no reason to believe they will do so in
the future. In the past employees have been willing to work for reduced wages
and or convert wages to shares of the company, but there is no reason to believe
they will do so in the future.
LIQUIDITY
In the first quarter of 2006 the company raised funds through the sale of
approximately $280,000 of convertible debentures to a group of investors
associated with Midtown Partners & Co. LLC. During the first quarter Peter V.
DeCrescenzo and Vincent DeCrescenzo each agreed to convert $100,000 owed them by
the company into a debenture on the same terms as Midtown Partners' debentures.
The Company continues to review other means of raising funds including issuing
debentures and equity instruments. The Company is also reviewing the sale of
non-core assets.
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 the expansion of sales
organization.
o Reduce expenses through improved labor utilization and the reducing of
leasehold expenses.
F-10
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
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 4- PROPERTY AND EQUIPMENT, NET; DATA ASSETS AND WEBSITE
Depreciation and amortization expense was $99,813 and $99,213 for the period
ended March 31, 2006 and 2005, respectively.
NOTE 5- 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.
NOTE 6- ACCRUED LIABILITES
As of March 31, 2006, accrued liabilities consisted of the following:
Accrued professional fees and other expenses $ 138,148
Accrued payroll and payroll taxes 490,081
Accrued interest 64,028
Accrued settlements and contingencies 397,494
----------
$1,089,751
==========
NOTE 7 - NOTES AND LOANS PAYABLE
Loans and notes payable due to non-related parties consisted of the following as
of March 31, 2006.
$750,000 line of credit with a commercial asset-backed lender with a term of two
years beginning August 2004. The line of credit bears interest at prime plus 4%
per annum plus on-going fees. It is secured by the Company's accounts $276,182
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.
---------
Total loans and notes payable $ 276,182
=========
F-11
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
NOTE 8 - CONVERTIBLE DEBENTURES
On March 22, 2006 a group of five investors associated with Midtown Partners &
Co. LLC purchased convertible debentures with an aggregate initial principal of
$279,778. The debentures mature in 2008 and bear interest at the rate of 12% per
annum; the debentures are payable monthly in cash. The principal and any unpaid
interest is convertible, into common stock at the rate of one share of common
stock for each $0.01 or principal or interest converted.
In addition, the investors received warrants to purchase a total of
8,393,347 for $0.01 per share. The warrants are exercisable immediately and
expire on the tenth anniversary of their issue. In addition, they provide for
cashless exercise.
In connection with this transaction, the investment banking firm of
Midtown Partners & Co. LLC received an investment banking fee of $ 27,778 plus a
$2,000 non-accountable expense allowance. In addition, as additional
compensation, the Company issued identical ten-year warrants to purchase
5,009,002 shares of common stock for $.01 per share.
The investors had represented themselves to be accredited investors who
were purchasing the debentures and warrants and any shares issued upon their
conversion or exercise, respectively, for their own investment and not for
resale. They agreed in writing 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) and
4(6).
NOTE 9 - EQUITY
DEBT CONVERSION
In March of 2006 Peter DeCrescenzo, the company's president and Vincent
DeCrescenzo, Sr. the company's executive vice president agreed that each would
convert $100,000 of past due salary and vacation into convertible debentures on
the same terms as the Midtown Partners investors. However, no compensation was
paid with respect to this transaction. The transaction was concluded in May
2006.
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, can be paid in lieu of cash.
During the first quarter of 2006, quarterly dividends accrued on its Class E
Preferred Stock at the rate of $400 per share, per quarter, for a total of
$39,800 accrued for the three months ended March 31, 2006. During the first
quarter of 2006, 5,135,486 shares were issued to settle $39,800 of dividends due
from 2005.
F-12
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
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 instrument by transferring
assets at a specified or determined date or upon an event to occur.
STOCK WARRANTS
On March 22, 2006 a group of five investors associated with Midtown
Partners & Co. LLC purchased convertible debentures with an aggregate initial
principal of $278,778. The debentures mature in 2008 and bear interest at the
rate of 12% per annum; it is payable monthly in cash. The principal and any
unpaid interest is convertible, into common stock at the rate of one share of
common stock for each $0.01 or principal or interest converted. In addition, the
investors received warrants to purchase a total of 8,393,347 shares for $0.01
per share. The warrants are exercisable immediately and expire on the tenth
anniversary of their issue. In addition, they provide for cashless exercise. In
connection with this transaction, the investment-banking firm of Midtown
Partners & Co. LLC received an investment banking fee of $ 27,778 plus a $2,000
non-accountable expense allowance. In addition, as additional compensation, the
Company issued identical ten-year warrants to purchase 5,009,002 shares of
common stock for $.01 per share. These warrants were out of the money at twice
the value of the Company common stock and as a result are of no value.
NOTE 10 - STOCK OPTIONS
We account for option issues according to FASB Statement No. 123R, "Share-Based
Payment, an amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R
requires companies to recognize in the statement of operations the grant-date
fair value of stock options and other equity-based compensation issued to
employees beginning January 1, 2006. During the three months ended March 31,
2006, the Company did not issue any employee stock options nor did any employee
stock options vest.
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 provisions of APB No. 25 "Accounting for Stock Issued to Employees"
and related interpretations.
At March 31, 2006, the Company had one stock based compensation plan, which is
described below. The Company accounts for the fair value of its grants under
this plan in accordance with FASB 123R and FASB 148. There as no Compensation
cost that has been charged against income for this plan for the three months
ended March 31, 2006.
Under the 2002 Employee stock Option Plan, the Company may grant options to its
employees for up to 10 million shares of common stock.
Under this plan, the exercise price of each option equals the market price of
the Company's stock on the date of grant and an option's maximum term is 10
years. Options are granted on various dates and vest in one-third increments
commencing at the grant date with subsequent vesting at approximately the first
and second anniversary of the options grant date.
F-13
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
The fair value of each option grant is estimated on the date of the grant using
the prospective method of transition as prescribed by FASB Statement No. 123R
and 148.
A summary of the status of the Company's stock option plans as of March 31, 2006
and changes during the period ending on that dates is presented below:
Stock options activity for period ending March 31st is as follows:
Options Outstanding, January 1, 2006 2,914,034 $ 0.18
Options Granted 0 $ 0
Options Forfeited (0) $ 0
Options Expired 0 0
Options Exercised 0 0
-----------------------
Options outstanding, March 31, 2006 2,914,034 $ 0.18
=======================
NOTE 11- COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has entered into two lease obligations for office space along with
two corporate apartments in New York City. The offices are located in Flrida,
and New York.
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 apartments in New York City leases were renewed on January 1,
2005. The term of the lease is from January 1, 2005 through December 31, 2007.
The leases are with a related party. (See Note 14).
Rent expense amounted to $74,921 and $90,700 for the three months periods ended
March 31, 2006 and 2005, respectively.
EMPLOYMENT CONTRACTS
The Company had employment contracts with four employees during 2006.
F-14
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
Executive employment contracts at March 31, 2006.
Annual
Position Compensation
- ---------------------------------------- --------
President and C.E.O $250,000
C.O.O. and C.F.O $150,000
Administrative Head of Healthcare Dialog $150,000
Corporate Secretary $ 66,000
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, ending December 31,
2006, extendable for successive one term, 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 each year shall be at least the percentage of the
prior year's C.P.I. 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 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's President. The employee shall receive $200
per month towards his cellular phone bill.
NOTE 12- INCOME TAXES
As of March 31, 2006, the Company had federal and state net operating losses of
approximately $11,160,000 that are subject to annual limitations through 2025.
The losses are available to offset future taxable income.
The temporary differences that give rise to deferred tax asset and liability at
March 31, 2006 are as follows:
Deferred tax asset
Net operating losses $ 4,326,000
Less valuation allowance (4,326,000)
-----------
Net deferred tax asset $ 0
===========
F-15
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
In assessing the amount of deferred tax asset to be recognized, management
considers whether it is more likely than not that some portion or the entire
deferred tax asset will not be realized. It is not possible at this time to
determine that the deferred tax asset is more likely to be realized than not.
Accordingly, a full valuation allowance has been established for all periods
presented.
The Tax Reform Act of 1986 imposed substantial restrictions on the utilization
of net operating losses and tax credits in the event of an "ownership change",
as defined by the Internal Revenue Code. Federal and state net operating losses
are subject to limitations as a result of these restrictions. The Company
experienced a substantial change in ownership exceeding 50%. As a result, the
Company's ability to utilize its net operating losses against future income has
been significantly reduced.
The effective tax rate for the periods ended March 31, 2006 and 2005 are as
follows:
U.S. statutory tax rate 35%
State and local taxes 4
Less valuation reserve (39)
---
Effective tax rate 0
===
NOTE 13 - SEGMENT DISCLOSURES
The Company's reportable operating segments are categorized in three components:
(1) Communications; which includes Healthcare Dialog, Inc.,, (2) Data; which
includes, and Data Dialog, Inc., and AdValiant USA (3) Corporate which is Dialog
Group, Inc.
Communications
Healthcare Dialog designs, develops and distributes products and services that
automate and streamline direct marketing and customer relationship management
processes to 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
F-16
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
MyMedCenter provides, maintains and delivers healthcare information over the
internet and television station websites.
DATA
Data Dialog provides online marketing lists, 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.
Revenues are generated from:
----------------------------
o data from the Data Dialog master database
o "Adialogin" A product that automatically appends names and
addresses to telephone numbers on inbound calls to telephone
service centers or on the web.
o direct mail campaigns
o membership and bidding in Request for Quotes "RFQ" an online
marketplace for quoting direct mail jobs
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.
SIGNIFICANT CUSTOMERS
Two customers in the Healthcare segment accounted for approximately 60% of the
Company's consolidated revenues for 2006, while one customer in the Healthcare
segment accounted for approximately 40% of the consolidated revenues for 2005.
No customer in the Data segment accounted for more than 2% of the consolidated
revenues of the Company in either 2006 or in 2005.
Management is not aware of any known trends, uncertainties, or circumstances
that are reasonably likely to have material effect on composition or percentages
of significant customers.
Three months ended March 31, 2006
---------------------------------
Consolidated
Corporate Communications Data Totals
REVENUE $ 0 $ 350,246 $ 613,000 $ 963,246
COST OF SALES 0 166,210 143,167 309,377
----------- ----------- ----------- -----------
GROSS PROFIT 0 184,036 469,833 653,869
----------- ----------- ----------- -----------
OPERATING EXPENSES:
TOTAL OPERATING EXPENSE 357,790 134,319 427,024 919,133
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (357,790) 49,717 42,809 (265,264)
----------- ----------- ----------- -----------
Other Income (Expenses):
Interest Income 5,073 0 0 5,073
Interest expenses (54,261) (11,954) (7,258) (73,473)
----------- ----------- ----------- -----------
Total other income (expenses) (49,188) (11,954) (7,258) (68,400)
----------- ----------- ----------- -----------
Income/(Loss) from continuing operations (406,978) 37,763 35,551 (333,664)
Discontinued Operations 287,067 0 0 287,067
----------- ----------- ----------- -----------
Net Profit/(Loss) ($ 119,911) $ 37,763 $ 35,551 ($ 46,597)
=========== =========== =========== ===========
Total Net Assets $ 584,181 $ 181,710 $ 348,863 $ 1,114,754
=========== =========== =========== ===========
Gross Fixed and Other Assets $ 1,153,346 $ 0 $ 234,494 $ 1,387,840
=========== =========== =========== ===========
Accumulated Depreciation and Amortization $ 852,458 $ 0 $ 189,120 $ 526,764
=========== =========== =========== ===========
Depreciation and Amortization Expense $ 84,998 $ 0 $ 14,815 $ 99,813
=========== =========== =========== ===========
F-17
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
Three months ended March 31, 2005
---------------------------------
Corporate Healthcare Data Total
REVENUE $ 0 $ 803,199 $ 392,033 1,195,232
COST OF SALES 0 353,643 114,784 468,428
----------- ----------- ----------- -----------
GROSS PROFIT 0 449,556 277,249 726,804
OPERATING EXPENSES:
Selling, General and Administration Expenses 465,536 316,372 298,547 1,080,456
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSE 465,536 316,372 298,547 1,080,456
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (453,536) 133,184 (21,298) (353,652)
Other Income(Expenses)
Interest income
Interest expense (24,556) (15,863) (1,474) (41,894)
Other (expense)
Other income
Forgiveness of debt 3,750 3,750
----------- ----------- ----------- -----------
Total other income(expenses) (20,806) (15,863) (1,474) (38,144)
----------- ----------- ----------- -----------
Income/(Loss) Before Inactive and Discontinued Operations (486,343) 117,321 (22,774) (391,796)
Inactive Operations (290) 60,236 59,946
Discontinued operations
Net Income/(Loss) (486,343) 117,031 37,462 (331,850)
=========== =========== =========== ===========
Total Net Assets 813,051 795,787 266,279 1,874,117
=========== =========== =========== ===========
Gross Fixed and Other Assets 1,054,807 0 255,034 1,309,841
=========== =========== =========== ===========
Accumulated Depreciation and Amortization 518,384 0 122,886 641,270
=========== =========== =========== ===========
NOTE14 - RELATED PARTY TRANSACTIONS
CONVERTIBLE NOTES DUE TO RELATED PARTIES
During 2005, the Company's issued a convertible note of $100,000 to an officer
and director. In addition the Company issued a convertible note of $26,000 to a
company controlled by a director. Convertible notes in the aggregate amount of
$118,045 were issued to four employees for unpaid wages at December 31, 2004.
Pearl Street Holdings has convertible notes which consist of $510,000 and
$595,000. The $595,000 notes were taken over from a non-related party during
2005. All of the convertible notes bear interest at the rate of five (5%)
percent per annum and mature on February 1, 2007. The holders of the notes can
convert them into Company common stock at a price of $0.01 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.
F-18
DIALOG GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
DUE TO OFFICER
In December 2005, an officer and director provided approximately $50,000
directly to the Company to help in the financing of other loans.
CONVERSION OF ACCRUED SALARIES AND VACATION TO RELATED PARTIE In March of 2006
Peter DeCrescenzo, the company's president and Vincent DeCrescenzo, Sr. the
company's executive vice president agreed that each would convert $100,000 of
past due salary and vacation into convertible debentures on the same terms as
the Midtown Partners investors. However, no compensation was paid with respect
to this transaction.
RENT TO RELATED PARTIES
The Company entered into leases for two apartments from January 1, 2006 through
December 31, 2007 from a company controlled by the President and C.E.O. and the
C.O.O. and C.F.O. of its shareholders and executives. Rent expense paid to these
related parties amounted to $12,000 for three months ended March 31, 2006.
NOTE 15 -LITIGATION
Suppliers
In 2003 Acxiom Corporation commenced an action against Dialog Group
and its then ThinkDirectMarketing subsidiary in the Circuit Court of Faulkner
County, Arkansas. The action was for a breach of written contracts, including a
promissory note and a Data License Agreement. Acxiom sought $400,000 on the note
and $295,415 for unpaid data usage, and $1,250,000 for unused minimum usage
requirements for 2003 and 2004.
In January of 2006 Dialog Group, Inc. settled with Acxiom, for
Ninety Thousand Dollars ($90,000.00),) Dollars to be paid over 37 months. At The
first payment of $5,000 has been made.
Also in January of 2006 CBS Market Watch had an attorney contact
Healthcare Dialog concerning a claim for $45,510. A settlement was reached for
the amount of $36,408. As of March 31, the balance remaining was $31,408.
In April 2004 USA Direct obtained a default judgment for $39,025
against Dialog Group in the Common Pleas Court of the State of Pennsylvania,
York County. The Company has agreed to settle the claim for $20,000. As of March
31, 2006 the balance remaining was $15,000.00.
Former Subsidiaries
In April 2003, Dean Eaker and Bruce Biegel commenced an arbitration
proceeding against Dialog Group and its former subsidiary, TDMI, relating to the
termination of their employment before the American Arbitration Association in
New York City. On January 17, 2005, the arbitration panel awarded $313,763.75 to
Dean Eaker and $160,133 to Bruce Biegel. The full amount of the award has been
accrued on the Dialog Group books and charged to loss on discontinued operation.
On April 17, 2005 the company settled with both Eaker and Biegel for a series of
payments aggregating $473,897.50. As of March 31, 2006 $176,092 remains to be
paid.
F-19
Item 2. Management's Discussion and Analysis or Plan of Operation.
General
Dialog Group, Inc. (DLGG) is a publicly traded corporation,
headquartered at 257 Park Avenue South, Suite 1201, New York, New York 10010,
with an administrative and sales office in Sunrise, Florida. The company's two
Segments, Data and Communications, provide a broad spectrum of proprietary and
exclusive databases for healthcare, consumer and business-to-business market
clients. The company also provides a combination of traditional customer
relationship management support applications such as advertising and marketing
services.
Sale of Mail Mogul
On February 28, 2006 the Company sold the entire capital stock of its
Mail Mogul, Inc. subsidiary to an unrelated third party. Mail Mogul results were
reported in the Data Segment. The Mail Mogul business consisted of sales of data
and supplies and the provision of business leads to the mail shop market. As
part of its business, Mail Mogul operated the Direct Mail Quotes platform.
In consideration of the release of approximately $296,623 of the
Company's and its subsidiaries' debt to Mail Mogul, the Company delivered the
stock to the buyer and paid approximately $3,000 of expenses in connection with
the sale. The Company enjoyed a gain of approximately $254,810 on the sale of
Mail Mogul.
After the transaction, Mail Mogul's new owner remained in debt to the
Company's Data Dialog subsidiary for about $319,000. In settlement of the debt,
the new owner of Mail Mogul sold the Direct Mail Quotes platform to Data Dialog.
As additional consideration, Data Dialog assumed Mail Mogul's existing liability
to the Direct Mail Quotes customers of about $59,000.
Description of the Segments
Both of Dialog Group's Segments each currently market its product and
service offerings through branded product lines. The Data Segment products are
Data Dialog Marketing, Data Dialog Data Management and Adialogin. The
Communications Segments are Healthcare Dialog Communications and MyMedCenter.
Data Segment
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, provide data services, and streamline the distribution
of data. Data Dialog Marketing offers a host of data-related services, such as
targeted marketing lists, lead generation, turnkey direct mail programs, and
data cleansing to multiple market segments including insurance, financial
planning, real estate, auto dealerships, printers, letter shops 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 user. The unit
markets a proprietary online list creation tool, Data Dialog Select.
Data Dialog Data Management serves the database needs of list brokers
and managers marketing nearly 200 different lists created from both licensed and
proprietary databases. Data Dialog Management provides access to these lists via
its branded online platform: Access Dialog. Access Dialog in designed for use by
both our internal sales force and list professionals and requires registration
and training. It also promotes and markets list products via
DataDialogDataManagement.com where list and marketing professionals can learn
about its products and run counts and purchase list online after qualifying.
Adialogin is a customer data integration product that automatically
appends name and address information, as well as demographic, financial and
lifestyle information, to telephone numbers on calls made by consumer and
business customers to CTI Platforms. Adialogin initially marketed its products
executively to call centers and Interactive Voice Response system users
operating in-bound and blended call centers with 5 to 500 seats. Adialogin
currently has contracts and sub-contracts with 27 businesses in this market
segment and an additional 20 agreements with resellers which service this
market. The real time format of this unit's products gives customers instant
access to data to speed up their promotional efforts and improve customer
service. In 2005 and the first quarter of 2006 Adialogin developed a web
application for its technology which will be introduced during the second
quarter of 2006.
Communications Segment
Healthcare Dialog Communications delivers advertising, relationship
marketing and communications services to the healthcare industry. Clients use
its strategic and creative services to build comprehensive programs for
healthcare professionals, consumers, and sales representatives. These include
training materials development, patient and professional education materials
distribution, and targeted direct mail and advertising campaigns. Clients rely
on Healthcare Dialog Communications' interactive services to produce
sophisticated promotional Web sites, educational Web sites, interactive training
and educational CD-ROMs, Internet advertising, e-mail campaigns, and proprietary
marketing programs.
MyMedCenter platform provides, maintains, and delivers healthcare,
beauty and pet content across a national network of 87 local affiliate TV and
radio station Web sites. The content, which includes over 15,000 text articles,
attracts over a million unique health information seekers per day to the
broadcast stations' Web sites for a combined US household penetration of 75%. On
these sites client public relations, promotional material, and educational
material are blended into a seamless presentation for maximum viewer impact. To
maintain repeat traffic, all features are refreshed daily.
Dialog Group
---------------------------------------- --------------------------- -------------------------------
Income Statement Item First Quarter 2006 First Quarter 2005
--------------------- ------------------ ------------------
---------------------------------------- --------------------------- -------------------------------
Revenue $963,246 $1,195,232
---------------------------------------- --------------------------- -------------------------------
Cost of Revenue 309,377 468,428
---------------------------------------- --------------------------- -------------------------------
Operating Expenses 919,133 1,080,456
---------------------------------------- --------------------------- -------------------------------
Result of Operations (265,264) (353,652)
---------------------------------------- --------------------------- -------------------------------
Net Other Income(Expense) (68,400) (38,144)
---------------------------------------- --------------------------- -------------------------------
Discontinued Operations 287,067 59,946
---------------------------------------- --------------------------- -------------------------------
Net Result $(46,597) $(331,850)
---------------------------------------- --------------------------- -------------------------------
Management continued to evaluate the margins of some of the products
offered and focused more on profit improvement and not Revenue alone. Revenues
for the quarter ended March 31, 2006 were $963,200 compared with $1,195,200 for
the quarter ended March 31, 2005. This represents a decline of $232,000 or about
20% from the same period a year ago. Revenue from the high margin Data Segment
was $613,000 or 64% of total Revenue. Data Revenues in total for the first
quarter of 2006 are ahead of the first quarter of 2005. Revenue for each of the
Segments and some of the products will be addressed in more detail below.
Costs of Revenues for the quarter ended March 31, 2006 were $309,400,
some 32% of Revenues, compared with $468,400 or approximately 40% of Revenues in
the quarter ended March 31, 2005. The decline in Revenue of $232,000 was some
what offset by the $159,000 decline in Cost of Revenue from a year ago for the
same period. Improved terms from data suppliers and the greater utilization of
company data assets rather than relying on external sources and a change in the
mix of Revenue drove down Cost of Revenue as a percentage in the first quarter
of 2006 compared with the same quarter of the prior year. The sources of the
Revenue and Costs for each Segment are discussed in more detail in the sections
which follow.
Operating Expenses for the quarter ended March 31, 2006 were $919,100
compared with $1,080,400 for the quarter ended March 31, 2005. This represents a
reduction of $161,300 from the first quarter of 2005. Management plans to
continue to reduce overhead in the quarters ahead while continuing to increase
the amount spent on marketing.
Losses from Operations were $265,300 for the quarter ended March 31,
2006, compared with $353,700 for the quarter ended March 31, 2005, an
improvement of approximately $88,400 from the same period a year ago. The
positive results can be attributed to lower Cost of Revenue resulting from
higher margin businesses making up a greater percentage of Total Revenues in the
first quarter of 2006 than for the comparable period in 2005. A reduction of
Operating Expenses also contributed to the improved results. "Reduce Overhead"
has and will continue to be the Dialog Group credo.
Net Other Income/Expense was an Expense of $68,400 for the quarter
ended March 31, 2006 all of which is attributed to interest payments, compared
with Net Other Income/Expense which was an Expense of $38,100 for the quarter
ended March 31, 2005, an increase of $30,300. Last year included interest
expense of $41,900.
The Net Loss for the quarter ended March 31, 2006 was $46,600, compared
with a Net Loss of $331,900 in the quarter ended March 31, 2005, representing an
improvement of $285,300. This significant improvement can be attributed to the
gain from discontinued operations of $287,067.
Data Segment:
---------------------------------------- --------------------------- -------------------------------
Income Statement Item First Quarter 2006 First Quarter 2005
--------------------- ------------------ ------------------
---------------------------------------- --------------------------- -------------------------------
Revenue $613,000 $392,033
---------------------------------------- --------------------------- -------------------------------
Cost of Revenue 143,167 114,784
---------------------------------------- --------------------------- -------------------------------
Operating Expenses 427,024 298,547
---------------------------------------- --------------------------- -------------------------------
Result of Operations 42,809 (21,298)
---------------------------------------- --------------------------- -------------------------------
Net Other Income (7,258) (1,474)
---------------------------------------- --------------------------- -------------------------------
Discontinued Operations 0 60,236
---------------------------------------- --------------------------- -------------------------------
Net Result $35,551 $37,462
---------------------------------------- --------------------------- -------------------------------
Data Dialog Marketing, Data Dialog Management and Adialogin Revenues
totaled about $613,000 for the period ending March 31, 2006, compared to
approximately $392,000 for the first quarter of 2005. The Revenue improvement of
$221,000 can be attributed to all product lines producing Revenues above their
respective 2005 first quarter levels. Of particular note are the improvements in
Revenue levels at Data Dialog Management and from the Adialogin call center
product.
Data Costs of Revenue for the first three months of 2006 were $143,000
or 23% of Revenues, compared with $114,800 or 29% of Revenues in the first
quarter of 2005. The improvement in the rate resulted from a greater percentage
of data sales being filled from company-owned data assets. Should Revenues
continue to improve in the quarters ahead, Cost of Revenue percentage should
continue to improve as a result of fixed expenses relating to data acquisition
and Internet marketing.
Data Operating Expenses for the three-month period ended March 31, 2006
were $427,000. In the first quarter of 2005 the comparable figure was $298,500,
about $128,500 less than this year. Approximately $40,000 of the $128,500 was
spent on selling and marketing. In the first quarter of 2006 Data Operating
Expenses were 70% of Revenues which compare favorably to the 84% rate for the
first quarter of 2005.
Data Segment's Income from Operations for the first quarter of 2006 was
$42,800, compared to a loss of approximately $21,300 for the first quarter of
2005. Investments made in sales staff, marketing and the online platform for
Data Dialog Marketing and Adialogin's call center products helped contributed to
the almost $64,1000 improvement.
Data Net Income for the first quarter of 2006 was $35,600 compared to
$37,500. In the first quarter of 2006 the Company sold its Mail Mogul business.
The 2005 segment information has been reclassified to eliminate these operations
Communications Segment:
---------------------------------------- --------------------------- -------------------------------
Income Statement Item First Quarter 2006 First Quarter 2005
--------------------- ------------------ ------------------
---------------------------------------- --------------------------- -------------------------------
Revenue $350,246 $803,199
---------------------------------------- --------------------------- -------------------------------
Cost of Revenue 166,216 353,643
---------------------------------------- --------------------------- -------------------------------
Operating Expenses 134,319 316,372
---------------------------------------- --------------------------- -------------------------------
Result of Operations 49,717 133,184
---------------------------------------- --------------------------- -------------------------------
Net Other Income (Expense) (11,954) (15,863)
---------------------------------------- --------------------------- -------------------------------
Discontinued Operations 0 (290)
---------------------------------------- --------------------------- -------------------------------
Net Result $37,763 $117,031
---------------------------------------- --------------------------- -------------------------------
Total Revenue from the Communications Segment was $350,200 for the
first quarter of 2006, well below the $803,200 Revenue figure for the same
period a year ago. A metamorphosis of the Communications Segment away from a
strict focus on healthcare is taking place. It is less dependent on a few large
pharmaceutical clients than in the past. In the first quarter of 2006 a major
pharmaceutical company did not renew a program that had been running for the
past several years with Healthcare Dialog Communications. This accounted for the
majority of the decline in Revenue for this Segment form year to year.
MyMedCenter Revenues were below the 2005 level in the first quarter of 2006
because clients did not participate in the MyMedCenter program in the first
quarter of 2006 because of the inability of our website partner to deliver
contracted for traffic during the fourth quarter of 2005. Finally the iData
product which was offered in 2005 was not offered in 2006
The Communications Segments Costs of Revenue was $166,200 for the
quarter ended March 31, 2006, or 47% of Revenue compared with $353,600, and 44%
of Revenue for the quarter ended March 31, 2005.
Communications Total Operating Expenses were approximately $134,300 for
the three months ended March 31, 2006, compared to $316,400 for the same period
a year ago. The rate of Expenses to Revenue for both years was about 39%.
For the three months ended March 31, 2006, Communications consolidated
Net Income from Operations was approximately $49,800 compared to $133,200 in the
first quarter of 2005. Communications experienced a decline in volume in the
first quarter of 2006, compared to the same period a year ago, but remained
profitable as a result of Expense reductions.
Liquidity & Capital Resources
DGI had a consolidated working capital deficit of approximately
($4,007,200) on March 31, 2006 as compared to a deficit of approximately
($2,854,000) at December 31, 2005. The increase of approximately $1,153,200 is
the result increase in accounts payable, accrued expenses and short-term
borrowings due a reduced level of sales in the first quarter that did not
provide the level of accounts receivable required to fund operations. An
additional reason for the increase is that the Convertible Notes are now
included in the short term liabilities.
Going Concern
In the first quarter of 2006 the company raised funds through the
private sale of approximately $280,000 of convertible debentures to a group of
investors associated with Midtown Partners & Co. LLC. Peter V. DeCrescenzo
converted $100,000 in salary to the debenture as well. The Company continues to
review means of raising funds including issuing additional debentures or equity
securities. If unsuccessful the Company may not be able to meet its short-term
capital needs.
In the past suppliers were prepared to extend the company payments
terms for larger dollars amounts over longer periods. As a result of the
company's poor payment history fewer suppliers than in the past are willing to
give the company the kind of payment terms it needs. In the past members of
management lent the company money.
In the past members of management have used their personal credit cards
to pay for company expenses, but there is no reason to believe they will do so
in the future. In the past employees have been willing to work for reduced wages
and or convert wages to shares of the company, but there is no reason to believe
they will do so in the future.
Inflation
Inflation rates in the United States have not had a significant impact
on operating results for the periods presented.
Off-Balance Sheet Transactions
At no time during the first quarter did the Company have any
relationships with unconsolidated entities or financial partnerships, including
as entities often referred to as structured finance or special purpose entities,
which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes.
Item 3 Controls and Procedures.
The Company evaluated, under the supervision and with the participation
of the Company's management (including its chief executive officer and with its
chief financial officer), the effectiveness of the design and operation of its
disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).
Based upon their evaluation of such disclosure controls and procedures, the
Company's chief executive officer and chief financial officer have concluded as
of March 31, 2006, that such controls needed improvement to operate as designed
and alert them on a timely basis to any material information relating to the
Company required to be included in the Company's periodic SEC filings.
Management continues its focus on the issue of internal control in
particular. To that end, in 2005 management centralizing the accounting
function. In May of 2006 a CPA firm was hired to work with management and the
company's auditors to improve controls. Management will continue to evaluate and
test present and new measures while at the same time reviewing areas that may
require improvement. Additionally, it continues the process of hiring persons
with the skill sets appropriate to fill the Company's needs as they have evolved
as a result of the sale of companies in 2005 and 2006.
Part II. Other Information
Item 1. Legal Proceedings
Suppliers
In 2003 Acxiom Corporation commenced an action against Dialog Group and
its then ThinkDirectMarketing subsidiary in the Circuit Court of Faulkner
County, Arkansas. The action was for a breach of written contracts, including a
promissory note and a Data License Agreement. Acxiom sought $400,000 on the note
and $295,415 for unpaid data usage, and $1,250,000 for unused minimum usage
requirements for 2003 and 2004.
In January 2006 the Company settled with Acxiom for Ninety Thousand
($90,000.00) Dollars to be paid over forty-two months. All required payments
have been made when due by the end of March 31, 2006.
Also in January 2006 Healthcare Dialog was contacted by an attorney for
CBS Market Watch concerning their claim for $45,510 for content. The claim was
settled for $36,408. As of March 31, 2006 the balance remaining was $31,408.
In April 2004 USA Direct obtained a default judgment for $39,025
against Dialog Group in the Common Pleas Court of the State of Pennsylvania,
York County. The Company has agreed to settle the claim for $20,000. As of March
31, 2006 the balance remaining was $15,000.
Former Subsidiaries
In April 2003, Dean Eaker and Bruce Biegel commenced an arbitration
proceeding against Dialog Group and its former subsidiary, TDMI, relating to the
termination of their employment before the American Arbitration Association in
New York City. On January 17, 2005, the arbitration panel awarded $313,764 to
Dean Eaker and $160,133 to Bruce Biegel. The full amount of the award has been
accrued on the Dialog Group books and charged to loss on discontinued operation
On April 17, 2005 the company settled with both Eaker and Biegel for a series of
payments aggregating $473,898. As of March 31, 2006 $176,092 remains to be paid.
Except as specified above, there are no material presently pending
legal proceedings to which Dialog Group is a party, or to which any of its
properties or assets are subject.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales in the first quarter which were not reported on the
Current Report on Form 8-K, filed March 27, 2006.
Items 3, 4 and 5 are omitted, as there is no information to report there under.
Item 6. Exhibits
Exhibits
Exhibit
Number Description Page
------ ----------- ----
2.1 Third Amended Plan of Reorganization - Incorporated by reference from Report on Form 8-K filed X
on October 12, 2001
2.2 Amendment dated February 27, 2003 to an Agreement for Merger by and among IMX Pharmaceuticals, X
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 Dialog Group, Inc., a Delaware corporation X
("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 - Incorporated by reference from Interim Report X
on Form 8-K filed on March 14, 2003
3(i).2 Certificate of Designation of Class C-1 Preferred Stock - Incorporated by reference from the X
initial filing of registration statement file number 333-106490
3(i).3 Certificate of Designation of Class C-2 Preferred Stock - Incorporated by reference from the X
initial filing of registration statement file number 333-106490
3(i).4 Certificate of Designation of Class C-3 Preferred Stock - Incorporated by reference from the X
initial filing of registration statement file number 333-106490
3(i).5 Certificate of Cancellation of Class C and Class D Preferred Stock - Incorporated by reference X
Number Description Page
------ ----------- ----
from the initial filing of registration statement file number 333-106490
3(i).6 Certificate of Amendment for Increased Shares - Incorporated by reference from the initial X
filing of registration statement file number 333-106490
3(i).7 Certificate of Designation of Class E Preferred Stock Incorporated by reference from Amendment X
No.1 to Annual Report on Form 10-KSB filed on October 3, 2005.
3(i).8 Certificate of Elimination of Classes C-1, C-1, and C-3 Preferred Stock Incorporated by X
reference from Amendment No.1 to Annual Report on Form 10-KSB filed on October 3, 2005.
3(i).9 Certificate of Amendment for Increased Shares Incorporated by reference from Amendment No.1 to X
Annual Report on Form 10-KSB filed on October 3, 2005.
3(ii).1 By-laws - Incorporated by reference from Interim Report on Form 8-K filed on March 14, 2003 X
4.1 Instruments defining the rights of security holders - Incorporated by reference from Exhibit X
3(i).1 through Exhibit 3(i).10.
4.2 Convertible Debenture - Incorporated by reference from the Current Report on Form 8-K filed X
March 27, 2006.
4.3 Warrant - Incorporated by reference from the Current Report on Form 8-K filed March 27, 2006. X
10 Material contracts
10.1 Employment Agreement for Peter V. DeCrescenzo Incorporated by reference from the Annual Report X
on Form 10-KSB filed on April 14, 2003
10.2 Employment Agreement for Vincent DeCrescenzo Incorporated by reference from the Annual Report on X
Form 10-KSB filed on April 14, 2003
10.3 Employment Agreement for Cindy Lanzendoen Incorporated by reference from the Annual Report on X
Form 10-KSB filed on April 14, 2003
10.5 2002 Stock Option Plan, as amended- Incorporated by reference from the initial filing of X
registration statement file number 333-106490
10.6 Amendment to Employment Agreement for Peter V. DeCrescenzo. Incorporated by reference from X
Amendment No.1 to Annual Report on Form 10-KSB filed on October 3, 2005.
10.7 Amendment to Employment Agreement for Vincent DeCrescenzo, Sr. Incorporated by reference from X
Number Description Page
------ ----------- ----
Amendment No.1 to Annual Report on Form 10-KSB filed on October 3, 2005.
10.8 Guarantee Agreement with Peter DeCrescenzo Incorporated by reference from Amendment No.1 to X
Annual Report on Form 10-KSB filed on October 3, 2005.
10.9 Guarantee Agreement with Vincent DeCrescenzo Incorporated by reference from Amendment No.1 to X
Annual Report on Form 10-KSB filed on October 3, 2005.
21.1 Subsidiaries of the registrant 35
31(i) 302 Certification of Chief Executive Officer 36
31(ii) 302 .Certification of Chief Financial Officer 38
32(i) 906 Certification of Chief Executive Officer 40
32(ii) 906 Certification of Chief Financial Officer 41
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: May 31, 2006
By: /s/ Peter V. DeCrescenzo
----------------------------------------
Peter V. DeCrescenzo, President and
Chief Executive Officer
Signature Title Date
- --------- ----- ----
/s/ Peter V. DeCrescenzo Chief Executive Officer May 31, 2006
------------------------
Peter V. DeCrescenzo
/s/ Vincent DeCrescenzo Chief Financial May 31, 2006
- ------------------------- and Accounting Officer
Vincent DeCrescenzo
INDEX TO EXHIBITS
Exhibit Page
Number Number Description
--------- ----------- --------------------------------------------
21.1 35 Subsidiaries of the Registrant
31(i) 36 302 Certification of Chief Executive Officer
31(ii) 38 302 Certification of Chief Financial Officer
32(i) 40 906 Certification of Chief Executive Officer
32(ii) 41 906 Certification of Chief Financial Officer