UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the Quarterly Period Ended September 30, 2008
Commission
File Number 000-51010
MOBILEPRO
CORP.
(Exact
name of registrant as specified in its charter)
DELAWARE
|
87-0419571
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
|
|
6701
Democracy Boulevard, Suite 202, Bethesda, MD
|
20817
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(301)
571-3476
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange
Act”) during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer o |
Smaller reporting company x |
|
|
(Do
not check if smaller
reporting
company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o
No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
equity, as of the latest practicable date: As of November 7, 2008, the Company
had 938,264,653 outstanding shares of its common stock, $0.001 par value per
share.
TABLE
OF CONTENTS
ITEM
NUMBER AND CAPTION
|
PAGE
|
|
|
|
PART
I
|
FINANCIAL
INFORMATION
|
3
|
|
|
|
ITEM
1.
|
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
|
3
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
8
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
|
27
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
40
|
ITEM
4T.
|
CONTROLS
AND PROCEDURES
|
40
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
43
|
|
|
|
ITEM
1.
|
LEGAL
PROCEEDINGS
|
43
|
ITEM
1A.
|
RISK
FACTORS
|
45
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
50
|
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
51
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
51
|
ITEM
5.
|
OTHER
INFORMATION
|
51
|
ITEM
6.
|
EXHIBITS
|
51
|
|
|
|
|
SIGNATURES
|
53
|
PART
I
FINANCIAL
INFORMATION
Item
1. Financial Statements
MOBILEPRO
CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
SEPTEMBER
30 AND MARCH 31, 2008
ASSETS
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
March
31,
|
|
|
|
2008
|
|
2008
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,413,434
|
|
$
|
1,011,396
|
|
Restricted
cash
|
|
|
80,000
|
|
|
556,397
|
|
Accounts
receivable, net
|
|
|
280,920
|
|
|
231,362
|
|
Notes
receivable
|
|
|
859,128
|
|
|
1,065,000
|
|
Prepaid
expenses and other current assets
|
|
|
179,779
|
|
|
123,759
|
|
Assets
of companies held for sale
|
|
|
27,723,152
|
|
|
28,021,141
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
30,536,413
|
|
|
31,009,055
|
|
|
|
|
|
|
|
|
|
FIXED
ASSETS, NET OF ACCUMULATED DEPRECIATION
|
|
|
166,741
|
|
|
257,655
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Notes
receivable, long-term
|
|
|
1,565,000
|
|
|
1,800,000
|
|
Deferred
financing fees
|
|
|
123,980
|
|
|
-
|
|
Investments
and other assets
|
|
|
367,301
|
|
|
324,243
|
|
|
|
|
|
|
|
|
|
Total
Other Assets
|
|
|
2,056,281
|
|
|
2,124,243
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
32,759,435
|
|
$
|
33,390,953
|
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
MOBILEPRO
CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
SEPTEMBER
30 AND MARCH 31, 2008
(CONTINUED)
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
March
31,
|
|
|
|
2008
|
|
2008
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Notes
payable and convertible debentures
|
|
$
|
13,391,102
|
|
$
|
13,253,736
|
|
Accounts
payable and accrued expenses
|
|
|
3,064,963
|
|
|
3,177,037
|
|
Deferred
revenue
|
|
|
600,000
|
|
|
600,000
|
|
Liabilities
of companies held for sale
|
|
|
8,559,376
|
|
|
9,663,144
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
25,615,441
|
|
|
26,693,917
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 20,035,425 shares authorized,
|
|
|
|
|
|
|
|
35,378
shares issued and outstanding at September 30 and March 31,
2008
|
|
|
35
|
|
|
35
|
|
Common
stock, $0.001 par value, 1,500,000,000 shares authorized, 852,764,653
and
|
|
|
|
|
|
|
|
775,821,796
shares issued and outstanding at September 30 and March 31,
2008
|
|
|
852,765
|
|
|
775,822
|
|
Additional
paid-in capital
|
|
|
101,641,948
|
|
|
101,554,026
|
|
Accumulated
deficit
|
|
|
(95,350,754
|
)
|
|
(95,632,847
|
)
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity
|
|
|
7,143,994
|
|
|
6,697,036
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
32,759,435
|
|
$
|
33,390,953
|
|
The
accompanying notes are an integral part of the
condensed consolidated financial statements.
MOBILEPRO
CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For
the Three Months Ended
|
|
For
the Six Months Ended
|
|
|
|
Seprember
30,
|
|
Seprember
30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
860,569
|
|
$
|
4,197,406
|
|
$
|
933,996
|
|
$
|
10,165,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
COSTS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services (exclusive of depreciation and amortization)
|
|
|
1,080
|
|
|
2,185,248
|
|
|
2,160
|
|
|
5,750,034
|
|
Payroll,
professional fees and related expenses (exclusive of stock
compensation)
|
|
|
341,569
|
|
|
2,638,326
|
|
|
757,778
|
|
|
6,228,459
|
|
Office
rent and expenses
|
|
|
41,724
|
|
|
228,040
|
|
|
77,644
|
|
|
380,413
|
|
Other
general and administrative expenses
|
|
|
84,630
|
|
|
239,955
|
|
|
185,269
|
|
|
625,198
|
|
Write-down
in carrying value of notes receivable
|
|
|
300,000
|
|
|
-
|
|
|
300,000
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
45,456
|
|
|
491,524
|
|
|
90,913
|
|
|
1,208,705
|
|
Stock
compensation
|
|
|
25,706
|
|
|
434,569
|
|
|
49,675
|
|
|
635,122
|
|
Total
Operating Costs and Expenses
|
|
|
840,165
|
|
|
6,217,662
|
|
|
1,463,439
|
|
|
14,827,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
20,404
|
|
|
(2,020,256
|
)
|
|
(529,443
|
)
|
|
(4,662,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
AND OTHER EXPENSE, NET
|
|
|
(329,772
|
)
|
|
(52,999
|
)
|
|
(475,195
|
)
|
|
(705,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
ON SALE OF ASSETS
|
|
|
-
|
|
|
(2,800,206
|
)
|
|
-
|
|
|
(2,778,906
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
IN NET LOSS OF MICROLOG CORPORATION
|
|
|
(65,326
|
)
|
|
-
|
|
|
(100,333
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM CONTINUING OPERATIONS
|
|
|
(374,694
|
)
|
|
(4,873,461
|
)
|
|
(1,104,971
|
)
|
|
(8,146,635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations of discontinued operations
|
|
|
204,016
|
|
|
(219,783
|
)
|
|
485,926
|
|
|
(1,935,274
|
)
|
Gain
(loss) on sale of discontinued operation
|
|
|
901,138
|
|
|
(7,517,516
|
)
|
|
901,138
|
|
|
(7,517,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM DISCONTINUED OPERATIONS
|
|
|
1,105,154
|
|
|
(7,737,299
|
)
|
|
1,387,064
|
|
|
(9,452,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) APPLICABLE TO COMMON SHARES
|
|
$
|
730,460
|
|
$
|
(12,610,760
|
)
|
$
|
282,093
|
|
$
|
(17,599,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) PER SHARE, BASIC AND DILUTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.0005
|
)
|
$
|
(0.0063
|
)
|
$
|
(0.0014
|
)
|
$
|
(0.0106
|
)
|
Discontinued
operations
|
|
|
0.0014
|
|
|
(0.0100
|
)
|
|
0.0018
|
|
|
(0.0124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) PER SHARE, BASIC AND DILUTED
|
|
$
|
0.0009
|
|
$
|
(0.0163
|
)
|
$
|
0.0004
|
|
$
|
(0.0230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARES
OUTSTANDING
|
|
|
802,323,970
|
|
|
775,103,810
|
|
|
789,145,293
|
|
|
764,933,385
|
|
The
accompanying notes are an integral part of the
condensed consolidated financial statements.
MOBILEPRO
CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For
the Six Months Ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
282,093
|
|
$
|
(17,599,425
|
)
|
(Income)
loss from discontinued operations
|
|
|
(1,387,064
|
)
|
|
9,452,790
|
|
Loss
from continuing operations
|
|
|
(1,104,971
|
)
|
|
(8,146,635
|
)
|
Items
that reconcile net income (loss) to net cash provided
by
|
|
|
|
|
|
|
|
(used
in) operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
90,913
|
|
|
1,208,705
|
|
Noncash
interest expense
|
|
|
255,556
|
|
|
196,293
|
|
Amortization
of deferred financing fees
|
|
|
53,134
|
|
|
-
|
|
Stock
compensation
|
|
|
49,675
|
|
|
635,122
|
|
Equity
in net loss of Microlog Corporation
|
|
|
100,333
|
|
|
-
|
|
Write-down
in carrying value of notes receivable
|
|
|
300,000
|
|
|
-
|
|
Loss
on sale of payphone assets
|
|
|
-
|
|
|
2,778,906
|
|
Other
noncash charges
|
|
|
-
|
|
|
239,404
|
|
Changes
in assets and liabilities
|
|
|
|
|
|
|
|
Decrease
in restricted cash
|
|
|
476,397
|
|
|
-
|
|
(Increase)
decrease in accounts receivable
|
|
|
(49,558
|
)
|
|
671,915
|
|
Decrease
in notes receivable
|
|
|
140,872
|
|
|
-
|
|
(Increase)
in other current assets
|
|
|
(56,020
|
)
|
|
(507,387
|
)
|
(Increase)
in other assets
|
|
|
(143,390
|
)
|
|
(16,117
|
)
|
Increase
(decrease) in accounts payable and accrued expenses
|
|
|
6,476
|
|
|
(1,519,311
|
)
|
Operating
activities of discontinued operations
|
|
|
413,064
|
|
|
337,333
|
|
|
|
|
1,637,452
|
|
|
4,024,863
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
532,481
|
|
|
(4,121,772
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Proceeds
from sale of payphone assets
|
|
|
-
|
|
|
3,248,741
|
|
Capital
expenditures, net
|
|
|
-
|
|
|
(333,066
|
)
|
Proceeds
from sale of investments
|
|
|
-
|
|
|
277,426
|
|
Investing
activities of discontinued operations
|
|
|
-
|
|
|
1,713,478
|
|
|
|
|
|
|
|
|
|
Net
cash provided by investing activities
|
|
|
-
|
|
|
4,906,579
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Borrowings/(payments)
of debt, net
|
|
|
(3,000
|
)
|
|
(1,920,830
|
)
|
Deferred
financing fees
|
|
|
(177,114
|
)
|
|
-
|
|
Financing
activities of discontinued operations
|
|
|
(186,946
|
)
|
|
(244,676
|
)
|
|
|
|
|
|
|
|
|
Net
cash (used in) financing activities
|
|
$
|
(367,060
|
)
|
$
|
(2,165,506
|
)
|
The
accompanying notes are an integral part of the
condensed consolidated financial statements.
MOBILEPRO
CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(Unaudited)
|
|
For
the Six Months Ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
$
|
165,421
|
|
$
|
(1,380,699
|
)
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - BEGINNING OF PERIOD
|
|
|
2,075,117
|
|
|
3,430,844
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - END OF PERIOD
|
|
|
2,240,538
|
|
|
2,050,145
|
|
|
|
|
|
|
|
|
|
LESS
CASH AND CASH EQUIVALENTS OF DISCONTINUED
OPERATIONS
|
|
|
(827,104
|
)
|
|
(1,252,879
|
)
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS OF CONTINUING OPERATIONS
|
|
$
|
1,413,434
|
|
$
|
797,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW
|
|
|
|
|
|
|
|
INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
617,441
|
|
$
|
717,428
|
|
Income
taxes paid
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NONCASH
|
|
|
|
|
|
|
|
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of new convertible debenture to YA Global
|
|
$
|
13,391,175
|
|
$
|
-
|
|
Retirement
of convertible debentures issued to YA Global
|
|
$
|
(13,168,944
|
)
|
$
|
-
|
|
Issuance
of warrants with new convertible debenture
|
|
$
|
(10,390
|
)
|
$
|
-
|
|
Convertible
preferred stock of United Systems Access, Inc.
|
|
$
|
-
|
|
$
|
5,763,893
|
|
Notes
receivable
|
|
$
|
-
|
|
$
|
2,000,000
|
|
Payment
of debentures and accrued interest with common stock
|
|
$
|
(104,800
|
)
|
$
|
(1,967,908
|
)
|
The
accompanying notes are an integral part of the
condensed consolidated financial statements.
MOBILEPRO
CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2008
(Unaudited)
NOTE
1-ORGANIZATION
Overview
MobilePro
Corp., incorporated under the laws of the State of Delaware in July 2000, is
a
holding company with subsidiaries in the pay telephone and online gaming
industries and an affiliate in the software industry. Although classified as
discontinued operations, we still own an integrated telecommunications business.
We previously owned broadband wireless, telecommunications and integrated data
communications services companies which delivered a comprehensive suite of
voice
and data communications services, including local exchange, long distance,
enhanced data, Internet, cellular, and wireless broadband services to end user
customers. We previously operated in three industry segments - voice services,
Internet services and wireless networks. Together with its consolidated
subsidiaries, Mobilepro Corp. is hereinafter referred to as “Mobilepro” or the
“Company”.
The
Company’s voice services segment has included the operations of CloseCall
America, Inc. (“CloseCall”), a Stevensville, Maryland-based competitive local
exchange carrier (a “CLEC”), Davel Communications, Inc. (“Davel”), a Cleveland,
Ohio-based independent payphone provider, and American Fiber Network, Inc.
(“AFN”), a CLEC based in Overland Park, Kansas. The Company’s Internet services
segment has included DFW Internet Services, Inc. (“DFW”, doing business as
Nationwide Internet), an Irving, Texas-based Internet services provider, its
acquired Internet service provider subsidiaries, and InReach Internet, Inc.
(“InReach”), an Internet service provider based in Stockton, California. The
Company’s municipal wireless networks operations were conducted primarily by a
wholly owned subsidiary, NeoReach, Inc. (“NeoReach”), and its subsidiary, Kite
Networks, Inc. (“Kite Networks”, formerly known as NeoReach Wireless, Inc.). The
wireless networks segment also included the operations of the Company’s
subsidiary, Kite Broadband, LLC (“Kite Broadband”), a broadband wireless service
provider. Both Kite Networks and Kite Broadband were based in Ridgeland,
Mississippi. The corporate segment has included our Internet gaming subsidiary,
ProGames Network, Inc. (“ProGames”), that we founded in December
2005.
On
June
30, 2007, the Company entered into a Purchase Agreement (the “USA Agreement”)
with United Systems Access, Inc. (“USA”), pursuant to which USA agreed to
acquire all of the outstanding shares of CloseCall and AFN (the Company’s “CLEC
Business”, which was previously included in the voice services business segment)
and all of the outstanding shares of DFW and InReach (together these companies
have comprised the Company’s Internet services provider business segment, or
“ISP Business”). The sale of the ISP Business was completed on July 18, 2007.
The sale of the CLEC Business was subject to the receipt of verification of
certain regulatory approvals, which was originally expected to be obtained
by
the end of calendar year 2007. On January 14, 2008, the Company received notice
from USA purporting to terminate the USA Agreement with respect to the sale
of
the CLEC Business, but provided that USA remained interested in discussing
terms
upon which it would purchase the CLEC Business (see Note 3). USA was unable
to
complete the purchase on terms acceptable to the Company and, as a result of
this default, the Company subsequently terminated the sale of its CLEC Business
to USA.
On
July
8, 2007, the Company entered into a Purchase Agreement (the “Gobility
Agreement”) with Gobility, Inc. (“Gobility”), pursuant to which Gobility
acquired all of the outstanding shares of NeoReach and Kite Networks, and all
of
the outstanding membership interests in Kite Broadband (together these companies
have comprised the Company’s wireless networks business segment, or “Wireless
Networks”). As further discussed below, Gobility is in default with respect to
its obligation to obtain funding and to pay amounts due under certain equipment
obligations and leases for which the Company is a co-obligor. The Company is
currently cooperating with Gobility in its efforts to sell the assets of Kite
Networks in order to satisfy these obligations (see Note 3).
On
June
30, 2007, Davel sold approximately 730 operating payphones to an unaffiliated
payphone operator. On September 7, 2007, Davel sold an additional 21,405
payphones to Sterling Payphones, LLC (“Sterling”). Sterling also assumed certain
liabilities of Davel. Effective September 30, 2007, Davel sold an additional
300
payphones (see Note 3). Following these transactions, Davel’s remaining
operations have been significantly reduced. Davel’s remaining operations are
being continued and Davel is pursuing the recovery of certain claims including
the AT&T Corporation (“AT&T”), Sprint Communications Company, LP
(“Sprint”) and Qwest Communications Company, Inc. (“Qwest”) claims described in
Note 8.
Going
Concern Uncertainty
The
Company has historically lost money. The Company’s accumulated deficit at
September 30, 2008 was $95,350,754. Although the Company had net income of
$282,093 in the six months ended September 30, 2008, it had a loss from
continuing operations of $1,104,971. In the fiscal years ended March 31, 2008,
2007 and 2006, the Company sustained net losses of $18,361,602, $45,898,288
and
$10,176,407, respectively. Over these periods, most of the acquired businesses
of Mobilepro experienced declining revenues. Although restructuring measures
reduced other operating expenses, the Company was unable to sufficiently reduce
the corresponding costs of services. In addition, the Company funded the
start-up and operations of the municipal wireless networks and online gaming
businesses without these companies achieving profitability. The Company was
able
to generate $532,481 of cash from operating activities during the six months
ended September 30, 2008. Cash flow from operations was primarily due to cash
generated by its CLEC Business and $810,215 of receipts relating to claims
involving over-billings by certain telecommunications carriers of Davel in
violation of regulatory rulings (“Regulatory Receipts”), including $718,314
received from Qwest in the second fiscal quarter (see Note 8). The amount of
cash used in operations during the fiscal year ended March 31, 2008 was
$3,558,996.
Because
the cash required to fund the continuing operating losses and to complete the
build-out of planned municipal wireless networks exceeded the Company’s
available capital, the Company signed agreements to sell substantial portions
of
its operations to several unaffiliated buyers (see Note 3). The Company is
also
seeking a buyer for its CLEC Business. If the Company is successful in doing
so,
it will use the expected proceeds to retire the amounts owed under the
convertible debenture issued to YA Global Investments, L.P. (“YA Global”, f/k/a
Cornell Capital Partners, L.P) and other obligations of the Company.
Notwithstanding
expected cash flow deficits, the Company has significant claims against third
parties which, if successful, could be used by the Company to fund its
obligations and/or pay all or a portion of the amounts due to YA Global (see
Note 8). Claims against third parties include litigation against AT&T,
Sprint and Qwest for non-payment of dial around compensation to the Davel
entities, portions of amounts claimed from telecommunications carriers for
regulatory receipts, and contractual claims for damages in connection with
the
sale of the CLEC and Wireless Networks Businesses. However, there can be no
assurance that the Company will be able to prevail in its claims against third
parties, that the amount awarded will be material, or that such amounts, if
any,
can be collected by the Company.
The
Company’s financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and settlement of liabilities
and
commitments based on recorded amounts for the foreseeable future. If
the
Company is unable to permanently eliminate the cash requirements represented
by
the Wireless Networks Business, and/or fails to sell the CLEC Businesses to
USA
or a new buyer on terms that are acceptable to the Company, the Company will
not
have the ability to continue as a going concern without additional capital
and/or collections of significant amounts on claims against third parties.
The
condensed consolidated financial statements do not include any adjustments
that
might result from the outcome of this uncertainty.
NOTE
2-SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Condensed
Consolidated Financial Statement Presentation
The
condensed consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant inter-company accounts and transactions
have been eliminated in consolidation. Certain prior-period financial statement
balances have been reclassified to conform to the September 30, 2008
presentation.
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from those
estimates.
These
financial statements are unaudited and have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
regarding interim financial reporting. Accordingly, they do not include all
of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. These financial statements should
be read in conjunction with the financial statements, and notes thereto,
included in the Company’s Annual Report on Form 10-K for the fiscal year ended
March 31, 2008. In the opinion of management, the comparative financial
statements for the periods presented herein include all adjustments that are
normal and recurring, and that are necessary for a fair presentation of results
for the interim periods. The results of operations for the six months ended
September 30, 2008 are not necessarily indicative of the results that will
be
achieved for the fiscal year ending March 31, 2009.
Companies
Held for Sale
The
assets and liabilities of the CLEC Business and the remaining net liabilities
of
the Wireless Networks Business are summarized and classified as “held for sale”
in the accompanying condensed consolidated balance sheets at September 30 and
March 31, 2008. The operating results of these businesses and the operating
results of the ISP Business, which was sold in the second quarter of fiscal
year
2008, are included in discontinued operations in the accompanying condensed
consolidated statements of operations for the six months ended September 30,
2007. For the six months ended September 30, 2008, discontinued operations
includes the operating results of the CLEC Business and the gain and net
interest cost of the remaining assets and liabilities of the Wireless Networks
Business.
Impact
of Recent Accounting Standards
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the
accounting for uncertainty in income tax positions. FIN 48 requires that the
Company recognize in the consolidated financial statements the impact of a
tax
position that is more likely than not to be sustained upon examination based
on
the technical merits of the position. The provisions of FIN 48 were effective
for the Company on April 1, 2007. Adoption of FIN 48 did not have a material
effect on the consolidated financial statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements,” which defines fair value,
establishes a framework and gives guidance regarding the methods used for
measuring fair value, and expands disclosures about fair value measurements.
The
provisions of SFAS No. 157 are effective for financial statements issued for
the
Company’s fiscal year beginning April 1, 2008 (April 1, 2009 with respect to
certain non-financial assets and liabilities), and interim periods within such
fiscal years. The adoption of SFAS No. 157 for financial assets and
liabilities in the first quarter of the current fiscal year did not have a
material effect on the Company’s financial position or results of operations as
the Company does not have any material financial assets or liabilities measured
at fair value.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities,” which provides companies with an
option to report selected financial assets and liabilities at fair value. The
objective is to reduce both complexity in accounting for financial instruments
and the volatility in earnings caused by measuring related assets and
liabilities differently. The provisions of SFAS No. 159 are effective for
financial statements issued for the Company’s fiscal year beginning April 1,
2008. The Company did not elect to measure its financial instruments or any
other items at fair value as permitted by SFAS No. 159. Therefore, the
adoption of FAS No. 159 did not have a material effect on the Company’s
financial position or results of operations.
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations.”
SFAS No. 141R modifies the accounting for business combinations by requiring
that acquired assets and assumed liabilities be recorded at fair value,
contingent consideration arrangements be recorded at fair value on the date
of
the acquisition and preacquisition contingencies will generally be accounted
for
in purchase accounting at fair value. The pronouncement also requires that
transaction costs be expensed as incurred, acquired research and development
be
capitalized as an indefinite-lived intangible asset and the requirements of
SFAS
No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities,” be met at the acquisition date in order to accrue for a
restructuring plan in purchase accounting. SFAS No. 141R is required to be
adopted prospectively effective for the Company’s fiscal year beginning April 1,
2009. The Company does not expect SFAS No. 141R to have a significant impact
on
the Company’s consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — an amendment of ARB No. 51.” SFAS
No. 160 modifies the reporting for noncontrolling interests in the balance
sheet and minority interest income (expense) in the statement of operations.
The
pronouncement also requires that increases and decreases in the noncontrolling
ownership interest amount be accounted for as equity transactions. SFAS
No. 160 is required to be adopted prospectively, with limited exceptions,
effective for the fiscal year beginning April 1, 2009. The Company does not
expect SFAS No. 160 to have a significant impact on the Company’s consolidated
financial statements.
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities — an amendment of FASB Statement
No. 133.” SFAS No. 161 modifies existing requirements to include
qualitative disclosures regarding the objectives and strategies for using
derivatives, fair value amounts of gains and losses on derivative instruments
and disclosures about credit-risk-related contingent features in derivative
agreements. The pronouncement also requires the cross-referencing of derivative
disclosures within the financial statements and notes thereto. The requirements
of SFAS No. 161 are effective for the Company’s interim and annual fiscal
periods beginning on April 1, 2009. The Company does not expect SFAS No. 161
to
have a significant impact on the Company’s consolidated financial statements or
related disclosures.
Cash
and Cash Equivalents
The
Company considers all highly liquid debt instruments and other short-term
investments with an initial maturity of three months or less to be cash or
cash
equivalents. The Company maintains cash and cash equivalents with financial
institutions that exceed the limit of insurability under the Federal Deposit
Insurance Corporation. However, due to management’s belief in the financial
strength of its financial institutions, management does not believe the risk
of
keeping deposits in excess of federal deposit limits to be a material
risk.
Restricted
Cash
The
Company is required to maintain letters of credit collateralized by cash as
additional security for the performance of obligations under certain service
agreements. Restricted cash at March 31, 2008 also includes $206,397 that was
held in escrow to indemnify Sterling for possible claims that could arise in
connection with the sale of Davel’s payphones on September 7, 2007 (see Note 3).
On September 12, 2008 the remaining balance of the escrow account and accrued
interest was transferred to unrestricted cash. The cash collateral is restricted
and is not available for the Company’s general working capital needs. The
letters of credit expire at various dates through March 2010.
Revenue
Recognition
The
Company has derived a material portion of its revenues through the provision
of
local telephone, long distance, and wireless calling, and Internet access
services to subscribers. The Company recognizes revenue related to these
telecommunications services when such services are rendered and collection
is
reasonably assured; it defers revenue for services that the Company bills in
advance. Revenue related to service contracts covering future periods is
deferred and recognized ratably over the periods covered by the
contracts.
A
material amount of the Company’s revenues was also generated from the use of
Davel’s payphones. Davel derives its payphone revenue from two principal
sources: coin calls and non-coin calls. Revenue related to all calls, including
dial-around compensation and operator service revenue, is recognized in the
periods that the customers place the calls. Any variations between recorded
amounts of revenue and actual cash receipts are accounted for at the time of
receipt.
Non-coin
operator service calls are handled by independent operator service providers.
These carriers assume billing and collection responsibilities for
operator-assisted calls originating on Davel’s payphone network and pay
commissions to Davel based upon gross revenue. Davel recognizes revenue related
to operator service calls in amounts equal to the commissions that it is
entitled to receive in the periods that the services are rendered.
Davel
also recognizes revenue related to non-coin dial-around calls that are initiated
from a Company payphone in order to gain access to a specific long distance
company or to make a standard toll free call. Revenue related to such
dial-around calls is recognized initially based on estimates. The inter-exchange
carriers have historically paid for fewer dial-around calls than are actually
made and the collection period for dial-around revenue is generally four to
six
months, but can be in excess of one year. Most dial-around receivable amounts
are received early in each calendar quarter from an industry clearinghouse
organization, one quarter in arrears. For example, Davel was entitled to receive
its dial-around receipts related to the quarter ended June 30, 2007 in October
2007, allowing it to adjust the second calendar quarter dial-around receivable
amount included in the balance sheet at September 30, 2007 based on the actual
collection experience. Davel’s estimate of revenue for the most recent calendar
quarter is based on the historical analysis of calls placed and amounts
collected. These analyses are updated on a periodic basis. Recorded amounts
of
revenue may be adjusted based on actual receipts and/or the subsequent revision
of prior estimates. Total
dial-around revenue amounts for the three and six months ended September 30,
2008 were $28,605 and $45,291, respectively.
The
amounts for the corresponding periods of the prior year were $931,202 and
$2,176,919, respectively.
Accounts
Receivable
The
Company conducts business and may extend credit to customers based on an
evaluation of the 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 exposure
to credit losses and maintains allowances for anticipated losses considered
necessary under the circumstances and based to a significant extent on recent
historical overall account write-off experience. The Company had allowances
for
doubtful accounts of $886,975 and $993,356 at September 30 and March 31, 2008,
respectively, relating to accounts receivable other than dial-around
compensation amounts, which were included in assets of companies held for sale
in the accompanying consolidated balance sheets.
Dial-around
receivable amounts included in the condensed consolidated balance sheets at
September 30, 2008 and March 31, 2008 were $29,605 and $45,692, respectively.
During all periods presented, credit losses, to the extent identifiable, were
generally within management’s overall expectations.
Notes
Receivable
Notes
Receivable consist of a $2,000,000 note receivable from USA, as amended, with
a
remaining principal balance of $859,128 and $1,000,000 at September 30 and
March
31, 2008, respectively, and $1,865,000 of notes receivable that the Company
received in connection with Gobility’s sale of the Longmont, Colorado wireless
network (see Note 3). In July 2008, the Company revised the payment terms
relating to the USA note and received principal and interest payments totaling
$200,000. The remaining principal balance and accrued interest at 12% per annum
is due on December 29, 2008. This note and accrued interest of $19,187 and
$19,852 at September 30 and March 31, 2008, respectively, are included in
current assets of continuing operations in the accompanying condensed
consolidated balance sheets.
The
$1,865,000 of notes receivable from DHB Networks, LLC (“DHB”), the purchaser of
the Longmont, Colorado wireless network, consist of four notes. The notes
generally provide for quarterly payments of interest only at 9% for the first
three years beginning September 1, 2008 plus equal quarterly principal payments
of $141,050 commencing March 1, 2011. The notes and any unpaid interest are
due
in March 2015. The notes are guaranteed by the chief executive officer and
principal owner of DHB.
In
October 2008, the Company revised the payment terms on the DHB notes and
received or will receive $12,500 towards the interest that was due in September
2008. The remaining unpaid interest accrued through November 30, 2008 will
be
capitalized. Thereafter, interest is payable quarterly beginning February 28,
2009 at a new rate of 10% per annum. The maturity and principal payments dates
have not changed. The Company also wrote down the carrying value of the notes
by
$300,000 in the quarter ended September 30, 2008 in recognition of the current
financial condition of DHB. These notes receivable and accrued interest are
included in assets of continuing operations in the condensed consolidated
balance sheets.
Fair
Value of Financial Instruments
The
carrying amounts reported in the condensed consolidated balance sheets for
cash
and cash equivalents, accounts receivable and accounts payable approximate
fair
value because of the immediate or short-term maturity of these financial
instruments.
Deferred
Financing Fees
The
Company incurred financing costs of $177,114 in connection with refinancing
of
the secured convertible debenture issued to YA Global on June 30, 2008. These
costs, representing primarily legal and other fees to be paid in cash, are
included in other assets of continuing operations at September 30, 2008 and
will
be amortized to interest expense through the maturity date of the debentures
on
May 1, 2009. Total financing fees charged to interest expense of continuing
operations for the three and six months ended September 30, 2008 was $53,134.
At
September 30, 2008, the unamortized balance of deferred financing fees included
in the condensed consolidated balance sheets was $123,980.
Accounting
for Stock Options and Warrants
Effective
April 1, 2006, the Company adopted SFAS 123R, “Share Based Payments,” relating
to stock-based compensation issued to employees, including options, warrants,
restricted share plans, performance-based awards, stock appreciation rights,
stock purchase plans and other stock-based awards. Under SFAS 123R, compensation
cost is recorded in the financial statement based on the fair value of the
award
on the date of grant and is recognized as compensation expense over the period
in which the award vests. The Company uses the Black-Scholes pricing model
to
determine the fair value of options and warrants.
Property,
Plant and Equipment
Depreciation
expense is computed using the straight-line method during the estimated useful
life of each asset. The amounts of depreciation related to continuing operations
and included in the condensed consolidated statements of operations for the
three and six months ended September 30, 2008 were $45,456 and $90,913,
respectively. The amounts for the corresponding periods of the prior year were
approximately $406,746 and $993,020 respectively.
In
accordance with FASB Statement No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, furniture and equipment and other long-lived
assets included in assets of companies held for sale are not depreciated or
amortized while such assets are classified as held for sale.
Advertising
Contracts
CloseCall
uses print, signage, radio and television advertising to market services to
customers of certain local professional sports teams. Advertising programs
include the use of long-term contracts. Upon the negotiation of such a contract,
the Company records the cost of the advertising program as an asset, and
amortizes the balance to operating expenses over the life of the contract.
At
September 30 and March 31, 2008, assets of companies held for sale included
prepaid expenses of $2,317 and $137,749, respectively, related to such
contracts. The corresponding contract liability is paid typically in
installments. At September 30 and March 31, 2008, liabilities of companies
held
for sale included accounts payable and accrued expenses of $36,985 and $171,375,
respectively, that are payable under such contracts.
Goodwill
and Long-Lived Assets
At
September 30 and March 31, 2008, $20,531,278 of goodwill is included in assets
of companies held for sale in the Company’s condensed consolidated balance
sheets. Generally accepted accounting principles require that the Company assess
the fair value of goodwill amounts relating to acquired entities at least
annually in order to identify any impairment in the values. However, on a
quarterly basis, management is alert for events or circumstances that would
indicate that, more likely than not, the fair value amounts of goodwill for
reporting segments have been reduced below the corresponding carrying amounts.
If there is a determination that the fair value of an acquired entity is less
than the corresponding net assets amount, including goodwill, an impairment
loss
would be identified and recorded at that time. As of March 31, 2008, the Company
evaluated the carrying value of goodwill and determined that no adjustment
for
impairment was required. There were also no asset impairment charges recorded
in
the three and six months ended September 30, 2008 and 2007.
Customer
Location Contracts
Intangible
assets previously included amounts paid to property location owners in
connection with payphone installation contracts, which were sold in conjunction
with the sale of a majority of Davel’s payphones in September 2007. These other
assets were amortized on a straight-line basis over their estimated useful
lives
based on contract terms (generally 5 years). Amortization expense related to
location contracts of $84,778 and $215,685 is included in operating costs and
expenses of continuing operations for the three and six months ended September
30, 2007, respectively.
Accounts
Payable and Accrued Liabilities
The
accounts payable and accrued liabilities of continuing operations consisted
of
the following at the indicated dates:
|
|
September
30,
2008
|
|
March
31, 2008
|
|
Accounts
payable
|
|
$
|
716,915
|
|
$
|
768,175
|
|
Accrued
restructuring costs
|
|
|
100,218
|
|
|
100,218
|
|
Accrued
compensation
|
|
|
267,188
|
|
|
252,874
|
|
Accrued
interest expense
|
|
|
132,453
|
|
|
167,371
|
|
Other
accrued liabilities
|
|
|
1,848,189
|
|
|
1,888,399
|
|
Totals
|
|
$
|
3,064,963
|
|
$
|
3,177,037
|
|
Income
Taxes
The
Company has adopted the provisions of SFAS No. 109, “Accounting for Income
Taxes”. The statement requires an asset and liability approach for financial
accounting and reporting for income taxes, and the recognition of deferred
tax
assets and liabilities for the temporary differences between the financial
reporting bases and tax bases of the Company’s assets and liabilities at enacted
tax rates expected to be in effect when such amounts are realized or settled.
Because of its history of losses, the Company has not had any material federal
or state income tax obligations. No provision for income taxes was required
in
the three months and six months ended September 30, 2008 and 2007 because of
net
operating loss carryforwards generated by the Company.
NOTE
3-DISPOSITION
OF BUSINESSES
Sale
of the ISP and CLEC Businesses
On
June
30, 2007, the Company entered into a Purchase Agreement with USA, pursuant
to which USA agreed to acquire all of the outstanding shares of CloseCall,
AFN,
DFW and InReach. The USA Agreement was subsequently amended to extend the
closing date for the sale of the ISP Business, which was completed on July
18,
2007. The closing for the CLEC Business was expected to occur following receipt
of the necessary regulatory approvals. Until the closing, USA agreed to manage
the CLEC Business pursuant to a management agreement entered into with USA
(the
“USA Management Agreement”).
On
January 14, 2008, the Company received notice from USA purporting to terminate
the USA Agreement with respect to the sale of the CLEC Business, but provided
that USA remained interested in discussing terms upon which it would complete
the purchase. The Company has been in communications with USA and disputes
the
validity of the claims alleged for the purported termination, which include
the
alleged failure to obtain certain regulatory and contractual approvals and
the
alleged breach of certain representations and warranties set forth in the USA
Agreement. The Company believes the purported termination was in bad faith
and
intends to pursue any and all legal and equitable remedies available to it
against USA. Despite the on-going discussions with USA, the Company re-assumed
operating control of AFN and CloseCall and terminated the agreement to sell
the
CLEC Business to USA in the fourth quarter of the fiscal year ended March 31,
2008.
Under
the
USA Agreement, the total purchase price for the ISP and CLEC Businesses was
$27,663,893 consisting of $21.9 million in cash and 8,100 shares of convertible
preferred stock of USA (the “USA Preferred”) with a fair value of $5,763,893.
The 8,100 shares of USA Preferred, received as an advanced payment towards
the
purchase of the CLEC Business, are convertible into 7.5% of the outstanding
common stock of USA and could be redeemed for $8.1 million in cash, at the
option of the Company, anytime following the third anniversary of the closing
of
the CLEC Business (the “Put Option”). Prior to that time, USA had the option to
redeem all of the unconverted USA Preferred for $12,960,000. The fair value
of
the USA preferred was originally based on the present value of the $8.1 million
Put Option discounted at an interest rate of 10%. Through December 31, 2007,
the
discount on the USA preferred of $2,336,107 was being accreted to income through
the estimated date the Put Option was to become exercisable using the interest
method. During the second and third quarters of the fiscal year ended March
31,
2008, the Company recorded and included as an offset to interest expense
$244,198 of income relating to the discount. Following the termination of the
sale of the CLEC Business to USA in the fourth quarter of fiscal 2008, the
value
of the USA Preferred was considered impaired. The Company discontinued the
accretion of the discount and wrote-off the carrying value of the USA Preferred
against the liability recorded for the advanced proceeds from USA. The net
difference in carrying values of $56,442 was recorded as a reduction in the
loss
on sale of discontinued operations in the fourth quarter of the fiscal year
ended March 31, 2008.
Upon
the
closing of the sale of the ISP Business on July 18, 2007, the Company received
$2.5 million in cash, a $2 million note, which was originally payable upon
the
earlier of the closing of the CLEC Business or January 1, 2008, and the 8,100
shares of USA Preferred. The remaining cash proceeds of $17,400,000 were to
be
paid by USA at the time of the CLEC closing. Until that time, USA was required
to cause the managed companies to make monthly payments of interest on this
balance at a rate of 7.75% directly to YA Global, two months in arrears. The
Company received the monthly payments due through January 1, 2008, which
payments have been applied to principal and interest on the Secured Debenture
and Amended Debenture. The Company initially recorded these payments as an
offset to interest expense in the amount of $616,985 through December 31, 2007.
In the fourth quarter of fiscal year 2008, the Company reversed this amount
that
was previously credited to interest expense.
On
January 3, 2008, the Company entered into an amendment to the $2,000,000
promissory note due from USA. USA made payments of $500,000 each on January
4
and January 11, 2008 with the remaining balance of $1,000,000, together with
accrued interest at the rate of 7.75%, due on the earlier of the date of the
closing of the sale of the CLEC Business or March 31, 2008. Of the $1,000,000
of
payments, the Company received $125,000 and the remaining $875,000 was used
to
pay principal and interest on the convertible debentures due to YA Global.
USA
did not pay the remaining principal balance of $1,000,000 or the accrued
interest due on March 31, 2008. In July 2008, the Company revised the payment
terms relating to the USA note and received principal and interest payments
totaling $200,000. The remaining principal balance and accrued interest at
12%
per annum is due on December 29, 2008.
The
loss
incurred in connection with the sale of the ISP Business, before the adjustment
for the termination of the sale of the CLEC Business in the fourth quarter
of
fiscal year 2008, of $2,481,227 is included in the loss on sale of discontinued
operations in the three months and six months ended September 30,
2007.
Sale
of the Wireless Networks Business
On
July
8, 2007, the Company entered into a Purchase Agreement with Gobility, pursuant
to which Gobility acquired all of the outstanding shares of Neoreach, and
indirectly Kite Networks, and all of the outstanding membership interests in
Kite Broadband. The purchase price was $2.0 million, paid in the form of a
debenture that is convertible into shares of Gobility common stock (the
“Gobility Debenture”) at a rate of $5.00 per share, or such lower price, if
Gobility issues common stock or securities convertible into common stock at
a
price that is less than $5.00 per share. Unless converted, the Gobility
debenture is due July 8, 2009 with annual interest at 8%.
Under
the
terms of the Gobility Debenture, Gobility was required to raise at least $3.0
million in cash no later than August 15, 2007. Prior to closing, the Company
received a reliance letter from Wingfield Corporation, N.V. (“Wingfield”), a
Brussels, Belgium-based merchant bank, stating that such financing was
forthcoming. To date, Gobility has not obtained financing from Wingfield or
any
other source and is in default with respect to the Gobility Debenture. As a
result of this default, the Company has the right but not the obligation to
repurchase the Wireless Networks Business with the surrender of the Gobility
Debenture and the payment of nominal additional consideration. In addition
to
its inability to obtain the required financing, Gobility has been unable to
fund
its operations including the payment of amounts due under a series of capital
equipment leases and other equipment-related obligations. Because the equipment
leases and other equipment purchases were co-signed by Mobilepro, if Kite
Networks fails to pay the leases, absent any other defenses it may have, the
Company could be obligated to pay the debt. As a result of these defaults by
Gobility, the Company has written off the $2.0 million Gobility Debenture and
has recorded the capital leases and equipment-related obligations as liabilities
in connection with the sale. The Company has also recorded the certificates
of
deposits securing the lease obligations.
The
Company is currently cooperating with Gobility in its efforts to sell the assets
of Kite Networks in order to pay off the obligations relating to the leases
and
other equipment. In September 2007, the Company was required to make lease
payments totaling $64,165. On March 10, 2008, Gobility sold the assets of the
wireless network in Longmont, Colorado, and the Company received the related
proceeds in the form of promissory notes from the purchaser totaling $1,800,000.
In addition, the Company entered into a forbearance agreement with the principal
equipment vendor and agreed to pay the $1,591,978 equipment obligation, with
interest at the prime rate, and a related lease obligation in the principal
amount of $149,749. In March 2008, the Company also satisfied the terms of
one
of the leases relating to the Tempe, Arizona wireless network with an aggregate
principal balance of $318,595, plus accrued interest, by paying $93,000 in
cash
and having the $250,000 certificate of deposit that secured the lease applied
thereto. As a result of the sale to Gobility and these transactions, the Company
recorded a net loss on the sale of its Wireless Networks Business of $3,433,843
that was reported in the loss on sale of discontinued operations for the fiscal
year ended March 31, 2008. Of this amount, the Company recognized a loss of
$5,036,289 in the second fiscal quarter and a $1,602,446 reduction in the loss
relating to the sale of the Longmont, Colorado wireless network that was
recorded in the fourth quarter of the fiscal year ended March 31, 2008.
On
August
1, 2008, the Company executed a promissory note and release with Data Sales
Co.,
Inc. (“Data Sales”) in the principal amount of $330,000. The note is in full
satisfaction of a $1,231,138 lease obligation for which the Company was a
co-borrower with Kite Networks and reflects the impact of a sale of certain
uninstalled wireless equipment by Data Sales to an unaffiliated third party
purchaser that was consummated in July 2008. The Company recorded a gain of
$901,138, or $0.0011 per share, in its fiscal second quarter as a result of
the
transaction.
The
Company continues to cooperate with Gobility in its efforts to sell the
remaining assets of Kite Networks. In the event Gobility is unsuccessful in
its
attempts to sell the remaining assets and satisfy the lease obligations, the
Company, subject to any defenses it might have, could be required to make the
payments on the remaining leases. At September 30, 2008, the amounts recorded
on
the balance sheet as liabilities of companies held for sale relating to the
capital lease obligations, accrued interest, and the note payable and equipment
obligation were $2,421,632, $368,703 and $1,768,511, respectively. The Company
has also recorded the certificates of deposits securing the lease obligations
in
the aggregate amount of $937,664 as assets of companies held for sale in the
accompanying consolidated balance sheets.
Discontinued
Operations
The
Company has sold its Wireless Networks and ISP Businesses and continues to
market its CLEC Business. Revenues, operating costs and expenses, and other
income and expense attributable to the Wireless Networks, ISP and CLEC
Businesses have been aggregated to a single line, loss from discontinued
operations, in the condensed consolidated statements of operations for all
periods presented. The Company has no income taxes due to operating losses
incurred for tax purposes. No interest expense, other than amounts relating
to
the capital leases or other debt recorded by the discontinued businesses, has
been allocated to discontinued operations.
The
revenues and the net income (loss) of discontinued operations were as follows:
|
|
Three
Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
Revenues
|
|
$
|
8,054,407
|
|
$
|
9,779,097
|
|
Income
(loss) from discontinued operations before disposal
|
|
$
|
204,016
|
|
$
|
(219,783
|
)
|
Gain
(loss) on disposal
|
|
|
901,138
|
|
|
(7,517,516
|
)
|
Income
(loss) from discontinued operations
|
|
$
|
1,105,154
|
|
$
|
(7,737,299
|
)
|
|
|
Six
Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
Revenues
|
|
$
|
15,710,594
|
|
$
|
24,789,298
|
|
Income
(loss) from discontinued operations before disposal
|
|
$
|
485,926
|
|
$
|
(1,935,274
|
)
|
Gain
(loss) on disposal
|
|
|
901,138
|
|
|
(7,517,516
|
)
|
Income
(loss) from discontinued operations
|
|
$
|
1,387,064
|
|
$
|
(9,452,790
|
)
|
Assets
and liabilities associated with the Wireless Networks, ISP and CLEC Businesses
have been segregated from continuing operations and presented separately as
assets of companies held for sale and liabilities of companies held for sale
in
the condensed consolidated balance sheets at September 30 and March 31, 2008.
The major classifications of such assets and liabilities were as follows:
|
|
September
30,
2008
|
|
March
31,
2008
|
|
Cash
and cash equivalents
|
|
$
|
827,104
|
|
$
|
1,063,721
|
|
Restricted
cash
|
|
|
1,294,502
|
|
|
1,425,165
|
|
Accounts
receivable, net
|
|
|
2,964,261
|
|
|
2,718,933
|
|
Prepaid
expenses and other current assets
|
|
|
951,873
|
|
|
1,125,926
|
|
Fixed
assets, net
|
|
|
540,123
|
|
|
539,047
|
|
Goodwill,
net of impairment
|
|
|
20,531,278
|
|
|
20,531,278
|
|
Customer
contracts and relationships, net
|
|
|
524,111
|
|
|
508,424
|
|
Other
assets
|
|
|
89,900
|
|
|
108,647
|
|
|
|
|
|
|
|
|
|
Assets
of companies held for sale
|
|
$
|
27,723,152
|
|
$
|
28,021,141
|
|
Accounts
payable and accrued expenses
|
|
$
|
3,618,734
|
|
$
|
3,675,162
|
|
Deferred
revenue
|
|
|
623,832
|
|
|
701,638
|
|
Notes
payable and capital lease and equipment obligations
|
|
|
4,316,810
|
|
|
5,286,344
|
|
Liabilities
of companies held for sale
|
|
$
|
8,559,376
|
|
$
|
9,663,144
|
|
Sale
of Payphones
The
Company completed a series of transactions to sell a majority of Davel’s
payphones in order to provide cash for operating purposes and to retire
additional amounts owed to YA Global under the convertible debentures. On June
30, 2007, we completed the sale of approximately 730 operating payphones to
an
unaffiliated payphone operator and received over $200,000 in cash proceeds.
A
gain in the amount of $10,640 was recognized in connection with this transaction
in the quarter ended June 30, 2007.
On
September 7, 2007, Davel sold approximately 21,405 payphones to Sterling. Under
the terms of the sale agreement, the Company received $50,000 in cash and
$1,839,821 in cash was paid to YA Global to reduce the amount of principal
and
interest owed under the outstanding convertible debentures. Pursuant to the
sale
agreement, proceeds in the amount of $850,832 were used for the direct payment
of certain related liabilities and broker fees and $1,200,000 of proceeds was
used for the funding of escrow accounts established for the payment of key
vendor obligations and indemnification claims. Sterling also assumed certain
other liabilities of Davel. Effective September 30, 2007, Davel sold an
additional 300 payphones for approximately $85,000. After these sales, Davel’s
remaining operations have been significantly reduced. Davel’s remaining
operations are being continued and Davel is pursuing the recovery of certain
claims including the AT&T, Sprint and Qwest claims described in Note
8. A
net
loss of $2,800,206 was included in the loss from continuing operations in the
second quarter of the fiscal year ended March 31, 2008 in connection with these
transactions.
NOTE
4-INVESTMENTS
During
the year ended March 31, 2005, the Company provided certain management services
to two emerging technology firms. As consideration, the Company received a
non-affiliate equity interest in each firm. These investments were recorded
in
the amounts of $300,000 and $150,000, respectively, approximating the value
of
the services provided. The shares of common stock held by the Company are
considered to be available-for-sale securities. If a decline in the fair value
of these securities is judged by management to be other than temporary, the
cost
basis of the securities would be written down to fair value at that time. During
the second and third quarters of the fiscal year ended March 31, 2008, the
Company received $277,426 and $84,077, respectively, from the sale of a portion
of the shares and wrote down the carrying value of the remaining shares. The
Company recognized a loss of $93,094 in the second quarter and a gain of $11,507
in the third quarter of fiscal 2008 relating to these transactions. The carrying
value of the common stock included in other assets of continuing operations
at
March 31, 2008 was $6,910. In the three months ended June 30, 2008, the Company
wrote off the remaining carrying value of the shares.
The
Company received advanced proceeds, primarily in the form of an investment
in
8,100 shares of the USA Preferred, in connection with the sale of the ISP and
CLEC Businesses in the second quarter of the fiscal year ended March 31, 2008
(see Note 3). The fair value of the USA Preferred of $5,763,893, net of a
$2,336,107 discount, was initially recorded and portions of the discount in
the
amounts of $96,465 and $147,733 were accreted to income in the second and third
quarters of fiscal year 2008, respectively. Following the termination of the
sale of the CLEC Business to USA in the fourth quarter of the 2008 fiscal year,
the value of the convertible preferred stock was considered impaired and was
written-off against the liability recorded for the advance from USA. The
difference between the carrying values of the asset and liability of $56,442
was
recorded as a reduction in the loss on sale of discontinued operations reported
in the consolidated statements of operations during the fourth quarter of the
fiscal year ended March 31, 2008.
On
January 5, 2008, the Company entered into an agreement to purchase 2,666,667
shares of the outstanding common stock of Microlog Corporation (“Microlog”) from
TFX Equities, Inc. (“TFX”) for $1,000 in cash (the “Microlog Agreement”). The
Company also received from TFX $2,000,000 of 10% subordinated notes, due from
Microlog on January 5, 2011, that are convertible into Microlog common stock
at
a price of $0.10 per share, warrants to purchase 100 shares of Series A
convertible preferred stock of Microlog, and warrants to purchase 750,000 shares
of Microlog common stock at an exercise price of $0.10 per share in connection
with the Microlog Agreement. In addition, the Company invested $250,000 in
cash
directly in Microlog in exchange for a 10% subordinated note with a face value
of $250,000, due January 5, 2011, that is convertible into Microlog common
stock
at a price of $0.10 per share.
The
Company currently owns approximately 30% of the outstanding common stock of
Microlog and accounts for its investment using the equity method of accounting.
If all of the warrants and convertible securities issued by Microlog were
exercised or converted to common stock, the Company would own approximately
70%
of the outstanding common stock on a fully diluted basis. Microlog is a
Germantown, MD based government contractor that develops, sells and installs
software for integrated voice response and web-based customer contact systems
in
the healthcare industry. Microlog’s common stock is traded on the “Pink Sheets”
under the symbol “MLOG”. The market value of the Company’s investment in the
common stock of Microlog at September 30, 2008 was $453,333.
In
January 2008, the Company also entered into a management agreement to provide
financial, legal and administrative services to Microlog at a rate of $8,800
per
month. The accompanying consolidated statements of operations include revenues
of $26,400 and $52,800 related to this management agreement and $56,250 and
$112,500 of interest income related to notes receivable from Microlog for the
three months and six months ended September 30, 2008, respectively. There were
no comparable amounts for the corresponding periods of the prior year. At
September 30 and March 31, 2008, the carrying value of the investment and
amounts due from Microlog of $321,884 and 256,917, respectively, are included
in
investments and other assets of continuing operations in the accompanying
condensed consolidated balance sheets.
NOTE
5-DEBT
Debt
Maturities
A
summary
of the balances owed under the debentures and other notes payable of continuing
operations at September 30, 2008 and March 31, 2008 was as follows:
|
|
September
30,
|
|
March
31,
|
|
|
|
2008
|
|
2008
|
|
Convertible
Debenture issued to YA Global
|
|
$
|
13,286,375
|
|
$
|
-
|
|
Amended
Debenture issued to YA Global
|
|
|
-
|
|
|
11,006,823
|
|
Secured
Debentures issued to YA Global
|
|
|
-
|
|
|
2,162,121
|
|
Other
notes payable
|
|
|
112,000
|
|
|
115,000
|
|
|
|
|
13,398,375
|
|
|
13,283,944
|
|
Less:
Unamortized debt discounts
|
|
|
(7,273
|
)
|
|
(30,208
|
)
|
Less:
Amounts due within one year
|
|
|
(13,391,102
|
)
|
|
(13,253,736
|
)
|
Long-term
portion of debt
|
|
$
|
-
|
|
$
|
-
|
|
Based
on
the current terms of the YA Global debenture and other notes payable, as
amended, the entire balance of debt at September 30, 2008 will become due for
payment in the twelve-month period ending September 30, 2009.
The
Convertible Debenture Agreement
Effective
June 30, 2008, the Company issued a secured convertible debenture to YA Global
(the “Convertible Debenture’) with an aggregate principal balance of
$13,391,175, replacing the Amended Debenture and the Secured Debenture described
below. The Convertible Debenture provides for monthly payments of interest
at
12% with the remaining principal balance due on May 1, 2009. Accordingly, the
entire principal balance of the Convertible Debenture has been classified as
a
current liability at September 30, 2008 in the Company’s condensed consolidated
balance sheets. YA Global may convert any portion of the unpaid principal and
interest into shares representing up to 4.99% of the Company’s common stock at
the lesser of $0.04973 per share or the average of the two lowest volume
weighted average prices during the five trading days immediately preceding
the
conversion date. If certain conditions are met, the Company has the option
to
pay up to 4.5% of the total interest due in common stock at the applicable
conversion price on the day immediately prior to the interest payment date.
The
conversion price is subject to adjustment if the Company is deemed to have
issued shares at a price that is lower than the effective conversion price
on
the date such shares are issued. The Convertible Debenture is secured by
substantially all of the assets of the Company.
During
the three months ended September 30, 2008, the Company issued 76,942,857 shares
of common stock in satisfaction of $104,800 in principal relating to the
Convertible Debenture. Subsequent to September 30, 2008, YA Global converted
an
additional $36,075 of principal into 85,500,000 shares of common stock. Such
shares are tradable by YA Global pursuant to Rule 144 of the Securities Act
of
1933 (the “Securities Act”).
In
connection with the issuance of the Convertible Debenture, the Company granted
to YA Global a seven-year warrant to purchase 25,000,000 shares of its common
stock at an exercise price of $0.04973 per share, which expires on June 30,
2015. In addition, the outstanding warrants previously granted to YA Global
to
purchase 15,000,000 share of common stock at $0.20 per share and 10,000,000
shares of common stock at $0.174 per share were repriced and are now exercisable
at a price of $0.04973 per share. The Convertible Debenture was recorded in
the
accounts net of an unamortized debt discount of $10,390 reflecting the fair
value of the related warrants on the date of issuance or repricing. The discount
amounts are being amortized as charges to interest expense over the remaining
term of the Convertible Debenture.
The
Secured Debenture Agreement
On
August
28, 2006, the Company entered into a financing agreement with YA Global that
provided $7.0 million in debt financing with the proceeds received in a series
of four closings (the “Secured Debenture Agreement”). At each closing, the
Company issued YA Global a 7.75% secured convertible debenture in the gross
amount for the closing, convertible into shares of common stock at $0.174 per
share. The Company received cash proceeds of $6,495,000, net of financing fees
of $505,000. In addition, YA Global was issued warrants to purchase 10,000,000
additional shares of common stock that expire on various dates in 2011 at an
exercise price of $0.174 per share, as amended. As set forth above, the warrants
were repriced on June 30, 2008 and are now exercisable at a price of $0.04973
per share.
The
debentures issued pursuant to the Secured Debenture Agreement were recorded
in
the balance sheet net of unamortized debt discounts reflecting the fair market
values of the debentures on the dates of issuance after allocating a like amount
of proceeds to the related warrants. The discount amounts were amortized as
charges to interest expense over the terms of the related debentures.
Under
conditions similar to those included in the Amended Debenture (see discussion
below), the Company had the right to make any and all such principal and
interest payments by issuing shares of its common stock to YA Global with the
amount of such shares based upon the lower of $0.174 per share or 93% of the
average of the two lowest daily volume weighted average per share prices of
its
common stock during the five days immediately following the scheduled payment
date. Through March 31, 2007, the Company issued 42,598,498 shares of its common
stock in satisfaction of $1,500,000 in principal and $198,654 in accrued
interest. From April 1, 2007 through May 10, 2007, the Company issued an
additional 78,091,157 shares of its common stock in satisfaction of $1,849,343
in principal and $47,743 in accrued interest. The Company used cash to pay
$29,836 in principal and $6,614 in interest on May 10, 2007. On July 18, 2007,
the Company also paid $145,821 in principal and $265,678 in accrued interest
from the proceeds of sale of the ISP Business. On September 7, 2007 and October
19, 2007, the Company paid an additional $347,009 in principal and $68,493
of
interest from the proceeds of sale of Davel’s payphones. During the quarter
ended December 31, 2007, the Company paid $42,117 in principal and $38,128
of
interest from the monthly interest payments received from USA on the $17.4
million cash balance due at the time of the CLEC closing. In January 2008,
the
Company paid $865,393 of principal and $26,521 of interest from the payments
received from USA relating to the $2,000,000 note receivable and the monthly
interest payment.
Under
the
terms of the Secured Debenture Agreement, as amended through January 16, 2007,
the Company agreed to make weekly principal payments of at least $125,000 in
satisfaction of the remaining principal commencing February 1, 2008, with
interest on the outstanding principal balance payable at the same time. The
Company made a partial payment of $114,530 toward the amounts due on the Secured
Debenture and Amended Debenture on February 1, 2008. The Company also made
partial payments of interest on the debentures aggregating $200,000 on May
2 and
June 4, 2008. On June 30, 2008, the Company issued the Convertible Debenture
in
exchange for the Secured Debenture and Amended Debenture as described above.
The
Amended Debenture
On
June
30, 2006, the Company entered into an amended secured convertible debenture
in
the amount of $15,149,650 with YA Global (the “Amended Debenture”), replacing
the debenture that was previously outstanding (the “Debenture”). The Company had
the right to make any and all principal and interest payments by issuing shares
of its common stock to YA Global provided
that all
such shares may only be issued by the Company if such shares are tradable under
Rule 144 of the Securities Act, are registered for sale under the Securities
Act, or are freely tradable by YA Global without restriction. The value assigned
to such shares was based upon the lower of $0.275 per share or 93% of the
average of the two lowest daily volume weighted average per share prices of
the
Company’s common stock during the five days immediately following the scheduled
payment date. YA Global had the right to convert all or any part of the unpaid
principal and accrued interest owed under the Amended Debenture into shares
of
our common stock at a conversion price of $0.275 per share. The Amended
Debenture was secured by a blanket lien on our assets. The Amended Debenture
bore interest at an annual rate of 7.75%.
In
connection with the issuance of the Debenture, the Company issued to YA Global
a
five-year warrant that expires on May 13, 2010, as modified, to purchase
15,000,000 shares of its common stock at an exercise price of $0.20 per share
(the “Warrant”). As indicated above, the Warrant was repriced on June 30, 2008
and is now exercisable at a price of $0.04973 per share. In connection with
the
issuance of the Amended Debenture, YA Global was issued an additional warrant,
as modified, to purchase 13,750,000 shares of the Company’s common stock at a
purchase price of $0.20 per share (the “Additional Warrant”). This Additional
Warrant expired in November 2007.
The
face
amount of the Amended Debenture was recorded initially in the balance sheet
net
of unamortized debt discount of $319,000. During the quarter ended December
31,
2006, the fair value of the Additional Warrant was recalculated based on its
reset terms resulting in an increase to such value of $192,500. The net amount
of the Amended Debenture reflects the fair market value after allocating
additional proceeds in the amount of $192,500 to the Additional Warrant. The
increased discount on the Amended Debenture was amortized as a charge to
interest expense over the term of the Amended Debenture.
Through
March 31, 2007, the Company issued 50,578,702 shares of its common stock in
satisfaction of $2,500,000 in principal and $681,827 in accrued interest. On
May
10, 2007, the Company issued 4,510,933 shares of its common stock in
satisfaction of $70,822 in principal. On July 18, 2007, the Company also paid
$247,005 in principal and $216,181 in accrued interest from the proceeds of
sale
of the ISP Business. On September 7, 2007, the Company paid an additional
$1,325,000 in principal and $116,853 of interest from the proceeds of sale
of
Davel’s payphones. During the quarter ended December 31, 2007, the Company paid
$196,313 of interest from the monthly interest payments received from USA on
the
$17.4 million cash balance due at the time of the CLEC closing. In January
2008,
the Company paid $98,157 of interest from the payments received from USA
relating to the $2,000,000 note receivable and the monthly interest
payment.
Under
the
terms of the Amended Debenture, as revised through January 16, 2008, the Company
agreed to make weekly scheduled principal payments of at least $250,000
commencing February 1, 2008 with interest on the outstanding principal balance
payable at the same time. The Company made a partial payment of $114,530 toward
the amounts due on the Secured Debenture and Amended Debenture on February
1,
2008. The Company also made partial payments of interest on the debentures
aggregating $200,000 on May 2 and June 4, 2008. On June 30, 2008, the Company
issued the Convertible Debenture in exchange for the Secured Debenture and
Amended Debenture as described above.
Availability
of Registered Shares
The
Company filed a registration statement on Form S-3 on October 12, 2006 covering
the resale of a total of 404,474,901 shares of the Company’s common stock by
various selling stockholders, including 55,089,635 shares that may be issued
to
YA Global under the Amended Debenture, 120,689,655 shares related to convertible
debentures issued under the Secured Debenture Agreement, and 38,750,000 shares
related to the corresponding stock warrants. This registration statement was
declared effective by the SEC, enabling the Company’s use of common stock to
make installment payments to YA Global under the various debentures. As of
May
10, 2007, the Company has issued all of the approximately 175,779,000 shares
covered by the registration statement relating to the convertible debentures.
At
September 30, 2008, the total principal balance payable to YA Global under
the
Convertible Debenture was $13,286,375.
The
Debentures - Interest Expense
For
the
three and six months ended September 30, 2008, the amounts of interest expense
related to the debentures issued to YA Global, and included in the accompanying
condensed consolidated statements of operations based on the stated interest
rates, were $409,203 and $664,063, respectively. The amounts for the
corresponding periods of the prior year were $289,909 and $611,105,
respectively.
Interest
expense amounts included in the accompanying condensed consolidated statements
of operations for the current and prior year periods also included total debt
discount amortization related to the debentures issued to YA Global.
Amortization amounts were $3,117 and $33,325, respectively, for the three months
and six months ended September 30, 2008. The amounts for the corresponding
periods of the prior year were $38,152 and $193,841, respectively. Interest
expense also included $53,134 for amortization of deferred financing fees
related to the Convertible Debenture for both the three months and six months
ended September 30, 2008. There was no comparable expense in the corresponding
periods of the prior year.
The
discounts provided to YA Global in connection with the issuance of shares of
common stock in satisfaction of principal and interest payments due under the
convertible debentures were charged to interest expense. The amount of such
interest expense included in both the three months ended June 30, 2007 and
the
six months ended September 30, 2007 was $148,550.
Notes
Payable to YA Global
In
May
2007, the Company borrowed $1,100,000 from YA Global under a one-year promissory
note with annual interest at a rate of 12% for the first six months of its
term
and an annual rate of 15% thereafter. This promissory note and the related
accrued interest were repaid in July 2007 from the proceeds of sale of the
ISP
Business. Interest expense was $7,223 and $25,315 for the three months and
six
months ended September 30, 2007.
Capital
Leases of Discontinued Operations
The
Company remains the co-obligor on certain capital leases and equipment
obligations of Kite Networks that were assumed by Gobility under the terms
of
the Gobility Agreement. The lease terms range from 24 to 36 months. As a result
of Gobility’s default under the Gobility Agreement as described in Note 3,
including their failure to make the monthly lease payments, the Company
continues to be liable for these capital leases and equipment obligations.
The
Company continues to cooperate with Gobility in its efforts to sell the
remaining assets of Kite Networks. In the event Gobility is unsuccessful in
its
attempts to sell the remaining assets and satisfy the lease obligations, the
Company could be required to make the payments on the remaining leases. As
discussed in Note 8, Harborside Investments III LLC, one of the lessors, filed
a
lawsuit against the Company to collect amounts due under its lease. Other
leasing companies could also accelerate the payment date and demand immediate
payment of the outstanding balances from the Company as a result of the default
in lease payments by Gobility. The Company could also be subject to late payment
penalties and interest at the default rate.
The
outstanding principal amounts of the capital leases, equipment obligation and
accrued interest are included in liabilities of companies held for sale at
September 30 2008 and March 31, 2008 in the accompanying condensed consolidated
balance sheets. The Company has also recorded the certificates of deposits
securing the lease obligations in the aggregate amount of $937,664, which are
available to offset a portion of the capital lease liabilities, as assets of
companies held for sale in the accompanying condensed consolidated balance
sheets. At September 30, 2008, a summary of the future scheduled payments based
on the original terms of the capital leases and the note payable, equipment
and
interest obligations were as follows:
Lease
payments due in the twelve months ending --
|
|
|
|
September
30, 2009
|
|
$
|
2,661,777
|
|
September
30, 2010
|
|
|
250,898
|
|
|
|
|
2,912,675
|
|
Less
- interest portions
|
|
|
(491,043
|
)
|
Capital
leases - principal portions
|
|
|
2,421,632
|
|
Equipment
obligation
|
|
|
1,451,978
|
|
Note
payable
|
|
|
316,533
|
|
Accrued
interest on capital leases and other obligation
|
|
|
368,703
|
|
Total
liabilities
|
|
$
|
4,558,846
|
|
The
equipment obligation provides for monthly principal payments of $20,000, plus
interest at the prime rate, with additional principal payments due on a
quarterly basis based on the scheduled payments due on the notes receivable
from
the purchaser of the Longmont, Colorado wireless network. The remaining unpaid
principal balance and accrued interest is due and payable on September 7, 2010.
The annual scheduled maturities of the equipment obligation are $351,477 and
$1,100,501 for the twelve months ended September 30, 2009 and 2010,
respectively.
As
discussed in Note 3, on August 1, 2008, the Company executed a promissory note
and release in the principal amount of $330,000 in full satisfaction of
$1,231,138 of the lease obligations. The note requires twenty-three monthly
payments of $10,000 and accrues interest at the rate of twelve percent. The
remaining unpaid principal balance and accrued interest is due and payable
on
July 31, 2010. The Company recorded a gain of $901,138, or $0.0011 per share,
in
its fiscal second quarter as a result of the transaction.
NOTE
6-STOCKHOLDERS’
EQUITY
Common
Stock Transactions in the Six Months Ended September 30,
2008
In
the
six months ended September 30, 2008, the Company issued 76,942,857 shares of
its
common stock in satisfaction of $104,800 in principal owed to YA Global relating
to the Convertible Debenture. Subsequent to September 30, 2008, the Company
issued 85,500,000 additional shares of common stock in satisfaction of $36,075
in principal owed to YA Global
Common
Stock Transactions in the Six Months Ended September 30, 2007
In
the
six months ended September 30, 2007, the Company issued 82,602,090 shares of
its
common stock in satisfaction of $1,920,164 in principal and $47,743 in accrued
interest owed to YA Global relating to the convertible debentures.
In
September 2007, the Company issued 742,188 shares of common stock, valued at
$118,750 in settlement of an obligation to an officer of one of the Company’s
subsidiaries.
Stock
Options and Warrants
The
stockholders of the Company have approved the issuance of 30,000,000 shares
of
common stock in connection with stock options granted pursuant to the 2001
Equity Performance Plan (the “2001 Plan”). In addition, the Company has issued
options and warrants to purchase common stock to key personnel pursuant to
specific authorization of the board of directors outside the scope of the 2001
Plan. The following tables summarize the stock option activity and the warrant
activity for the six months ended September 30, 2008:
|
|
|
|
Weighted-
Average
|
|
Stock
Options --
|
|
Number
of Options
|
|
Exercise
Price
|
|
Outstanding
- March 31, 2008
|
|
|
1,656,000
|
|
$
|
0.2200
|
|
Granted
|
|
|
-
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
$
|
-
|
|
Cancelled
|
|
|
-
|
|
$
|
-
|
|
Outstanding
- June 30, 2008
|
|
|
1,656,000
|
|
$
|
0.2200
|
|
Granted
|
|
|
-
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
$
|
-
|
|
Cancelled
|
|
|
-
|
|
$
|
-
|
|
Outstanding
- September 30, 2008
|
|
|
1,656,000
|
|
$
|
0.2200
|
|
|
|
|
|
|
|
|
|
Exercisable
- September 30, 2008
|
|
|
1,656,000
|
|
$
|
0.2200
|
|
Stock
Warrants --
|
|
|
|
Weighted-Average |
|
|
|
Number
of Warrants
|
|
Exercise
Price
|
|
Outstanding
- March 31, 2008
|
|
|
123,938,968
|
|
$
|
0.1362
|
|
Granted
|
|
|
61,850,000
|
|
$
|
0.0212
|
|
Exercised
|
|
|
-
|
|
$
|
-
|
|
Cancelled
|
|
|
(7,000,000
|
)
|
$
|
0.1593
|
|
Outstanding
- June 30, 2008
|
|
|
178,788,968
|
|
$
|
0.0757
|
|
Granted
|
|
|
-
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
$
|
-
|
|
Cancelled
|
|
|
-
|
|
$
|
-
|
|
Outstanding
- September 30, 2008
|
|
|
178,798,638
|
|
$
|
0.0757
|
|
|
|
|
|
|
|
|
|
Exercisable
- September 30, 2008
|
|
|
131,643,134
|
|
$
|
0.1011
|
|
On
May
28, 2008, the Company granted warrants to purchase 36,850,000 shares of common
stock at an exercise price of $0.0016 per share to certain officers, directors
and management personnel. The warrants expire ten years from the date of grant.
Half of the warrants to purchase 20,000,000 shares of common stock granted
to
Jay Wright, Chief Executive Officer, vest on June 30, 2009 with the other half
vesting on June 30, 2010. The warrants to purchase 1,500,000 shares of common
stock granted to Donald Sledge, Director, vest on August 31, 2010. The remaining
warrants vest on June 30, 2009. On May 28, 2008, the Company also canceled
warrants to purchase 5,000,000 shares of common stock at an exercise price
of
$0.22 per share previously granted to Mr. Wright.
Options
to purchase common stock that are awarded pursuant to the terms of the 2001
Plan
expire ten years from the date of grant. The options typically vest over two
to
three year periods according to a defined schedule set forth in the individual
stock option agreement. Certain portions of the stock options vested based
on
the achievement of individual and Company objectives. Warrants to purchase
shares of common stock vest over periods that range from twelve to thirty-six
months. The vesting of warrants awarded to certain of the Company’s officers was
set to occur upon the achievement of individual and/or Company objectives.
Warrants typically expire on the ten-year anniversary of the date of grant.
Effective
April 1, 2006, the Company adopted SFAS 123R, “Share Based Payments,” relating
to stock based compensation issued to employees. The amounts of compensation
expense included in continuing operations in the accompanying condensed
consolidated statements of operations for the three and six months ended
September 30, 2008 were $25,706 and $49,675, respectively. The amounts for
the
corresponding periods of the prior year were $434,569 and $635,122,
respectively.
The
fair
value of each option is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for grants during
the
six months ended September 30, 2008 and 2007:
|
|
2008
|
|
2007
|
|
Dividend
yield
|
|
|
-
|
%
|
|
-
|
%
|
Expected
volatility
|
|
|
70
|
%
|
|
60
|
%
|
Risk-free
interest rate
|
|
|
3.00
|
%
|
|
4.00
|
%
|
Expected
term (in years)
|
|
|
10.00
|
|
|
10.00
|
|
In
connection with the issuance of the Convertible Debenture on June 30, 2008,
the
Company granted to YA Global a seven-year warrant to purchase 25,000,000 shares
of its common stock at an exercise price of $0.04973 per share which expires
on
June 30, 2015. In addition, the outstanding warrants previously granted to
YA
Global to purchase 15,000,000 share of common stock at $0.20 per share and
10,000,000 shares of common stock at $0.174 per share were repriced and are
now
exercisable at a price of $0.04973 per share.
NOTE
7-BASIC
AND DILUTED INCOME (LOSS) PER SHARE
Basic
income (loss) per share includes no dilution and is computed by dividing net
income (loss) available to common stockholders by the weighted-average number
of
common shares outstanding for the period. Diluted income (loss) per share
includes the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
The effects of the assumed exercise of outstanding stock options and warrants
and the assumed conversion of the convertible debentures for the three month
and
six month periods presented herein were anti-dilutive as the Company incurred
losses from continuing operations in these periods.
NOTE
8-LITIGATION
In
addition to certain other litigation arising in the normal course of its
business that we believe will not materially affect our financial position
or
operating results, we were involved with the following legal proceedings during
the six months ended September 30, 2008.
1)
At the
time that we acquired Davel, there was existing litigation brought against
Davel
and other defendants regarding a claim associated with certain alleged patent
infringement. Davel was named as a defendant in a civil action captioned Gammino
v. Cellco Partnership d/b/a Verizon Wireless, et al., C.A. No. 04-4303 filed
in
the United States District Court for the Eastern District of Pennsylvania.
The
plaintiff claimed that Davel and other defendants allegedly infringed its patent
involving the prevention of fraudulent long-distance telephone calls. The
plaintiff was seeking monetary relief of at least $7,500,000. Davel did not
believe that the allegations set forth in the complaint were valid, and
accordingly, Davel filed a Motion for Summary Judgment with the United States
District Court. On October 4, 2007 the United States District Court granted
Davel’s Motion for Summary Judgment and the Court entered final judgment
dismissing Plaintiff John R. Gammino’s claims for patent infringement. On
November 1, 2007, Plaintiff filed his Notice of Appeal commencing an action
in
the United States Court of Appeal for the Federal District. In response, Davel
filed its appellate brief on February 26, 2008. Notwithstanding the pending
appellate proceeding, the parties entered into a Settlement Agreement in July
2008 terminating the litigation and providing a mutual release of claims, which
ended the pending litigation between the parties.
2)
On
April
17, 2007, the Supreme Court of the United States issued an opinion in the case
captioned Global Crossing Telecommunications, Inc. v. Metrophones
Telecommunications, Inc. on Certiorari from the United States Court of Appeals
for the Ninth Circuit (the "Ninth Circuit" and the "Metrophones Case"), No.
05-705, in which it upheld the Ninth Circuit's decision that independent
payphone providers have a private right of action to pursue recovery in federal
court from telecommunication carriers who fail to pay dial around compensation.
The ruling in the Metrophones Case impacts litigation that has been pending
in
federal district court against AT&T, Sprint and Qwest (the "Defendants") for
non-payment of dial around compensation (the “District Court Litigation”). Davel
Communications, Inc. and certain of Davel's subsidiaries (collectively, the
"Davel Entities") are directly or indirectly plaintiffs in the District Court
Litigation. Following the Supreme Court ruling in the Metrophones Case, AT&T
and Sprint filed with the United States Supreme Court a Petition for a Writ
of
Certiorari No. 07-552 seeking review of the ruling of the United States Court
of
Appeals for the District of Columbia Circuit that the plaintiffs had standing
in
the District Court Litigation. On January 4, 2008 the United States Supreme
Court granted the Petition for a Writ of Certiorari. The parties filed their
respective briefs during the first calendar quarter of 2008, with the United
States Supreme Court hearing oral arguments on April 21, 2008. On June 23,
2008,
the United Stated Supreme Court issued a ruling affirming the decision of the
United States Court of Appeals. The recent ruling by the United States Supreme
Court has permitted the District Court Litigation to move forward.
Although
the District Court Litigation has been pending since 1999, the litigation
remains in its preliminary phases. As a result, we cannot predict the likelihood
of success on the merits, the costs associated with the pursuit of the claims,
the timing of any recovery or the amount of recovery, if any. However, the
industry representing a group of independent payphone providers, including
the
Davel Entities, has prevailed in a similar Federal Communications Commission
administrative proceeding against another carrier for non-payment of dial-around
compensation using a similar methodology which was accepted and pursuant to
which the Federal Communications Commission assessed pre-judgment interest
(the
"Similar Litigation"). The Similar Litigation is being appealed to the U.S.
Court of Appeals for the District of Columbia. Based upon our methodology in
the
Similar Litigation, we estimate that the amount in controversy for the Davel
Entities against the Defendants extends well into the eight figures, but any
recovery is conditioned on, among other things (i) prevailing on the merits
at
trial; (ii) having the Davel Entities' damages model and other claims approved
in whole or in large part; (iii) prevailing on any appeals that the Defendants
may make; and (iv) the continued solvency of the Defendants. As evidenced by
the
nine years that this litigation has been in process, the Defendants have shown
an interest in stretching the duration of the litigation and have the means
to
do so. Although the Davel Entities could ultimately benefit (in an absolute
sense, although not necessarily on a present value basis) from this delay in
the
event that pre-and/or post-judgment interest (awarded at 11.25% per annum in
the
Similar Litigation) is assessed against the Defendants and the potential award
of attorneys' fees and/or other remedies (in addition to compensatory damages)
if the Davel Entities prevail, such delay will result in a deferral of the
receipt of any cash to the Davel Entities.
3) Under
the
authority granted by the Management Agreement to USA, CloseCall America filed
a
complaint in the Circuit Court for Howard County, Maryland, against Skyrocket
Communications, Inc. (“Skyrocket”) Case No. 13-C-07-70296 for breach of contract
and unjust enrichment (the “Skyrocket Litigation”). CloseCall’s claim arose from
an unpaid credit owing to CloseCall in the amount of $23,914, owed under a
terminated technical support services agreement. In response thereto, Skyrocket
filed a counter-claim alleging breach of contract and asserting damages in
the
amount of $1.5 million. In January 2008 Skyrocket filed an amended
counter-complaint asserting an additional claim for intentional
misrepresentation, seeking $5 million in actual damages and $5 million in
punitive damages. Based upon our belief that the counter-claim and amended
counter-claims are without merit, CloseCall filed a motion for summary judgment.
The Court granted CloseCall’s motion on the amended counter-claim and dismissed
Skyrocket’s claim for intentional misrepresentation. CloseCall intends to seek
reconsideration of its motion for summary judgment on the counter-claim. It
is
expected that the matter will proceed to trial during the first calendar quarter
of 2009. We believe that CloseCall has meritorious defenses to the alleged
claims and we intend to vigorously defend CloseCall in this matter.
Notwithstanding the foregoing, in the event that CloseCall is required to
litigate the matter and its defenses were not successful, we believe that any
potential exposure related to the claims alleged against CloseCall are not
likely to be material.
4)
On
or
about March 15, 2008 we were served with a summons and complaint in the Superior
Court of New Jersey in Bergen County captioned Harborside Investments III LLC
vs. MobilePro Corp. and Neoreach, Inc. The plaintiff alleges claims of breach
of
agreement and unjust enrichment arising out of an equipment lease agreement
for
wireless equipment and seeks damages in the amount of $976,361 (the “Harborside
Litigation”). On or about April 28, 2008 the Company filed its answer, separate
defenses and third party complaint against JTA Leasing Co., LLC. The Harborside
Litigation is in its initial stages. Although we believe MobilePro has
meritorious defenses to the alleged claims and we intend to vigorously defend
ourselves in this matter we cannot predict the likelihood of success in the
Harborside Litigation. The Company has recorded the liability for the estimated
principal balance relating to this capital lease obligation and the related
accrued interest which is included in liabilities of companies held for sale
in
the condensed consolidated balance sheets at September 30 and March 31, 2008.
5)
On
March 4, 2008 the Company filed a complaint in the Circuit Court of Madison
County, Mississippi against Telava Networks, Inc. d/b/a Telava Wireless/Network,
Inc. (“Telava”) asserting claims against Telava for breach of contract and
tortuous breach of contract in connection with a June 2007 purchase agreement
pursuant to which Telava agreed to purchase MobilePro’s interests in Kite
Networks and the rest of our wireless business. The Company seeks recovery
of
all available damages including, but not limited to, actual, consequential
general, expectancy and punitive damages. Telava filed a motion to remove the
case to the United States District Court for the Southern District of
Mississippi, Jackson Division after which it filed an answer denying the
substantive claims made by MobilePro and asserting certain affirmative defenses
to the claims. . On or about September 30, 2008 the parties entered into a
joint
stipulation of dismissal, without prejudice. The dismissal agreement ends the
existing litigation while preserving the Company’s right to re-assert the claims
at a later date if the Company so elects.
6)
Davel
and certain of its wholly owned subsidiaries have been plaintiffs in a complaint
filed against Qwest Corporation (“Qwest” and the “Qwest Litigation”) in the
United States District Court for the Western District of Washington alleging
various claims concerning Qwest’s billings to the plaintiffs from 1997 to 2003
for certain communication services from Qwest. The proceeding had previously
been stayed through January 2008 to permit the Federal Communications Commission
to issue a ruling that would provide the court guidance concerning the billing
matters at issue in the Qwest Litigation. Despite the failure of the Federal
Communications Commission to timely issue the guidance sought by the district
court, on or about September 30, 2008 the parties entered into a Settlement
Agreement to resolve the Qwest Litigation. The proceeds received as a result
of
the Settlement Agreement had previously been assigned to the former lenders
of
Davel pursuant to the acquisition and related agreements between the Company
and
former secured lenders of Davel. As a result of a modification to certain
agreements between the Company and the former lenders in December 2007, the
Company was permitted to retain $718,314 of the settlement proceeds.
7)
Other
Ongoing and Threatened Litigation
The
Company is involved in other claims and litigation arising in the ordinary
course of business, which it does not expect to materially affect its financial
position or results of operations. The Company has been threatened by several
former employees with litigation; however, to date, no litigation or other
action has commenced which is material to the Company.
Item
2. Management's Discussion and Analysis of Results of Operations and Financial
Condition.
The
following is a discussion and analysis of our results of operations for the
three and six month periods ended September 30, 2008 and 2007, our financial
condition at September 30, 2008 and factors that we believe could affect our
future financial condition and results of operations. Historical results may
not
be indicative of future performance.
This
discussion and analysis should be read in conjunction with our consolidated
financial statements and the notes thereto included elsewhere in this Form
10-Q.
Our consolidated financial statements are prepared in accordance with Generally
Accepted Accounting Principles in the United States (“GAAP”). All references to
dollar amounts in this section are in United States dollars.
Forward
Looking Statements
This
Quarterly Report on Form 10-Q contains forward-looking statements that involve
risks and uncertainties. The statements contained in this document that are
not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act
of 1934, including without limitation statements regarding our expectations,
beliefs, intentions or strategies regarding our business, and the level of
our
expenditures and savings for various expense items and our liquidity in future
periods. We may identify these statements by the use of words such as
“anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,”
“may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “will,”
“would” and other similar expressions. All forward-looking statements included
in this document are based on information available to us on the date hereof,
and we assume no obligation to update any such forward-looking statements,
except as may otherwise be required by law. Our actual results could differ
materially from those anticipated in these forward-looking
statements.
Background
We
are a
holding company with subsidiaries in the pay telephone and online gaming
industries and an affiliate in the software industry. Although classified as
discontinued operations, we still own an integrated telecommunications business.
We previously owned broadband wireless, telecommunications and integrated data
communication services companies which delivered a comprehensive suite of voice
and data communications services, including local exchange, long distance,
enhanced data, Internet, wireless and broadband services to end user customers.
At June 30, 2007, we marketed and sold our integrated communications services
through nine branch offices in seven states and we serviced over 123,000 billed
accounts representing over 211,000 equivalent subscriber lines including
approximately 110,000 local and long-distance telephone lines, approximately
38,000 dial-up lines, approximately 5,000 DSL lines, approximately 25,000 fixed
and mobile wireless lines, approximately 6,000 cellular lines and the remaining
are other Internet-related accounts. We owned and operated approximately 22,200
payphones located predominantly in 44 states and the District of Columbia.
Most
of our subscribers have been residential customers.
Historically,
our revenues had been generated through three of our four business
reporting segments:
Wireless
Networks
|
Our
broadband wireless network deployment efforts had been conducted
by our
wholly owned subsidiary, NeoReach, Inc., (“NeoReach”), and its subsidiary,
Kite Networks, Inc. (“Kite Networks,” formerly, NeoReach Wireless, Inc.).
This segment has also included the operations of Kite Broadband,
LLC
(“Kite Broadband”), a wireless broadband Internet service provider located
in Ridgeland, Mississippi.
|
|
|
Voice Services
|
Our
voice services segment has been led by CloseCall America, Inc.
(“CloseCall”), a competitive local exchange carrier (“CLEC”, which is a
term applied under the Telecommunications Act of 1996 to local telephone
companies which compete with incumbent local telephone companies)
based in
Stevensville, Maryland; American Fiber Network, Inc. (“AFN”), a CLEC based
in Overland Park, Kansas; and Davel Communications, Inc. (“Davel”), an
independent payphone provider based in Cleveland, Ohio. CloseCall
offers
its customers a full array of telecommunications products and services
including local, long-distance, 1-800-CloseCall anytime/anywhere
calling,
digital wireless, high-speed telephone (voice over IP), and dial-up
and
DSL Internet services. AFN is licensed to provide local access, long
distance and/or Internet services throughout the United States. Davel
was
previously one of the largest independent payphone operators in the
United
States.
|
Internet Services
|
Our
Internet services segment included DFW Internet Services, Inc. (“DFW”,
doing business as Nationwide Internet), an Internet services provider
(“ISP”) based in Irving, Texas, its acquired Internet service provider
subsidiaries and InReach Internet, Inc. (“InReach”), a full service ISP
located in Stockton, California that we acquired on November 1, 2005.
Our
Internet services segment provided dial-up and broadband Internet
access, web-hosting services, and related Internet services to business
and residential customers in many states.
|
|
|
Corporate
|
Our
corporate reporting segment serves as the holding company of the
operating
subsidiaries that are divided among the other three business reporting
segments, provides senior executive and financial management, and
performs
corporate-level accounting, financial reporting, and legal functions.
This
segment also includes our Internet gaming subsidiary, ProGames Network,
Inc. (“ProGames”) that we founded in December
2005.
|
Prior
to
January 2004, we were a development stage company. Although we were incorporated
approximately eight years ago, we have undergone a number of changes in our
business strategy and organization. In June 2001, we focused our business on
the
integration and marketing of complete mobile information solutions to meet
the
needs of mobile professionals. In April 2002, we acquired NeoReach and shifted
our focus toward solutions supporting the third generation wireless market
that
provides broadband to allow faster wireless transmission of data, such as the
viewing of streaming video in real time. We shifted our business strategy again
in December 2003 with a new management team, expanding significantly the scope
of our business activity to include Internet access services, local and long
distance telephone services and the ownership and operation of payphones. In
2005, we began to invest in the business of deploying broadband wireless
networks and providing wireless network access services in wireless access
zones
to be primarily located in municipality-sponsored areas. As indicated above,
we
entered these businesses primarily through acquisitions. We completed twenty-two
(22) acquisitions during this period.
Mobilepro
Corp. (“Mobilepro”) was incorporated under the laws of Delaware in July 2000
and, at that time, was focused on the integration and marketing of complete
mobile information solutions that satisfied the needs of mobile professionals.
In June 2001, Mobilepro merged with and into CraftClick.com, Inc.
(“CraftClick”), with CraftClick remaining as the surviving corporation. The name
of the surviving corporation was subsequently changed to Mobilepro Corp. on
July
9, 2001. CraftClick had begun to cease its business operations in October 2000,
and ultimately disposed of substantially all of its assets in February
2001.
On
March
21, 2002, we entered into an Agreement and Plan of Merger with NeoReach, a
private Delaware company, pursuant to which we merged a newly formed, wholly
owned subsidiary into NeoReach in a tax-free transaction. The merger was
consummated on April 23, 2002. As a result of the merger, NeoReach became a
wholly owned subsidiary of Mobilepro.
DFW
was
the principal operating subsidiary within our Internet services division. On
January 20, 2004, we acquired DFW. After that time, we acquired nine additional
Internet service businesses that have operated as subsidiaries of DFW and,
on
November 1, 2005, we acquired the business of InReach.
On
October 15, 2004, we closed our acquisition of CloseCall. One month later,
we
closed our acquisition of Davel. On June 30, 2005, we acquired AFN.
In
June
2005, we participated in the formation of Kite Broadband, a wireless broadband
Internet service provider, resulting in an initial 51% ownership of this
venture. On January 31, 2006, we acquired the remaining 49% of Kite Broadband
and 100% of the outstanding common stock of Kite Networks, Inc.
On
March
31, 2006, we merged Kite Networks, Inc. with and into NeoReach Wireless, Inc.
and changed the name of the combined entity to Kite Networks, Inc. (“Kite
Networks”).
On
July
8, 2007 we sold our interests in Kite Broadband, Kite Networks and Neoreach.
See
discussion below concerning The Sale of the Wireless Business to
Gobility.
On
June
30, 2007, the Company entered into an agreement to sell the CLEC and ISP
Businesses to United Systems Access, Inc. (“USA”, and the “USA Agreement”). The
closing of the ISP Businesses occurred on July 18, 2007. The closing of the
sale
of the CLEC Business to USA has not occurred. See discussion below concerning
The Sale of the ISP and CLEC Businesses to USA Telecom.
During
June and September 2007 the Company entered into a series of transactions to
sell the majority of its pay telephones. See discussion below concerning the
Sale of the Payphone Assets.
Our
principal executive offices are located at 6701 Democracy Boulevard, Suite
202,
Bethesda, MD 20817 and our telephone number at that address is (301) 571-3476.
We maintain a corporate Web site at www.mobileprocorp.com. We make available
free of charge through our Web site our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and all amendments to those
reports, as soon as reasonably practicable after we electronically file or
furnish such material with or to the SEC. The contents of our Web site are
not a
part of this report. The SEC also maintains a Web site at www.sec.gov that
contains reports, proxy statements, and other information regarding
Mobilepro.
Current
Business Conditions
Our
acquisition strategy of the last four years was executed with one primary
objective being the establishment of a viable telecommunications company with
sufficient credibility to be considered for selection by cities for the
deployment, ownership and management of broadband wireless networks. The
effectiveness of our business plan execution was initially confirmed by the
selection by Tempe, Arizona, of Kite Networks (formerly NeoReach Wireless)
for
its network. Subsequently, we were selected by several other cities for the
deployment, ownership, and management of such networks and had substantially
completed citywide wireless networks deployments in Farmers’ Branch, Texas, and
Longmont, Colorado.
However,
most of our acquired businesses experienced declining revenues. Although
restructuring measures helped to control other operating expenses, we were
unable to reduce the corresponding costs of services sufficiently to maintain
profitability. In addition, we funded the start-up and operations of the
municipal wireless networks and online gaming businesses without these companies
achieving profitability.
As
a
result, our business has historically lost money. Our accumulated deficit at
September 30, 2008 was $95,350,754. Although the Company had net income of
$282,093 in the six months ended September 30, 2008, it had a loss from
continuing operations of $1,104,971. In the fiscal years ended March 31, 2008,
2007 and 2006, the Company sustained net losses of $18,361,602, $45,898,288
and
$10,176,407, respectively. The Company was able to generate $532,481 of cash
from operating activities during the six months ended September 30, 2008. Cash
flow from operations was primarily due to cash generated by its CLEC Business
and $810,215 of receipts relating to claims involving over-billings by certain
telecommunications carriers of Davel in violation of regulatory rulings
(“Regulatory Receipts”), including $718,314 received from Qwest in the second
fiscal quarter (see Item 1. - “Legal Proceedings”). The amount of cash used in
operations during the fiscal year ended March 31, 2008 was $3,558,996. Future
losses are likely to occur. Accordingly, we are likely to continue to experience
liquidity and cash flow problems if we are unable to complete the planned sale
of assets, to improve the Company’s operating performance, or to raise
additional capital as needed and on acceptable terms.
To
date,
YA Global has been a significant source of capital for us, providing financing
in several forms. During fiscal 2007, we borrowed funds under a series of
convertible debentures. The total amount owed to YA Global under the debentures
at March 31, 2007 was $18,149,650. In May 2007, we borrowed $1,100,000 from
YA
Global under a promissory note in order to help bridge our cash flow shortfall
during the first quarter of fiscal year 2008. This promissory note and accrued
interest were repaid in July 2007. Using shares of our common stock registered
on Form S-3 in November 2006, we made principal and interest payments on the
debentures that totaled $4,880,489 during the fiscal year ended March 31, 2007,
and that totaled $1,967,908 from April 2007 through May 2007. However, the
supply of registered shares available for the conversion of the debentures
was
exhausted. We made additional cash payments of principal and interest on the
debentures that totaled $4,149,651 during the fiscal year ended March 31, 2008,
primarily from the proceeds of the sale of the ISP Business and payphone assets
discussed below. However, the Company was unable to make the weekly scheduled
principal payments of $375,000 plus interest commencing February 1, 2008 and
made partial payments of interest aggregating $200,000 on May 2 and June 4,
2008. Effective
June 30, 2008, the Company issued a secured convertible debenture to YA Global
(the “Convertible Debenture”) with an aggregate principal balance of
$13,391,175, replacing the former convertible debentures. The Convertible
Debenture provides for monthly payments of interest at 12% with the remaining
principal balance due on May 1, 2009. The Convertible Debenture continues to
be
secured by substantially all of the assets of the Company (see Note 5 to the
condensed consolidated financial statements).
The
Sale of the Wireless Networks Business to Gobility
The
cash
needs of Kite Networks had been substantially funded through borrowings by
the
Company from YA Global under a variety of debt instruments and over $5 million
in equipment lease financing. Kite Networks had also been provided extended
payment terms by certain significant equipment suppliers. However, we realized
that sufficient funds were not available from these existing sources for Kite
Networks to effectively continue the execution of its business plan. As a
result, we commenced the search for capital as described below during the fourth
quarter of the fiscal year 2007.
In
December 2006, we engaged an investment banking firm to assist in evaluating
strategic alternatives for the wireless networks business conducted by its
Kite
Networks and Kite Broadband subsidiaries. Efforts to secure investment capital
for this business or to find a willing buyer resulted in the sale of the
wireless networks business to Gobility, Inc. (“Gobility”) on July 8, 2007. The
purchase price was $2.0 million, paid with a debenture convertible into shares
of common stock of Gobility. However, under the terms of the debenture, Gobility
was required to raise at least $3.0 million in cash no later than August 15,
2007. This did not occur. As a result of this default by Gobility on the
financing obligation under the debenture, we have the right but not the
obligation to repurchase the wireless networks business with the surrender
of
the debenture and the payment of a nominal additional amount.
Gobility
expected to raise capital for its operating purposes from Wingfield Corporation,
N.V., a Brussels Belgium-based merchant bank, pursuant to a funding commitment
letter that was presented to the Company at closing. Because this funding has
not been obtained, Gobility has been unable to fund its operations including
the
payment of amounts due under a series of capital equipment leases and other
equipment-related obligations. On the date of the sale to Gobility, the
aggregate amount of this debt included in the balance sheet of Kite Networks
was
approximately $6,111,000. Because the equipment leases and other equipment
purchases were co-signed by Mobilepro, if Kite Networks fails to pay the leases,
the Company, subject to any defenses it may have, may be obligated to pay this
debt. The Company could also be subject to late payment penalties and interest
at the default rate.
The
Company is currently cooperating with Gobility in its efforts to sell the assets
of Kite Networks in order to pay off the obligations relating to the leases
and
other equipment. In September 2007, the Company was required to make lease
payments totaling $64,165. On March 10, 2008, Gobility sold the assets of the
wireless network in Longmont, Colorado, and the Company received the proceeds
in
the form of promissory notes totaling $1,800,000. In addition, the Company
entered into a forbearance agreement with the principal equipment vendor and
agreed to pay the $1,591,978 equipment obligation, with interest at the prime
rate, and a related lease obligation in the principal amount of $149,749. In
March 2008, the Company also satisfied the terms of one of the leases relating
to the Tempe, Arizona wireless network with an aggregate principal balance
of
$318,595, plus accrued interest, by paying $93,000 in cash and having the
$250,000 certificate of deposit that secured the lease applied thereto. As
a
result of the sale to Gobility and these transactions, the Company recorded
a
net loss on the sale of its Wireless Networks Business of $3,433,843 that was
reported in the loss on sale of discontinued operations for the fiscal year
ended March 31, 2008. Of this amount, the Company recognized a loss of
$5,036,289 in the second fiscal quarter and a $1,602,446 reduction in the loss
relating to the sale of the Longmont, Colorado wireless network that was
recorded in the fourth quarter of the fiscal year ended March 31, 2008.
On
August
1, 2008, the Company executed a promissory note and release with Data Sales
Co.,
Inc. (“Data Sales”) in the principal amount of $330,000. The note is in full
satisfaction of a $1,231,138 lease obligation for which the Company was a
co-borrower with Kite Networks and reflects the impact of a sale of certain
uninstalled wireless equipment by Data Sales to an unaffiliated third party
purchaser that was consummated in July 2008. The Company recorded a gain of
$901,138, or $0.0011 per share, in its fiscal second quarter as a result of
the
transaction.
The
Company continues to cooperate with Gobility in its efforts to sell the
remaining assets of Kite Networks. In the event Gobility is unsuccessful in
its
attempts to sell the remaining assets and satisfy the lease obligations, the
Company, subject to any defenses it might have, could be required to make the
payments on the remaining leases. At September 30, 2008, the aggregate amount
recorded on the balance sheet as liabilities of companies held for sale relating
to the capital lease obligations, accrued interest, notes payable and the
equipment obligation was $4,558,846. The Company has also recorded the
certificates of deposits securing the lease obligations in the aggregate amount
of $937,664 as assets of companies held for sale in the Company’s condensed
consolidated balance sheets.
The
Sale of the ISP and CLEC Businesses to USA Telecom
In
April
2007, we announced that our Board of Directors had decided to explore potential
strategic alternatives for the entire Company, and that it had received
inquiries from potential buyers regarding the purchase of portions of its
business. This initiative was undertaken with the goals of maximizing the value
of our assets, returning value to our stockholders and eliminating the Company’s
debt, particularly amounts owed to YA Global.
We
received letters of interest regarding the acquisition of the CloseCall, AFN
and
the Internet service provider businesses (the “Wireline Businesses”) and several
potential purchasers conducted due diligence activities. This process resulted
in the execution of the agreement to sell the Wireline Businesses to USA. Under
the USA Agreement, the total purchase price for the ISP and CLEC Businesses
was
$27,663,893 consisting of $21.9 million in cash and 8,100 shares of convertible
preferred stock of USA (the “USA Preferred”). Pursuant to the USA Agreement, we
closed the sale of the Internet service provider companies to USA on July 18,
2007, and received cash proceeds of $2,500,000, a promissory note for $2,000,000
and 8,100 shares of preferred stock of USA convertible into 7.5% of the fully
diluted shares of USA’s common stock initially valued at $5,763,893.
Simultaneously, we used $2,000,000 of this cash to pay down principal and
accrued interest owed to YA Global under the promissory note and debentures.
The
sale
of CloseCall and AFN (the “CLEC Business”) required the receipt of certain state
regulatory approvals before it could be completed. Pursuant to a management
agreement that was signed in July 2007 (the “USA Management Agreement”), USA
operated the CLEC Business, retained any cash provided by the operations of
these companies and funded any cash requirements of the companies pending
completion of the sale of these companies. In addition, USA was required to
make
debenture interest payments to YA Global on the Company’s behalf during the term
of the USA Management Agreement based on an assumed principal balance of $17.4
million at an interest rate of 7.75%.
Upon
the
close and pursuant to the terms of the USA Agreement, we expected to receive
cash proceeds of $19.4 million, including payment of the $2.0 million promissory
note. On January 3, 2008, the Company entered into an amendment to the
$2,000,000 promissory note due from USA. USA made payments of $500,000 each
on
January 4 and January 11, 2008 with the remaining balance of $1,000,000,
together with accrued interest at the rate of 7.75%, due on the earlier of
the
date of the closing of the sale of the CLEC Business or March 31, 2008. Of
the
$1,000,000 of payments, the Company received $125,000 and the remaining $875,000
was used to pay principal and interest on the convertible debentures due to
YA
Global. USA did not pay the remaining principal balance of $1,000,000 or the
accrued interest due on March 31, 2008. In July 2008, the Company revised the
payment terms relating to the USA note and received principal and interest
payments totaling $200,000. The remaining principal balance and accrued interest
at 12% per annum is due on December 29, 2008.
On
January 14, 2008, the Company received notice from USA purporting to terminate
the USA Agreement with respect to the sale of the CLEC Business, but provided
that USA remained interested in discussing terms upon which it would complete
the purchase. The Company has been in communications with USA and disputes
the
validity of the claims alleged for the purported termination, which include
the
alleged failure to obtain certain regulatory and contractual approvals and
the
alleged breach of certain representations and warranties set forth in the USA
Agreement. The Company believes the purported termination was in bad faith
and
intends to pursue any and all legal and equitable remedies available to it
against USA. Despite the on-going discussions with USA, the Company re-assumed
operating control of AFN and Close Call in January 2008 and terminated the
USA
Management Agreement and the sale of the CLEC Business. Following the
termination of the sale of the CLEC Business to USA in the fourth quarter of
fiscal 2008, the value of the USA Preferred was considered impaired. The Company
discontinued the accretion of the discount and wrote-off the carrying value
of
the USA Preferred against the liability recorded for the advanced proceeds
from
USA. The net difference in carrying values of $56,442 was recorded as a
reduction in the loss on sale of discontinued operations in the fourth quarter
of the fiscal year ended March 31, 2008.
The
Company expected to use the cash proceeds from the sale of the CLEC Business
to
retire the YA Global debentures plus any remaining amounts of accrued interest.
If the sale of the CLEC Business is not sold to an alternative buyer on terms
satisfactory to the Company, the Company may not have the ability to continue
as
a going concern without a significant restructuring of the YA Global debt.
See
Item 1A. below - Risk Factors - “Failure to Complete the Sale of the CLEC
Businesses May Result in Our Inability to Retire the YA Global Debentures”.
Discontinued
Operations
In
connection with the activities summarized above, we have reclassified the assets
and liabilities of the CLEC Business and the remaining assets and liabilities
of
the Wireless Networks Business as assets and liabilities related to companies
held for sale in the condensed consolidated balance sheets at September 30
and
March 31, 2008. In addition, we have classified the results of operations of
the
CLEC, ISP, and Wireless Networks Businesses in discontinued operations in the
condensed consolidated statements of operations for the three months and six
months ended September 30, 2007. Discontinued operations include the results
of
operations for the CLEC Business and the costs associated with the remaining
assets and liabilities of the Wireless Networks Business for the three months
and six months ended September 30, 2008.
Sales
of Payphone Assets
The
Company completed a series of transactions to sell a majority of Davel’s
payphones in order to provide cash for operating purposes and additional
retirements of convertible debenture debt. On June 30, 2007, we completed the
sale of approximately 730 operating payphones to an unaffiliated payphone
operator and received over $200,000 in cash proceeds. A gain in the amount
of
$10,640 was recognized in connection with this transaction in the quarter ended
June 30, 2007.
In
September 2007, in three transactions, we completed the sale of approximately
21,700 payphones to unaffiliated purchasers. After the direct payment of certain
related liabilities and broker fees in the aggregate amount of approximately
$851,000, and the funding of escrow accounts established for the payment of
vendor obligations and indemnification claims in the aggregate amount of
$1,200,000, proceeds of approximately $1,840,000 were used to retire convertible
debenture debt of approximately $1,672,000 and related accrued interest of
approximately $168,000. After these sales, Davel’s remaining operations have
been significantly reduced. Davel’s remaining operations are being continued and
Davel is pursuing the recovery of certain claims including the AT&T, Sprint
and Qwest claims described in Item 1. - Legal Proceedings. A
net
loss of $2,800,206 was included in the loss from continuing operations reported
in the second quarter of the fiscal year ended March 31, 2008 in connection
with
these transactions.
Critical
Accounting Policies
We
consider the accounting policies related to the disposal of long-lives assets,
discontinued operations, the valuation of goodwill and other intangible assets,
transactions related to our debt and equity financing activity, and revenue
and
related cost recognition to be critical to the understanding of our results
of
operations. Critical accounting policies include the areas where we have made
what we consider to be particularly subjective or complex judgments in making
estimates and where these estimates can significantly impact our financial
results under different assumptions and conditions. We prepare our financial
statements in conformity with U.S. generally accepted accounting principles.
As
such, we are required to make certain estimates, judgments, and assumptions
that
we believe are reasonable based upon the information available. These estimates,
judgments, and assumptions affect the reported amounts of assets and liabilities
at the date of the financial statement and the reported amounts of revenue
and
expenses during the periods presented. Actual results could be different from
these estimates.
Impact
of Recent Accounting Standards
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the
accounting for uncertainty in income tax positions. FIN 48 requires that the
Company recognize in the consolidated financial statements the impact of a
tax
position that is more likely than not to be sustained upon examination based
on
the technical merits of the position. The provisions of FIN 48 were effective
for the Company on April 1, 2007. Adoption of FIN 48 did not have a material
effect on the consolidated financial statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements,” which defines fair value,
establishes a framework and gives guidance regarding the methods used for
measuring fair value, and expands disclosures about fair value measurements.
The
provisions of SFAS No. 157 are effective for financial statements issued for
the
Company’s fiscal year beginning April 1, 2008 (April 1, 2009 with respect to
certain non-financial assets and liabilities), and interim periods within such
fiscal years. The adoption of SFAS No. 157 for financial assets and
liabilities in the first quarter of the current fiscal year did not have a
material effect on the Company’s financial position or results of operations as
the Company does not have any material financial assets or liabilities measured
at fair value.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities,” which provides companies with an
option to report selected financial assets and liabilities at fair value. The
objective is to reduce both complexity in accounting for financial instruments
and the volatility in earnings caused by measuring related assets and
liabilities differently. The provisions of SFAS No. 159 are effective for
financial statements issued for the Company’s fiscal year beginning April 1,
2008. The Company did not elect to measure its financial instruments or any
other items at fair value as permitted by SFAS No. 159. Therefore, the
adoption of FAS No. 159 did not have a material effect on the Company’s
financial position or results of operations.
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations.”
SFAS No. 141R modifies the accounting for business combinations by requiring
that acquired assets and assumed liabilities be recorded at fair value,
contingent consideration arrangements be recorded at fair value on the date
of
the acquisition and preacquisition contingencies will generally be accounted
for
in purchase accounting at fair value. The pronouncement also requires that
transaction costs be expensed as incurred, acquired research and development
be
capitalized as an indefinite-lived intangible asset and the requirements of
SFAS
No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities,” be met at the acquisition date in order to accrue for a
restructuring plan in purchase accounting. SFAS No. 141R is required to be
adopted prospectively effective for the Company’s fiscal year beginning April 1,
2009. The Company does not expect SFAS No. 141R to have a significant impact
on
the Company’s consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — an amendment of ARB No. 51.” SFAS
No. 160 modifies the reporting for noncontrolling interests in the balance
sheet and minority interest income (expense) in the statement of operations.
The
pronouncement also requires that increases and decreases in the noncontrolling
ownership interest amount be accounted for as equity transactions. SFAS
No. 160 is required to be adopted prospectively, with limited exceptions,
effective for the fiscal year beginning April 1, 2009. The Company does not
expect SFAS No. 160 to have a significant impact on the Company’s consolidated
financial statements.
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities — an amendment of FASB Statement
No. 133.” SFAS No. 161 modifies existing requirements to include
qualitative disclosures regarding the objectives and strategies for using
derivatives, fair value amounts of gains and losses on derivative instruments
and disclosures about credit-risk-related contingent features in derivative
agreements. The pronouncement also requires the cross-referencing of derivative
disclosures within the financial statements and notes thereto. The requirements
of SFAS No. 161 are effective for the Company’s interim and annual fiscal
periods beginning on April 1, 2009. The Company does not expect SFAS No. 161
to
have a significant impact on the Company’s consolidated financial statements or
related disclosures.
Results
of Operations and Financial Condition
The
results of continuing operations include the operating results of Mobilepro,
Davel and ProGames. Due to the sale of a majority of Davel’s payphones in
September 2007, the operating results for the periods reported in the current
and prior fiscal years are not comparable. Results of discontinued operations
include the operating results of the CLEC, ISP and Wireless Networks Businesses.
The operating results of the first and second quarters of the current and prior
years are not comparable due to the sale of the ISP and Wireless Networks
Businesses in the second quarter of the fiscal year ending March 31,
2008.
We
realize that effective analysis of our operations with an approach of comparing
results for a current period with the results of a corresponding prior period
may not be helpful in understanding our financial condition and results of
operation in light of the recent sale of certain of our subsidiaries. In order
to analyze ourselves, we focus not only on achieving increasing amounts of
net
income and EBITDA, but emphasize the change of net income/(loss) per
share.
The
Three Months Ended September 30, 2008 and 2007
Consolidated
revenues of continuing operations for the quarter ended September 30, 2008
were
$860,569 compared with revenues of $4,197,406 in the prior year quarter. Current
quarterly revenues consist of management fees from Microlog Corporation
(“Microlog”), an affiliate, and the revenues of ProGames and Davel. Davel’s
revenues include the
current quarter adjustments to “dial-around” revenues (intercarrier compensation
paid to us by the providers of 800 and other toll-free numbers at the rate
of
49.4 cents per call) that were generated by our communications services in
prior
quarters and $794,383 of Regulatory Receipts relating primarily to claims
against Qwest Corporation and certain other telecommunication carriers (see
Note
8 to the condensed consolidated financial statements). As discussed above,
in
the second quarter of fiscal 2008, we sold most of our remaining operational
payphones in a series of transactions including the sale of approximately 21,700
payphones in September 2007. The operating results related to these assets
are
reflected in the condensed consolidated statement of operations through the
sale
dates. In the three months ended September 30, 2007, Davel derived most of
its
operating revenues from coin revenue and “dial-around” revenues generated by its
payphones.
Cost
of
services (exclusive of depreciation and amortization) in the quarter ended
September 30, 2008 was $1,080 compared to $2,185,248 in the second quarter
of
the prior fiscal year. This decline reflects the reduction in the number of
payphones operated by Davel following the payphone sales described above.
The
total
operating costs and expenses of continuing operations for the quarter ended
September 30, 2008, excluding the cost of services, depreciation and
amortization, were $793,629 compared to $3,540,890 in the second quarter of
the
prior fiscal year, a decrease of $2,747,261. This was principally due to the
elimination of the majority of Davel’s expenses following the sale of its
payphone assets, which expenses declined by $2,301,345 compared to the second
quarter of the prior fiscal year. The Company was also able to reduce operating
costs through the reduction in payroll, professional fees and related expenses
and a reduction in stock compensation expense. Payroll and professional fees
declined as a result of reductions in personnel and reductions in legal fees
relating to litigation and sales of the Company’s business units. Stock
compensation expense decreased from $434,569 to $25,706 in the three months
ended September 30, 2008 due to the vesting of options and warrants granted
in
prior years and a reduction in the fair value of current year grants. The
reduction in operating costs and expenses was partially offset by a $300,000
write down in the carrying value of notes receivable in three months ended
September 30, 2008. The operating costs and expenses (excluding depreciation
and
amortization) of ProGames for the three months ended September 30, 2008 and
2007
were approximately $43,000 and $132,000, respectively reflecting reductions
in
personnel and other costs.
Depreciation
and amortization expenses of continuing operations were $45,457 and $491,524
in
the quarters ended September 30, 2008 and 2007, respectively, representing
the
reductions in depreciation of the costs of deployed payphones and the
amortization of payphone location contracts resulting from phone sales and
removals.
Interest
and other expense, net, was $329,772 for the quarter ended September 30,
2008
compared with $52,999 of expense in the corresponding quarter of the prior
fiscal year. Interest expense in the three months ended September 30, 2008
includes interest at 12% on the Convertible Debenture issued on June 30,
2008,
which replaced the 7.75% convertible debentures that were outstanding in
the
prior year. Interest and other expense, net in the three months ended September
30, 2007 was offset by interest on the proceeds that were to be received
from
USA relating to the sale of the CLEC Business and the accretion of discount
on
the USA Preferred Stock. The major components of interest and other (income)
expense for quarters ended September 30, 2008 and 2007 are presented in the
following schedule.
Type
of Debt
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Convertible
debentures (at stated rates)
|
|
$
|
409,203
|
|
$
|
289,909
|
|
Convertible
debentures (debt discount amortization)
|
|
|
3,117
|
|
|
38,152
|
|
Convertible
debenture (deferred financing fee amortization)
|
|
|
53,134
|
|
|
-
|
|
Notes
payable to YA Global
|
|
|
-
|
|
|
7,233
|
|
Notes
receivable - Microlog
|
|
|
(56,250
|
)
|
|
-
|
|
Other
notes receivable
|
|
|
(69,829
|
)
|
|
-
|
|
USA
interest on cash due at CLEC closing
|
|
|
-
|
|
|
(277,089
|
)
|
Accretion
of discount - USA Preferred Stock
|
|
|
-
|
|
|
(96,465
|
)
|
Other,
net
|
|
|
(9,603
|
)
|
|
91,259
|
|
Interest
and Other (Income) Expense, net
|
|
$
|
329,772
|
|
$
|
52,999
|
|
The
loss
from continuing operations for the three months ended September 30, 2008 was
$374,694, or $0.0005 per share, compared to a loss of $4,873,461, or $0.0063
per
share, in the prior year quarter. The current quarterly loss from continuing
operations included a $65,326 loss representing our equity in the net loss
of an
affiliate, Microlog , an investment we acquired in January 2008. It also
includes a loss of $79,494 for ProGames and income of $660,228 for Davel.
Davel’s income is primarily due to the collection of $794,383 of regulatory
receipts in the current quarter, as previously described above. The loss from
continuing operations for the three months ended September 30, 2007 includes
losses of $170,812 for ProGames and $3,698,883 for Davel, including a $2,800,206
loss on the sale of certain payphone assets and related liabilities of Davel.
Revenues
from discontinued operations were $8,054,407 in the current quarter, which
relates to the Company’s CLEC Business. Second quarter revenues from
discontinued operations last year were $9,779,097, which included $8,947,974
relating to the CLEC Business and $831,123 relating to the ISP and Wireless
Networks Businesses. The decline in revenues relating to the CLEC Business
was
primarily due to a reduction in the number of residential customers and to
a
lesser extent to reductions applicable to the bundling of services billed to
customers. The decline in revenue was offset in part by an increase in software
sales.
Income
from discontinued operations for the three months ended September 30, 2008
was
$1,105,154, or $0.0014 per share, and includes the operating results of the
CLEC
Business and interest and other expenses relating to the remaining obligations
of Kite Networks. The current quarterly income also includes a $901,138 gain
on
the sale of discontinued operations applicable to the settlement of one of
the
Kite Networks leases. The loss from discontinued operations for the three months
ended September 30, 2007 was $7,737,229, or $0.0100 per share, which includes
a
$5,036,289 loss on the sale of the Wireless Networks Business and a $2,481,227
loss on the sale of the ISP Business. Without the operating results and losses
of the ISP and Wireless Networks Businesses, there would have been income of
$25,651 relating to the CLEC business (including Kite interest) in the prior
year quarter.
We
reported net income of $730,460 for the quarter ended September 30, 2008, or
$0.0009 per share, compared with a net loss of $12,610,760, or $0.0163 per
share, for the quarter ended September 30, 2007.
The
Six Months Ended September 30, 2008 and 2007
Consolidated
revenues of continuing operations for the six ended September 30, 2008 were
$933,996 compared with revenues of $10,165,226 in the corresponding period
of
the prior year. Current year-to-date revenues consist of management fees from
Microlog, an affiliate, and the revenues of ProGames and Davel. Davel’s revenues
include the current year adjustments to “dial-around” revenues (intercarrier
compensation paid to us by the providers of 800 and other toll-free numbers
at
the rate of 49.4 cents per call) that were generated by our communications
services in prior quarters and $810,215 of Regulatory Receipts relating
primarily to claims against Qwest and certain other telecommunication carriers
(see Note 8 to the condensed consolidated financial statements). As discussed
above, in the second quarter of fiscal 2008, we sold most of our remaining
operational payphones in a series of transactions including the sale of
approximately 21,700 payphones in September 2007. The operating results related
to these assets are reflected in the condensed consolidated statement of
operations through the sale dates. In the six months ended September 30, 2007,
Davel derived most of its operating revenues from coin revenue and “dial-around”
revenues generated by its payphones.
Cost
of
services (exclusive of depreciation and amortization) in the six months ended
September 30, 2008 was $2,160 compared to $5,750,034 in the corresponding period
of the prior fiscal year. This decline reflects the reduction in the number
of
payphones operated by Davel following the payphone sales described above.
The
total
operating costs and expenses of continuing operations for the six months ended
September 30, 2008, excluding the cost of services, depreciation and
amortization, were $1,370,366 compared to $7,869,192 in the corresponding period
of the prior fiscal year, a decrease of $6,498,826. This was principally due
to
the elimination of the majority of Davel’s expenses following the sale of its
payphone assets, which expenses declined by $5,402,314 compared to the
corresponding period of the prior fiscal year. The Company was also able to
reduce operating costs through the reduction in payroll, professional fees
and
related expenses and a reduction in stock compensation expense. Payroll and
professional fees declined as a result of reductions in personnel, reductions
in
legal fees, and reductions in audit and consulting fees applicable to compliance
with the Sarbanes-Oxley Act of 2002. Stock compensation expense decreased from
$635,122 to $49,675 in the six months ended September 30, 2008 due to the
vesting of options and warrants granted in prior years and a reduction in the
fair value of current year grants. The operating costs and expenses (excluding
depreciation and amortization) of ProGames for the six months ended September
30, 2008 and 2007 were approximately $99,758 and $302,985, respectively
reflecting reductions in personnel and other costs.
Depreciation
and amortization expenses were $90,913 and $1,208,705 in the six months ended
September 30, 2008 and 2007, respectively, representing the reductions in
depreciation of the costs of deployed payphones and the amortization of payphone
location contracts resulting from phone sales and removals.
Interest
and other expense, net, was $475,195 for the six ended September 30, 2008
compared with $705,024 of expense in the corresponding period of the prior
fiscal year. During the prior year, we retired principal owed under the YA
Global debentures in the amount of approximately $4,065,000 and the YA Global
promissory note in the amount of $1,100,000 that we issued in May 2007. Interest
expense in the six months ended September 30, 2008 includes interest at 12%
on
the Convertible Debenture issued on June 30, 2008, which replaced the 7.75%
convertible debentures that were previously outstanding. Interest and other
expense, net in the six months ended September 30, 2007 was offset by interest
on the proceeds that were to be received from USA relating to the sale of the
CLEC Business and the accretion of discount on the USA Preferred Stock. The
major components of interest and other (income) expense for six ended September
30, 2008 and 2007 are presented in the following schedule.
Type
of Debt
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Convertible
debentures (at stated rates)
|
|
$
|
664,063
|
|
$
|
611,105
|
|
Convertible
debentures (debt discount amortization)
|
|
|
33,325
|
|
|
193,841
|
|
Convertible
debentures (stock issuance discounts)
|
|
|
-
|
|
|
148,550
|
|
Convertible
debenture (deferred financing fee amortization)
|
|
|
53,134
|
|
|
-
|
|
Notes
payable to YA Global
|
|
|
-
|
|
|
25,315
|
|
Notes
receivable - Microlog
|
|
|
(112,500
|
)
|
|
-
|
|
Other
notes receivable
|
|
|
(142,970
|
)
|
|
-
|
|
USA
interest on cash due at CLEC closing
|
|
|
-
|
|
|
(277,089
|
)
|
Accretion
of discount - USA Preferred Stock
|
|
|
-
|
|
|
(96,465
|
)
|
Other,
net
|
|
|
(19,857
|
)
|
|
99,767
|
|
Interest
and Other (Income) Expense, net
|
|
$
|
475,195
|
|
$
|
705,024
|
|
The
loss
from continuing operations for the six months ended September 30, 2008 was
$1,014,971, or $0.0014 per share, compared to a loss of $8,146,635, or $0.0106
per share, in the corresponding period of the prior year. The current
year-to-date loss included a $100,333 loss representing our equity in the net
loss of an affiliate, Microlog, an investment we acquired in January 2008.
It
also includes a loss of $168,474 for ProGames and income of $511,214 for Davel.
Davel’s income is primarily due to the collection of $810,215 of Regulatory
Receipts as previously described above. The loss from continuing operations
for
the six months ended September 30, 2007 includes losses of $403,101 for ProGames
and $5,204,044 for Davel, including a $2,778,906 loss on the sale of certain
payphone assets and related liabilities of Davel.
For
the
six months ended September 30, 2008, revenues from discontinued operations
were
$15,710,594, which relates to the Company’s CLEC Business. Year-to-date revenues
from discontinued operations last year were $24,789,298, which included
$18,058,603 relating to the CLEC Business and $6,730,695 relating to the ISP
and
Wireless Networks Businesses. The decline in revenues relating to the CLEC
Business was primarily due to a reduction in the number of residential customers
and to a lesser extent to reductions applicable to the bundling of services
billed to customers. The decline in revenue was offset in part by an increase
in
software sales.
Income
from discontinued operations for the six months ended September 30, 2008 was
$1,387,064, or $0.0018 per share, including income of $485,926 relating to
the
operating results of the CLEC Business and interest and other expenses relating
to the remaining obligations of Kite Networks. The year-to-date income also
includes a $901,138 gain on the sale of discontinued operations applicable
to
the settlement of one of the Kite Networks leases. The loss from discontinued
operations for the six months ended September 30, 2007 was $9,452,790, or
$0.0124 per share, which includes a $5,036,289 loss on the sale of the Wireless
Networks Business and a $2,481,227 loss on the sale of the ISP Business. Without
the operating results and losses of the ISP and Wireless Networks Businesses,
there would have been income of $619,102 relating to the CLEC business
(including Kite interest) in the six months ended September 30,
2007.
We
reported net income of $282,093 for the six months ended September 30, 2008,
or
$0.0004 per share, compared with a net loss of $17,599,425 for the quarter
ended
September 30, 2007, or $0.0230 per share.
Liquidity
and Capital Resources
We
have
forecasted our operating cash requirements through the end of fiscal year 2009
based on several important assumptions. We have not forecasted the use of cash
that would be required to repay the capital lease obligations of the Wireless
Networks Business in the event that Gobility fails to raise sufficient capital
to fund these obligations. Mobilepro Corp. is co-obligor on certain capital
leases of Kite Networks and has retained the lease obligations as liabilities
of
companies held for sale in its condensed consolidated balance sheets. The total
principal balance of these leases was approximately $2,422,000 at September
30,
2008. The capital leases are secured by approximately $938,000 of certificates
of deposits. Monthly lease payments on these capital leases total approximately
$111,000. In addition, the Company was a co-purchaser of certain wireless
network equipment obtained by Kite Networks. In March 2008, we entered into
a
forbearance agreement with this supplier and have agreed to make installment
payments through September 2010. The amount owed to the supplier for the
purchase of this equipment approximates $1,452,000 at September 30, 2008. On
August 1, 2008, we executed a $330,000 promissory note payable to the lessor
and
were released from approximately $1,231,000 of the capital lease obligations
as
a result of the sale of certain uninstalled wireless equipment by the lessor.
Our forecast takes into account the payments required under the equipment
obligation and the promissory note. The certificates of deposit and the
promissory note and equipment obligation are included in the Company’s condensed
consolidated balance sheets at September 30, 2008 as assets and liabilities
of
companies held for sale, respectively.
We
have
also forecasted our operating cash requirements assuming we will be able to
complete the sale of the CLEC Business. In the fourth quarter of fiscal 2008,
the Company terminated the USA Agreement with respect to the sale of the CLEC
Business (see “Sale of the ISP and CLEC Businesses” above). The Company expected
to use the cash proceeds from the sale of the CLEC Businesses to retire the
YA
Global debentures plus the remaining amounts of accrued interest. If the CLEC
Businesses is not sold to an alternative buyer, or if the Company is required
to
make payments on the capital leases of Kite Networks, the Company will not
have
the ability to continue as a going concern beyond the current fiscal year
without additional financing or the collection of significant amounts on claims
against third parties (see Item 1 - “Legal Proceedings”). Claims against third
parties include litigation against AT&T Corporation (“AT&T”), Sprint
Communications Company, LP (“Sprint”) and Qwest Communications, Inc. (“Qwest”)
for non-payment of dial around compensation to the Davel Entities and portions
of amounts claimed from telecommunications carriers for over-billing.
During
the six months ended September 30, 2008, the balance of unrestricted cash and
cash equivalents relating to continuing operations increased by $402,038 to
$1,413,434. There was also a decrease in cash and cash equivalents of $236,617
relating to discontinued operations.
Net
cash
provided by operations during the six months ended September 30, 2008 was
$532,481, reflecting the funding of operating expenses incurred by Davel and
the
corporate segment, offset by $810,215 of Regulatory Receipts relating to claims
against certain telecommunications carriers, and $413,064 of cash provided
by
operating activities of discontinued operations. There were decreases in
restricted cash and collections of notes receivable of continuing operations
totaling $617,269 that also contributed to the net cash provided by operations.
Net cash provided by operations also reflects a $300,000 adjustment for the
write down in the carrying value of certain notes receivable and $255,556 of
non-cash interest expense, including $222,231 of interest added to the
outstanding balance of the Convertible Debenture in connection with the
refinancing of the debt due to YA Global as described below.
There
was
no cash used in or provided by investing activities in the six months ended
September 30, 2008.
Our
financing activities during the six months ended September 30, 2008 used net
cash of $367,060, including $186,946 of cash used in discontinued operations.
Cash used in financing activities includes $177,114 of financing costs incurred
in connection with the refinancing of the YA Global debt on June 30, 2008 as
described below. The financing activities of discontinued operations used
$186,946 in cash to pay debt obligations, including the notes payable
and equipment and capital lease obligations relating to the Wireless
Networks Business.
Our
history of net losses, our lack of a sufficient corporate credit history with
significant suppliers and the uncertain payback associated with investments
in
municipal wireless networks has proved to be significant obstacles to overcome
in our search for capital. Nevertheless, YA Global has continued to support
the
Company. On June 30, 2006, we issued an amended 7.75% secured convertible
debenture in the amount of $15,149,650 to YA Global, replacing a convertible
debenture with an outstanding principal amount of $15,000,000 (and accrued
interest of approximately $149,650) that was issued to YA Global in May 2005.
On
August
28, 2006, the Company entered into a financing agreement with YA Global that
provided $7.0 million in funding with the proceeds received upon the issuance
of
a series of secured, convertible debentures. At each closing, the Company issued
YA Global a 7.75% secured convertible debenture in the principal amount for
that
closing, convertible into common stock at $0.174 per share and paid a
transaction fee equal to 7% of the proceeds. On August 30, 2006, the first
closing provided gross cash proceeds of $2,300,000. During the quarter ended
December 31, 2006, additional gross cash proceeds of $3,525,000 were received.
Pursuant to the final closing under this agreement, we received gross proceeds
of $1,175,000 on February 1, 2007.
Using
shares of our common stock registered on Form S-3 in November 2006 and as
permitted by the terms of the debentures, the Company made principal and
interest payments on the debentures issued to YA Global that totaled $4,880,489
during the fiscal year ended March 31, 2007, and that totaled $1,967,908 from
April 2007 through May 2007. However, the supply of registered shares available
for the conversion of the debentures was exhausted. We made additional cash
payments of principal and interest on the debentures that totaled $4,149,651
during the fiscal year ended March 31, 2008, primarily from the proceeds of
the
sale of the ISP Business and payphone assets. However, the Company was unable
to
make the weekly scheduled principal payments of $375,000 plus interest
commencing February 1, 2008. The Company made a partial payment of interest
of
$114,530 on February 1, 2008 and made additional payments of interest
aggregating $200,000 on May 2 and June 4, 2008.
Effective
June 30, 2008, the Company issued a secured convertible debenture to YA Global
(the “Convertible Debenture’) with an aggregate principal balance of
$13,391,175, replacing the former convertible debentures. The Convertible
Debenture provides for monthly payments of interest at 12% with the remaining
principal balance due on May 1, 2009. Accordingly, the entire principal balance
of the Convertible Debenture has been classified as a current liability at
September 30, 2008 in the Company’s condensed consolidated balance sheets. YA
Global may convert any portion of the unpaid principal and interest into shares
representing up to 4.99% of the Company’s common stock at the lesser of $0.04973
per share or the average of the two lowest volume weighted average prices during
the five trading days immediately preceding the conversion date. If certain
conditions are met, the Company has the option to pay up to 4.5% of the total
interest due in common stock at the applicable conversion price on the day
immediately prior to the interest payment date. The conversion price is subject
to adjustment if the Company is deemed to have issued shares at a price that
is
lower than the effective conversion price on the date such shares are issued.
The Convertible Debenture is secured by substantially all of the assets of
the
Company.
During
the three months ended September 30, 2008, the Company issued 76,942,857 shares
of common stock in satisfaction of $104,800 in principal relating to the
Convertible Debenture. Subsequent to September 30, 2008, YA Global converted
an
additional $36,075 of principal into 85,500,000 shares of common stock. Such
shares are tradable by YA Global pursuant to Rule 144 of the Securities Act
of
1933 (the “Securities Act”)
As
described above, certain equipment leases and other equipment purchases of
Kite
Networks were co-signed by Mobilepro Corp. The Company, subject to any defenses
it may have, could be required to make the payments due on these leases and
other equipment-related obligations that were transferred to Gobility in
connection with the sale of the Wireless Networks Business. To date Gobility
has
not made any lease payments and has not raised at least $3.0 million in cash
as
required under the terms of the Gobility Debenture. As a result, the Company
has
the right but not the obligation to repurchase the Wireless Networks Business
with the surrender of the Gobility Debenture and the payment of nominal
additional consideration.
On
March
10, 2008, Gobility sold the assets of the wireless network in Longmont,
Colorado, and the Company received the proceeds in the form of promissory notes
totaling $1,800,000. In addition, the Company entered into a forbearance
agreement with the principal equipment vendor and agreed to pay the $1,591,978
equipment obligation, with interest at the prime rate, and a related lease
obligation in the principal amount of $149,749. In March 2008, the Company
also
paid one of the leases with an aggregate principal balance of $318,595, plus
accrued interest, by paying $93,000 in cash and applying the $250,000
certificate of deposit that secured the lease relating to the Tempe, Arizona
wireless network.
On
August
1, 2008, the Company executed a promissory note and release with Data Sales
in
the principal amount of $330,000. The note is in full satisfaction of $1,231,138
of the lease obligations of Kite Networks and reflects the impact of a sale
of
certain uninstalled wireless equipment by Data Sales to an unaffiliated third
party purchaser that was consummated in July 2008. The note requires
twenty-three monthly payments of $10,000 and accrues interest at the rate of
twelve percent. The unpaid principal balance and accrued interest is due and
payable on July 31, 2010. The Company recorded a gain of $901,138, or $0.0011
per share, in its fiscal second quarter as a result of the
transaction.
The
Company is currently cooperating with Gobility in its efforts to sell the
remaining assets of Kite Networks in order to pay off the obligations relating
to the leases and other equipment. In the event Gobility is unsuccessful in
its
attempts to sell the remaining assets and satisfy the lease obligations, the
Company could be required to make the payments on the remaining leases. At
September 30, 2008, the aggregate amount recorded on the condensed consolidated
balance sheets as liabilities of companies held for sale relating to the capital
lease obligations, accrued interest, and the note payable and equipment
obligation was $5,448,846. The Company has also recorded the certificates of
deposits securing the lease obligations of $937,664 as assets of companies
held
for sale.
Our
major
challenge is to sustain the funding of current operations until the sale of
the
CLEC Businesses can be completed or another method to retire our debt to YA
Global is achieved. Following the termination of the sale of the CLEC Business
to USA and the related management agreement in the fourth quarter of fiscal
year
2008, the Company re-assumed operating control of AFN and CloseCall. The CLEC
Business continues to generate cash in amounts that we believe will be
sufficient to fund the cost of debt service relating to the Convertible
Debenture and certain other costs. However, we continue to fund the operations
of ProGames which has not yet generated sufficient revenues to be profitable.
ProGames continues to expand its venues to market its online gaming activities.
We also have corporate expenses and the lease obligations associated with the
Wireless Networks Business that, subject to certain defenses, the Company may
be
required to fund.
The
Company’s financial statements have been prepared on a going concern basis which
contemplates the realization of assets and settlement of liabilities and
commitments based on recorded amounts for the foreseeable future. If
the
Company is unable to permanently eliminate the cash requirements represented
by
the Wireless Networks Business, and/or fails to sell the CLEC Businesses to
USA
or a new buyer on terms that are acceptable to the Company, the Company will
not
have the ability to continue as a going concern without additional capital
and/or collections of significant amounts on claims against third parties.
The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Inflation
Our
monetary assets, consisting primarily of cash and receivables, and our
non-monetary assets, consisting primarily of intangible assets and goodwill,
are
not affected significantly by inflation. We believe that replacement costs
of
equipment, furniture, and leasehold improvements will not materially affect
our
operations. However, the rate of inflation affects our expenses, such as those
for employee compensation and costs of network services, which may not be
readily recoverable in the price of services offered by us.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk.
Our
exposure to market risk for changes in interest rates relates primarily to
our
purchase of certificates of deposit to secure letters of credit and capital
leases. In addition, we own an investment in the common stock of Microlog which
had a market value of $453,333 at September 30, 2008. Microlog’s common stock is
traded on the “Pink Sheets” under the symbol “MLOG” and is subject to variations
in price based on trading volume as well as general market conditions. Our
investment is accounted for under the equity method of accounting and, along
with the notes and other receivables due from Microlog, had a carrying value
of
$321,884 at September 30, 2008.
We
do not
use derivative financial instruments in our investments. Accordingly, we do
not
believe that there is any material market risk exposure with respect to
derivative or other financial instruments that would require disclosure in
this
item
Item
4T. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
Under
the
supervision and with the participation of our management, including our Chief
Executive Officer (“CEO”) and Chief Accounting Officer (“CAO”), we conducted an
evaluation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the
end
of the period covered by this Quarterly Report on Form 10-Q. Based upon that
evaluation, our CEO and our Principal Accounting Officer have concluded that
the
design and operation of our disclosure controls and procedures were effective
to
ensure that information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities
and
Exchange Commission and that information required to be disclosed in the reports
that we file or submit under the Exchange Act is accumulated and communicated
to
management, including our principal executive and financial officers, to allow
timely decisions regarding required disclosure. Our quarterly evaluation of
disclosure controls includes an evaluation of some components of our internal
control over financial reporting, and internal control over financial reporting
is also separately evaluated on an annual basis for purposes of providing the
management report, which is set forth below.
Management
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting to provide reasonable assurance regarding
the
reliability of our financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted
accounting principles. Internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that
in
reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with authorizations of management and directors of
the
company; and (iii) provide reasonable assurance regarding prevention of timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Management
assessed our internal control over
financial reporting as of March 31, 2008, the end of the fiscal year. Management
based its assessment on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Management’s assessment included evaluation of elements such as the
design and operating effectiveness of key financial reporting controls, process
documentation, accounting policies, and our overall control environment. This
assessment is supported by testing and monitoring performed by our own finance
and accounting personnel.
Based
on
our assessment, management has concluded that our internal control over
financial reporting was ineffective as of the end of the fiscal year to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting principles as a result of
the
material weaknesses in internal control as described and defined below. We
reviewed the results of management’s assessment with the Audit Committee of our
Board of Directors. In addition, on a quarterly basis we will evaluate any
changes to our internal control over financial reporting to determine if a
material changed has occurred.
Material
Weaknesses in Internal Controls
Bagell,
Josephs, Levine & Company, L.L.C. (“Bagell”) our independent registered
public accounting firm, has provided us with an unqualified report on our
consolidated financial statements for the fiscal year ended March 31, 2008.
However, during the conduct of our assessment of internal control over financial
reporting, we identified material weaknesses in the design of certain general
controls governing computer processing activities and have advised
the audit committee that the following material weaknesses existed at March
31,
2008. As defined by the Public Company Accounting Oversight Board Auditing
Standard No. 5, a material weakness is a deficiency or a combination of
deficiencies in internal control over financial reporting such that there is
a
reasonable possibility that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely basis.
The
material weaknesses exist in the design and execution of certain general
controls governing computer processing (“I/T”) activities. Most
significantly, the management of the customer information database utilized
by
the customer care and customer billing functions of one of our companies is
performed offsite by a subcontracted consultant without proper controls over
access to the data or changes to the system. In addition, we do not have
processes established to document the control over changes made to certain
proprietary information systems that supply transaction amounts. Finally, we
do
not have the proper processes in place at all subsidiaries for the establishment
and maintenance of individual access codes and passwords.
While
these material weaknesses did not have an effect on our reported results or
result in the restatement of any previously issued financial statements or
any
other related disclosure, they nevertheless constituted deficiencies in our
controls. In light of these material weaknesses and the requirements enacted
by
the Sarbanes-Oxley act of 2002, and the related rules and regulations adopted
by
the SEC, our Chief Executive Officer and Chief Accounting Officer concluded
that, as of March 31, 2008, our controls and procedures needed improvement
and
were not effective at a reasonable assurance level. Despite those deficiencies
in our internal controls, management believes that there were no material
inaccuracies or omissions of material fact in this quarterly
report.
Since
the
discovery of the material weaknesses in I/T internal controls at our CLEC
subsidiaries as described above, our CLEC subsidiaries became subject to the
Management Agreement with USA as described elsewhere in this Form 10Q. As a
result, management’s focus on internal controls over financial reporting was
temporarily diverted until we reassumed the management of the Company’s CLEC
Business. Management has plans to strengthen the Company's oversight over the
I/T functions and its attendant controls, procedures, documentation and security
beyond what has existed in prior years. Specifically, we have converted to
a new
general ledger system and plan to replace the customer information database
system utilized by the customer care and customer billing functions that is
presently maintained offsite by a subcontractor. During the next fiscal year
we
plan to convert to a new billing system that is currently being developed by
one
of our other subsidiaries which we believe will provide proper controls over
access to the data and changes to the system. We also plan to take whatever
additional steps are necessary to improve our I/T controls and procedures and
eliminate the identified material weaknesses.
The
elimination of the material weaknesses identified above is among our highest
priorities. We have discussed our corrective actions and future plans with
our
Audit Committee and Bagell as of the date of this quarterly report, and believe
the planned actions should serve to correct the above listed material weaknesses
in our internal controls. However, we cannot provide assurance that either
we or
our independent auditors will not in the future identify further material
weaknesses or significant deficiencies in our internal control over financial
reporting that we have not discovered to date.
Inherent
Limitations on Effectiveness of Controls
The
Company’s management, including the CEO and CAO, does not expect that our
Disclosure Controls or our internal control over financial reporting will
prevent or detect all error and all fraud. A control system, no matter how
well
designed and operated, can provide only reasonable, not absolute, assurance
that
the control system’s objectives will be met. The design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further, because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any, within the
company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events,
and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Projections of any evaluation
of
controls effectiveness to future periods are subject to risks. Over time,
controls may become inadequate because of changes in conditions or deterioration
in the degree of compliance with policies or procedures.
Changes
in Internal Control over Financial Reporting
There
have been no changes in our internal controls over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-Q that
have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
PART
II
OTHER
INFORMATION
Item
1. Legal Proceedings.
In
addition to certain other litigation arising in the normal course of its
business that we believe will not materially affect our financial position
or
operating results, we were involved with the following legal proceedings during
the six months ended September 30, 2008.
1)
At the
time that we acquired Davel, there was existing litigation brought against
Davel
and other defendants regarding a claim associated with certain alleged patent
infringement. Davel was named as a defendant in a civil action captioned Gammino
v. Cellco Partnership d/b/a Verizon Wireless, et al., C.A. No. 04-4303 filed
in
the United States District Court for the Eastern District of Pennsylvania.
The
plaintiff claimed that Davel and other defendants allegedly infringed its patent
involving the prevention of fraudulent long-distance telephone calls. The
plaintiff was seeking monetary relief of at least $7,500,000. Davel did not
believe that the allegations set forth in the complaint were valid, and
accordingly, Davel filed a Motion for Summary Judgment with the United States
District Court. On October 4, 2007 the United States District Court granted
Davel’s Motion for Summary Judgment and the Court entered final judgment
dismissing Plaintiff John R. Gammino’s claims for patent infringement. On
November 1, 2007, Plaintiff filed his Notice of Appeal commencing an action
in
the United States Court of Appeal for the Federal District. In response, Davel
filed its appellate brief on February 26, 2008. Notwithstanding the pending
appellate proceeding, in July 2008 the parties entered into a Settlement
Agreement terminating the litigation and providing a mutual release of claims,
which ended the pending litigation between the parties.
2)
On
April 17, 2007, the Supreme Court of the United States issued an opinion in
the
case captioned Global Crossing Telecommunications, Inc. v. Metrophones
Telecommunications, Inc. on Certiorari from the United States Court of Appeals
for the Ninth Circuit (the "Ninth Circuit" and the "Metrophones Case"), No.
05-705, in which it upheld the Ninth Circuit's decision that independent
payphone providers have a private right of action to pursue recovery in federal
court from telecommunication carriers who fail to pay dial around compensation.
The ruling in the Metrophones Case impacts litigation that has been pending
in
federal district court against AT&T, Sprint and Qwest (the "Defendants") for
non-payment of dial around compensation (the “District Court Litigation”). Davel
Communications, Inc. and certain of Davel's subsidiaries (collectively, the
"Davel Entities") are directly or indirectly plaintiffs in the District Court
Litigation. Following the Supreme Court ruling in the Metrophones Case, AT&T
and Sprint filed with the United States Supreme Court a Petition for a Writ
of
Certiorari No. 07-552 seeking review of the ruling of the United States Court
of
Appeals for the District of Columbia Circuit that the plaintiffs had standing
in
the District Court Litigation. On January 4, 2008 the United States Supreme
Court granted the Petition for a Writ of Certiorari. The parties filed their
respective briefs during the first calendar quarter of 2008, with the United
States Supreme Court hearing oral arguments on April 21, 2008. On June 23,
2008,
the United Stated Supreme Court issued a ruling affirming the decision of the
United States Court of Appeals. The recent ruling by the United States Supreme
Court has permitted the District Court Litigation to move forward.
Although
the District Court Litigation has been pending since 1999, the litigation
remains in its preliminary phases. As a result, we cannot predict the likelihood
of success on the merits, the costs associated with the pursuit of the claims,
the timing of any recovery or the amount of recovery, if any. However, the
industry representing a group of independent payphone providers, including
the
Davel Entities, has prevailed in a similar Federal Communications Commission
administrative proceeding against another carrier for non-payment of dial-around
compensation using a similar methodology which was accepted and pursuant to
which the Federal Communications Commission assessed pre-judgment interest
(the
"Similar Litigation"). The Similar Litigation is being appealed to the U.S.
Court of Appeals for the District of Columbia. Based upon our methodology in
the
Similar Litigation, we estimate that the amount in controversy for the Davel
Entities against the Defendants extends well into the eight figures, but any
recovery is conditioned on, among other things (i) prevailing on the merits
at
trial; (ii) having the Davel Entities' damages model and other claims approved
in whole or in large part; (iii) prevailing on any appeals that the Defendants
may make; and (iv) the continued solvency of the Defendants. As evidenced by
the
nine years that this litigation has been in process, the Defendants have shown
an interest in stretching the duration of the litigation and have the means
to
do so. Although the Davel Entities could ultimately benefit (in an absolute
sense, although not necessarily on a present value basis) from this delay in
the
event that pre-and/or post-judgment interest (awarded at 11.25% per annum in
the
Similar Litigation) is assessed against the Defendants and the potential award
of attorneys' fees and/or other remedies (in addition to compensatory damages)
if the Davel Entities prevail, such delay will result in a deferral of the
receipt of any cash to the Davel Entities.
3) Under
the
authority granted by the Management Agreement to USA, CloseCall America filed
a
complaint in the Circuit Court for Howard County, Maryland, against Skyrocket
Communications, Inc. (“Skyrocket”) Case No. 13-C-07-70296 for breach of contract
and unjust enrichment (the “Skyrocket Litigation”). CloseCall’s claim arose from
an unpaid credit owing to CloseCall in the amount of $23,914 owed under a
terminated technical support services agreement. In response thereto, Skyrocket
filed a counter-claim alleging breach of contract and asserting damages in
the
amount of $1.5 million. In January 2008 Skyrocket filed an amended
counter-complaint asserting an additional claim for intentional
misrepresentation, seeking $5 million in actual damages and $5 million in
punitive damages. Based upon our belief that the counter-claim and amended
counter-claims are without merit, CloseCall filed a motion for summary judgment.
The Court granted CloseCall’s motion on the amended counter-claim and dismissed
Skyrocket’s claim for intentional misrepresentation. CloseCall intends to seek
reconsideration of its motion for summary judgment on the counter-claim. It
is
expected that the matter will proceed to trial during the first calendar quarter
of 2009. We believe that CloseCall has meritorious defenses to the alleged
claims and we intend to vigorously defend CloseCall in this matter.
Notwithstanding the foregoing, in the event that CloseCall is required to
litigate the matter and its defenses were not successful, we believe that any
potential exposure related to the claims alleged against CloseCall are not
likely to be material.
4)
On
or
about March 15, 2008 we were served with a summons and complaint in the Superior
Court of New Jersey in Bergen County captioned Harborside Investments III LLC
vs. MobilePro Corp. and Neoreach, Inc. The plaintiff alleges claims of breach
of
agreement and unjust enrichment arising out of an equipment lease agreement
for
wireless equipment and seeks damages in the amount of $976,361 (the “Harborside
Litigation”). On or about April 28, 2008 the Company filed its answer, separate
defenses and third party complaint against JTA Leasing Co., LLC. The Harborside
Litigation is in its initial stages. Although we believe MobilePro has
meritorious defenses to the alleged claims and we intend to vigorously defend
ourselves in this matter we cannot predict the likelihood of success in the
Harborside Litigation. The Company has recorded the liability for the estimated
principal balance relating to this capital lease obligation and the related
accrued interest which is included in liabilities of companies held for sale
in
the condensed consolidated balance sheets at September 30 and March 31, 2008.
5)
On
March 4, 2008 the Company filed a complaint in the Circuit Court of Madison
County, Mississippi against Telava Networks, Inc. d/b/a Telava Wireless/Network,
Inc. (“Telava”) asserting claims against Telava for breach of contract and
tortuous breach of contract in connection with a June 2007 purchase agreement
pursuant to which Telava agreed to purchase MobilePro’s interests in Kite
Networks and the rest of our wireless business. The Company seeks recovery
of
all available damages including, but not limited to, actual, consequential
general, expectancy and punitive damages. Telava filed a motion to remove the
case to the United States District Court for the Southern District of
Mississippi, Jackson Division after which it filed an answer denying the
substantive claims made by MobilePro and asserting certain affirmative defenses
to the claims. On or about September 30, 2008 the parties entered into a joint
stipulation of dismissal, without prejudice. The dismissal agreement ends the
existing litigation while preserving the Company’s right to re-assert the claims
at a later date if the Company so elects.
6)
Davel
and certain of its wholly owned subsidiaries have been plaintiffs in a complaint
filed against Qwest Corporation (“Qwest” and the “Qwest Litigation”) in the
United States District Court for the Western District of Washington alleging
various claims concerning Qwest’s billings to the plaintiffs from 1997 to 2003
for certain communication services from Qwest. The proceeding had previously
been stayed through January 2008 to permit the Federal Communications Commission
to issue a ruling that would provide the court guidance concerning the billing
matters at issue in the Qwest Litigation. Despite the failure of the Federal
Communications Commission to timely issue the guidance sought by the district
court, on or about September 30, 2008 the parties entered into a Settlement
Agreement to resolve the Qwest Litigation. The proceeds received as a result
of
the Settlement Agreement had previously been assigned to the former lenders
of
Davel pursuant to the acquisition and related agreements between the Company
and
former secured lenders of Davel. As a result of a modification to certain
agreements between the Company and the former lenders in December 2007, the
Company was permitted to retain $718,314 of the settlement proceeds.
7)
Other
Ongoing and Threatened Litigation
The
Company is involved in other claims and litigation arising in the ordinary
course of business, which it does not expect to materially affect its financial
position or results of operations. The Company has been threatened by several
former employees with litigation; however, to date, no litigation or other
action has commenced which is material to the Company.
Item
1A. Risks Factors
Investing
in our securities involves a high degree of risk. Before investing in our
securities, you should carefully consider the risks and uncertainties described
below and those included in our Annual Report on Form 10-K for the fiscal year
ended March 31, 2008, our Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 2008, and the other information contained in this report.
Our
future results may also be impacted by other risk factors listed from time
to
time in our future filings with the SEC, including, but not limited to, our
Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q.
If
any of these risks or uncertainties actually occurs, our business, financial
condition or future operating results could be materially harmed. In such an
event, the trading price of our common stock could decline and you could lose
part or all of your investment.
The
Sale of Portions of Our Business May Not Be Concluded and We May Not Have
Sufficient Cash to Continue Operations
We
have
forecasted our operating cash requirements through the end of fiscal year 2009
based on several important assumptions. We have assumed that Gobility will
succeed in selling some or all of its assets, thus enabling Kite Networks to
satisfy some or all of its liabilities including the capital equipment leases
or
that the wireless networks can be sold by Gobility to a party or parties that
are capable of paying these obligations or otherwise renegotiating the terms
of
the leases in a satisfactory manner. A sale of the wireless networks further
assumes that in addition to finding a willing and able buyer, Gobility can
also
negotiate an assignment or other transfer of the existing lease obligations
with
the various leasing companies, as well as obtaining approval of the various
municipalities in which the wireless networks are deployed. The Company
understands that negotiations between potential buyers, Gobility and the various
leasing companies have to date been difficult and lacking in reasonable
cooperation. As a result, despite the interest of potential buyers, it may
be
difficult or impossible to negotiate a reasonable settlement with certain
leasing companies. The lack of reasonable cooperation by the leasing companies
could cause a potential buyer to choose not to purchase the Gobility assets
and
have a material adverse effect on the Company and its ability to continue as
a
going concern.
If
Gobility is unsuccessful in facilitating a sale of some or all of its assets,
the Company will be unable to permanently eliminate the cash requirements
represented by the wireless network business as planned. In such an event,
the
Company will not have sufficient cash to sustain operations without the
completion of the Wireline Business sale , raising additional capital or
arriving at the successful conclusion of one or more of the District Court
Litigation matters. (see Paragraph 2 of Item 1. - “Legal Proceedings”).
On
June
30, 2007, we executed an agreement to sell the Wireline Businesses (including
CloseCall, AFN and the Internet service provider companies) to USA. We had
assumed that the sale of CloseCall and AFN would occur in accordance with the
terms of the Purchase Agreement. However, on January 14, 2008 we received notice
from USA, which purports to terminate the Purchase Agreement. In the event
that
the Company is unsuccessful in closing the Purchase Agreement with USA, or
otherwise selling the businesses to an alternative buyer or raising new capital,
the Company will not have sufficient cash to satisfy the cash requirements
represented by the wireless network businesses, our corporate overhead and
our
debt obligations and we could therefore suffer a material adverse effect to
our
business.
Included
in its audit report on our consolidated financial statements included for the
fiscal year ended March 31, 2008, our independent registered public accounting
firm included a paragraph describing that there is substantial doubt about
the
Company’s ability to continue as a going concern.
The
Failure of Gobility to Sell Assets May Result in Our Payment of Transferred
Liabilities and May Cause a Material Adverse Effect to our
Business
In
December 2006, we engaged an investment banking firm to assist in evaluating
strategic alternatives for the wireless networks business conducted by its
Kite
Networks and Kite Broadband subsidiaries. Efforts to secure investment capital
for this business or to find a willing buyer resulted in the sale of the
wireless networks business to Gobility on July 8, 2007. The purchase price
was
$2.0 million, paid with a debenture convertible into shares of common stock
of
Gobility. However, under the terms of the debenture, Gobility was required
to
raise at least $3.0 million in cash no later than August 15, 2007. Gobility
has
defaulted on the financing obligation under the debenture, providing us the
right to repurchase the wireless networks business with the surrender of the
debenture and the payment of a nominal additional amount.
Mobilepro
remains a co-obligor on certain capital leases transferred to Gobility. The
total principal balance of these leases was approximately $2,422,000 at
September 30, 2008. Monthly payments on these capital leases total approximately
$111,000 and they are more than twelve months in arrears. In addition, Mobilepro
was a co-purchaser of certain wireless network equipment obtained by Kite
Networks. The amount originally owed to the supplier of this equipment for
the
purchase of this equipment was $1,591,978. The Company entered into a
forbearance agreement with the equipment vendor and agreed to pay the equipment
obligation over time, with interest at the prime rate. In the event certain
assets are sold by Gobility, the proceeds of such asset sale will be used to
satisfy all or a portion of the equipment obligation.
On
March
10, 2008 Gobility sold the assets of the wireless network in Longmont, Colorado
and the Company received the related proceeds in the form of promissory notes
from the purchaser totaling $1,800,000. Thereafter, in July 2008 Data Sales
sold
certain of the leased assets to a third party, further reducing the total
principal balance of the leases by approximately $1,231,000. In connection
with
the foregoing asset sale, the Company executed a promissory note and release
with Data Sales in the principal amount of $330,000. Although Gobility has
previously represented to us that it is pursuing the sale of its remaining
wireless network assets, we understand that Gobility has not yet closed on
the
sale of those wireless networks and that it has defaulted in making scheduled
lease payments. If Gobility fails to consummate the sale of its remaining
wireless network assets and make the required payments on the liabilities
described above, it is likely that the creditors described above will demand
payment of the past due amounts from Mobilepro. As a result of Gobility’s
failure to satisfy the monthly lease obligations, one leasing company has
commenced legal action against Mobilepro, which is currently proceeding in
its
initial phases of discovery (see the Harborside Litigation in Paragraph 4 of
Item 1. “Legal Proceedings”). Other leasing companies may also elect to commence
legal action and may elect to accelerate the payment date for the balance of
the
remaining monthly payments. In such event, Mobilepro would not have sufficient
cash to satisfy the obligations to the leasing companies. Further, if we were
unsuccessful in defending lawsuits from the leasing companies and were required
to satisfy the obligations to the leasing companies, the Company may not be
able
to meet its principal and interest payment obligations on the convertible
debenture and YA Global could potentially foreclose on the assets of the
Company.
We
Have Lost Money Historically Which Means That We May Not Be Able to Continue
Operations
The
Company has historically lost money. The Company’s accumulated deficit at
September 30, 2008 was $95,350,754. Although the Company had net income of
$282,093 in the six months ended September 30, 2008, it had a loss from
continuing operations of $1,104,971. In the years ended March 31, 2008, 2007
and
2006, the Company sustained net losses of $18,361,602, $45,898,288 and
$10,176,407, respectively. Over this three year period, most of the acquired
businesses of Mobilepro have experienced declining revenues. Although
restructuring measures have reduced other operating expenses, the Company had
been unable to reduce the corresponding costs of services. In addition, the
Company has funded the start-up and operations of the municipal wireless
networks and online gaming businesses without these companies achieving expected
profitability and continues to fund the Company’s corporate overhead. The
Company was able to generate $532,481of cash from operating activities during
the six months ended September 30, 2008. Cash flow from operations was primarily
due to cash generated by its CLEC Business and $810,215 of Regulatory Receipts
relating to claims against certain telecommunications carriers of Davel,
including $718,314 received from Qwest in the second fiscal quarter (see Item
1.
- “Legal Proceedings”). Future losses are likely to occur. Accordingly, the
Company will continue to experience liquidity and cash flow problems if it
is
unable to improve its operating performance, to sell assets for cash including
the CLEC Business, or to raise additional capital as needed and on acceptable
terms.
If
YA Global or Other Large Stockholders Sell Part or All of Their Shares of Common
Stock in the Market, Such Sales May Cause Our Stock Price to
Decline
From
time
to time, YA Global and other selling stockholders may sell in the public market
up to all of the shares of common stock owned at that time. Under
the
Convertible Debenture, YA Global has the right to convert its debt into common
stock of the Company. Such shares are tradable under Rule 144 of the Securities
Act. YA Global has converted $140,875 of debt into 162,442,857 shares of common
stock since June 30, 2008 and has sold at least 118,642,857
shares.
Any
significant downward pressure on our stock price caused by the sale of stock
by
large selling stockholders could encourage short sales by third parties. Such
short sales could place further downward pressure on our stock
price.
Failure
to Complete the Sale of the CLEC Business May Result in Our Inability to Retire
the YA Global Debentures
On
June
30, 2007, we executed an agreement to sell the Wireline Businesses (including
CloseCall, AFN and the Internet service provider companies) to USA. Pursuant
to
the USA Purchase Agreement, we closed the sale of the Internet service provider
companies to USA on July 18, 2007 and received cash proceeds of $2,500,000,
a
promissory note for $2,000,000 and preferred stock convertible into 7.5% of
the
fully diluted shares of USA’s common stock initially valued at $5.8 million.
Simultaneously, we used $2,000,000 of this cash to pay down principal and
accrued interest owed to YA Global under the debentures. The balance of the
promissory note was $1,000,000 and was scheduled to be paid by USA on or before
March 31, 2008. In July 2008, the Company revised the payment terms relating
to
the USA note and received principal and interest payments totaling $200,000.
The
remaining principal balance and accrued interest at 12% per annum is due on
December 29, 2008.
Upon
the
close and pursuant to the terms of the USA Purchase Agreement, the Company
was
scheduled to receive additional cash proceeds of $18.4 million, including
payment of the balance of the promissory note. The cash proceeds from the sale
of the CLEC Business were expected to be utilized to retire the YA Global
debentures plus accrued interest.
However,
on January 14, 2008 we received notice from USA which purports to terminate
the
Purchase Agreement but provides that USA remains interested in discussing the
terms upon which it would purchase CloseCall and AFN. USA was unable to complete
the purchase of the CLEC Business on terms acceptable to the Company and, as
a
result of this default the Company subsequently terminated the purchase
agreement. In the event that the Company is unsuccessful in selling the
businesses to an alternative buyer and if the Company is unable to obtain
additional credit or an extension of the maturity date of May 1, 2009 under
the
YA Global debt, the Company may not have the ability to continue as a going
concern.
We
Do Not Have Enough Shares and Registered Shares to Cover the Conversion of
the
Debentures into Our Common Stock
Effective
June 30, 2008, the Company issued the Convertible Debenture to YA Global with
an
initial principal balance of $13,391,175 replacing the Amended Debenture and
the
Secured Debenture. The Convertible Debenture provides for monthly payments
of
interest at 12% with the remaining principal balance due on May 1, 2009.
Accordingly, the entire principal balance of the Convertible Debenture has
been
classified as a current liability at September 30, 2008 in the Company’s
condensed consolidated balance sheets. YA Global may convert any portion of
the
unpaid principal and interest into shares representing up to 4.99% of the
Company’s common stock at the lesser of $0.04973 per share or the average of the
two lowest volume weighted average prices during the five trading days
immediately preceding the conversion date. If certain conditions are met, the
Company has the option to pay up to 4.5% of the total interest due in common
stock at the applicable conversion price on the day immediately prior to the
interest payment date. The conversion price is subject to adjustment if the
Company is deemed to have issued shares at a price that is lower than the
effective conversion price on the date such shares are issued.
Using
shares of its common stock registered on Form S-3 in November 2006, the Company
made principal and interest payments on the debentures that totaled $4,880,481
during the fiscal year ended March 31, 2007, and that totaled $1,967,908 from
April 2007 through May 2007.
In
order
to issue a sufficient number of shares to permit the unpaid balance of the
Convertible Debenture to be converted into common stock, assuming sufficient
market capitalization, the Company would need to obtain authorization from
its
shareholders to increase the number of authorized shares of common stock. In
conjunction with its annual meeting on October 23, 2008, the Company has
commenced the process to obtain shareholder approval to increase the number
of
authorized shares and/or to conduct a reverse stock split of its common stock,
and has further extended the meeting to obtain such approval. The Company cannot
guarantee that any such proposal will ultimately be approved by the
shareholders. In the event the Company is not successful in obtaining the
approval of its shareholders, the Company will not have a sufficient number
of
shares of its common stock to permit the conversion of the Convertible
Debenture, which could cause the Company to be unable to fulfill its obligations
under the terms of the Convertible Debenture.
Absent
new capital, a sale of the CLEC Business on acceptable terms or other
significant event, the Company may not have the ability to continue as a going
concern without a significant restructuring of the YA Global Convertible
Debenture.
Legal
Actions May Be Required by Us in order to Enforce Certain Legal Rights
The
telecommunications industry includes hundreds of companies, many with
substantially greater infrastructure, financial, personnel, technical,
marketing, and other resources, and larger numbers of established customers
and
more prominent name recognition than us. We transact business with certain
of
these companies. In addition, certain of our businesses operate in areas of
the
industry that are subject to federal and/or state regulations. As a result,
in
order to enforce rights under negotiated contracts with transaction partners
or
to obtain the benefits of certain government regulations, we may be forced
to
initiate or to participate in legal action. For example, as discussed in Item
1,
Paragraph 2 - “Legal Proceedings”, Davel is engaged in a lengthy and expensive
legal process relating to the nonpayment of dial-around compensation by large,
long distance carriers. Using their greater resources, defendants have taken
and
may in the future continue to take actions that stretch the duration of
litigation and substantially delay our receipt of the benefits of favorable
legal decisions. Furthermore, there can be no guarantee that the legal actions
taken by the Company will ultimately result in a favorable legal decision to
the
Company.
Adverse
Decisions in Litigation Could Cause a Material Adverse Effect and/or Cause
the
Company to Cease Operations
CloseCall
is a defendant in the Skyrocket Litigation and the Company is a defendant in
the
Harborside Litigation, which are described in Item 1 - “Legal Proceedings”.
Although CloseCall and the Company believe they have meritorious defenses to
the
claims raised in each of these matters and intend to vigorously defend
themselves, there can be no guarantee that CloseCall and the Company will
ultimately succeed in doing so. If an adverse ruling is ultimately issued
against CloseCall in the Skyrocket Litigation or against the Company in the
Harborside Litigation, we may not have sufficient funds available to satisfy
a
judgment. In such event, the Company could cease operations and/or be required
to seek the protection of the bankruptcy court to protect the interests of
its
secured creditor.
Similarly,
Davel and its subsidiaries are plaintiffs in the District Court Litigation
in
which it seeks recovery of significant amounts of nonpaid dial around
compensation from large, long distance carriers. Although the Company believes
Davel’s litigation efforts will ultimately result in a favorable legal decision
in the District Court Litigation, there can be no guarantee that Davel will
ultimately succeed, or that it will ultimately recover, or timely recover,
significant amounts of money owed to it. In the event Davel is unable to recover
the monies owed to it for the non-payment of dial around compensation, and
the
Company is otherwise unable to raise additional capital, the Company could
be
forced to cease operations.
Federal
Regulators Have Taken and May Take Positions in the Future with Which We
Disagree or Which We Believe are Contrary to Existing Law and Regulation, Which
May Impose Substantial Litigation Costs on Our Business, Impede Our Access
to
Capital and/or Force Us to Seek a Merger Partner or Cease
Operations
As
a
publicly traded telecommunications company, we are subject to the regulatory
scrutiny of both the FCC and the SEC. Both agencies are so-called
“administrative agencies” with statutory authority to implement and enforce laws
passed by the U.S. Congress. Despite this limited scope, both the FCC and SEC
have the ability to use discretion in certain cases both in interpreting what
the laws passed by Congress mean and when to enforce such laws. The FCC and/or
SEC may even take positions with which we disagree or which we believe are
unfounded in statute, regulation, or prior agency guidance and which are adverse
to Mobilepro. For instance, the FCC has been repeatedly overruled by federal
courts in recent years for misinterpretations of the 1996 Telecom Act. In order
to contest such behavior, Mobilepro may be forced to resort to litigation.
In
the context of the SEC, Mobilepro’s ability to have any registration statement
“go effective” may be impeded if in its comments to a future registration
statement the SEC were to take a position with which we disagree based on prior
law, regulation or prior SEC interpretative guidance. The registration process
that resulted in our Form S-3 becoming effective in November 2006 commenced
in
September 2005 with the filing of Form SB-2. The protracted registration process
included the filing of several registration statement amendments in order to
incorporate changes from the SEC received in a series of comment letters. If
we
were to encounter similar difficulties and a prolonged registration process
in
connection with a future registration statement, it could materially impair
Mobilepro’s access to the capital markets, potentially force Mobilepro to incur
substantial litigation related costs and may force Mobilepro to seek a merger
with another company or cease operations.
The
Federal and State Regulations under Which We Operate Could Change,
Resulting in Harm to Our Business
The
enactment of the Telecommunications Act of 1996 significantly altered the
regulatory landscape in which our businesses operate. In addition, state
regulators maintain jurisdiction over certain of our services. We cannot predict
whether future FCC or state regulatory decisions may adversely affect our
ability to operate certain of our businesses or impact our
profitability.
Although
the Telecommunications Act of 1996, as implemented by the FCC, addressed certain
historical inequities in the payphone marketplace, uncertainties relating to
the
impact and timing of the implementation of this framework still exist. The
uncertainty with the greatest potential financial impact relates to revenue
from
and collectibility of access code calls and toll-free dialed calls, or dial
around compensation. Dial around compensation has previously accounted for
a
material percentage of our revenues. Historically, many parties legally
obligated by the FCC to pay dial around compensation have nevertheless failed
to
do so. We believe that such failures exist today. While we believe that we
would
have the right to sue in order to collect amounts owed, such efforts may consume
management time and attention and our cash, and there can be no assurance that
such efforts would result in the collection of any additional amounts.
Consequently, such illegal nonpayment activities may adversely affect our cash
flows, receivable collectibility, and future business
profitability.
In
addition, the FCC has issued recent orders concerning, among other things,
universal service contribution methodology and inter-carrier compensation.
It is
unclear whether these orders will ultimately be implemented by the FCC, and
if
implemented, what impact, if any, they will have for our CLEC
businesses.
Our
Common Stock Is Deemed to Be “Penny Stock,” Which May Make It More Difficult for
Investors to Resell Their Shares Due to Suitability
Requirements
Our
common stock is deemed to be “penny stock” as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934. A penny stock
has
the following characteristics:
•
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It
is traded at a price of less than $5.00 per share;
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|
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•
|
It
is not traded on a “recognized” national exchange;
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•
|
Its
price is not quoted on the NASDAQ automated quotation system
(NASDAQ-listed stock must still have a price of not less than $5.00
per
share); or
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•
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Its
issuer has net tangible assets less than $2.0 million (if the issuer
has
been in continuous operation for at least three years) or $5.0 million
(if
in continuous operation for less than three years), or has average
annual
revenues of less than $6.0 million for the last three years.
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Trading
of our stock may be restricted by the SEC’s penny stock regulations that may
limit a stockholder’s ability to buy and sell our stock.
The
penny
stock rules impose additional sales practice requirements on broker-dealers
who
sell to persons other than established customers and “accredited investors.” The
term “accredited investor” refers generally to institutions with assets in
excess of $5,000,000 or individuals with a net worth in excess of $1,000,000
or
annual income exceeding $200,000 or $300,000 jointly with their spouse. The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document in a form prepared by the SEC that provides information
about penny stocks and the nature and level of risks in the penny stock market.
The broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer’s account. The bid and offer
quotations, and the broker-dealer and salesperson compensation information,
must
be given to the customer orally or in writing prior to effecting the transaction
and must be given to the customer in writing before or with the customer’s
confirmation. Moreover, broker/dealers are required to determine whether an
investment in a penny stock is a suitable investment for a prospective investor.
The penny stock rules require that prior to a transaction in a penny stock
not
otherwise exempt from these rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser’s written agreement to the transaction.
These
disclosure requirements may have the effects of reducing the number of potential
investors and the level of trading activity in the secondary market for the
stock that is subject to these penny stock rules. Consequently, these penny
stock rules may affect the ability of broker-dealers to trade our securities.
This may make it more difficult for investors in our common stock to sell shares
to third parties or to otherwise dispose of them. This could cause our stock
price to decline. We believe that the penny stock rules discourage investor
interest in and limit the marketability of our common stock.
In
addition, the National Association of Securities Dealers, or NASD, has adopted
sales practice requirements that may also limit a stockholder’s ability to buy
and sell our stock. Before recommending an investment to a customer, a
broker-dealer must have reasonable grounds for believing that the investment
is
suitable for that customer. Prior to recommending speculative low priced
securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s financial status,
tax status, investment objectives and other information. Under interpretations
of these rules, the NASD believes that there is a high probability that
speculative low priced securities will not be suitable for at least some
customers. The NASD requirements make it more difficult for broker-dealers
to
recommend that their customers buy our common stock, which may limit investors’
ability to buy and sell our stock and have an adverse effect on the market
for
our shares.
The
Unavailability of Telecommunication Lines Could Threaten Our
Business
Our
ability to deliver good quality services at competitive prices depends on our
ability to obtain access to T-l and dial-up lines pursuant to pricing and other
terms that are acceptable to us. Access to these lines necessary for providing
services to a significant portion of our subscribers is obtained from incumbent
local exchange carriers like Verizon and AT&T. To date, we have been
successful in reaching certain important agreements with each of these carriers
providing us with opportunities to expand services and the geographic coverage
of such services and predictable prices, avoiding any interruption in service
to
our customers. In the event that any of the carriers would be unable or
unwilling to provide service to us, even if legally required to do so, our
ability to service existing customers or add new customers could be adversely
impaired in a material manner.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
On
May
26, 2008, the Board of Directors approved the issuance of up to 36,850,000
shares of common stock as follows: a warrant for up to 20,000,000 shares of
common stock to Jay O. Wright, Chairman of the Board and Chief Executive
Officer, a warrant to each of Douglas Bethell, President of the CloseCall and
AFN, and Tammy L. Martin, Chief Administrative Officer and General Counsel,
for
4,000,000 shares of common stock, a warrant for up to 1,750,000 shares of common
stock to Donald Paliwoda, the Company’s Chief Accounting Officer, 1,500,000
shares of common stock to its independent director, Donald Sledge, and warrants
totaling 5,600,000 to nine non-executive employees of the Company. The exercise
price for each warrant is $0.0016 per share.
Effective
June 30, 2008, the Company issued the Convertible Debenture in the amount
of
$13,391,175 to YA Global, replacing the previously issued convertible
debentures. YA Global may convert any portion of the unpaid principal and
interest into shares representing up to 4.99% of the Company’s common stock at
the lesser of $0.04973 per share or the average of the two lowest volume
weighted average prices during the five trading days immediately preceding
the
conversion date. If certain conditions are met, the Company has the option
to
pay up to 4.5% of the total interest due in common stock at the applicable
conversion price on the day immediately prior to the interest payment date.
The
conversion price is subject to adjustment if the Company is deemed to have
issued shares at a price that is lower than the effective conversion price
on
the date such shares are issued.
On
June
30, 2008, in connection with the issuance of the Convertible Debenture, the
Company granted to YA Global a seven-year warrant to purchase 25,000,000 shares
of its common stock at an exercise price of $0.04973 per share which expires
on
June 30, 2015. In addition, the outstanding warrants previously granted to
YA
Global to purchase 15,000,000 share of common stock at $0.20 per share and
10,000,000 shares of common stock at $0.174 per share were repriced and are
now
exercisable at a price of $0.04973 per share.
During
the three months ended September 30, 2008, the Company issued 76,942,857
unregistered shares of common stock to YA Global in satisfaction of $104,800
in
principal relating to the Convertible Debenture. Subsequent to September 30,
2008, YA Global converted an additional $36,075 of principal into 85,500,000
unregistered shares of common stock. Such shares are tradable by YA Global
pursuant to Rule 144 of the Securities Act of 1933.
Except
as
otherwise noted, the securities described in this Item were issued pursuant
to
the exemption from registration provided by Section 4(2) of the Securities
Act
of 1933 and/or Regulation D promulgated under the Securities Act. Each such
issuance was made pursuant to individual contracts that are discrete from one
another and are made only with persons who were sophisticated in such
transactions and who had knowledge of and access to sufficient information
about
Mobilepro to make an informed investment decision. Among this information was
the fact that the securities were restricted securities.
Item
3. Defaults upon Senior Securities.
There
were no defaults upon senior securities during the three months ended June
30,
2008. However, please see the Risk Factors above titled “The Failure of Gobility
to Sell Assets May Result in Our Payment of Transferred Liabilities and May
Cause a Material Adverse Effect to our Business”.
Item
4. Submission of Matters to a Vote of Security Holders.
On
October 23, 2008 the Company held its Annual Meeting of Shareholders. The voting
has been extended to provide additional time to solicit proxies of additional
shareholders regarding the matters presented at the 2008 Annual
Meeting.
Item
5. Other Information.
Not
applicable.
Item
6. Exhibits.
|
(a) |
The
following exhibits are filed as part of this
report:
|
Exhibit
No.
|
Description
|
|
Location
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10.1
|
Third
Amended and Restated Employment Agreement, dated June 25, 2008, between
Jay O. Wright and the Company
|
|
Incorporated
by reference to Exhibit 10.51 to the Registrant’s Annual Report on Form
10-K filed on June 27, 2008
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|
|
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10.2
|
Securities
Purchase Agreement dated June 30, 2008 between Mobilepro Corp. and
YA
Global Investments, L.P.
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on July 9, 2008
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10.3
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12%
Secured Convertible Debenture dated June 30, 2008 issued by Mobilepro
Corp. to YA Global Investments, L.P.
|
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Incorporated
by reference to Exhibit 10.2 to the Registrant’s Current Report on Form
8-K filed on July 9, 2008
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10.4
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Global
Security Agreement dated June 30, 2008 between Mobilepro Corp. and
YA
Global Investments, L.P.
|
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Incorporated
by reference to Exhibit 10.3 to the Registrant’s Current Report on Form
8-K filed on July 9, 2008
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10.5
|
Intellectual
Property Security Agreement dated June 30, 2008 between Mobilepro
Corp.
and YA Global Investments, L.P.
|
|
Incorporated
by reference to Exhibit 10.4 to the Registrant’s Current Report on Form
8-K filed on July 9, 2008
|
|
10.6
|
Global
Guarantee Agreement dated June 30, 2008 between Mobilpro Corp. and
YA
Global Investments, L.P.
|
|
Incorporated
by reference to Exhibit 10.5 to the Registrant’s Current Report on Form
8-K filed on July 9, 2008
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10.7
|
Global
Pledge Agreement dated June 30, 2008 between Mobilpro Corp. and YA
Global
Investments, L.P.
|
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Incorporated
by reference to Exhibit 10.6 to the Registrant’s Current Report on Form
8-K filed on July 9, 2008
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10.8
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Warrant
dated June 30, 2008 issued by Mobilepro Corp. to YA Global Investments,
L.P.
|
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Incorporated
by reference to Exhibit 10.7 to the Registrant’s Current Report on Form
8-K filed on July 9, 2008
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10.9
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Promissory
Note made as of August 1, 2008 by and among Mobilepro Corp. and Data
Sales
Co., Inc. in the amount of Three Hundred Thirty Thousand Dollars
($330,000).
|
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on August 4, 2008
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31.1
|
Certification
by Jay O. Wright, Chief Executive Officer, pursuant to Rule
13a-14(a)
|
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Provided
herewith
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31.2
|
Certification
by Donald L. Paliwoda, Principal Financial Officer, pursuant to Rule
13a-14(a)
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Provided
herewith
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32.1
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Certification
by Jay O. Wright and Donald L. Paliwoda, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002**
|
|
Provided
herewith
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|
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99.1
|
Power
Point Presentation by Mobilepro Corp. at its Annual Meeting of
Shareholders on October 23, 2008
|
|
Incorporated
by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
8-K filed on October 24, 2008
|
|
**
These
certifications are not deemed filed by the SEC and are not to be incorporated
by
reference in any filing of the Registrant under the Securities Act of 1933
or
the Securities Exchange Act of 1934, irrespective of any general incorporation
language in any filings.
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
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MOBILEPRO
CORP. |
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Date: November
14, 2008 |
By: |
/s/ Jay
O.
Wright |
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Jay O. Wright, Chief Executive
Officer |
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Date: November
14, 2008 |
By: |
/s/ Donald
L.
Paliwoda |
|
Donald L. Paliwoda, Chief
Accounting
Officer |