Attached files
file | filename |
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EX-31.2 - MULTIBAND CORP | v166098_ex31-2.htm |
EX-32.1 - MULTIBAND CORP | v166098_ex32-1.htm |
EX-31.1 - MULTIBAND CORP | v166098_ex31-1.htm |
EX-32.2 - MULTIBAND CORP | v166098_ex32-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
___________
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
OF 1934
|
FOR
THE PERIOD ENDING SEPTEMBER 30, 2009
|
|
OR
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
OF 1934
|
FOR
THE TRANSITION PERIOD FROM ______ TO ______
|
|
COMMISSION
FILE NUMBER 0 – 1325
|
|
___________
MULTIBAND
CORPORATION
(Exact
name of registrant as specified in its charter)
MINNESOTA
(State or
other jurisdiction of incorporation or organization)
41 - 1255001
(IRS
Employer Identification No.)
9449
Science Center Drive, New Hope, Minnesota 55428
(Address
of principal executive offices)
Telephone
(763) 504-3000 Fax (763) 504-3060
Internet: www.multibandusa.com
(Registrant's
telephone number, facsimile number, and Internet address)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes o 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 the definitions 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 x (do not
check if a smaller reporting company) Smaller reporting company o
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
On,
November 5, 2009 there were 9,659,797 shares outstanding of the registrant's
common stock, no par value, and 490,418 outstanding shares of the registrant's
convertible preferred stock.
PART
I. FINANCIAL INFORMATION
ITEM
1. CONSOLIDATED FINANCIAL STATEMENTS
MULTIBAND
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30, 2009 (unaudited)
|
September
30, 2008 (unaudited)
|
September
30, 2009 (unaudited)
|
September
30, 2008 (unaudited)
|
|||||||||||||
REVENUES
|
$ | 71,421 | $ | 12,341 | $ | 200,975 | $ | 28,861 | ||||||||
COSTS
AND EXPENSES
|
||||||||||||||||
Cost
of products and services (exclusive of depreciation and amortization shown
separately below)
|
54,645 | 8,556 | 158,855 | 18,770 | ||||||||||||
Selling,
general and administrative
|
13,774 | 2,758 | 43,023 | 7,173 | ||||||||||||
Depreciation
and amortization
|
2,414 | 846 | 8,402 | 2,463 | ||||||||||||
Impairment
of assets
|
- | - | - | 66 | ||||||||||||
Total
costs and expenses
|
70,833 | 12,160 | 210,280 | 28,472 | ||||||||||||
INCOME
(LOSS) FROM OPERATIONS
|
588 | 181 | (9,305 | ) | 389 | |||||||||||
OTHER
INCOME (EXPENSE)
|
||||||||||||||||
Interest
expense
|
(1,026 | ) | (301 | ) | (2,771 | ) | (514 | ) | ||||||||
Interest
income
|
9 | 13 | 19 | 32 | ||||||||||||
Management
consulting income
|
- | 1,447 | - | 1,447 | ||||||||||||
Other
income(expense)
|
76 | (5 | ) | 424 | 48 | |||||||||||
Total
other income (expense)
|
(941 | ) | 1,154 | (2,328 | ) | 1,013 | ||||||||||
NET
INCOME (LOSS) BEFORE INCOME TAXES AND NONCONTROLLING INTEREST IN
SUBSIDIARIES
|
(353 | ) | 1,335 | (11,633 | ) | 1,402 | ||||||||||
PROVISION
FOR INCOME TAXES
|
372 | 286 | 574 | 749 | ||||||||||||
NET
INCOME (LOSS)
|
(725 | ) | 1,049 | (12,207 | ) | 653 | ||||||||||
LESS:
NET INCOME (LOSS) ATTRIBUTABLE TO THE NONCONTROLLING INTEREST IN
SUBSIDIARIES
|
(266 | ) | 138 | (2,044 | ) | 550 | ||||||||||
NET
INCOME (LOSS) ATTRIBUTABLE TO MULTIBAND CORPORATION AND
SUBSIDIARIES
|
(459 | ) | 911 | (10,163 | ) | 103 | ||||||||||
Preferred
stock dividends
|
70 | 64 | 214 | 4,049 | ||||||||||||
INCOME
(LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
$ | (529 | ) | $ | 847 | $ | (10,377 | ) | $ | (3,946 | ) | |||||
INCOME
(LOSS) PER COMMON SHARE – BASIC:
|
||||||||||||||||
INCOME
(LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS
|
$ | (0.05 | ) | $ | 0.09 | $ | (1.08 | ) | $ | (0.43 | ) | |||||
INCOME
(LOSS) PER COMMON SHARE – DILUTED:
|
||||||||||||||||
INCOME
(LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS
|
$ | (0.05 | ) | $ | 0.09 | $ | (1.08 | ) | $ | (0.43 | ) | |||||
Weighted
average common shares outstanding – basic
|
9,659 | 9,562 | 9,653 | 9,184 | ||||||||||||
Weighted
average common shares outstanding – diluted
|
9,659 | 9,797 | 9,653 | 9,184 |
See
accompanying notes to the unaudited condensed consolidated financial
statements
Page
2
MULTIBAND
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in
thousands)
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30, 2009 (unaudited)
|
September
30, 2008 (unaudited)
|
September
30, 2009 (unaudited)
|
September
30, 2008 (unaudited)
|
|||||||||||||
NET
INCOME (LOSS)
|
$ | (459 | ) | $ | 911 | $ | (10,163 | ) | $ | 103 | ||||||
OTHER
COMPREHENSIVE INCOME (LOSS), NET OF TAX:
|
||||||||||||||||
Unrealized
gains (losses) on securities:
|
||||||||||||||||
Unrealized
holding gains (losses) arising during period
|
(29 | ) | - | (37 | ) | 152 | ||||||||||
COMPREHENSIVE
INCOME (LOSS)
|
$ | (488 | ) | $ | 911 | $ | (10,200 | ) | $ | 255 |
See
accompanying notes to the unaudited condensed consolidated financial
statements
Page
3
MULTIBAND
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
ASSETS
(in
thousands)
September
30, 2009 (unaudited)
|
December
31, 2008 (audited)
|
|||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$
|
4,253
|
$
|
4,346
|
||||
Securities
available for sale
|
9
|
46
|
||||||
Accounts
receivable, net
|
15,170
|
3,437
|
||||||
Other
receivable – related party
|
518
|
7,666
|
||||||
Inventories
|
10,387
|
1,903
|
||||||
Prepaid
expenses and other
|
3,731
|
1,273
|
||||||
Current
portion of notes receivable
|
61
|
61
|
||||||
Total
Current Assets
|
34,129
|
18,732
|
||||||
PROPERTY
AND EQUIPMENT, NET
|
8,438
|
2,033
|
||||||
OTHER
ASSETS
|
||||||||
Goodwill
|
35,489
|
1,095
|
||||||
Intangible
assets, net
|
24,446
|
3,668
|
||||||
Other
receivable – related party – long term
|
3,169
|
-
|
||||||
Notes
receivable – long-term, net of current portion
|
32
|
39
|
||||||
Other
assets
|
2,197
|
476
|
||||||
Total
Other Assets
|
65,333
|
5,278
|
||||||
TOTAL
ASSETS
|
$
|
107,900
|
$
|
26,043
|
See
accompanying notes to the unaudited condensed consolidated financial
statements
Page
4
MULTIBAND
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
(in
thousands, except share and liquidation preference amounts)
September
30, 2009 (unaudited)
|
December
31, 2008 (audited)
|
|||||||
CURRENT
LIABILITIES
|
||||||||
Mandatory
redeemable preferred stock, 0 and 15,000 Class F preferred
shares
|
$ | - | $ | 150 | ||||
Line
of credit
|
50 | - | ||||||
Short
term debt
|
202 | - | ||||||
Short-term
debt – related party
|
1,400 | 100 | ||||||
Current
portion of long-term debt
|
456 | 1,509 | ||||||
Current
portion of capital lease obligations
|
523 | 311 | ||||||
Accounts
payable
|
34,610 | 8,274 | ||||||
Accrued
liabilities
|
24,427 | 4,435 | ||||||
Deferred
service obligations and revenue
|
3,246 | 1,488 | ||||||
Total
Current Liabilities
|
64,914 | 16,267 | ||||||
LONG-TERM
LIABILITIES
|
||||||||
Long-term
debt, net of current portion and original issue discount
|
4,705 | 46 | ||||||
Long-term
debt, net of current portion-related party
|
33,715 | 300 | ||||||
Capital
lease obligations, net of current portion
|
539 | 317 | ||||||
Total
Liabilities
|
103,873 | 16,930 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
STOCKHOLDERS'
EQUITY (DEFICIT)
|
||||||||
Cumulative
convertible preferred stock, no par value:
|
||||||||
8%
Class A (14,171 shares issued and outstanding, $148,796 liquidation
preference)
|
213 | 213 | ||||||
10%
Class B (1,670 and 2,570 shares issued and outstanding, $17,535 and
$26,985 liquidation preference)
|
17 | 26 | ||||||
10%
Class C (113,480 and 114,080 shares issued and outstanding, $1,134,800 and
$1,140,800 liquidation preference)
|
1,469 | 1,482 | ||||||
10%
Class F (150,000 shares issued and outstanding, $1,500,000 liquidation
preference)
|
1,500 | 1,500 | ||||||
8%
Class G (11,595 shares issued and outstanding, $115,950 liquidation
preference)
|
48 | 48 | ||||||
6%
Class H (2.0 shares issued and outstanding, $200,000 liquidation
preference)
|
- | - | ||||||
Class
E, no par value, (200,000 and 0 shares issued and outstanding, $2,000,000
and $0 liquidation preference)
|
2,000 | - | ||||||
Common
stock, no par value (9,659,797 and 9,642,374 shares issued and
outstanding)
|
37,856 | 37,687 | ||||||
Stock
subscriptions receivable
|
(40 | ) | (84 | ) | ||||
Options
and warrants
|
46,573 | 46,038 | ||||||
Accumulated
other comprehensive income – unrealized gain on securities available for
sale
|
9 | 46 | ||||||
Accumulated
deficit
|
(91,297 | ) | (81,314 | ) | ||||
Total
Stockholders' Equity (Deficit)
|
(1,652 | ) | 5,642 | |||||
Noncontrolling
interest in subsidiaries
|
5,679 | 3,471 | ||||||
Total
Equity
|
4,027 | 9,113 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 107,900 | $ | 26,043 |
See
accompanying notes to the unaudited condensed consolidated financial
statements
Page
5
MULTIBAND
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
NINE
MONTHS ENDED SEPTEMBER 30,
|
||||||||
2009
|
2008
|
|||||||
(unaudited)
|
(unaudited)
|
|||||||
OPERATING
ACTIVITIES
|
||||||||
Net
loss
|
$
|
(12,207
|
)
|
$
|
653
|
|||
Adjustments
to reconcile net loss attributable to Multiband Corporation and
subsidiaries to net cash provided from operating
activities:
|
||||||||
Depreciation
and amortization
|
8,402
|
2,463
|
||||||
Amortization
of imputed interest discount
|
35
|
219
|
||||||
Amortization
of original issue discount related to warrants issued with long term
debt
|
35
|
-
|
||||||
Amortization
of debt issuance costs
|
15
|
-
|
||||||
Loss
(gain) on sale of property and equipment and intangible
assets
|
(35
|
)
|
52
|
|||||
Gain
on debt extinguishment
|
-
|
(30
|
)
|
|||||
Impairment
of goodwill, intangibles and property and equipment
|
-
|
65
|
||||||
Change
in allowance for doubtful accounts on accounts receivable
|
51
|
(15
|
)
|
|||||
Change
in reserve for stock subscriptions and interest receivable
|
43
|
8
|
||||||
Expense
related to repricing of warrants
|
30
|
-
|
||||||
Stock
based compensation expense for future services
|
-
|
153
|
||||||
Stock
based compensation expense for services
|
133
|
18
|
||||||
Compensation
expense of restricted stock award
|
-
|
24
|
||||||
Management
consulting income from DirecTECH
|
-
|
(1,447
|
)
|
|||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(7,104
|
)
|
887
|
|||||
Inventories
|
5,647
|
221
|
||||||
Prepaid
expenses and other
|
(1,095)
|
(52
|
)
|
|||||
Other
assets
|
(21
|
)
|
120
|
|||||
Accounts
payable and accrued liabilities
|
1,463
|
(229
|
)
|
|||||
Deferred
service obligations and revenue
|
1,671
|
781
|
||||||
Net
cash flows from (used by) operating activities
|
(2,937
|
)
|
3,891
|
|||||
INVESTING
ACTIVITIES
|
||||||||
Purchases
of property and equipment
|
(2,166
|
)
|
(112
|
)
|
||||
Checks
issued in excess of bank balance with the purchase of 80% of outstanding
stock of DirecTECH operating entities
|
(369
|
)
|
-
|
|||||
Cash
acquired via purchase of NC (formerly Michigan Microtech, Inc.
(MMT))
|
-
|
4,044
|
||||||
Cash
collected on other receivables – related party acquired with the purchase
of NC (formerly Michigan Microtech, Inc. (MMT))
|
-
|
2,815
|
||||||
Purchase
of US Install
|
-
|
(101
|
)
|
|||||
Purchases
of intangible assets
|
(175
|
)
|
-
|
|||||
Proceeds
from sale of property and equipment and intangible assets
|
-
|
5
|
||||||
Collections
on notes receivable
|
37
|
5
|
||||||
Net
cash flows from (used in) investing activities
|
(2,673
|
)
|
6,656
|
|||||
FINANCING
ACTIVITIES
|
||||||||
Payments
on short-term debt
|
(25
|
)
|
-
|
|||||
Payments
on long-term debt
|
(2,657
|
)
|
(84
|
)
|
||||
Payments
on capital lease obligations
|
(335
|
)
|
(152
|
)
|
||||
Payments
on note payable – related party
|
(1,400
|
)
|
-
|
|||||
Payments
for debt issuance costs
|
(144
|
)
|
-
|
|||||
Net
advances on line of credit
|
5
|
-
|
||||||
Payment
on mandatory redeemable preferred stock
|
(150
|
)
|
(58
|
)
|
||||
Payments
for stock issuance costs
|
-
|
(25
|
)
|
|||||
Payments
received on stock subscriptions receivable
|
-
|
3
|
||||||
Proceeds
from issuance of preferred stock
|
500
|
-
|
||||||
Proceeds
from note payable – related party
|
3,700
|
-
|
||||||
Proceeds
from issuance of long-term debt
|
6,100
|
100
|
||||||
Redemption
of preferred stock
|
(18
|
)
|
(102
|
)
|
||||
Preferred
stock dividends
|
(59
|
)
|
(81
|
)
|
||||
Net
cash flows from (used in) financing activities
|
5,517
|
(399
|
)
|
|||||
INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
(93
|
)
|
10,148
|
|||||
CASH
AND CASH EQUIVALENTS - Beginning of Period
|
4,346
|
944
|
||||||
CASH
AND CASH EQUIVALENTS - END OF PERIOD
|
$
|
4,253
|
$
|
11,092
|
See
accompanying notes to the unaudited condensed consolidated financial
statements
Page
6
MULTIBAND
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
NINE
MONTHS ENDED SEPTEMBER 30,
|
||||||||
2009
|
2008
|
|||||||
(unaudited)
|
(unaudited)
|
|||||||
Cash
paid for interest, net of amortization of original issue discount and
interest discount
|
$ | 1,872 | $ | 199 | ||||
Cash
paid for federal and state income taxes
|
611 | 682 | ||||||
Non-cash
investing and financing transactions:
|
||||||||
Conversion
of Class I preferred stock to common stock
|
- | 3,745 | ||||||
Conversion
of Class G preferred stock to common stock
|
- | 150 | ||||||
Conversion
of accrued interest into common stock
|
2 | 2 | ||||||
Conversion
of accrued dividends into common stock
|
166 | 175 | ||||||
Intrinsic
value of preferred dividends
|
3 | 84 | ||||||
Purchase
of property and equipment via increase of capital lease
obligations
|
562 | 47 | ||||||
Warrants
issued for long-term notes payable
|
372 | - | ||||||
Debt
reduced by reduction in other receivable from DirecTECH
|
1,447 | |||||||
Purchase
of US Installs via increase in accrued expenses
|
- | 103 | ||||||
Acquisition
of securities available for sale upon expiration of contingent
rights
|
- | 209 | ||||||
Reduction
of stock subscription receivable via cancellation of common
stock
|
- | 61 | ||||||
Debt
and accrued interest paid with issuance of common stock
|
- | 20 | ||||||
Purchase
of 51% of MMT via issuance of notes payable and common stock, net of
discount for imputed interest
|
- | 5,783 | ||||||
Increase
in short-term debt via offset to accounts payable
|
159 | - | ||||||
Purchase
of 80% of outstanding stock of DirecTECH operating entities via issuance
of short and long-term notes payable
|
38,240 | - | ||||||
Reduction
of notes payable via reduction of related party receivable in connection
with the purchase of 80% of outstanding stock of DirecTECH operating
entities
|
5,844 | - | ||||||
Reduction
of notes payable with issuance notes payable in connection with
acquisition
|
- | |||||||
Purchase
of 29% of outstanding stock of NC (formerly MMT) with issuance of short
and long-term notes payable
|
1,660 | - | ||||||
Purchase
of 80% of outstanding stock of DirecTECH operating entities with payment
to escrow in 2008
|
500 | - | ||||||
Reduction
of notes payable with issuance notes payable in connection with
acquisition
|
300 | - | ||||||
Reduction
of note payable – related party with exchange for preferred
stock
|
1,500 | - | ||||||
Reduction
of accounts payable with proceeds from sale of intangible asset and
equipment
|
446 | - | ||||||
Reduction
in accounts payable and accrued expenses with issuance of long-term
debt
|
394 | - | ||||||
Common
stock issued for services to be rendered
|
- | 158 |
See
accompanying notes to the unaudited condensed consolidated financial
statements
Page
7
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(in
thousands, except for share amounts)
NOTE
1 - Unaudited Consolidated Financial
Statements
|
The
information furnished in this report is unaudited and reflects all adjustments
which are normal recurring adjustments and, which in the opinion of management,
are necessary to fairly present the operating results for the interim periods.
The operating results for the interim periods presented are not necessarily
indicative of the operating results to be expected for the full fiscal
year. The unaudited consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and footnotes
thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008, previously filed with the Securities and Exchange
Commission.
NOTE
2 - Summary of Significant Accounting
Policies
|
Nature of Business
Multiband
Corporation and subsidiaries (the Company) was incorporated in Minnesota in
September 1975. The Company provides voice, data and video services
to multi-dwelling unit and single family home customers. The
Company's products and services are sold to customers located throughout the
United States of America.
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern that contemplates the realization of
assets and satisfaction of liabilities in the normal course of
business. For the nine months ended September 30, 2009, the Company
incurred a net loss attributable to Multiband Corporation and subsidiaries of
$10,163 versus the nine months ended September 30, 2008 in which the Company
earned a net income attributable to Multiband Corporation and subsidiaries of
$103. At September 30, 2009, the Company had an accumulated deficit
of $91,297. The Company's ability to continue as a going concern is
dependent on it attaining profitability and/or raising additional
capital. Management may sell, if prudent, certain assets on a
strategic basis for prices agreeable to the Company and/or obtain additional
debt or equity capital to meet all of its existing cash obligations and fund
commitments on planned Multiband projects; however, there can be no assurance
that the sources will be available or available on terms favorable to the
Company. Management anticipates that the impact of the actions listed
below will generate sufficient cash flows to pay current liabilities, long-term
debt and capital and operating lease obligations and fund the Company's
operations for the next twelve months:
1.
|
Initiate
and grow its Home Service Provider (HSP) business by eliminating
competitive HSP providers from certain of its core
markets.
|
2.
|
Improve
gross margin percentages by cycling technicians from training and placing
them in a revenue generating role and by mitigating work order breakage
expense.
|
3.
|
Reduce
operating expenses by reducing training costs through the lowering of
technician turnover, managing professional fees, insurance and other
general and administrative expenses.
|
4.
|
Evaluate
factors such as anticipated usage and inventory turnover to maintain
optimal inventory levels.
|
5.
|
Obtain
additional debt financing.
|
6.
|
Expand
call center support with sales of call center services to both existing
and future system operators and to buyers of the Company’s video
subscribers.
|
7.
|
Solicit
additional equity investment in the Company by either issuing preferred or
common stock.
|
Principles of
Consolidation
The 2008
consolidated financial statements include the accounts of Multiband Corporation
(MBCorp) and its wholly owned subsidiaries, Minnesota Digital Universe, Inc.
(MDU), Multiband Subscriber Services, Inc. (MBSS), and Multiband USA, Inc.
(MBUSA). In addition, effective March 1, 2008, the Company acquired a
51% interest in Multiband NC, Inc. (NC) (formerly Michigan Microtech, Inc.
(MMT)) and have also included NC’s results of operations and cash flow for the
seven months ended September 30, 2008 in the consolidated financial statements
for that period.
In
addition, effective January 2, 2009, the Company purchased 80% of the issued and
outstanding shares of common stock of all of the DirecTECH Holding Co. (DTHC)
operating subsidiaries (DirecTECH) (an additional 29% of Multiband NC, Inc.
(NC) (formerly Michigan Microtech, Inc. (MMT)), 51% of which was previously
purchased effective March 1, 2008 (see Note 3) and 80% of Multiband NE, Inc.
(NE), Multiband SW, Inc. (SW), Multiband EC, Inc. (EC), Multiband MDU, Inc.
(MBMDU), Multiband DC, Inc. (DC) and Multiband Security, Inc. (Security) (see
Note 3)). The noncontrolling interest in subsidiaries on the
unaudited condensed consolidated balance sheet (formerly Minority Interest) and
unaudited condensed consolidated statement of operations represents DTHC’s 20%
ownership of Multiband NE, Inc. (NE), Multiband SW, Inc. (SW), Multiband EC,
Inc. (EC), Multiband NC, Inc. (NC), Multiband MDU, Inc. (MBMDU), Multiband DC,
Inc. (DC) and Multiband Security, Inc. (Security). The 2009
consolidated financial statements include the accounts of all wholly-owned
subsidiaries and the newly acquired companies (DirecTECH). The
Company pushes down applicable overhead, interest expense and amortization
expense from the parent company (MBCorp) to its subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Page
8
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(in
thousands, except for share amounts)
|
Revenue
Recognition
|
The
Company recognizes revenue in accordance with the Securities Exchange
Commission’s Staff Accounting Bulletin No. 104 “Revenue Recognition” (“SAB
104”), which requires that four basic criteria be met before revenue can be
recognized: (i) persuasive evidence of a customer arrangement exists; (ii) the
price is fixed or determinable; (iii) collectability is reasonably assured; and
(iv) product delivery has occurred or services have been
rendered. The Company recognizes revenue as services are performed
and completed.
The
Company earns HSP segment revenue as follows:
·
|
installation
and service of DirecTV video programming for residents of single family
homes
|
·
|
installation
of home security systems and internet
services
|
The
Company has a home services provider (HSP) agreement with DirecTV which allows
the Company to install and activate DirecTV video programming services for
residents of single family homes. As a DirecTV HSP, the Company earns
revenue for installing and servicing DirecTV video customers pursuant to
predetermined rates set by DirecTV which may vary from time to
time. Revenue is recognized upon completion of the delivery and
installation of equipment. DirecTV reimburses the Company for
substantially all DirecTV equipment used for customer installation related to
the HSP segment.
MDU
segment user charges are recognized as revenues in the period the related
services are provided. Any amounts billed prior to services being
provided are reported as deferred service obligations and revenues.
The
Company earns MDU segment revenue as follows:
1.
|
from
voice, video and data communications products which are sold and
installed
|
2.
|
direct
billing of user charges to multiple dwelling units, through the activation
of, enhancement of, and residual fees on video programming services
provided to residents of multiple dwelling
units
|
Revenue
generated from activation of video programming services is earned in the month
of activation. According to Multiband's Master System Operator
agreement with DirecTV, in the event that a customer cancels within the first 12
months of service, DirecTV has the right to chargeback the Company for a portion
of the activation fees received. The Company has estimated the
potential charge back of commissions received on activation fees during the past
12 months based on historical percentages of customer cancellations and has
included that amount as a reduction of revenue. Residual income is
earned as services are provided by DirecTV through its system
operators. As a master system operator for DirecTV, the Company earns
a fixed percentage based on net cash received by DirecTV for recurring monthly
services, a variable amount depending on the number of activations in a given
month, and a variable amount for coordinating improvements of systems used to
deliver enhanced programming services. The Company’s master system
operator contract with DirecTV also permits the Company to earn revenues through
its control of other system operators who are unable to provide DirecTV video
programming services without the Company’s performance.
Page
9
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(in
thousands, except for share amounts)
The
Company reports the aforementioned MDU voice, data, and video revenues on a
gross basis based on the following factors: the Company has the primary
obligation in the arrangement with its customers; the Company controls the
pricing of its services; the Company performs customer service for the
agreements; the Company approves customers; and the Company assumes the risk of
payment for services provided. We offer some products and services that are
provided by third party vendors. We review the relationship between
us, the vendor and the end customer on an individual basis to assess whether
revenue should be reported on a gross or net basis. As an example,
our resold satellite digital television revenue is reported on a net
basis.
MDU
segment revenue generated by the support center to service third party
subscribers by providing billing and call center support services is recognized
in the period the related services are provided.
Customers
contract for both the purchase and installation of voice and data networking
technology products and certain video technologies products. Revenue
is recognized when the products are delivered and installed and the customer has
accepted and has the ability to fulfill the terms of the contract.
The
Company’s policy is to present taxes imposed on revenue-producing transactions
on a net basis which means any sales tax charged is not part of the Company’s
revenues.
Deferred Revenue
The
Company invoices for certain installation upgrade projects upon order of project
equipment. Revenue is deferred on these projects until the equipment
is installed.
Goodwill and Other Intangible
Assets
The
Company periodically evaluates goodwill and other intangible and long-lived
assets for potential impairment indicators. These judgments regarding
the existence of impairment indicators are based on legal factors, market
conditions and operational performance of the business
segments. Future events could cause the Company to conclude that
impairment indicators exist and that goodwill and other intangible and
long-lived assets are impaired. Any resulting impairment loss could have a
material adverse impact on our financial condition and results of
operations. Goodwill was $35,489 and $1,095 at September 30, 2009 and
December 31, 2008, respectively, and is recorded as part of our MDU and HSP
segments. The increase in goodwill during 2009 is due to the purchase
of DirecTECH (see Note 3).
Goodwill
by business segment consists of the following:
MBCorp.
|
MDU
|
HSP
|
Total
|
|||||||||||||
Balance,
December 31, 2008
|
$ | - | $ | 50 | $ | 1,045 | $ | 1,095 | ||||||||
Acquisitions
|
- | 312 | 34,082 | 34,394 | ||||||||||||
Balance,
September 30, 2009
|
$ | - | $ | 362 | $ | 35,127 | $ | 35,489 |
Page
10
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(in
thousands, except for share amounts)
Components
of intangible assets are as follows:
September 30, 2009
|
December 31, 2008
|
|||||||||||||||
Gross Carrying
|
Accumulated
|
Gross Carrying
|
Accumulated
|
|||||||||||||
Amount
|
Amortization
|
Amount
|
Amortization
|
|||||||||||||
Intangible
assets subject to amortization
|
||||||||||||||||
Right
of entry contracts
|
$ | 2,583 | $ | 1,087 | $ | 801 | $ | 526 | ||||||||
Contracts
with DirecTV
|
36,902 | 13,952 | 11,502 | 8,060 | ||||||||||||
Customer
contracts
|
102 | 102 | 102 | 86 | ||||||||||||
Total
|
39,587 | 15,141 | 12,405 | 8,672 | ||||||||||||
Impairment
of intangibles
|
- | - | - | 65 | ||||||||||||
Total
including impairment
|
$ | 39,587 | $ | 15,141 | $ | 12,405 | $ | 8,737 |
Amortization
of intangible assets was $1,759 and $669 for the three months ended September
30, 2009 and 2008, respectively. For the nine months ended September
30, 2009 and 2008, amortization of intangible assets was $6,469 and $1,851,
respectively. Estimated amortization expense of intangible assets for
the remainder of the year ending December 31, 2009 and for the years ending
December 31, 2010, 2011, 2012, 2013, 2014 and thereafter is $1,778, $5,726,
$5,104, $5,058, $4,961, $1,714 and $92, respectively. Right of entry
contracts contain $13 of contracts that have not been placed in service,
therefore no amortization expense has been recorded. The weighted
average remaining life of the intangibles is 4.42 years, with right of entry
contracts average life of 4.38 years and contracts with DirecTV of 4.42 years as
of September 30, 2009.
Debt Issuance Costs
The
Company has incurred $145 of debt issuance costs during the nine months ended
September 30, 2009. The Company amortizes the debt issuance costs over 43
months and includes these costs with other assets on the unaudited condensed
consolidated balance sheet. Amortization of debt issuance costs of $10 and
$15 for the three and nine months ended September 30, 2009, respectively, is
included in interest expense.
Stock-Based Compensation
The
Company measures and recognizes compensation expense for all stock-based
payments at fair value. The financial statements for the nine months
ended September 30, 2009 and 2008 recognize compensation cost for the portion of
outstanding awards which have vested during the year. The Company
recognizes stock-based compensation costs on a straight-line basis over the
requisite service period of the award, which is generally the option vesting
term. For the three months ended September 30, 2009 and 2008 total
share-based compensation expense of $19 ($.00 per share) and $209 ($.02 per
share), respectively, was included in selling, general and administrative
expenses. For the nine months ended September 30, 2009 and 2008,
total share-based compensation expense of $133 ($.01 per share) and $153 ($.02
per share) was included in selling, general and administrative expenses,
respectively. As of September 30, 2009, there was $183 of total
unrecognized compensation cost related to nonvested share-based compensation
arrangements granted under the Plan. That cost is expected to be
recognized over a weighted-average period of 2.98 years. This is an
estimate based on options currently outstanding and therefore this projected
expense could be more in the future.
In
determining the compensation cost of the options granted during the three and
nine months ended September 30, 2009 and 2008, the fair value of each option
grant has been estimated on the date of grant using the Black-Scholes option
pricing model and the weighted average assumptions used in these calculations
are summarized as follows:
Three
months ended
|
Nine
months ended
|
|||||||||||||||
September 30, 2009
|
September 30, 2008
|
September 30, 2009
|
September 30, 2008
|
|||||||||||||
Risk-free
interest rate
|
*
|
3.15%
|
1.43%
|
3.15%
|
||||||||||||
Expected
life of options granted
|
*
|
6.5
Years
|
5.0
Years
|
6.5
Years
|
||||||||||||
Expected
volatility range
|
*
|
95%
|
95%
|
94%
|
||||||||||||
Expected
dividend yield
|
*
|
0%
|
0%
|
0%
|
* - no
options were issued this period.
Page
11
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(in
thousands, except for share amounts)
The
Company’s determination of fair value of share-based payment awards on the date
of grant using an option-pricing model is affected by the Company’s stock price
as well as assumptions regarding a number of variables. These
variables include, but are not limited to the Company’s expected stock price
volatility, and actual and projected stock option exercise behaviors and
forfeitures. An option's expected term is the estimated period
between the grant date and the exercise date of the option. As the
expected-term period increases, the fair value of the option and the
compensation cost will also increase. The expected-term assumption is
generally calculated using historical stock option exercise data. The
Company does not have historical exercise data to develop such an
assumption. In cases where companies do not have historical data and
where the options meet certain criteria, the use of a simplified expected-term
calculation is allowed. Accordingly, the Company calculated the
expected terms using the simplified method.
In
January 2009, the Company issued 80 shares of stock options with a Black Scholes
valuation of $72 to four directors of the Company. These seven year
stock options were immediately vested and were issued as long-term incentive
compensation pursuant to the Company’s 2000 Non-employee Directors Stock
Compensation Plan.
In
January 2009, the Company issued 214 shares of stock options with a Black
Scholes valuation of $193 to two officers of the Company. These seven
year stock options vest over four years and were issued as long-term incentive
compensation pursuant to the Company’s 1999 Stock Compensation
Plan.
Net Income (Loss) per Common
Share
Basic net
income (loss) per common share is computed by dividing the income (loss)
attributable to common stockholders by the weighted average number of common
shares outstanding for the reporting period. Diluted income (loss)
per common share is computed by dividing income (loss) attributable to common
stockholders by the sum of the weighted average number of common shares
outstanding plus all additional common stock that would have been outstanding if
potentially dilutive common shares related to common share equivalents (stock
options, stock warrants, convertible preferred shares, and issued but not
outstanding restricted stock) had been issued. All options, warrants,
convertible preferred shares, and restricted stock outstanding during the three
months September 30, 2009 and the nine months ended September 30, 2009 and 2008
were excluded from the calculation of diluted loss per share as their effects
were anti-dilutive due to the Company’s net losses for the periods. The three
months ended September 30, 2008 accounted for dilutive options, warrants,
preferred shares, and restricted stock. For the three months ended
September 30, 2008, there were 2,138,244 shares of anti-dilutive shares related
to options and warrants that were not included in the denominator for diluted
earnings per share.
The
following table sets forth the computation of basic and diluted earnings per
share:
Three
months ended
|
Nine
months ended
|
|||||||||||||||
September 30, 2009
|
September 30, 2008
|
September 30, 2009
|
September 30, 2008
|
|||||||||||||
Numerator:
Income (loss) attributable to common stockholders
|
$ | (529 | ) | $ | 847 | $ | (10,377 | ) | $ | (3,946 | ) | |||||
Denominator:
|
||||||||||||||||
Weighted-average
shares outstanding
|
9,659 | 9,562 | 9,653 | 9,184 | ||||||||||||
Effect
of dilutive securities
|
235 | - | - | |||||||||||||
Denominator
for diluted earnings per share
|
9,659 | 9,797 | 9,653 | 9,184 | ||||||||||||
Basic
earnings (loss) per share
|
$ | (0.05 | ) | $ | 0.09 | $ | (1.08 | ) | $ | (0.43 | ) | |||||
Diluted
earnings (loss) per share
|
$ | (0.05 | ) | $ | 0.09 | $ | (1.08 | ) | $ | (0.43 | ) | |||||
Page
12
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(in
thousands, except for share amounts)
Segment Reporting
A
business segment is a distinguishable component of an enterprise that is engaged
in providing an individual product or service or a group of related products or
services and that is subject to risks and returns that are different from those
of other business segments. Management believes that the Company
has two operating segments, HSP (Home Service Provider), where the
Company receives net cash payments for the installation and service of DirecTV
video programming for residents of single family homes; and MDU,
where the Company acts as a master service operator for DirecTV, receives net
cash payments for managing video subscribers through its network of system
operators who are billed by DirecTV and also directly bills voice, data and
video subscribers as a principal. The previously filed Form 10-K
business segments disclosed the MCS segment which is now reported within the MDU
segment.
Recent Accounting
Pronouncements
Effective
September 15, 2009, the Company adopted a new accounting standard that
establishes the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) as the exclusive reference to be applied in the
preparation of financial statements in conformity with GAAP. Accordingly, all
references to legacy guidance issued under previously recognized authoritative
literature have been removed in the third quarter of fiscal 2009. As the ASC was
not intended to change or alter existing GAAP, it did not have any impact on the
Company’s results of consolidated operations or financial position.
Income Taxes
The
Company accounts for deferred tax assets and liabilities under the liability
method. Deferred tax liabilities are recognized for temporary
differences that will result in taxable amounts in future
years. Deferred tax assets are recognized for deductible temporary
differences and tax operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
the enacted tax rates expected to apply to taxable income in the periods in
which the deferred tax asset or liability is expected to be realized or
settled. We assess the likelihood that our deferred tax assets will
be recovered from future taxable income and record a valuation allowance to
reduce our deferred tax assets to the amounts we believe to be
realizable. We concluded that a full valuation allowance against our
U.S. deferred tax assets was appropriate as of September 30, 2009 and December
31, 2008.
Reclassifications
Certain
accounts in the prior quarter’s unaudited condensed consolidated financial
statements have been reclassified for comparative purposes to conform to the
current period presentation. The reclass was a change in presentation
of minority interest related to noncontrolling interest in stockholders’ equity
(see Note 4). Also, the MCS segment was combined with the MDU segment
in 2009. These reclassifications had no effect on net income
(loss).
NOTE
3 – Business Acquisitions
|
Effective
January 2, 2009, the Company purchased 80% of the issued and outstanding shares
of common stock of all of the DTHC operating subsidiaries (DirecTECH) (an
additional 29% of NC (formerly MMT), 51% of which was previously purchased
effective March 1, 2008 and 80% of NE, SW, EC, MBMDU, DC and
Security. DTHC, a fulfillment agent for a national satellite
television company, DirecTV, specializes in the providing of satellite TV to
single family homes. The purpose of this acquisition was to increase
the Company’s business of installing video services in single family homes (HSP
segment). The purchase price totaled $40,400 plus other consideration
valued at $1,608 as of the acquisition date. The $40,400 consists of
three parts; 1) $500 in cash which was paid at the initial closing date of
January 2, 2009 and in escrow as a deposit at December 31, 2008, 2) a
non-interest bearing note of $500 payable without interest as follows: $250
on demand on or after April 1, 2009 and $250 after the Company’s retention of
senior financing, as defined, no later than August 31, 2009 and 3) a
promissory note in the amount of $39,400, due January 1, 2013, bearing interest
at an annual rate of 8.25% (subject to adjustment in the event of a default),
plus the remaining $800 note payable from the purchase of 51% of
NC. Subsequent to the closing, the Company and DTHC mutually agreed
to offset the $40,200 promissory note by the amount of $5,844, for an offsetting
receivable on Multiband’s books as of December 31, 2008. This reduced
the amount of this promissory note to $34,356.
Page
13
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(in
thousands, except for share amounts)
As part
of the agreement, Multiband has until December 31, 2009 to purchase the
remaining 20% of the issued and outstanding shares of common stock of all
DirecTECH. The consideration for the 20% purchase will be $10,000 of
Multiband Series J Preferred Stock, whose issuance will require Multiband
shareholder approval. The closing on the remaining 20% stock transaction is
anticipated to occur on or before December 31, 2009.
The
Company evaluates the purchase price allocation based on the fair value of the
assets acquired and liabilities assumed. The Company recognizes
pre-acquisition contingencies at fair value, if fair value can be reasonably
determined. If fair value cannot be reasonably determined, the
Company records the contingencies at its best estimate.
Because
the Company had previously gained control of NC with its purchase of 51% of NC
in March 2008, Multiband recognized the acquisition of additional 29% ownership
interest in NC on January 2, 2009 as an equity transaction. The
purchase price of $1,660 increased the accumulated deficit and the transfer of
$2,054 of noncontrolling interest to controlling interest decreased the
accumulated deficit. No increase to goodwill or intangibles was
recorded as part of this acquisition.
As it
relates to the purchase of the remainder of the DTHC operating subsidiaries, the
Company recognized the assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with certain exceptions. The
Company recognized goodwill as of the acquisition date, measured using an
income, market or cost approach, which in most types of business combinations
will result in measuring goodwill as the excess of the fair value of
consideration transferred plus the fair value of any noncontrolling interest in
the acquiree at the acquisition date over the fair value of the identifiable net
assets acquired or assumed. A qualitative and quantitative analysis
of factors that make up recognized goodwill, such as DirecTECH’s assets,
liabilities and other contingent considerations, such as leases and other
off-balance sheet commitments, follows. This analysis is preliminary
while the Company is still in its one year measurement period.
A summary
of the transaction is as follows:
Cash
paid
|
$ | 500 | ||
Short-term
debt
|
500 | |||
Promissory
note
|
39,400 | |||
Total
consideration
|
40,400 | |||
Less
consideration for 29% of NC (recorded separately as an equity
transaction)
|
(1,660 | ) | ||
Consideration
for 80% of outstanding stock of EC, NE, SW, MBMDU, DC, and
Security
|
$ | 38,740 | ||
Assets
|
$ | 31,348 | ||
Intangible
assets
|
27,634 | |||
Goodwill
|
34,193 | |||
Liabilities
|
(48,129 | ) | ||
Noncontrolling
interest
|
(6,306 | ) | ||
$ | 38,740 |
The fair
value of the intangible assets of $27,634 and noncontrolling interest of $6,306
was obtained by management, using a fair value measurement which included
applying discount rates of 15%, a terminal value of $28,200, as well as a
noncontrolling discount of 30%.
As part
of the acquisition, the Company preliminarily assessed a $5,040 contingent legal
accrual related to an existing litigation. In connection with the
purchase of the operating subsidiaries of DTHC, the Company has the right to
offset 50% of certain claims against the note to DTHC once those claims are
settled and paid. The Company has recorded a receivable of $2,290 which
represents an estimate of the amount that can be recovered from DTHC based on
the preliminary legal estimate. The receivable is classified as long-term since
management intends to offset the receivable with any balance remaining on the
note payable to DTHC. At present, the litigation is proceeding
through a discovery stage. While the parties have made some
preliminary attempts to settle the matter there is no guarantee that the matter
can be settled out of court. As a result there is no current timeline
under which the amount of the aforementioned accrual can be
finalized.
Page
14
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(in
thousands, except for share amounts)
During
the three months ended September 30, 2009, the Company increased this contingent
legal accrual $1,500 which brings the total accrual to $6,540. This
contingent accrual was increased due to new information obtained during the
quarter about facts and circumstances that existed as of the acquisition date
related to certain
legal matters. This increased accrual produced a purchase price adjustment to
goodwill and receivables. The Company intends to adjust the purchase
price allocation should more information become available as to the fair value
of the legal contingency during the measurement period.
The
Company acquired $25,400 of intangible assets relating to contracts with DirecTV
as well as right of entry contracts of $2,234. At the time of the
acquisition, the weighted average remaining life of the intangibles acquired was
2.57 years based on terms without renewals, with right of entry contracts
average life of 5.44 years and contracts with DirecTV of 2.33
years. The weighted average remaining life of the intangibles
acquired was 3.49 years assuming one year term renewals, with right of entry
contracts average life of 5.44 years and contracts with DirecTV of 3.33
years. In May 2009, the Company signed a new contract with DirecTV
(see Note 10). The Company capitalizes material costs incurred to
renew or extend terms of intangible assets. No costs have been
incurred to renew or extend the terms of intangible assets during the three and
nine months ended September 30, 2009. Goodwill and intangible assets
acquired are not expected to be deductible for tax purposes.
The
Company’s report on Form 10-K for the year ended December 31, 2008 contained a
preliminary estimated fair value of all the aforementioned assets and
liabilities related to the purchase. At the time of the preliminary
estimate DirecTech had not completed its audit for the year ended December 31,
2008. Nor at this time had the Company completed its procedures to
value and allocate the final purchase price to intangible and tangible assets
acquired in the acquisition. The Company’s subsequent receipt of
final balance sheet information to the aforementioned Form 10-K filing,
necessitated a revision of the DirecTech purchase price
valuation. This revision is reflected in this
footnote. The revision consists of reallocations of goodwill and
other intangible assets related to the purchase. More specifically,
goodwill assets were increased by $14,400 and intangible assets were decreased
by $9,066 from the original estimate, due to the additional purchase of 29% of
NC being treated as an equity transaction and therefore no additional assets
(including goodwill) or liabilities were allocated for NC in the purchase price
(see Note 4). At June 30, 2009, the Company revised the fair value of
the contingent consideration from $1,608 to zero. The Company
determined that the significant level 3 inputs previously used to determine the
contingent consideration were incomplete. After further review, the
Company determined that it was appropriate to define this change as a
measurement period adjustment to the purchase price. At September 30,
2009, the Company adjusted the contingencies estimated as a result of improved
information regarding circumstances that existed as of the acquisition date
which increased the liability by $1,090 and goodwill and receivables by
$545.
Since the
transaction was effective January 2, 2009, there has been no change in the
September 30, 2009 balance sheet or income statement for the three and nine
months ended September 30, 2009. The unaudited pro forma information
for the three and nine months ended September 30, 2008 does not purport to
represent what the Company’s results of operations would actually have been if
such transactions in fact had occurred at such date or to project the Company’s
results of future operations.
Page
15
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(in
thousands, except for share amounts)
2008
|
||||||||
Consolidated
as
reported
|
2008
Pro
Forma
|
|||||||
Three
months ended September 30, 2008
|
||||||||
Revenues
|
$
|
12,341
|
$
|
60,018
|
||||
Income(loss) from
operations
|
181
|
1,566
|
||||||
Net
income attributable to Multiband Corp and subsidiaries
|
911
|
(45
|
)
|
|||||
Preferred
stock dividends
|
64
|
64
|
||||||
Income
attributable to common shareholders
|
$
|
847
|
$
|
(109
|
)
|
|||
Income
(loss) attributable to common shareholders per common share –
basic
|
$
|
0.09
|
$
|
(0.01
|
)
|
|||
Income
(loss) attributable to common shareholders per common share –
diluted
|
$
|
0.09
|
$
|
(0.01
|
)
|
|||
Weighted
average shares outstanding – basic
|
9,562
|
9,562
|
||||||
Weighted
average shares outstanding – diluted
|
9,797
|
9,562
|
||||||
Nine
months ended September 30, 2008
|
||||||||
Revenues
|
$
|
28,861
|
$
|
171,759
|
||||
Income
from operations
|
389
|
(3,303
|
)
|
|||||
Net
income attributable to Multiband Corp and subsidiaries
|
103
|
(6,338
|
)
|
|||||
Preferred
stock dividends
|
4,049
|
4,049
|
||||||
Loss
attributable to common shareholders
|
$
|
(3,946
|
)
|
$
|
(10,387
|
)
|
||
Loss
attributable to common shareholders per common share –
basic and diluted
|
$
|
(0.43
|
)
|
$
|
(1.11
|
)
|
||
Weighted
average shares outstanding – basic and diluted
|
9,184
|
9,353
|
NOTE
4 – Noncontrolling Interest
|
September 30, 2009
|
December 31, 2008
|
|||||||
Equity
of noncontrolling interest (previously minority interest) in
subsidiaries:
|
||||||||
Noncontrolling
interest in subsidiaries, beginning balance
|
$ | 3,471 | $ | - | ||||
Purchase
of 51% of NC
|
- | 2,819 | ||||||
Purchase
of 80% of NE, SC, EC, MBMDU, DC & Security
|
6,306 | - | ||||||
Purchase
of 29% NC from noncontrolling interest
|
(2,054 | ) | - | |||||
Net
income(loss) attributable to the noncontrolling interest in
subsidiaries
|
(2,044 | ) | 652 | |||||
Noncontrolling
interest (previously minority interest) in subsidiaries, ending
balance
|
$ | 5,679 | $ | 3,471 |
Page
16
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(in
thousands, except for share amounts)
NOTE
5 – Inventories
|
September 30, 2009
|
December 31, 2008
|
|||||||
Inventories
consisted of the following:
|
||||||||
DirecTV
– serialized
|
$ | 3,956 | $ | 813 | ||||
DirecTV
– nonserialized
|
4,309 | 670 | ||||||
Other
|
2,122 | 420 | ||||||
Total
|
$ | 10,387 | $ | 1,903 |
The
Company’s inventories are segregated into three major
categories. Serialized DirecTV inventories consist primarily of
satellite receivers and similar devices. Non-serialized DirecTV
inventories consist primarily of satellite dishes, poles and similar devices
which are supplied by DirecTV. Other inventory consists primarily of
cable, switches and various small parts used in the installation of DirecTV
satellite dishes. The large increase in inventory is due to the
purchase of DirecTECH (see Note 3).
NOTE
6 – Securities Available for Sale
|
As of
December 31, 2007, Multiband had the voting rights for and was holding in trust
58,161 common shares of URON for various contingent rights holders whose rights
were tied to potential future warrant exercises or preferred stock
conversions. The Company values these shares at fair
value. Fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. In determining fair value, the
Company values and records all investment securities transactions on a trade
date basis. Securities listed on a national or regional securities
exchange are valued at their last reported sales price on the last business day
of the period. Securities which are not traded on a major exchange or
for which no sale was reported on that date are valued at the average of their
last quoted "bid" price and "asked" price. Short positions are valued
at the last quoted "asked" price. Inputs used in the valuation
methods can be either readily observable, market corroborated, or generally
unobservable inputs. Whenever possible the Company attempts to
utilize valuation methods that maximize the use of observable inputs and
minimizes the use of unobservable inputs. The Company’s investments
in available-for-sale securities was determined based on quoted market prices in
active markets for identical assets and liabilities (level 1). As of
February 4, 2008, certain aforementioned contingent rights were not exercised by
the various holders; therefore Multiband owns 37,994 shares of
URON. As a result, Multiband recorded the fair value of URON shares
based on quoted market prices as an unrealized gain. URON
subsequently changed their name to Western Capital Resources, Inc. At
September 30, 2009 and December 31, 2008 the balance in securities available for
sale was $9 and $46, respectively.
Securities
available for sale consisted of the following:
September 30, 2009
|
December 31, 2008
|
|||||||
Beginning
balance
|
$ | 46 | $ | - | ||||
Initial
investment
|
- | 122 | ||||||
Current
period unrealized loss
|
(37 | ) | (76 | ) | ||||
Ending
balance
|
$ | 9 | $ | 46 |
Fair
value of securities available for sale is as follows:
Cost
|
Unrealized
Gain(Loss)
|
Fair
Value at
Period End
|
||||||||||
September
30, 2009
|
$ | - | $ | 9 | $ | 9 | ||||||
December
31, 2008
|
$ | - | $ | 46 | $ | 46 |
Page
17
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(in
thousands, except for share amounts)
NOTE
7 – Notes Payable
|
On May
26, 2009, the Company paid off its loan from Convergent Capital Partners I,
L.P., in the amount of $1,400. On May 27, 2009, the Company entered into a loan
agreement with Convergent Capital Partners, II, L.P. for $5,000. This loan
carries an interest rate of fourteen percent and requires monthly interest only
payments until December 2012 when the principal is due and payable in
full. In connection with this loan, the Company paid a closing fee to
the lender of $100. The Company also issued the lender 212,574 fully
vested five year warrants with an exercise price of $3. The gross
proceeds were allocated between the note and the warrants based on the relative
fair value at the time of issuance. The warrants were valued at $372
using the Black Scholes pricing model, recorded as original issue discount, and
amortized as interest expense over the term of the note. The Company
expensed $27 and $35 during the three and nine months ended September 30, 2009,
respectively. In the event the Company wishes to prepay the loan a
prepayment penalty will be assessed. The loan gives the lender a
first security position in the Company’s assets. The loan contains
certain covenants with regards to the Company’s quarterly earnings before
interest, taxes, depreciation and amortization. The Company is in
compliance with this covenant at September 30, 2009.
NOTE
8 – Accrued Liabilities
|
Accrued
liabilities consisted of the following:
September 30, 2009
|
December 31, 2008
|
|||||||
Payroll
and related taxes
|
$ | 7,851 | $ | 1,354 | ||||
Accrued
legal settlements and contingencies
|
6,420 | 960 | ||||||
Accrued
preferred stock dividends
|
614 | 622 | ||||||
Accrued
contract labor
|
3,250 | - | ||||||
Accrued
income taxes
|
445 | 499 | ||||||
Other
|
5,847 | 1,000 | ||||||
Total
Accrued Liabilities
|
$ | 24,427 | $ | 4,435 |
Page
18
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(in
thousands, except for share amounts)
NOTE
9 - Business Segments
|
The
Company has three reporting segments. Multiband Corp. segment
(MBCorp) includes corporate expenses (e.g. corporate administrative costs),
interest income, interest expense, depreciation and amortization. The
MDU segment (MDU, MBSS, MBMDU and MBUSA) represents results as the master
service operator for DirecTV and provides voice, data and video services to
residential multi-dwelling units as the principal to subscribers. The
HSP segment (NE, SW, EC, NC, DC and Security) provides the installation and
service of DirecTV video programming, internet and home security systems for
residents of single family homes. Segment disclosures by entity are
provided to the extent practicable under the Company's accounting
system.
Segment
disclosures are as follows:
MBCorp
|
MDU
|
HSP
|
Total
|
||||||||||||||
Three
months ended September 30, 2009:
|
|||||||||||||||||
Revenues
|
$ | - | $ | 6,595 | $ | 64,826 | $ | 71,421 | |||||||||
Income
(loss) from operations
|
(976 | ) | 36 | 1,528 | 588 | ||||||||||||
Identifiable
assets
|
2,744 | 12,868 | 92,288 | 107,900 | |||||||||||||
Depreciation
and amortization
|
99 | 1,022 | 1,293 | 2,414 | |||||||||||||
Capital
expenditures
|
69 | 636 | 35 | 740 |
MBCorp
|
MDU
|
HSP
|
Total
|
||||||||||||||
Three
months ended September 30, 2008:
|
|||||||||||||||||
Revenues
|
$ | - | $ | 4,948 | $ | 7,393 | $ | 12,341 | |||||||||
Income
(loss) from operations
|
(547 | ) | 164 | 564 | 181 | ||||||||||||
Identifiable
assets
|
4,675 | 6,590 | 12,877 | 24,142 | |||||||||||||
Depreciation
and amortization
|
277 | 560 | 9 | 846 | |||||||||||||
Capital
expenditures
|
21 | 14 | 11 | 46 |
MBCorp
|
MDU
|
HSP
|
Total
|
||||||||||||||
Nine
months ended September 30, 2009:
|
|||||||||||||||||
Revenues
|
$ | - | $ | 18,625 | $ | 182,350 | $ | 200,975 | |||||||||
Loss
from operations
|
(2,997 | ) | (346 | ) | (5,962 | ) | (9,305 | ) | |||||||||
Identifiable
assets
|
2,744 | 12,868 | 92,288 | 107,900 | |||||||||||||
Depreciation
and amortization
|
278 | 3,049 | 5,075 | 8,402 | |||||||||||||
Capital
expenditures
|
215 | 1,896 | 55 | 2,166 |
MBCorp
|
MDU
|
HSP
|
Total
|
||||||||||||||
Nine
months ended September 30, 2008:
|
|||||||||||||||||
Revenues
|
$ | - | $ | 12,884 | $ | 15,977 | $ | 28,861 | |||||||||
Income
(loss) from operations
|
(2,290 | ) | 826 | 1,853 | 389 | ||||||||||||
Identifiable
assets
|
4,675 | 6,590 | 12,877 | 24,142 | |||||||||||||
Depreciation
and amortization
|
693 | 1,750 | 20 | 2,463 | |||||||||||||
Capital
expenditures
|
43 | 58 | 11 | 112 |
Page
19
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(in
thousands, except for share amounts)
NOTE
10 – Commitments and Contingencies
|
Legal
proceedings
The
Company is subject to claims, regulatory processes and lawsuits that arise in
the ordinary course of business. The Company accrues for such matters
when a loss is considered probable and the amount of such loss, or a range of
loss, can be reasonably estimated. The Company has recorded $6,420 of
accrued liabilities as of September 30, 2009 for claims and potential
settlements associated with existing litigation. The majority of the
accrual relates to claims for back overtime wages alleged in a number of cases
filed between 2006 to 2008 entitled Lachiev v. JBM (S.D. Ohio); Davis v. JBM
(S.D. Ohio); Gruchy v. DirecTech Northeast (D. Mass); Stephen v. Michigan
Microtech (E.D. Mich); and In re DirecTECH Southwest, Inc. (E.D.
La). At present, the Company is vigorously defending those
claims.
In
connection with the purchase of the operating subsidiaries of DTHC, the Company
has the right to offset 50% of certain claims, currently estimated at $5,975,
against the note to DTHC once those claims are settled and paid. The
Company has recorded a receivable of $3,169 as of September 30, 2009 which
represents an estimate of the amount that potentially be recovered from DTHC
including legal fees. The Company’s portion of defense costs are
expensed as incurred. Additionally, the Company is subject to pending
claims, regulatory processes and lawsuits for which losses are not probable and
amounts cannot be reasonably estimated. Those losses could ultimately
be material to the Company’s financial position, results of operations and cash
flows.
Significant
relationship
The
Company is a master agent for DirecTV pursuant to a system operator agreement
with DirecTV dated August 2005. Under that agreement the Company is
required to ensure that its system operators meet minimum technical DirecTV
system standards so that the system operator subscribers may properly receive
DirecTV programming services. The initial term of the agreement is
for three years and provides for two additional two-year renewals if the Company
has a minimum number of paying video subscribers in its system operator
network. The Company has met the requirements and has entered into
the first two year automatic renewal period.
The
Company also has a separate home service provider agreement with DirecTV ending
May 1, 2013. The term of this agreement with DirecTV will
automatically renew as of May 1, 2013 for additional one year periods unless
either the Company or DirecTV gives written notice of termination at least 90
days in advance of expiration of the then current term. Termination
of the Company's DirecTV agreements would have a material adverse impact on the
Company's on-going operations. Revenues generated from DirecTV
amounted to 99.5% and 99.3% of total revenue for the three and nine months ended
September 30, 2009, respectively. Revenues generated from DirecTV for
the three and nine months ended September 30, 2008 were 93.5% and 91.4% of total
revenue, respectively. Accounts receivable from this customer was
83.2% and 52.6% of total accounts receivable as of September 30, 2009 and
December 31, 2008, respectively. The Company purchases a substantial
portion of its inventory from DirecTV. DirecTV is the only supplier
of the major components (i.e., dishes and receivers) used in HSP segment
installations. The total accounts payable to DirecTV, related to
inventory being supplied, was $17,606 and $3,034 at September 30, 2009 and
December 31, 2008, respectively.
Gain
on extinguishment of debt
In
January 2008, the Company negotiated payment of the remaining balance of the
note payable to Vern Swedin by issuing 7,500 shares of common stock at $2.60 per
share in settlement of this debt resulting in a gain on extinguishment of debt
of $30. This amount is included in other income on the consolidated
statement of operations for the nine months ended September 30,
2008.
Page
20
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(in
thousands, except for share amounts)
Line
of credit
The
Company has a line of credit agreement with a bank that provides borrowings up
to $50, due on demand. Amounts outstanding under this line of credit
carry an interest rate defined as the prime rate plus 3.0% (6.25% as of
September 30, 2009). As of September 30, 2009 and December 31, 2008, the amount
outstanding was $50 and $0, respectively. This line of credit is guaranteed by a
shareholder of the Company.
Current
portion of long-term debt
At
December 31, 2008, the Company was in compliance with all debt covenants of its
lender, Convergent Capital. This loan was paid off May 26, 2009 (see
Note 7). The Company is also in compliance with the new loan has debt
covenants for the three months ended September 30, 2009 (see Note
7).
Operating
leases – vehicles
The
Company leases substantially all of its fleet vehicles under operating leases
from one lessor. Each lease commences upon the in-service date of the
vehicle and requires scheduled lease payments to be paid monthly for one
year. After one year, the Company has the option to renew the open
ended lease for one year renewal periods or surrender the leased vehicle to the
lessor to be sold. If the net proceeds of such sale exceed the
vehicle’s then depreciated value, the lessee receives the benefit of such
excess. If there is a deficiency upon such sale, then lessee is required to pay
the deficiency as additional rent to lessor. The Company has entered
this agreement jointly and severally with various of its
subsidiaries. For the three months ended September 30, 2009 the
Company recognized a loss on the sale of vehicles of $65 and a gain of $181 for
the three months ended September 30, 2008. For the nine months ended
September 30, 2009 the Company recognized a loss on the sale of vehicles of $137
and a gain of $179 for the seven months ended September 30, 2008. For
the three months ended September 30, 2009 and 2008 the Company’s operating lease
expense under the lease totaled approximately $1,813 and $381,
respectively. For the nine months ended September 30, 2009 and seven
months ended September 30, 2008, the Company’s operating lease expense under the
lease totaled approximately $5,550 and $748, respectively. In
addition, the Company has a security deposit with the lessor in the amount of
approximately $1,701 and $257 which is included in other assets in the
accompanying balance sheet as of September 30, 2009 and December 31, 2008,
respectively.
Guaranty
On March
1, 2006, Corporate Technologies, LLC (CTLLC), a subsidiary of North Central
Equity, LLC, the purchaser of the MBS business segment, signed a lease with
Lexstar Tower I Limited Partnership whereby CTLLC assumed the lease obligation
for substantially all of the first floor space the Company is renting in Fargo,
North Dakota for the period beginning March 1, 2006 to February 28, 2011.
Pursuant to the aforementioned lease, the Company entered into a guaranty
whereby the Company, in the event of a default or early termination of the lease
by CTLLC, is obligated to perform CTLLC’s lease obligation during months 43-60
of the lease. This guaranty has no effect on the Company’s
consolidated financial statements for the nine months ended September 30, 2009
and 2008. However, should Multiband eventually have to perform on the guaranty
in the future, it could be liable for up to $349 in rent payments plus any
associated charges such as property taxes and common area
maintenance. The Company has determined that it is not required to
record any obligations related to this guaranty.
Page
21
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(in
thousands, except for share amounts)
NOTE
11 – Income Taxes
|
Due to
the Company’s purchase of 80% of the issued and outstanding shares of common
stock of all of the DTHC operating subsidiaries (DirecTECH) (an additional
29% of Multiband NC, Inc. (NC) (formerly Michigan Microtech, Inc. (MMT)), 51% of
which was previously purchased effective March 1, 2008 and 80% of Multiband NE,
Inc. (NE), Multiband SW, Inc. (SW), Multiband EC, Inc. (EC), Multiband MDU, Inc.
(MBMDU), Multiband DC, Inc. (DC) and Multiband Security, Inc. (Security)
effective January 2, 2009 the Company will file a 2009 consolidated tax return
which includes all of the newly acquired subsidiaries. Therefore, the
Company may be able to utilize the tax loss carryforwards of Multiband
Corporation if there is taxable income, subject to known limitations of the use
of the tax loss carryforwards. For the three months ended September
30, 2009 and 2008, the Company has recorded income tax expense of $372 and $286,
respectively, related to state taxes. For the nine months ended
September 30, 2009 and 2008, the Company recorded income tax expense related to
state taxes of $574 and $749, respectively.
The
Company assesses the uncertainty in the income taxes recognized in its financial
statements caused by the noncomparability in reporting tax assets and
liabilities by; (a) a consistent recognition threshold and (b) a measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return, and provides related
guidance on derecognition, classification, interest and penalties, accounting
interim periods, disclosure and transition. To the extent interest
and penalties would be assessed by taxing authorities on any underpayment of
income taxes, such amounts would be accrued and classified as a component of
income tax expenses on the consolidated statement of operations The
Company’s federal and state tax returns are potentially open to examinations for
years 2006-2008. The Company has no significant unrecognized tax
benefits as of September 30, 2009 that would reasonably be expected to affect
our effective tax rate during the next twelve months.
NOTE
12 – Related Party Transactions
|
On
September 30, 2009, the Company issued 50,000 shares of preferred series E stock
for $500 cash to director Eugene Harris.
On
September 1, 2009, the Company entered into an unsecured short term promissory
note in the amount of $800 with J. Bas Mattingly, Vice President of Business
Development of Multiband. The note carries an interest rate of 4% per
annum due. Principal and interest is due and payable December 31,
2009.
On May
26, 2009, the Company entered into a separate short-term loan with Mr. Bennett
in the amount of $1,400. This loan was paid in full on May 28,
2009. The term of the loan was approved by the disinterested members
of the Company’s audit committee.
On April
15, 2009, the Company entered into an unsecured short term promissory note in
the amount of $1,500 with director Frank Bennett. The note carried an interest
rate of 6% with a 1% origination fee totaling $15, and was due May 15,
2009. On May 4, 2009, the note was extended until June 15,
2009. On June 15, 2009, the note was extended until June 14,
2011. The terms of the loans were approved by the disinterested
members of the Company’s audit committee. On September 30, 2009, this
note was effectively paid off with the issuance of 150,000 shares of preferred
series E stock for $1,500 to Frank Bennett.
On
January 2, 2009, the Company entered into a promissory note in the amount of
$40,200 with DTHC, due January 1, 2013, bearing interest at an annual rate of
8.25% (subject to adjustment in the event of a default). The note was
subsequently adjusted by $5,844 for an offsetting receivable which was on
Multiband’s books as of December 31, 2008. This reduced the amount of
this promissory note to $34,356. The Company has the right to offset
50% of certain claims against the note to DTHC once those claims are settled and
paid. As of September 30, 2009, the Company has offset $641 of its
claims which brings the remaining balance of the note to $33,715.
Proceeds
for the acquisition of US Install Inc. by the Company completed in February,
2008 were obtained via an unsecured promissory note in the amount of $100
between Multiband and Bas Mattingly Master, LLC, a trust controlled by J. Bas
Mattingly, chairman of DTHC, which is a 20% owner of DirecTECH. The
note carries an interest rate of 7% per annum and is expected to be extended
through April 1, 2010.
The
Company has a line of credit agreement with a bank that provides borrowings up
to $50 (see Note 10). This line of credit is guaranteed by J. Bas
Mattingly, chairman of DTHC.
Page
22
MULTIBAND
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009 AND 2008
(in
thousands, except for share amounts)
NC leases
warehouse space from two individuals that have ownership via related trusts in
DTHC. DTHC owns 20% of DirecTECH as a noncontrolling interest
shareholder (see Note 3). Lease payments amount to $9 per month plus
expenses, expiring in December 2010.
Multiband
and its subsidiaries lease principal offices located at 2000 44th Street
SW, Fargo, ND 58013. The Fargo base rate is $14 per month. The Fargo
property is owned in part by David Ekman, Chief Information Officer, of the
Company.
Jim
Mandel, CEO of Multiband, loaned DTHC $100 in a short-term subordinated note
paying simple interest monthly at 10% and is due December 2012.
In 2008,
Multiband and DTHC performed certain management and information systems
functions for one another pursuant to management consulting and employee leasing
agreements. These agreements terminated concurrent with Multiband’s
purchase of the former DTHC operating entities (Note 3). During the
three and nine months ended September 30, 2008, the Company has reduced selling,
general and administrative expenses $330 and $960 as a reimbursement of direct
expenses in relation to these management consulting agreements,
respectively.
Prior to
the purchase of DirecTECH on January 2, 2009, Multiband provided support center
services to a then DirecTECH MDU (DTMDU), subsidiary of DTHC, currently
Multiband MDU, Inc. (MBMDU). The Company recorded MDU segment revenue
of $115 and $254 from DTMDU for the three and nine months ended September 30,
2008, respectively. DTMDU was also one of the system operators in the
MDU segment during 2008. The Company has recorded MDU segment cost of
products and services of $659 and $1,681 for the three and nine months ended
September 30, 2008 related to this system operator, respectively. The
Company had $771 in accounts receivable and $1,127 in accounts payable related
to these agreements at December 31, 2008.
Multiband
also had receivable balances with various DTHC entities at December 31, 2008 of
$7,666. Of this amount, $5,844 was subsequently offset in the first
quarter of 2009 against the purchase price note used to acquire majority
ownership of the operating subsidiaries of DTHC (Note 3).
The
Company has a note receivable due from a non-affiliated entity that is 50% owned
by a shareholder. The stated value of this note receivable is $12 and
$51 at September 30, 2009 and December 31, 2008, respectively. The
note is non-interest bearing and is paid monthly beginning October 31, 2007
through maturity on December 31, 2009. The Company has discounted
this note to its present value using the Company’s effective borrowing
rate. The carrying value of this note receivable was $0 and $34 at
September 30, 2009 and December 31, 2008, respectively. Interest
income on this note is immaterial and has not been recognized.
In 2008,
Multiband earned a performance bonus as part of the aforementioned management
consulting agreement with DTHC of $1,447 which was paid via reduction of the
debt incurred in the acquisition of MMT (see Note 3). The Company
recorded this consulting income as part of other income and expense on the
statement of operations because the income does not constitute the entity’s
ongoing major or central operations. The consulting income was not a
reimbursement of direct expenses.
NOTE
13 – Subsequent Events
|
In
connection with preparation of the condensed consolidated financial statements,
the Company evaluated subsequent events after the balance sheet date of
September 30, 2009 through November 16, 2009, the date these unaudited
consolidated financial statements were issued.
Page
23
From time
to time, the Company may publish forward-looking statements relating to such
matters as anticipated financial performance, business prospects, product
pricing, management for growth, integration of acquisitions, technological
developments, new products, and similar matters. Words such as
“anticipates”, “may”, “will”, “should”, “believes”, “estimates”, “expects”,
“intends”, “plans”, “predicts”, “will likely result”, “will continue”, or
similar expressions identify forward-looking statements. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements including those made in this statement. In order to
comply with the terms of the Private Securities Litigation Reform Act, the
Company notes that a variety of factors could cause the Company's actual results
and experience to differ materially from the anticipated results or Company's
forward-looking statements.
The risks
and uncertainties that may affect the operations, performance, developments and
results of the Company's business include the following: national and regional
economic conditions; pending and future legislation affecting IT and
telecommunications industries; market acceptance of the Company's products and
services; the Company's products and services; the Company's continued ability
to provide integrated communication solutions for customers in a dynamic
industry; the Company’s ability to successfully integrate and operate recently
acquired operations, and other competitive factors.
Because
these and other factors could affect the Company's operating results, past
financial performance should not necessarily be considered as a reliable
indicator of future performance and anticipated future period
results.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (in thousands)
OUR
COMPANY
Multiband
Corporation (the Company), is a Minnesota corporation formed in September 1975.
The Company has two operating segments: 1) Multi-Dwelling Unit (MDU), which
encompasses the subsidiary corporations Multiband Subscriber Services, Inc.,
Minnesota Digital Universe, Inc.; and Multiband MDU, Inc. (MBMDU), and 2) Home
Service Provider (HSP), which encompasses the following subsidiaries of which
Multiband owns an 80% interest in: Multiband NE, Inc. (NE), Multiband SW, Inc.
(SW), Multiband EC, Inc. (EC), Multiband DC, Inc. (DC) and Multiband Security,
Inc. (Security) (see Note 3).
The
Company completed an initial public offering in June 1984. In
November 1992, the Company became a non-reporting company under the Securities
Exchange Act of 1934. In July 2000, the Company regained its
reporting company status. In December 2000, the Company stock began
trading on the NASDAQ stock exchange under the symbol VICM. In July
2004, the symbol was changed to MBND concurrent with the Company’s name change
from Vicom, Incorporated to Multiband Corporation.
The Company’s website is located at:
www.multibandusa.com.
From its
inception until December 31, 1998, the Company operated as a telephone
interconnect company only. Effective December 31, 1998, the Company
acquired the assets of the Midwest region of Enstar Networking Corporation
(ENC), a data cabling and networking company. In late 1999, in the context of a
forward triangular merger, the Company, to expand its range of computer products
and related services, purchased the stock of Ekman, Inc. d/b/a Corporate
Technologies, and merged Ekman, Inc. into the newly formed surviving
corporation, Corporate Technologies USA, Inc. (MBS). MBS
provided voice, data and video systems and services to business and
government. The MBS business segment was sold effective April 1,
2005. The Company’s MCS segment (now known as MDU) began in February
2000. MCS, the Company’s continuing operating division, provides
voice, data and video services to multiple dwelling units (MDU), including
apartment buildings, condominiums and time share resorts. During 2004, the
Company purchased video subscribers in a number of separate transactions, the
largest one being Rainbow Satellite Group, LLC. During 2004, the Company also
purchased the stock of Minnesota Digital Universe, Inc., which made the Company
the largest master service operator in MDU’s for DirecTV satellite television in
the United States. At October 31, 2009, the Company had approximately
135,000 owned and managed subscriptions with an additional 51,000 subscriptions
supported by the call center.
Page
24
During
2008, the Company became involved in the business of installing video services
in single family homes by acquiring 51% of the outstanding stock of NC (formerly
Michigan Microtech, Inc. (MMT a former subsidiary of DTHC)), a fulfillment agent
for a national satellite television company, DirecTV, which specializes in the
providing of satellite TV to single family homes. This acquisition was followed
up by the acquisition of an 80% interest in a group of companies which were the
former operating subsidiaries of DTHC, (Multiband NE, Inc. (NE), Multiband SW,
Inc. (SW), Multiband EC, Inc. (EC), Multiband DC, Inc. (DC) and Multiband
Security, Inc. (Security)). The Company also purchased an additional
29% ownership interest in Multiband NC, of which it previously owned 51%,
effective on January 2, 2009.
The
Company’s rationale for acquiring the aforementioned operating subsidiaries is
as listed below.
1.
|
The
operating entities are potentially accretive to our business model as they
have the:
|
a.
|
Same
line of business (DirecTV)
|
b.
|
Ability
to leverage systems and management
|
c.
|
Ability
to leverage core competencies in support center, software, and
engineering
|
d.
|
Ability
to expand geographic presence with ample technician
capacity
|
e.
|
Size,
scale, and scope of combined business enterprise more in line with growth
necessary to support public entity
|
f.
|
Potential
for accretive positive cash flow and capacity for net
income.
|
2.
|
Also,
new business opportunities may be integrated into an existing installation
process which touches over 5,000 homes per day. Multiband Enterprise
Manager software application is capable of modification to support
“bundled billing” attribute resulting from new sales
opportunity.
|
3.
|
Furthermore,
the transaction produced a strong barrier to entry to other potential
competitors which creates potential for longevity and
exclusivity.
|
4.
|
Other
reasons for the acquisition
included:
|
a. Strong
financial performance by DirecTV which provides security and continued growth
potential for Multiband.
b. Strong
DirecTV balance sheet and liquidity which provides comfort for continued,
successful operations.
c. Multiband’s
public company reporting status provides an excellent platform to support and
motivate new human resource asset.
d. Multiband’s
management is, we believe, capable of “rightsizing” operating expense structure
of DTHC operating entities to provide increased cash flow and earning potential
over a short period of time; and
e. Opportunity
for significant shareholder appreciation when comparing industry valuation
metrics to pre-existing Multiband market values.
This
purchase was a significant event for the Company. The purchase materially
increased the size and scope of the Company’s operations. The Company
has now expanded its operations into 16 states with 32 field offices. The
Company now employs approximately 4,000 people. Multiband is now the second
largest independent DirecTV field services provider in the United
States.
Page
25
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
DOLLAR
AMOUNTS AS A PERCENTAGE OF REVENUES
|
DOLLAR
AMOUNTS AS A PERCENTAGE OF REVENUES
|
|||
THREE
MONTHS ENDED
|
NINE
MONTHS ENDED
|
|||
September 30, 2009
(unaudited)
|
September 30, 2008
(unaudited)
|
September 30, 2009
(unaudited)
|
September 30, 2008
(unaudited)
|
|
REVENUES
|
100%
|
100%
|
100%
|
100%
|
COST
OF PRODUCTS & SERVICES (Exclusive of depreciation and amortization
shown below)
|
76.5%
|
69.3%
|
79.0%
|
65.0%
|
SELLING,
GENERAL & ADMINISTRATIVE
|
19.3%
|
22.3%
|
21.4%
|
24.9%
|
DEPRECIATION
& AMORTIZATION
|
3.4%
|
6.9%
|
4.2%
|
8.5%
|
IMPAIRMENT
OF ASSETS
|
-
|
-
|
-
|
0.2%
|
INCOME
(LOSS) FROM OPERATIONS
|
.8%
|
1.5%
|
-4.6%
|
1.4%
|
INTEREST
EXPENSE & OTHER, NET
|
-1.3%
|
9.3%
|
-1.1%
|
3.5%
|
INCOME
(LOSS) BEFORE INCOME TAXES AND NONCONTROLLING INTEREST IN
SUBSIDIARIES
|
-.5%
|
10.8%
|
-5.8%
|
4.9%
|
PROVISION
FOR INCOME TAXES
|
.5%
|
2.3%
|
.3%
|
2.6%
|
NET
INCOME (LOSS)
|
-1.0%
|
8.5%
|
-6.1%
|
2.3%
|
LESS:
NET INCOME (LOSS) ATTRIBUTABLE TO THE NONCONTROLLING INTEREST IN
SUBSIDIARIES
|
-.4%
|
1.1%
|
-1.0%
|
1.9%
|
NET
INCOME (LOSS) ATTRIBUTABLE TO MULTIBAND CORPORATION AND
SUBSIDIARIES
|
-.6%
|
7.4%
|
-5.1%
|
.4%
|
Page
26
RESULTS
OF OPERATIONS
Revenues
Total revenues increased 478.7% to
$71,421 for the quarter ended September 30, 2009 as compared to $12,341 for the
quarter ended September 30, 2008. Revenues for the nine month period
ended September 30, 2009 increased 596.4% to $200,975 from $28,861 for the same
period in 2008. This overall increase in revenues is due to the
purchase of the former DirecTECH operating entities in January
2009.
Revenues for the three months ended
September 30, 2009 for the HSP segment, were $64,826 in comparison to $7,393 for
the same period in 2008, an increase of 776.9%. Revenues for the nine
month period ended September 30, 2009, for the HSP segment (acquired March 1,
2008), were $182,350 as compared to $15,977 for the same period in 2008, an
increase of 1041.3%. This increase is due to the purchase of the former
DirecTECH operating subsidiaries (see Note 3). During the three
months ended September 30, 2009, the increased HSP segment revenue is due to
improved job mix and increased incentive revenue over prior
periods. The Company expects that HSP segment fourth quarter revenues
will be slightly lower than the previous quarter due to typical
seasonality.
Revenues in the third quarter of 2009
for the MDU segment increased 33.3% to $6,595 as compared to $4,948 in the third
quarter of 2008. Revenues for the nine month period ended September
30, 2009, for the MDU segment, increased 44.6% to $18,625 from $12,884 for the
same period in 2008. These increases are primarily due to a larger
subscriber base, and increased activity from the call center. The
Company believes it can ultimately increase revenues by selling its support
center services to its network of system operators and by providing ancillary
programs for voice and data services to that same network. Due to
demand for high definition television services and a larger subscriber base, MDU
revenues are expected to remain above 2008 levels for the balance of
2009.
Cost
of Products and Services (Exclusive of depreciation and
amortization)
The Company's cost of products and
services, increased by 538.7% to $54,645 for the quarter ended September 30,
2009, as compared to $8,556 for the similar quarter last year. For
the nine months ended September 30, 2009, cost of products and services were
$158,855 compared to $18,770 in the prior year, a 746.3%
increase. Overall cost of products and services increased due to the
purchase of the former DirecTECH operating entities in January
2009.
Cost of products and services for the
HSP segment for the three months ended September 30, 2009 were $50,298 for the
HSP segment (acquired March 1, 2008), compared to $5,252 for the similar quarter
the prior year, an 857.7% increase. For the nine months ended
September 30, 2009, cost of products and services were $146,288 for the HSP
segment (acquired March 1, 2008), compared to the $10,989 for the seven months
ended September 30, 2008, a 123.1% increase. This increase is due to
the purchase of the former DirecTECH operating entities (see Note
3).
Cost of products and services for the
MDU segment for the quarter were $4,347 compared to $3,304 in the same quarter
last year, a 31.6% increase. For the nine months ended September 30,
2009, cost of products and services were $12,567 for the MDU segment, compared
to $7,780 in the prior year, a 61.5% increase. The increase in cost
of products and services in the MDU segment is primarily related to the purchase
of MBMDU, one of the former DirecTECH operating subsidiaries. The
increase in costs is also related to the increase in revenue generated by the
system operators due to a change in revenue mix and certain commission
payments. In 2009, the Company expects MDU cost of products and
services to increase slightly throughout the balance of the year due to certain
commission payments.
During
the remainder of 2009, the Company expects HSP cost of products and services to
remain consistent with third quarter results in relation to
revenues.
Page
27
Selling,
General and Administrative Expenses
Selling, general and administrative
expenses increased 399.6% to $13,774 in the quarter ended September 30, 2009,
compared to $2,758 in the prior year’s quarter due primarily to the acquisition
of DirecTECH in 2009. Selling, general and administrative expenses
were, as a percentage of revenues, 19.3% for the quarter ended September 30,
2009 and 22.3% for the similar period a year ago. For the nine months
ended September 30, 2009, selling, general and administrative expenses increased
499.8% to $43,023 compared to $7,173 for the nine months ended September 30,
2008, due primarily to the acquisition of DirecTECH in 2009. As a
percentage of revenue, selling, general and administrative expenses were 21.4%
for the nine months ended September 30, 2009, compared to 24.9% for the same
period in 2008. The decrease in selling, general and administrative
expenses as a percentage of revenue is primarily due to the significant increase
in revenues with proportionately less increases in payroll and administrative
expenses. The Company anticipates that for the remainder of 2009,
selling, general and administrative expenses will remain consistent with third
quarter levels.
Depreciation
and Amortization
Depreciation and amortization expense
increased 185.3% to $2,414 for the quarter ended September 30, 2009 compared to
$846 in the prior year’s quarter. For the nine months ended September
30, 2009, depreciation and amortization expense increased 241.1% to $8,402
compared to $2,463 for the nine months ended September 30, 2008. This
increase is largely due to amortization of intangibles related to the DirecTECH
purchase (see Note 3). Depreciation and amortization expense is
expected to remain at levels comparable to the third quarter through the
remainder of 2009.
Income
(Loss) from Operations
The Company, in the third quarter of
2009, incurred income from operations of $588 as compared to generating an
income of $181 during the prior year’s comparable period. Loss from
operations was $9,305 during the first nine months of 2009 compared to an income
of $389 during the first nine months of 2008. During the quarter
ended June 30, 2009, the Company incurred a material operating loss primarily
due to significant hiring and training expenses and inventory breakage related
to changes in work order closure technology. During the quarter ended
September 30, 2009, the Company generated an operating profit of $588 as the
aforementioned hiring, training and inventory breakage expenses were
reduced. Although the Company cannot definitively predict future
quarter operating results, we have reason to believe second quarter operating
results were atypical.
The MDU segment generated an income
from operations of $36 for the three months ended September 30, 2009 and
incurred a loss from operations of $346 for the nine months ended September 30,
2009 compared to income from operations of $164 and $826 for the three and nine
months ended September 30, 2008. The MBCorp segment, which has no
revenues, incurred a loss from operations of $976 for the three months ended
September 30, 2009 and $2,997 for the nine months ended September 30, 2009
compared to losses of $547 and $2,290 for the same periods last
year. For the third quarter of 2009, the HSP segment generated an
income from operations of $1,528, compared to income from operations of $564 in
the same period last year, which included NC (MMT) only. During the
three months ended September 30, 2009, the Company’s improved job mix and
earnings from incentives increased its revenue over prior periods. For the nine
months ended September 30, 2009, loss from operations was $5,962 for the HSP
segment, compared to an income from operations of $1,853 in the prior year which
included seven months of NC (MMT) only. The MBCorp segment loss is
expected to continue in future periods as corporate overhead is expected to
remain consistent with current levels. The Company believes it can
enhance profitability in its MDU division by growing its subscriber base at
existing properties since the on-going selling, general and administrative
expenses to service those subscribers is more variable than
fixed. The HSP segment is expected maintain its profitability by
reaching incentive goals and continued improvement in job mix.
Interest
Expense
Interest expense was $1,026 for the
quarter ended September 30, 2009, versus $301 for the similar period a year
ago. Amortization of original issue discount was $11 and $0 for the
three months ended September 30, 2009 and 2008. Interest expense was
$2,771 for the nine months ended September 30, 2009 and $514 for the same period
last year, primarily reflecting an increase due to interest expense incurred on
the debt issued for the purchase of DirecTECH (see Note
3). Amortization of original issue discount was $15 for the nine
months ended September 30, 2009, respectively and $0 for the same period last
year.
Page
28
Management
consulting income
During the three months ended September
30, 2008, Multiband recorded a performance bonus as part of the management
consulting agreement with DTHC of $1,447 which was paid via reduction of the
debt incurred in the acquisition of MMT (see Note 3 and Note 12). The
Company recorded this consulting income as part of other income and expense on
the statement of operations because the income does not constitute the entity’s
ongoing major or central operations. The consulting income was not a
reimbursement of direct expenses. No income was earned during the
comparable period ended September 30, 2009. This income is part of
the Multiband Corp. business segment.
Noncontrolling
Interest
Effective
January 1, 2009, the Company transitioned from accounting for a minority
interest to accounting for noncontrolling interests in subsidiaries (see Note
4). This resulted in the transferring of minority interest of $3,471
at December 31, 2008 related to the 51% ownership of NC from the mezzanine
section of the balance sheet to the noncontrolling interest in the equity
section of the balance sheet. As of January 2, 2009, Multiband purchased
an additional 29% of the outstanding stock of NC, $2,054 of noncontrolling
interest was transferred to Multiband’s controlling interest related to this
acquisition, leaving $1,417 as the remaining value of the noncontrolling
interest. In addition, Multiband purchased 80% of the outstanding
stock of EC, NE, SC, DC, Security and MBMDU (see Note 3). The Company
recorded $6,306 of noncontrolling interest related to this acquisition. The net
loss attributable to the noncontrolling interest in subsidiaries for the three
and nine months ended September 30, 2009 was ($266) and ($2,044),
respectively. For the three and nine months ended September 30, 2008,
net income attributable to the noncontrolling interest in subsidiaries was $138
and $550, respectively.
Income
Taxes
Due to
the Company’s purchase of 51% of NC’s stock, effective March 1, 2008, NC did not
file consolidated tax returns in 2008 with its former parent DTHC but filed as a
single entity as it no longer meets the 80% ownership required for tax
consolidation. Effective with the additional stock purchased in 2009,
NC expects to be able to utilize the tax loss carryforwards of Multiband
Corporation. For the three months ended September 30, 2009 and 2008, the Company
has recorded income tax expense of $372 and $286, respectively, related to state
taxes. For the nine months ended September 30, 2009 and 2008, the
Company recorded income tax expense related to state taxes of $574 and $749,
respectively.
Net
Income (Loss) Attributable to Multiband Corporation and
Subsidiaries
In the
third quarter of fiscal 2009, the Company reported a net loss attributable to
Multiband Corporation and subsidiaries of $459 compared to a net income
attributable to Multiband Corporation and subsidiaries of $911 for the third
fiscal quarter of 2008. For the nine months ended September 30, 2009,
the Company recorded a net loss attributable to Multiband Corporation and
subsidiaries of $10,163 compared to a net income attributable to Multiband
Corporation and subsidiaries of $103 for the nine months ended September 30,
2008. The net income for the three and nine months ended September
30, 2008 was largely due to the addition of the HSP segment via the acquisition
of MMT, the sale of unprofitable subscribers in the MCS segment, the increase in
managed subscribers in the MDU segment, and the management consulting income in
Multiband Corp. segment.
Liquidity
and Capital Resources
During the nine months ended September
30, 2009, the Company incurred net losses attributable to Multiband Corporation
and subsidiaries of $10,163 compared to a net income attributable to Multiband
Corporation and subsidiaries of $103 for the nine months ended September 30,
2008. Net cash used by operations during the nine months ended
September 30, 2009 was $2,937 as compared to the net cash from operations during
the nine months ended September 30, 2008 of $3,891. During the
quarter ended June 30, 2009, the Company incurred a material operating loss
primarily due to significant hiring and training expenses and inventory breakage
related to changes in work order closure technology. During the
quarter ended September 30, 2009, the Company generated an operating profit of
$588 as the aforementioned hiring, training and inventory breakage expenses were
reduced. Although the Company cannot definitively predict future
quarter operating results, we have reason to believe second quarter operating
results were atypical. As of September 30, 2009, the Company met the
compliance covenants of its lender, Convergent Capital.
Page
29
Cash and cash equivalents totaled
$4,253 at September 30, 2009 versus $4,346 at December 31,
2008. Working capital deficit at September 30, 2009 was $30,785 as
compared to positive working capital of $2,465 at December 31, 2008, primarily
due to the acquisition of the former DTHC operating entities. Total
debt and capital lease obligations increased by $38,957 in the nine months ended
September 30, 2009 due mainly to the addition of notes payable in order to
purchase DirecTECH. The Company had a material increase in accounts
receivable, accounts payable and accrued liabilities for the period ended
September 30, 2009 versus the period ended December 31, 2008 due to the
acquisition of 80% of outstanding stock of the former DTHC operating
entities. Net cash used by investing activities totaled $2,673 for
the period ended September 30, 2009, compared to net cash of $6,656 provided by
investing activities for the period ended September 30, 2008, related to cash
acquired in the acquisition of NC (formerly MMT).
The Company experienced a material
increase in revenues between the quarter ended September 30, 2009 and the
quarter ended September 30, 2008 as a result of the additional revenue obtained
from the purchase of the former DTHC operating entities. For the
balance of 2009, the Company intends to focus on facilitating growth of its HSP
business segment and its managed subscriber services including its support
center and its master system operator program. The Company believes
it can increase revenues by selling its support center services to its network
of system operators and by providing ancillary programs for voice and data
services to that same network.
The Company used $2,166 for capital
expenditures during the nine months ended September 30, 2009, as compared to
$112 in the similar period last year. Capital expenditures consisted
of project build-outs and equipment acquired for internal use. This
increase was related to an expansion of company funded video and internet
service build outs to MDU properties made during 2009. Throughout the
remainder of 2009, the Company estimates that it will have $500 of additional
capital expenditures.
Management anticipates that the impact
of the actions listed below will generate sufficient cash flows to pay current
liabilities, long-term debt and capital and operating lease obligations and fund
the Company's operations for the next twelve months:
1.
|
Initiate
and grow its Home Service Provider (HSP) business by eliminating
competitive HSP providers from certain of its core
markets
|
2.
|
Improve
gross margin percentages by cycling technicians from training and placing
them in a revenue generating role and by mitigating work order breakage
expense.
|
3.
|
Reduce
operating expenses by reducing training costs through decreased technician
turnover, managing professional fees, insurance and other general and
administrative expenses.
|
4.
|
Evaluate
factors such as anticipated usage and inventory turnover to maintain
optimal inventory levels.
|
5.
|
Obtain
additional debt financing.
|
6.
|
Expand
call center support with sales of call center services to both existing
and future system operators and to buyers of the Company’s video
subscribers.
|
7.
|
Solicit
additional equity investment in the Company by issuing either preferred or
common stock.
|
The
Company, as of September 30, 2009, needs to improve its working capital ratio
over the next few quarters to adequately manage the size of its expanded
operations. The Company, during the third quarter, did raise $2,000
in equity through the sale of preferred stock and sold intangible assets and
equipment for approximately $446. Since the Company acquired
significant assets in its purchase of 80% of the outstanding stock of the former
DTHC operating entities, Multiband believes it has the capacity to leverage
certain of those assets. Management believes that through a
combination of leveraging assets, its cash on hand, greater expense control,
positive operating income, combined with capital resources and the potential
ability to monetize intangible subscriber assets, it can meet its anticipated
liquidity and capital resource requirements for the next twelve
months.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Impairment of Long-Lived
Assets
The
Company’s long-lived assets include property, equipment and leasehold
improvements. At September 30, 2009, the Company had net property and
equipment of $8,438, which represents approximately 7.8% of the Company’s total
assets. In assessing for potential impairment for these assets, the
Company considers future performance. If these forecasts are not met,
the Company may have to record an impairment charge, which may be
material. During the three and nine months ended September 30, 2009
and 2008, the Company did not record any impairment losses related to long-lived
assets.
Page
30
Impairment of
Goodwill
At year
end, we test goodwill for impairment. If indicators of impairment are
determined to exist, we test goodwill for impairment quarterly. Our
judgments regarding the existence of impairment indicators are based on legal
factors, market conditions and operational performance of our operating
segments. Future events could cause us to conclude that impairment
indicators exist and that goodwill associated with our operating segments which
amounts to $35,489 as of September 30, 2009, may be impaired. Any
resulting impairment loss could have a material adverse impact on our financial
condition and results of operations. During the three and nine months
ended September 30, 2009 and 2008, the Company did not record any impairment
losses related to goodwill.
Impairment of Intangible
Assets
The
intangible assets consist of rights of entry contracts, contracts with DirecTV
and customer contracts. These intangibles are being amortized over
their estimated useful lives ranging from 3.5 to 119 months. If
significant changes would occur to the estimated future cash flows associated
with these intangibles, the Company would determine if there is impairment and
reduce the value of intangibles based on the discounted present value of such
cash flows. At September 30, 2009, the Company had net intangibles of
$24,446 which represented approximately 22.7% of the Company’s total
assets. During the three and nine months ended September 30, 2009,
the Company did not record any impairment charge to intangible
assets. During the three and nine months ended September 30, 2008,
the Company recorded an impairment charge to intangible assets of $0 and $66,
respectively.
Inventories
We value
our inventories at the lower of the actual cost or the current estimated market
value of the inventories. We regularly review inventory quantities on hand and
record a provision for excess and obsolete inventories. Rapid technological
change, frequent new product development, and rapid product obsolescence that
could result in an increase in the amount of obsolete inventory quantities on
hand characterize our industry.
Share-Based
Payments
The
Company accounts for its stock options using fair value for the measurement and
recognition of compensation expense for all share-based payment awards made to
employees and directors. The Company’s determination of fair value of
share-based payment awards on the date of grant using an option-pricing model is
affected by the Company’s stock price as well as assumptions regarding a number
of variables. These variables include, but are not limited to the
Company’s expected stock price volatility, and actual and projected stock option
exercise behaviors and forfeitures. During the third quarter of 2008,
the Company evaluated the variables used in calculating its option values and
through their application has reduced the ongoing expense recorded related to
stock options.
Revenue
Recognition
The
Company recognizes revenue in accordance with the Securities Exchange
Commission’s Staff Accounting Bulletin No. 104 (SAB 104) “Revenue Recognition”,
which requires that four basic criteria be met before revenue can be recognized:
(i) persuasive evidence of a customer arrangement exists; (ii) the price is
fixed or determinable; (iii) collectability is reasonably assured; and (iv)
product delivery has occurred or services have been rendered. The
Company recognizes revenue as services are performed and complete.
The
Company earns HSP segment revenue as follows:
·
|
installation
and service of DirecTV video programming for residents of single family
homes
|
·
|
installation
of home security systems and internet
services
|
The
Company has home services provider (HSP) agreements with DirecTV which allow the
Company to install and activate DirecTV video programming services for residents
of single family homes. As a DirecTV HSP, the Company earns revenue
for installing and servicing DirecTV video customers pursuant to predetermined
rates set by DirecTV which may vary from time to time. Revenue is
recognized upon completion of the delivery and installation of
equipment. DirecTV reimburses the Company for substantially all
DirecTV equipment used for customer installation related to the HSP
segment.
HSP
segment installation and services revenues are recognized in the period the
related services are provided in accordance with SAB 104. MDU segment
user charges are recognized as revenues in the period the related services are
provided in accordance with SAB 104. Any amounts billed prior to
services being provided are reported as deferred service obligations and
revenues.
Page
31
The
Company earns MDU segment revenue as follows:
·
|
from
voice, video and data communications products which are sold and
installed
|
·
|
direct
billing of user charges to multiple dwelling units, through the activation
of, enhancement of, and residual fees on video programming services
provided to residents of multiple dwelling
units
|
Revenue
generated from activation of video programming services is earned in the month
of activation. According to Multiband's Master System Operator
agreement with DirecTV, in the event that a customer cancels within the first 12
months of service, DirecTV has the right to chargeback the Company for a portion
of the activation fees received. In accordance with Securities
Exchange Commission SAB 104, the Company has estimated the potential charge back
of commissions received on activation fees during the past 12 months based on
historical percentages of customer cancellations and has included that amount as
a reduction of revenue. Residual income is earned as services are
provided by DirecTV through its system operators. As a master system
operator for DirecTV, the Company earns a fixed percentage based on net cash
received by DirecTV for recurring monthly services, a variable amount depending
on the number of activations in a given month, and a variable amount for
coordinating improvements of systems used to deliver enhanced programming
services. The Company’s master system operator contract with DirecTV
also permits the Company to earn revenues through its control of other system
operators who are unable to provide DirecTV video programming services without
the Company’s performance.
The
Company reports the aforementioned MDU voice, data, and video revenues on a
gross basis based on the following factors: the Company has the primary
obligation in the arrangement with its customers; the Company controls the
pricing of its services; the Company performs customer service for the
agreements; the Company approves customers; and the Company assumes the risk of
payment for services provided. We offer some products and services that are
provided by third party vendors. We review the relationship between
us, the vendor and the end customer on an individual basis to assess whether
revenue should be reported on a gross or net basis. As an example,
our resold satellite digital television revenue is reported on a net
basis.
MDU
segment revenue generated by the support center to service third party
subscribers by providing billing and call center support services is recognized
in the period the related services are provided.
Customers
contract for both the purchase and installation of voice and data networking
technology products and certain video technologies products. Revenue
is recognized when the products are delivered and installed and the customer has
accepted and has the ability to fulfill the terms of the contract.
The
Company’s policy is to present taxes imposed on revenue-producing transactions
on a net basis which means any sales tax charged is not part of the Company’s
revenues.
Deferred
Revenue
The
Company invoices for certain installation upgrade projects upon order of project
equipment. Revenue is deferred on these projects until the equipment
is installed.
Page
32
Disclosures about
Contractual Obligations and Commercial Commitments
The
following summarizes our contractual obligations as of September 30, 2009, that
have changed materially since our annual 10-K filing. The changes are
due to the acquisition of the DTHC operating subsidiaries (see Note 3) and the
effect these additional contractual obligations including interest payments are
expected to have on our liquidity and cash flows in future periods:
Total
|
1
Year or Less
|
2-3
Years
|
Over
3
Years
|
|||||||||||||
Operating
leases – buildings
|
$
|
4,805
|
$
|
1,743
|
$
|
2,311
|
$
|
751
|
||||||||
Operating
leases – vehicles
|
16,928
|
6,615
|
8,306
|
2,007
|
||||||||||||
Short-term
debt, related party
|
1,421
|
1,421
|
-
|
-
|
||||||||||||
Long-term
debt
|
7,934
|
1,372
|
6,509
|
53
|
||||||||||||
Long-term debt, related party | 42,844 | 3,566 | 5,563 | 33,715 | ||||||||||||
Capital
lease obligations
|
983
|
473
|
505
|
5
|
||||||||||||
Totals
|
$
|
74,915
|
$
|
15,190
|
$
|
23,194
|
$
|
36,531
|
ITEM
3. QUANTITIVE AND QUALITIVE DISCLOSURE ABOUT MARKET RISK
The
Company is not subject to any material interest rate risk as all current lending
agreements are at fixed rates of interest. The Convergent Capital
note of $1,400, which varied from 11% to 14%, dependent on the Company’s common
stock price was paid off on May 26, 2009.
ITEM
4. CONTROLS AND PROCEDURES
As of the
end of the period covered by this quarterly report, the Company carried out an
evaluation, under the supervision and with the participation of the Company’s
management, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures pursuant to Rule 13a-14(c) of the Securities
Exchange Act of 1934. As of September 30, 2009, the Company has not
tested the effectiveness of any controls or procedures with regards to its HSP
business segment due to the recent acquisition of same. The Company
does intend to perform such testing prior to December 31, 2009.
Based
upon that evaluation and the aforementioned acquisition, the Company’s Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures are not effective in alerting them in a
timely basis to material information relating to the Company required to be
disclosed in the Company’s periodic SEC reports. While the Company
believes its financial information as presented herein is materially accurate,
the Company is not prepared to conclude all of its key disclosure controls and
procedures are effective until it has completed its testing. Based on
the Company’s detailed account reconciliation and analysis process, the Company
needs to improve certain inventory control procedures. Currently the
Company is actively reviewing and updating those procedures.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
The
Company is subject to claims, regulatory processes and lawsuits that arise in
the ordinary course of business. The Company accrues for such matters
when a loss is considered probable and the amount of such loss, or a range of
loss, can be reasonably estimated. The Company has recorded $6,420 of
accrued liabilities as of September 30, 2009 for claims and potential
settlements associated with existing litigation. The majority of the
accrual relates to claims for back overtime wages alleged in a number of cases
filed between 2006 to 2008 entitled Lachiev v. JBM (S.D. Ohio); Davis v. JBM
(S.D. Ohio); Gruchy v. DirecTech Northeast (D. Mass); Stephen v. Michigan
Microtech (E.D. Mich); and In re DirecTECH Southwest, Inc. (E.D.
La). At present, the Company is vigorously defending those
claims.
In
connection with the purchase of the operating subsidiaries of DTHC, the Company
has the right to offset 50% of certain third party claims against the purchase
price note to DTHC once those claims are settled and paid. The
Company has recorded a receivable of $3,169 as of September 30, 2009, which
represents an estimate of the 50% portion to be offset against the note to DTHC
due to certain third party claims. The Company’s portion of defense
costs are expensed as incurred. Additionally, the Company is subject
to pending claims, regulatory processes and lawsuits for which losses are not
probable and amounts cannot be reasonably estimated. Those losses
could ultimately be material to the Company’s financial position, results of
operations and cash flows.
Page
33
ITEM
1A. RISK FACTORS
Our
operations and our securities are subject to a number of risks, including but
not limited to those described below. If any of the following risks actually
occur, the business, financial condition or operating results of Multiband and
the trading price or value of our common stock could be materially adversely
affected.
General
Multiband
over the past decade has continued to reinvent and reposition itself as
technologies for communications and entertainment services continue to grow and
evolve. Multiband needs to continue to stay on the edge of changes in technology
if it is to remain competitive in its chosen marketplaces.
Net Income (Losses) Attributable to Multiband Corporation
and Subsidiaries
The
Company had a net loss attributable to Multiband Corporation and subsidiaries of
$10,163 for the nine months ended September 30, 2009, net income of $945 for the
year ended December 31, 2008 and net loss of $6,088 for the year ended December
31, 2007. The Company may never be consistently
profitable.
The
prolonged effects of generating losses without additional funding may restrict
our ability to pursue our business strategy. Unless our business plan is
successful, an investment in our common stock may result in a complete loss of
an investor's capital.
If we
cannot achieve profitability from operating activities, we may not be able to
meet:
o our
capital expenditure objectives;
o our
debt service obligations; or
o our
working capital needs.
Working
Capital
The
Company had a working capital deficit of $30,785 at September 30, 2009 as
compared to positive working capital in the amount of $2,465 at December 31,
2008 due to the acquisition of DirecTECH.
Goodwill
and Intangible Assets
As of
September 30, 2009, the Company had goodwill of $35,489 and intangibles of
$24,446 primarily related to the purchase of DirecTECH. At September
30, 2009 the Company did not note any indications of impairment related to
goodwill or its intangible assets.
Deregulation
Several
regulatory and judicial proceedings have recently concluded, are underway or may
soon be commenced that address issues affecting operations and those of our
competitors, which may cause significant changes to our industry. We cannot
predict the outcome of these developments, nor can we assure you that these
changes will not have a material adverse effect on us. Historically, we have
been a reseller of products and services, not a manufacturer or carrier
requiring regulation of its activities. Pursuant to Minnesota statutes, our
Multiband activity is specifically exempt from the need to tariff our services
in MDU's. However, the Telecommunications Act of 1996 provides for significant
deregulation of the telecommunications industry, including the local
telecommunications and long-distance industries. This federal statute and the
related regulations remain subject to judicial review and additional
rule-makings of the Federal Communications Commission, making it difficult to
predict what effect the legislation will have on us, our operations, and our
competitors.
Page
34
Dependence
on Strategic Alliances
Several
suppliers or potential suppliers of Multiband, such as McLeod, WorldCom, WS Net,
XO Communications and others have filed for bankruptcy in recent years. While
the financial distress of its suppliers or potential suppliers could have a
material adverse effect on Multiband's business, Multiband believes that enough
alternate suppliers exist to allow the Company to execute its business plans.
The Company is also highly dependent on its Master System Operator agreement
with DirecTV. The initial term of the agreement expired in August
2008, and provided for two additional two-year renewals if the Company had a
minimum number of paying video subscribers in its system operator network. The
Company did meet the requirements and has entered into the first two year
automatic renewal period. The Company also has a home service
provider agreement with DirecTV ending May 1, 2013. The term of this
agreement with DirecTV will automatically renew for additional one year periods
unless either the Company or DirecTV gives written notice of termination at
least 90 days in advance of expiration of the then current term.
Although an alternate provider of satellite television services, Echostar,
exists, the termination of any or all of its HSP dealer agreements with DirecTV
would have a material adverse effect on Multiband's business.
Changes
in Technology
A portion
of our projected future revenue is dependent on public acceptance of broadband
and expanded satellite television services. Acceptance of these services is
partially dependent on the infrastructure of the internet and satellite
television which is beyond Multiband's control. In addition, newer technologies,
such as video-on-demand, are being developed which could have a material adverse
effect on the Company's competitiveness in the marketplace if Multiband is
unable to adopt or deploy such technologies.
Attraction
and Retention of Employees
Multiband's
success depends on the continued employment of certain key personnel, including
executive officers. If Multiband were unable to continue to attract and retain a
sufficient number of qualified key personnel, its business, operating results
and financial condition could be materially and adversely affected. In addition,
Multiband's success depends on its ability to attract, develop, motivate and
retain highly skilled and educated professionals with a wide variety of
management, marketing, selling and technical capabilities. Competition for such
personnel is intense and is expected to increase in the future.
Intellectual
Property Rights
Multiband
relies on a combination of trade secret, copyright and trademark laws, license
agreements, and contractual arrangements with certain key employees to protect
its proprietary rights and the proprietary rights of third parties from which
Multiband licenses intellectual property. Multiband also relies on
agreements with owners of MDUs which grant the Company rights of access for a
specific period to MDU premises whereby Multiband is allowed to offer its voice,
data, and video services to individual residents of the MDUs. If it
was determined that Multiband infringed the intellectual property rights of
others, it could be required to pay substantial damages or stop selling products
and services that contain the infringing intellectual property, which could have
a material adverse effect on Multiband's business, financial condition and
results of operations. Also, there can be no assurance that Multiband would be
able to develop non-infringing technology or that it could obtain a license on
commercially reasonable terms, or at all. Multiband's success depends
in part on its ability to protect the proprietary and confidential aspects of
its technology and the products and services it sells. There can be
no assurance that the legal protections afforded to Multiband or the steps taken
by Multiband will be adequate to prevent misappropriation of Multiband's
intellectual property.
Variability
of Quarterly Operating Results
Variations
in Multiband's revenues and operating results occur from quarter to quarter as a
result of a number of factors, including customer engagements commenced and
completed during a quarter, the number of business days in a quarter, employee
hiring and utilization rates, the ability of customers to terminate engagements
without penalty, the size and scope of assignments and general economic
conditions. Because a significant portion of Multiband's expenses are
relatively fixed, a variation in the number of customer projects or the timing
of the initiation or completion of projects could cause significant fluctuations
in operating results from quarter to quarter.
Page
35
Certain
Anti-Takeover Effects
Multiband
is subject to Minnesota statutes regulating business combinations and
restricting voting rights of certain persons acquiring shares of
Multiband. These anti-takeover statutes may render more difficult or
tend to discourage a merger, tender offer or proxy contest, the assumption of
control by a holder of a large block of Multiband's securities, or the removal
of incumbent management.
Volatility
of Multiband's Common Stock
The
trading price of our common stock has been and is likely to be
volatile. The stock market has experienced extreme volatility, and
this volatility has often been unrelated to the operating performance of
particular companies. Investors may not be able to sell the common
stock at or above the price they paid for their common stock, or at
all. Prices for the common stock will be determined in the
marketplace and may be influenced by many factors, including variations in our
financial results, changes in earnings estimates by industry research analysts,
investors' perceptions of us and general economic, industry and market
conditions.
Future
Sales of Our Common Stock May Lower Our Stock Price
If our
existing shareholders sell a large number of shares of our common stock, the
market price of the common stock could decline significantly. The
perception in the public market that our existing shareholders might sell shares
of common stock could depress our market price.
National
Market for Stock
There is
no assurance that the Company’s common stock will continue to trade on the
Nasdaq Stock Market or other national stock exchange due to ongoing listing
criteria for such exchanges.
Competition
We face
competition from others who are competing for a share of the MDU and HSP
markets, including other satellite companies, cable companies and telephone
companies. Some of these companies have significantly greater assets
and resources than we do.
Uncertain
Effects of the Acquisition
During
the first quarter of 2009, the Company completed its Stock Purchase Agreement
(SPA) with DTHC (see Note 3). The DTHC operating entity business as
merged into the Multiband business may not achieve the operating results and
growth anticipated by management in structuring the transaction.
General
Economic Conditions
As of
this writing, the United States is experiencing overall adverse economic
conditions. While we believe this environment may actually benefit the Company
in that consumers may stay home more for entertainment, there is no guarantee
that consumers will continue to purchase the Company’s services at a constant
level if the country’s recession becomes prolonged.
Page
36
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a)
|
An
annual meeting of Multiband shareholders was held on August 12, 2009.
There were present or present by proxy at the meeting 3,590,673 votes, the
number necessary to hold a quorum.
|
b)
|
The
meeting resulted in the following votes related to the following proxy
items:
|
1.
|
Election
of directors: All directors were re-elected for a term serving until the
next annual meeting with the votes in favor listed
below:
|
Director
|
Number of votes
|
|||
Bell
|
3,590,617 | |||
Bennett
|
3,590,633 | |||
Dodge
|
3,590,633 | |||
Harris
|
3,590,633 | |||
Mandel
|
3,590,617 | |||
Miller
|
3,590,633 |
2.
|
Ratify
the election of Baker Tilly Virchow Krause, LLP as independent registered
public accounting firm of the Company for fiscal year
2008.
|
Number of votes
|
||||
For
|
3,590,553 | |||
Against
|
0 | |||
Abstain
|
120 |
3.
|
The
approval of an amendment to Multiband’s 2000 Non-Employee Directors Stock
Compensation Plan (the Directors Plan) to increase the total number of
common stock shares reserved for awards to Non-Employee Directors under
the plan from 160,000 to 5,000,000.
|
Number of votes
|
||||
For
|
3,379,689 | |||
Against
|
210,736 | |||
Abstain
|
248 |
4.
|
The
approval of an amendment to Multiband’s 1999 Stock Compensation Plan (the
Employee Plan) to increase the total number of common shares reserved for
awards to employees under the plan from 860,000 to
15,000,000.
|
Number of votes
|
||||
For
|
3,383,351 | |||
Against
|
207,074 | |||
Abstain
|
248 |
5.
|
The
approval of an amendment to Multiband’s Articles of Incorporation to
increase the authorized number of Multiband common shares from 20 million
to 100 million.
|
Number of votes
|
||||
For
|
3,383,628 | |||
Against
|
206,747 | |||
Abstain
|
298 |
Page
37
ITEM
6. EXHIBITS
|
(a)
|
Exhibits
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 of the
Exchange Act.
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 of the
Exchange Act.
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section
1350.
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section
1350.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
MULTIBAND
CORPORATION
Registrant
|
||
Date: November
16, 2009
|
By:
|
/s/
James L. Mandel
Chief
Executive Officer
|
Date: November
16, 2009
|
By:
|
/s/
Steven M. Bell
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
Page
38