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EX-32.1 - EXHIBIT 32.1 - Network Cadence, Inc.ex32x1.htm
EX-31.2 - EXHIBIT 31.2 - Network Cadence, Inc.ex31x2.htm
EX-31.1 - EXHIBIT 31.1 - Network Cadence, Inc.ex31x1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-Q

(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2010
 
or
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______.
 
Commission file No. 000-52882
 
VERECLOUD, INC.
(Exact name of registrant as specified in its charter)
 

Nevada
26-0578268
(State or other jurisdiction of incorporation
or organization)
(I.R.S. Employer Identification Number)
 
   

6560 South Greenwood Plaza Boulevard
Number 400
Englewood, Colorado 80111
(Address of principal executive offices)
 
 
(877) 711-6492
(Registrant's telephone number, including area code)
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    x      No    ¨
 
Indicate by check mark whether the registrant 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 (§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    ¨      No    x
 
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 definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer
 
¨
 
Accelerated filer
 
¨
       
Non-accelerated filer
 
¨     (Do not check if a smaller reporting company)
 
Smaller reporting company
 
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    ¨      No    x
 
As of February 14, 2011, there were 71,427,165 shares of the registrant’s common stock, par value $0.001 per share, issued and outstanding.
 
 
 
 
 

 
 
 
Table of Contents
VERECLOUD, INC.
 
FORM 10-Q for the Quarterly Period Ended December 31, 2010
 
TABLE OF CONTENTS
     
   
PAGE
        Part I Financial Information
   
   
Item 1. Financial Statements
 
1
   
Condensed Consolidated Balance Sheets as of December 31, 2010 (unaudited) and June 30, 2010
 
1
   
Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2010 and 2009 (unaudited)
 
2
   
Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2010 and 2009 (unaudited)
 
3
   
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit) for the six months ended December 31, 2010 (unaudited)
    4 
     
Notes to Condensed Consolidated Financial Statements
 
5
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
15
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
20
   
Item 4. Controls and Procedures
 
20
   
Part II Other Information
 
21
   
Item 1.  Legal Proceedings
 
21
     
Item 1A.  Risk Factors
 
21
     
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
21
     
Item 3.  Defaults Upon Senior Securities
 
21
     
Item 4.  [Removed and Reserved]
 
21
     
Item 5.  Other Information
 
21
   
Item 6.  Exhibits
 
21
   
Signatures
 
22
   
     
     
 
 
i
 
 

 
 PART I FINANCIAL INFORMATION

Item 1.  Financial Statements
VERECLOUD, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
             
   
December 31,
   
June 30,
 
   
2010
   
2010
 
             
ASSETS
           
             
Current assets
           
Cash
  $ 562,574     $ 197,151  
Accounts receivable
    536,523       632,962  
Other current assets
    57,825       34,243  
Total current assets
    1,156,923       864,356  
                 
Property and equipment (Note 3)
               
Computer related
    88,684       87,655  
Equipment and machinery
    39,253       36,255  
Other property and equipment
    36,330       36,330  
Subtotal
    164,267       160,240  
Accumulated depreciation
    (118,816 )     (98,839 )
Net property and equipment
    45,452       61,401  
                 
Other assets
               
Capitalized software, net (Note 4)
    451,970       -  
                 
Total assets
  $ 1,654,345     $ 925,757  
                 
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
               
                 
Current liabilities
               
Accounts payable
  $ 228,317     $ 174,899  
Accrued liabilities
    312,550       319,899  
Total current liabilities
    540,867       494,798  
                 
Long term debt (Note 6)
    1,564,000       864,000  
                 
Total liabilities
    2,104,867       1,358,798  
                 
Commitments and contingencies (Notes 2,5,6,7,9,10)
               
                 
Stockholders' (deficit)
               
Preferred stock - $0.001 par value, 5,000,000 shares authorized:
    -       -  
No shares issued or outstanding
               
Common stock - $0.001 par value, 200,000,000 shares authorized:
    70,943       70,098  
70,943,000 and 70,098,000 shares issued and outstanding, respectively
               
Additional paid-in capital
    909,471       797,670  
Accumulated (deficit)
    (1,430,936 )     (1,300,809 )
Total stockholders'  (deficit)
    (450,522 )     (433,041 )
                 
Total liabilities and stockholders'  (deficit)
  $ 1,654,345     $ 925,757  
 
The accompanying notes are integral parts of these unaudited financial statements.
 
1

 
 

 
 
VERECLOUD, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

   
Three Months Ended December 31,
   
Six Months Ended December 31,
 
                         
   
2010
   
2009
   
2010
   
2009
 
                         
Revenue
  $ 1,593,685     $ 1,367,131     $ 3,104,227     $ 4,866,153  
                                 
Cost of goods sold
    691,094       511,363       1,368,525       2,169,536  
                                 
Gross profit
    902,591       855,768       1,735,702       2,696,616  
                                 
Operating expenses
                               
Employee related (1)
    344,652       631,583       760,637       869,601  
Marketing expense
    241,908       128,165       492,864       388,295  
Legal and accounting
    30,519       112,369       157,940       252,310  
Consulting expense
    106,582       66,263       171,675       91,538  
Rent
    22,500       34,416       44,935       70,442  
Travel and entertainment
    28,269       15,303       51,665       44,517  
Information technology
    9,170       1,127       18,237       29,742  
Depreciation
    9,362       -       19,977       11,921  
Other
    57,096       48,638       86,457       63,832  
Total operating expenses
    850,059       1,037,864       1,804,386       1,822,197  
                                 
Operating income (loss)
    52,532       (182,096 )     (68,684 )     874,419  
                                 
Other income (expense)
                               
Interest income
    93       2,570       226       2,643  
Interest (expense)
    (34,901 )     (44,327 )     (61,668 )     (96,374 )
Total other income (expense)
    (34,808 )     (41,757 )     (61,442 )     (93,731 )
                                 
Pretax income (loss)
    17,724       (223,853 )     (130,127 )     780,689  
                                 
Income tax expense (benefit)
    -       (34,128 )     -       64,310  
                                 
Net income (loss)
  $ 17,724     $ (189,724 )   $ (130,127 )   $ 716,379  
                                 
                                 
Basic net income (loss) per common share
  $ 0.00     $ (0.00 )   $ (0.00 )   $ 0.02  
Fully diluted net income (loss) per common share
  $ 0.00     $ (0.00 )   $ (0.00 )   $ 0.02  
                                 
Basic weighted average common shares
    70,397,647       47,380,000       70,240,323       45,580,219  
Fully diluted weighted average common shares
    87,855,636       48,812,935       87,454,644       46,316,995  
                                 
(1) Includes stock-based compensation as follows:
                               
      Salary and wages   $ 15,276     $ 175,827     $ 66,932     $ 175,827  
 
The accompanying notes are integral parts of these unaudited financial statements.

2

 
 

 
 
VERECLOUD, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
   
Six Months Ended
 
   
December 31,
 
Operating Activities
 
2010
   
2009
 
Net income (loss)
  $ (130,127 )   $ 716,379  
Adjustments to reconcile net income to
               
net cash from operations
               
Depreciation and amortization
    19,977       11,921  
Stock for services
    4,064       98,000  
Stock-based compensation
    66,932       175,827  
Income tax expense (benefit)
    -       64,310  
Change in assets and liabilities
               
Accounts receivable
    96,439       1,095,303  
Other current assets
    (23,582 )     6,600  
Accounts payable
    53,417       (84,856 )
Other current liabilities
    (7,349 )     (19,236 )
Net cash provided by operating activities
    79,771       2,064,248  
                 
Investing Activities
               
Purchase of computer related
    (1,030 )     (12,727 )
Purchase of equipment and machinery
    (2,998 )     (2,520 )
Purchase of other property and equipment
    -       (2,946 )
Capitalized software
    (451,970 )     -  
Net cash (used in) investing activities
    (455,998 )     (18,193 )
                 
Financing Activities
               
Issuance of common stock
    41,650       -  
Reduction in note payable
    (100,000 )     (560,000 )
Increase in long term debt
    800,000       -  
Members distributions
    -       (506,623 )
Net cash provided by (used in) financing activities
    741,650       (1,066,623 )
                 
Increase (decrease) in cash for period
  $ 365,423     $ 979,432  
Cash at beginning of period
    197,151       540,479  
Cash at end of period
  $ 562,575     $ 1,519,911  
                 
Schedule of Noncash Investing and Financing Activities
               
Share exchange agreement
  $ -     $ (579,905 )
Income taxes payable
  $ -     $ 579,905  
                 
Supplemental disclosure:
               
Cash paid for interest during the year
  $ -     $ 96,374  
Cash paid for income taxes during the year
  $ -     $ -  
 

The accompanying notes are integral parts of these unaudited financial statements.
 
3
 
 
 

 
 
VERECLOUD, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)
For the period from June 30, 2010 to December 31, 2010

                               
   
Common Stock
   
Additional
Paid in
   
Accumulated
Earnings
   
Total
Stockholders Equity
 
   
Shares
   
Amount
   
Capital
   
(Deficit)
   
(Deficit)
 
                               
Balance at June 30, 2010
    70,098,000     $ 70,098     $ 797,670     $ (1,300,808 )   $ (433,040 )
                                         
Stock based compensation
    -       -       51,657       -       51,657  
                                         
Net income (loss)
    -       -       -       (147,851 )     (147,851 )
                                         
Balance at September 30, 2010
    70,098,000     $ 70,098     $ 849,326     $ (1,448,659 )   $ (529,235 )
                                         
Stock option exercises
    845,000       845       40,805       -       41,650  
                                         
Surrender and issuance of stock for services (Note 8)
    -       -       4,064        -       4,064  
                                         
Stock based compensation (Note 9)
     -        -       15,276        -       15,276  
                                         
Net income (loss)
     -        -        -       17,724       17,724  
                                         
Balance at December 31, 2010
    70,943,000     $ 70,943     $ 909,471     $ (1,430,935 )   $ (450,521 )


The accompanying notes are integral parts of these unaudited financial statements.
 
4

 
 

 


VERECLOUD, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
1. Organization

Verecloud, Inc. (the "Company" or "Verecloud") is headquartered in Englewood, Colorado and is developing a cloud services brokerage platform known as Nimbus CSB ("Nimbus") focused on enabling communication service providers ("CSPs") to capture market share in the emerging cloud computing market.   

History of Verecloud

The Company began in 2006 as Cadence II, LLC, a Colorado limited liability company, doing business as Network Cadence ("Network Cadence"), and has driven operational improvements and innovation with clients across the telecommunications landscape through professional services contracts. From architecture design to solution, or technology selection to delivery and implementation, Network Cadence provided professional service solutions in all areas of operational support systems (service creation, order fulfillment, inventory, activation and provisioning, assurance and billing, among others).

On August 31, 2009, a web development company, Sage Interactive, Inc., a Nevada corporation ("Sage"), consummated a share exchange (the "Share Exchange") with the sole member of Network Cadence, pursuant to which it acquired all of the membership interests of Network Cadence in exchange for the issuance to the sole member of Network Cadence, of 42,320,000 shares of common stock, par value, $0.001.  After the Share Exchange, business operations consisted of those of Network Cadence and the operations of Sage ceased.  The Share Exchange was treated as a merger of Sage and Network Cadence, which is accounted for as a reverse acquisition with Network Cadence being the acquirer for financial reporting purposes.  As such, for all disclosures referencing shares authorized, issued, outstanding, reserved for, per share amounts and other disclosures related to equity, amounts have been retroactively restated to reflect share quantities as if the exchange of Network Cadence membership interest had occurred at the beginning of the periods presented as altered by the terms of the Share Exchange.  Upon the closing of the Share Exchange, the Articles of Incorporation were amended to change the name of the Company to Network Cadence, Inc. and Network Cadence became a wholly-owned subsidiary of Network Cadence, Inc.

On January 25, 2010, the Company instituted a four-for-one forward split of its common stock and amended its Articles of Incorporation to change the name of the Company from Network Cadence, Inc. to Verecloud, Inc. All historical information with regard to shares outstanding has been adjusted to reflect the split.

This Quarterly Report on Form 10-Q for the three and six months ended December 31, 2010 reflects the financial statements and related disclosures for Verecloud.
 
2.  Summary of Significant Accounting Policies
 
The unaudited balance sheet as of December 31, 2010, the condensed consolidated balance sheet as of June 30, 2010 and the unaudited interim condensed consolidated financial statements as of and for the three and six months ended December 31, 2010 and 2009 have been prepared in accordance with the instructions for Form 10-Q. In compliance with those instructions, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted. We believe that the disclosures made are adequate such that the information presented is not misleading.
 
In the opinion of management, these statements include all normal recurring adjustments necessary to fairly present our unaudited condensed consolidated results of operations, financial position and cash flows as of December 31, 2010 and 2009 and for all periods presented. These unaudited condensed consolidated financial statements should therefore be read in conjunction with the consolidated financial statements and notes thereto for the year ended June 30, 2010, included in our Form 10-K filed on September 28, 2010 and our Form 10-K/A filed on February 14, 2011.
 
The unaudited condensed consolidated results of operations, the unaudited condensed consolidated statement of changes in stockholders’ equity (deficit) and the unaudited condensed consolidated statements of cash flows for the three and six months ended December 31, 2010 are not necessarily indicative of the results or cash flows expected for the full year.

 
5
 
 

 
Critical Accounting Policies and Estimates

Basis of Presentation
 
The preparation of financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. On an ongoing basis, the Company makes and evaluates estimates and judgments, including those related to revenue recognition, capitalized software development costs, stock-based compensation, goodwill and intangible assets, valuation of investments and accounting for income taxes. It bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances; the results of which form the basis for making judgments about amounts and timing of revenue and expenses, the carrying values of assets and the recorded amounts of liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change.
 
Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of Verecloud and its wholly owned subsidiary, Network Cadence. For the three and six months ended December 31, 2010 and 2009, there were no equity investments in companies over which Verecloud has the ability to exercise significant influence, but does not hold a controlling interest. Verecloud has eliminated all significant intercompany accounts and transactions.
 
Reclassifications

Certain prior year financial statement amounts have been reclassified to conform to the current year presentation with no impact on previously reported net income (loss).
 
Cash and Cash Equivalents

For purposes of balance sheet classification and the statements of cash flows, the Company considers cash in banks, deposits in transit, and all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Concentration of Credit Risk
 
The Company primarily sells its services to customers in the communications industry in the United States on an uncollateralized, open credit basis. For the six months ended December 31, 2010, and 2009, one customer (LightSquared) accounted for 91% and 93% of the revenue, respectively.  For the three months ended December 31, 2010, the Company performed services for LightSquared under month to month statements of work.  This is expected to continue until the Company is able to secure a longer term agreement with LightSquared.  The current statements of work may be terminated by LightSquared with 30 days written notice.
 
Cash is maintained at financial institutions. The Federal Deposit Insurance Corporation ("FDIC") currently insures accounts at each institution for up to $250,000. At times, cash balances may exceed the FDIC insurance limit of $250,000.
 
Accounts Receivable
 
Accounts receivable include uncollateralized customer obligations due under normal trade terms and do not bear interest.

Allowances for doubtful accounts are maintained for estimated losses resulting from the inability of our customers to make required payments. The allowances are based on our regular assessment of the credit worthiness and financial condition of specific customers, as well as its historical experience with bad debts and customer deductions, receivables aging, current economic trends, geographic or country-specific risks and the financial condition of its distribution channels. All outstanding accounts receivable as of December 31, 2010 were either collected subsequent to year end or are deemed collectible based on the collection history of the customer.

Revenue Recognition
 
For the periods covered by this Quarterly Report on Form 10-Q, the Company derived revenue solely from billable professional services provided to clients.  Revenue is recognized only when all of the following conditions have been met:  (i) there is persuasive evidence of an arrangement; (ii) delivery has occurred; (iii) the fee is fixed or determinable; and (iv) collectability of the fee is reasonably assured.
 
 
 

 
Property and Equipment
 
Equipment and furniture are carried at historical cost, net of accumulated depreciation. Depreciation is computed using straight-line methods over the estimated useful lives of the assets, ranging from three to seven years. Expenditures for repairs and maintenance which do not materially extend the useful lives of equipment and furniture are charged to operations.
 
Fair Value Financial Instruments
 
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2010. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, accounts receivable, accounts payable and accrued expenses.  Fair values are assumed to approximate carrying values for these financial instruments because they are short term in nature, or are receivable or payable on demand.

Capitalized Software

The Company accounts for the costs of software within its products in accordance with Accounting Standards Codification ("ASC") Topic 985-20 "Costs of Software to be Sold, Leased or Marketed", under which certain software costs incurred subsequent to the establishment of technological feasibility are capitalized and amortized over the estimated lives of the related products. The Company determines technological feasibility to be established upon the internal release of a detailed program design, or to the extent that a detailed program design is not pursued, upon completion of a working model that has been confirmed by testing to be consistent with the product design, as specified by ASC Topic 985-20. Upon the general release of the product to customers, development costs for that product will be amortized over periods not exceeding three years, based on current and future revenue of the product.

Research and Development Costs
 
Costs related to research, design and development of products, which consist primarily of personnel, product design and infrastructure expenses, are expensed as they are incurred.

Advertising

Advertising and marketing costs are expensed when incurred.  For the three months ended December 31, 2010 and 2009, the Company incurred marketing expenses of $241,908 and $128,165, respectively. For the six months ended December 31, 2010 and 2009, the Company incurred marketing expenses of $492,864 and $388,295, respectively.
 
Segment Information
 
Certain information is disclosed based on the way management organizes financial information for making operating decisions and assessing performance. The Company currently operates in one business segment and will evaluate additional segment disclosure requirements if it expands operations.
 
Significant Customers

For the three and six months ended December 31, 2010 and 2009, the Company had a substantial business relationship with one major customer, LightSquared.  LightSquared accounted for 100% and 93% of the Company’s total revenue for the three months ended December 31, 2010 and 2009, respectively. LightSquared accounted for 91% and 93% of the Company’s total revenue for the six months ended December 31, 2010 and 2009, respectively.
 
Long-Lived Assets
 
The Company accounts for its long-lived assets in accordance with Accounting for the Impairment or Disposal of Long-Lived Assets ("ASC 360").  Its primary long-lived assets are property and equipment and capitalized software costs. ASC 360 requires a company to assess the recoverability of its long-lived assets whenever events and circumstances indicate the carrying value of an asset or asset group may not be recoverable from estimated future cash flows expected to result from its use and eventual disposition. Additionally, the standard requires expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are incurred, rather than as of the measurement date. For property and equipment, our assets consist primarily of computers and office equipment. The Company has compared the net book value of these assets to market-based pricing for similar used equipment. The Company accounts for the costs of software within its products in accordance with the ASC Topic 985-20 "Costs of Software to be Sold, Leased or Marketed" under which certain software costs incurred subsequent to the establishment of technological feasibility are capitalized and amortized over the estimated lives of the related products (Note 4). As of December 31, 2010, the depreciated value of the assets materially reflects the estimated fair value of similar used equipment in the marketplace.
 
7
 
 

 
 
Stock Based Compensation Expense
 
Stock based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.

The Company estimates the fair value of stock options in accordance with ASC Topic 718 using the Black-Scholes option-pricing model. This model requires the use of the following assumptions: (i) expected volatility of the Company’s common stock, which is based on the Company’s peer group in the industry in which the Company does business; (ii) expected life of the option award, which is calculated using the "simplified" method provided in the Security Exchange Commission's (the "SEC") Staff Accounting Bulletin No. 110 and takes into consideration the grant’s contractual life and vesting periods; (iii) expected dividend yield, which is assumed to be 0%, as the Company has not paid and does not anticipate paying dividends on its common stock; and (iv) the risk-free interest, which is based on the U.S. Treasury yield curve in effect at the time of grant with maturities equal to the grant’s expected life. In addition, ASC Topic 718 requires the Company to estimate the number of options that are expected to vest. In valuing stock based awards under ASC Topic 718, significant judgment is required in determining the expected volatility of the Company’s common stock.
 
Accounting for Income Taxes

Income tax expense or benefit is recognized for the amount of taxes payable or refundable for the current year’s results and for deferred tax assets and liabilities related to the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns.
 
Net Income (Loss) Per Common Share
 
Basic net income (loss) per common share calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the year.  Diluted net income (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents outstanding.  During the periods when they are anti-dilutive, common stock equivalents, if any, are not considered in the computation.
 
Recent Pronouncements
 
The Company evaluates pronouncements of various authoritative accounting organizations, primarily the Financial Accounting Standards Board ("FASB"), the SEC, and the Emerging Issues Task Force ("EITF"), to determine the impact of new pronouncements on GAAP and the preparation of our financial statements.  The Company has adopted the following new accounting standards:
 
In October 2009, FASB published Accounting Standards Update ("ASU") 2009-14, Certain Revenue Arrangements That Include Software Elements, to provide guidance for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and non-software components that function together to deliver the product’s essential functionality are excluded from the software revenue guidance in ASC Subtopic 985-605, Software-Revenue Recognition.  In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance. ASU 2009-14 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. This pronouncement did not have any impact on the Company’s condensed consolidated unaudited financial statements for the three and six months ended December 31, 2010 and 2009.

In January 2010, FASB published ASU 2010-06, Improving Disclosures about Fair Value Measurement, which requires additional disclosures regarding the activity in fair value measurements classified as Level 3 in the fair value hierarchy. Disclosure of activity in Level 3 fair value measurements is required for fiscal years beginning after December 15, 2010. Early adoption is permitted. The Company will provide these disclosures, if necessary, beginning in the second quarter of fiscal year 2011, if and when such activity occurs.
 
There were no other accounting standards and interpretations issued recently which are expected to have a material impact on the Company’s financial position, operations or cash flows.

8
 
 
 
 

 
 
3.  Property and Equipment
 
Property and equipment are recorded at cost. Replacements and major improvements are capitalized while maintenance and repairs are charged to expense as incurred. Depreciation is provided using primarily straight line methods over the estimated useful lives of the related assets.
 
Property and equipment at December 31, 2010 and June 30, 2010 consisted of the following:
 
   
December 31,
   
June 30,
 
   
2010
   
2010
 
             
Computer related
  $ 88,684     $ 87,655  
Equipment and machinery
    39,253       36,255  
Other property and equipment
    36,330       36,330  
   Subtotal
    164,267       160,240  
Accumulated depreciation
    (118,816 )     (98,839 )
   Net property and equipment
  $ 45,452     $ 61,401  

4.   Capitalized Software
 
The Company accounts for the costs of software within its products in accordance with the ASC Topic 985-20 "Costs of Software to be Sold, Leased or Marketed" under which certain software costs incurred subsequent to the establishment of technological feasibility are capitalized and amortized over the estimated lives of the related products. The Company determines technological feasibility to be established upon the internal release of a detailed program design, or to the extent that a detailed program design is not pursued, upon completion of a working model that has been confirmed by testing to be consistent with the product design, as specified by Topic 985-20. Upon the general release of the product to customers, development costs for that product will be amortized over periods not exceeding three years, based on current and future revenue of the product. Technological feasibility of the Company’s product, Nimbus CSB, was established in September 2010.  As a result, for the six months ended December 31, 2010, the Company capitalized $451,970 of software costs and recorded no amortization cost.

5.  Commitments and Contingencies
 
Consulting Agreements
 
On September 15, 2009, the Company signed a consulting agreement with Capital Group Communications, Inc. ("CGC"), pursuant to which CGC agreed to provide investor relations services including representing the Company in investor communications and public relations with existing stockholders, brokers, dealers and others for a 14-month period once the Company's stock is publicly traded (September 2010).  Pursuant to the terms of the consulting agreement, the Company agreed to compensate CGC with the issuance of 1,380,000 shares of restricted common stock. The fair market value of these services is estimated at $98,000 and, upon issuance of the shares, has been reflected in the operating expenses for the six months ended December 31, 2009 since the shares issued are non-refundable if the agreement is terminated and compensation is not based on future services.

On June 10, 2010, the Company entered into a consulting agreement with The Mesa Group, Inc., a Texas corporation ("TMG"), pursuant to which TMG agreed to render consulting services with respect to organizational and business matters to the Company.  The consulting agreement has a three year-term and provides that, commencing on March 31, 2011 and terminating on December 31, 2013, the Company shall pay TMG an aggregate amount of $744,000 in 12 quarterly payments of $62,000. As of December 31, 2010, the Company had accrued $135,273 associated with the consulting agreement.
 
On November 10, 2010, the Company entered into an agreement with Changewave, Inc. ("Changewave") in which Changewave will provide investor relations and shareholder marketing services for the Company. The term of agreement is November 1, 2010 to October 31, 2011. As compensation for these services, Changewave will receive 1,200,000 restricted shares of common stock over the term of the agreement. These shares are earned and payable quarterly beginning on November 1, 2010 with the final installment due on August 1, 2011. The contract may be terminated by the Company without cause with ten days notice to Changewave. In the event of termination, the Company is obligated for only those shares issued prior to the date of termination. In connection with payment of the first installment, the Company's chief executive officer has surrendered 300,000 shares of common stock on December 10, 2010 and the Company issued 300,000 shares of common stock to Changewave and recorded operating expense of $4,064 in the three months ended December 31, 2010.

In addition, the Company has entered into a variety of consulting agreements for services to be provided to the Company in the ordinary course of business.  These services include project staffing on customer engagements, business development activities and marketing efforts. These agreements call for various payments upon performance of services and are generally short-term and cancellable by the Company at will.
 
9
 
 

 
Operating Leases
 
The Company has a lease commitment for its office facility. This lease has a monthly rental payment of $7,500 and expires in March 2011.   In addition, the Company has three apartment leases in Reston, Virginia that are month to month at a combined monthly rate of $12,200.
 
Employment Agreements
 
On June 22, 2010, the Company entered into employment agreements (the "Employment Agreements") with the following executives:  (i) its President, William E. Wood, III; (ii) its Chief Financial Officer, James R. Buckley; (iii) its Chief Operating Officer, Michael P. Cookson; and (iv) its Chief Technology Officer, William Perkins.

Pursuant to the Employment Agreements:

(a)   Mr. Wood is to receive a base salary of $225,000 per annum and options to purchase 5,700,000 shares of the Company's common stock at $0.02 per share;

(b)   Mr. Buckley is to receive a base salary of $180,000 per annum and options to purchase 1,900,000 shares of the Company's common stock at $0.02 per share;

(c)   Mr. Cookson is to receive a base salary of $180,000 per annum and options to purchase 500,000 shares of the Company's common stock at $0.02 per share; and

(d)   Mr. Perkins is to receive a base salary of $180,000 per annum and options to purchase 350,000 shares of the Company's common stock at $0.02 per share.

Each option granted above began vesting 1/12 on the last day of each calendar quarter commencing December 31, 2010, so that if each executive remains continuously employed by the Company, their respective options will fully vest on June 30, 2013.

In addition, the Employment Agreements provide that each of the executives is eligible to participate in the Company's benefit plans (including, as they become available, savings, profit-sharing, life, disability, health, accident and other programs), will accrue three weeks paid vacation per year and be entitled to paid holidays in accordance with the Company's vacation policy.

In the event any executive's employment is terminated without cause (as defined in the Employment Agreements) or the executive resigns for good reason (as defined in the Employment Agreements), upon execution of a release of claims against the Company, the executive would be entitled to receive an amount equal to six times the amount of his monthly base salary. However, in the event the executive's employment is terminated without cause (as defined in the Employment Agreements) or the executive resigns for good reason (as defined in the Employment Agreements), at anytime during the period beginning three months prior to a change in control (as defined in the Employment Agreements) and ending 12 months after a change in control, the executive would instead be entitled to receive a lump sum payment equal to the sum of (i) 1.0 times his base salary, plus (ii) the bonus he earned for the prior calendar year, plus (iii) 12.0 times the monthly premium amount for the executive's employee benefits.

In addition, the Employment Agreements include a "modified 280G cutback" which provides that, in the event of a change in control (as defined in the Employment Agreements), if the executive would receive payments in excess of the Internal Revenue Code Section 280G statutory safe harbor amount, the executive will receive the amount of payments that results in the greatest after-tax proceeds.
 
6.  Borrowings

On June 10, 2010, the Company entered into a loan agreement (the "Loan Agreement") with TMG Holdings Colorado, LLC, a Texas limited liability company ("TMG Colorado"). Pursuant to the Loan Agreement, TMG Colorado agreed to provide the Company with a revolving line of credit in the principal amount of up to $1,564,000 (the "Loan") pursuant to a revolving credit note (the "Note"). As of December 31, 2010, the Company had borrowed $1,564,000 under the Note. Interest accrues on the outstanding principal amount of the Loan at the rate of 10% per annum and is paid quarterly, commencing on June 30, 2011. The Loan matures on June 30, 2012 and may be prepaid at anytime without premium or penalty. As a result, the outstanding balance at December 31, 2010 is classified as long term debt. The Loan Agreement provides that, without the prior written consent of TMG Colorado, the Company may not declare any dividends or make any other distributions of money or other property with respect to the Company's shares, except under limited circumstances described in the Loan Agreement. In addition, the Loan Agreement required that the Company establish a consulting agreement with TMG as further described in Note 5.

The Loan Agreement also contains customary representations, warranties and covenants. The Company's obligations under the Loan are secured by a first priority lien on all of the Company's assets pursuant to a security agreement (the "Security Agreement") between the Company and TMG Colorado dated as of June 10, 2010.  Failure to pay any amount of principal or interest when due, failure to comply with any other terms and conditions of the Loan Agreement, the Note or the Security Agreement, any false or inaccurate material representation, the bankruptcy of the Company, or liquidation, termination or dissolution of the Company, will result in an acceleration of the total balance of outstanding interest and principal on the Note. In addition, upon any of the foregoing defaults, the Note shall accrue default interest at a rate of 18% per annum and TMG Colorado may foreclose on the Company’s assets. 
 
 
10
 
 

 
 
7.  Related Parties

The Company has not adopted formal policies and procedures for the review, approval or ratification of related party transactions with its executive officers, directors and significant stockholders.  However, all material related party transactions for the periods covered by this report have been disclosed and such transactions have been approved by the board of directors.  Future transactions will be subject to the review, approval or ratification of the board of directors, or an appropriate committee thereof.  

On June 10, 2010, the Company entered into the Consulting Agreement with TMG.  Pursuant to the Consulting Agreement, TMG agreed to render consulting services with respect to organizational and business matters to the Company.  The consulting agreement has a three-year term and provides that, commencing on March 31, 2011 and terminating on December 31, 2013, the Company shall pay TMG an aggregate amount of $744,000 in 12 quarterly payments of $62,000.  As of December 31, 2010, the Company had accrued $135,273 associated with the Consulting Agreement.  The Company currently has the Loan Agreement with TMG's affiliate, TMG Colorado, and another affiliate of TMG, TMG Holdings, LLC, is the Company's second largest stockholder.
 
8.  Capital Stock

As of December 31, 2010, there were 70,943,000 outstanding shares of common stock and no issued and outstanding shares of preferred stock.

The Company’s Articles of Incorporation, as amended, authorize the issuance of 200,000,000 shares of common stock, $0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par value.

The Company’s Articles of Incorporation, as amended, authorize the issuance of preferred stock in one or more series at the discretion of the board of directors.  In establishing a series, the board of directors has the right to give it a distinctive designation so as to distinguish such series of preferred stock from other series and classes of capital stock.  In addition, the board of directors is obligated to fix the number of shares in such a series, and the preference rights and restrictions thereof.  All shares of any one series shall be alike in every particular except as provided by the Articles of Incorporation, as amended, or the Nevada Revised Statutes.

On January 25, 2010, the Company conducted a four-for-one forward split of its common stock, in which each share of our issued and outstanding common stock as of January 25, 2010 was converted into four shares of common stock.  Accordingly, all share amounts referenced herein are calculated on a post-split basis notwithstanding that certain grants or issuances were made prior to the date of the forward split.  In addition, all references in the accompanying financial statements to the number of common shares and per share amounts have been retroactively adjusted to reflect the forward stock split.
 
9.  Securities Authorized for Issuance under Equity Compensation Plans
 
The following table sets forth, as of December 31, 2010, certain information related to the Company’s compensation plans under which shares of its common stock are authorized for issuance.
 
Plan Category
 
Number of
securities to be Issued upon Exercise of Outstanding Options
(a)
   
Average
Exercise
Price of Outstanding Options
   
Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a))
 
Equity compensation plans approved by security holders
   
14,680,000
   
 $
0.04
     
475,000
 
                         
Equity compensation plans not approved by security holders
   
-
   
$
-
     
-
 
Total
   
14,680,000
   
$
0.04
     
475,000
 
 
11
 
 

 
 
On October 27, 2009, the Company's board of directors adopted the Verecloud 2009 Equity Incentive Plan (the "Incentive Plan"). The purpose of the Incentive Plan is to benefit the Company’s stockholders by furthering the growth and development of the Company by affording an opportunity for stock ownership to attract, retain and provide incentives to employees and directors of, and non-employee consultants to, the Company and its affiliates, and to assist the Company in attracting and retaining new employees, directors and consultants; to encourage growth of the Company through incentives that are consistent with the Company’s goals; to provide incentives for individual performance; and to promote teamwork.
 
Under the Incentive Plan, the board of directors in its sole discretion may grant stock options, stock appreciation rights, restricted stock, restricted stock units, bonus stock, deferred stock or other equity-based awards (each an "Award") to the Company’s employees, directors and consultants (or those of the Company’s affiliates).  The Awards available under the Incentive Plan also include performance-based Awards, which would have pre-established performance goals that relate to the achievement of the Company’s business objectives.  The performance-based stock Awards available under the Incentive Plan are intended to comply with the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended, to allow such Awards, when payable, to be tax deductible by the Company.
 
On June 22, 2010, the board of directors of Verecloud approved the increase in the amount of shares reserved for issuance under the Incentive Plan from 8,000,000 shares of common stock to 16,000,000 shares.  To the extent that an Award expires, ceases to be exercisable, is forfeited or repurchased by the Company, any shares subject to the Award may be used again for new grants under the Incentive Plan.  In addition, shares tendered or withheld to satisfy the grant or exercise price or tax withholding obligation with respect to any Award (other than with respect to options) may be used for grants under the Incentive Plan.  Initially, the maximum number of shares of Common Stock that may be subject to one or more Awards to a participant pursuant to the Incentive Plan during any fiscal year of the Company is 4,000,000.  However, the Incentive Plan, as amended, increases this maximum amount to 8,000,000 shares. On January 26, 2010, the Board of Directors (the “Board”) adopted the Verecloud, Inc. Unit Bonus Plan (the “Unit Bonus Plan”).  On September 16, 2010, upon written consent of each participant in the Unit Bonus Plan, the Board adopted an amendment to the Unit Bonus Plan to eliminate the market valuation vesting and payment trigger.  This payment trigger provided for the payment of unit awards if the Company maintained a valuation of $30 million or greater for a period of 15 consecutive days. After the amendment to the Unit Bonus Plan, the payment of unit awards may be still be triggered by a Change of Control (as defined in the Unit Bonus Plan) or an Involuntary Separation (as defined in the Unit Bonus Plan).

As of December 31, 2010, 15,525,000 options to acquire shares of common stock and restricted shares have been issued under the Incentive Plan leaving 475,000 shares of common stock remaining available for option and stock awards under the Incentive Plan. Of the 15,525,000 options to acquire shares of common stock issued, 845,000 were exercised in the three months ended December 31, 2010. In the three months ended December 31, 2010, options to acquire shares of common stock totalling 255,000 shares, issued to former employees of the Company, expired since they were not exercised within the required timeframe after termination. In general, each option vests evenly on the last day of each fiscal quarter, based on a three-year period commencing upon the employee's original date-of-hire.  As of December 31, 2010, 7,007,500 options have vested.
 
The following table summarizes the activity under the Company’s stock option plans:
                   
   
Number of
Shares
   
Weighted-
Average
Exercise
Price
   
Aggregate
Intrinsic
Value (1)
 
Outstanding as of June 30, 2010
   
15,100,000
   
 $
.04
   
$
-
 
Granted
   
680,000
   
 $
.11
     
-
 
Exercised
   
(845,000)
   
 $
.05
     
-
 
Expired
   
(255,000)
   
 $
.07
     
-
 
Outstanding as of December 31, 2010
   
14,680,000
   
$
.04
   
$
-
 
                         
 
(1)
Amounts represent the difference between the exercise price and the fair market value of common stock at each period end for all in the money options outstanding.

 
 
12
 
 

 
Stock Based Compensation
 
The Company estimates the fair value of stock options in accordance with ASC Topic 718 using the Black-Scholes option-pricing model. This model requires the use of the following assumptions: (i) expected volatility of the Company’s common stock, which is based on the Company’s peer group in the industry in which the Company does business; (ii) expected life of the option award, which is calculated using the "simplified" method provided in the SEC’s Staff Accounting Bulletin No. 110 and takes into consideration the grant’s contractual life and vesting periods; (iii) expected dividend yield, which is assumed to be 0%, as the Company has not paid and does not anticipate paying dividends on its common stock; and (iv) the risk-free interest, which is based on the U.S. Treasury yield curve in effect at the time of grant with maturities equal to the grant’s expected life. In addition, ASC Topic 718 requires the Company to estimate the number of options that are expected to vest. In valuing share-based awards under ASC Topic 718, significant judgment is required in determining the expected volatility of the Company’s common stock. The following table presents the weighted average assumptions used to estimate the fair values of the stock options granted for the three months ended December 31, 2010 and 2009:
 
 
2010
 
2009
 
Expected volatility
83%
 
86%
 
Expected life (years)
5.27
 
5.29
 
Expected dividend yield
 
 
Risk free interest rate
2.10%
 
2.78%
 
 
The per share weighted average fair value of options granted was $.11 for the three months ended December 31, 2010.  No options were granted prior to October 2009. As of December 31, 2010, there was $136,889 of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted average service period of 5.3 years. The Company utilizes historical volatility of other entities in a similar line of business for a period commensurate with the contractual term of the underlying financial statements. As of December 31, 2010, the Company had issued 15,525,000 options to purchase common stock. As of December 31, 2010, 7,007,500 of the Company’s stock options have vested. The Company recognized stock-based compensation expense of $15,276 and $175,827 for the three months ended December 31, 2010 and 2009, respectively.
 
The fair values of the common stock underlying stock options granted during the three months ended December 31, 2010 were estimated by the Company's board of directors, which intended all options granted to be exercisable at a price per share not less than the per share fair market value of our common stock underlying those options on the date of grant. Given the absence of a widely traded public trading market, the board of directors considered numerous objective and subjective factors to determine the best estimate of the fair market value of the common stock at each meeting at which stock option grants were approved. These factors included, but were not limited to, the following: (i) contemporaneous valuations of the common stock; (ii) the low trading volume of the common stock; (iii) developments in the business; and (iv) revenue trading multiples of comparable companies in the Company's industry and the discounted present value of anticipated cash flows through 2012. If the Company had made different assumptions and estimates, the amount of recognized and to be recognized stock-based compensation expense could have been materially different. The Company believes that it has used reasonable methodologies, approaches and assumptions in determining the fair value of our common stock.

10.  Stock Warrants
 
On August 12, 2010, upon approval by the Company board of directors, Phillip Tonge was elected as a director (the "Tonge Appointment").  In connection with the Tonge Appointment, the Company issued Mr. Tonge a warrant (the "Tonge Warrant") to purchase 200,000 shares of common stock at $0.02 per share.  The shares underlying the Tonge Warrant will vest equally over five consecutive quarters commencing on September 30, 2010 with full vesting occurring on December 31, 2011.  As of December 31, 2010, 80,000 shares had vested and the value of these vested warrants was estimated at $1,076 using the Black-Scholes option-pricing model. It was recorded as an increase to additional paid in capital.
 
On August 24, 2010, upon approval by the Company board of directors, Dr. Hossein Eslambolchi was elected as a director (the "Eslambolchi Appointment").  In connection with the Eslambolchi Appointment, the Company issued to Dr. Eslambolchi a warrant (the "Eslambolchi Warrant") to purchase 600,000 shares of the Company's common stock, at $0.07 per share.  As consideration for Dr. Eslambolchi's prior advisory service to the Company over a two-year period commencing January 29, 2009, 450,000 of the underlying common stock shares vested as of August 24, 2010.  As of December 31, 2010, 600,000 shares had vested and the value of these vested warrants was estimated at $9,682 using the Black-Scholes option-pricing model. It was recorded as an increase to additional paid in capital.
 
 
13
 
 

 
11.  Income Taxes
 
The income tax provision for the six months ended December 31, 2010 and 2009:
 
     
Six Months Ended
 
     
December 31,
   
December 31,
 
     
2010
   
2009
 
               
Current income tax expense (benefit)
             
U.S. Federal
    $ (187,832 )   $ 306,801  
State and local
      (24,860 )     40,606  
Total current expense (benefit)
      (212,692 )     347,407  
Change in tax status
      -       (283,097 )
Deferred tax asset allowance
      212,692       -  
Total income tax expense (benefit)
    $ -     $ 64,310  
 
Net operating loss carryforwards, if not used, will expire in 2031. The tax intangible is being amortized over 15 years and may be further limited by other provisions of the tax laws.  The Company has $515,165 of net operating loss carryforwards expiring in 2031.  Due to the uncertainty over whether the net operating loss carryforward will be realized, the Company has recorded a valuation allowance of $212,692 for the tax effect of the entire net operating loss carryforward. 
 
As a result of the Share Exchange on August 31, 2009, the Company became a "C" corporation. Effective August 31, 2009, Network Cadence became a wholly-owned subsidiary of Verecloud through the Share Exchange. Prior to the Share Exchange, Network Cadence was a pass-through entity for U.S. federal income tax purposes prior to the Share Exchange and U.S. federal, state, and local income taxes were not provided for this entity as it was not a taxable entity. Limited liability company members are required to report their share of our taxable income on their respective income tax returns. As a result of the Share Exchange, the Company is subject to corporate U.S. federal, state, and local taxes beginning in September 2009. Prior to the Share Exchange, no provision for income tax has been provided in the financial statements since, prior to the Share Exchange, the Company elected to be taxed as a partnership, whereby all income or losses flow through to the partners for income tax reporting purposes and the Company was on the cash basis of accounting for income tax purposes.

With the transition to a "C" corporation on August 31, 2009, the Company assumed a tax liability of $579,905 related to the conversion from a cash basis tax entity to an accrual based taxpayer. This liability was fully offset by the operating losses generated from September 1, 2009 to June 30, 2010.  In addition and in connection with the Note Purchase Agreement, described in Note 10, the Company has a deferred intangible tax asset of $415,629 at December 31, 2010. Due to the uncertainty over whether the deferred tax asset will be realized, the Company has recorded a valuation allowance for the entire deferred tax asset balance of $415,629.
 
A reconciliation of income tax computed at the United States federal statutory rate of 34% to reported income tax expense for the three and six months ended December 31, 2010 and 2009 follows:

   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2010
   
2009
 
Statutory U.S. federal tax rate
    34.0%       34.0%  
                 
Change in tax rate resulting from
               
LLC results not subject to federal or state income taxes
    -       -36.3%  
Tax intangible     11.0%       -2.7%  
State and local taxes
    4.5%       4.5%  
Stock based compensation
    -19.8%       8.7%  
Capitalized software costs     102.5%       -  
Deferred income tax valuation allowance
    -132.2%       0.0%  
Effective Tax Rate
    0.0%       8.2%  
 
 
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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with our consolidated financial statements, including the notes thereto, appearing in our Form 10-K for the year ended June 30, 2010 filed on September 28, 2010 and our Form 10-K/A filed on February 14, 2011.
 
Cautionary Note Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q and other materials we will file with the SEC contain, or will contain, disclosures which are forward-looking statements. Forward-looking statements include all statements that do not relate solely to historical or current facts, such as, but not limited to, the discussion of economic conditions in market areas and their effect on revenue growth, the discussion of our growth strategy, the effectiveness of our management information systems, and the availability of financing and working capital to meet funding requirements, and can generally be identified by the use of words such as "may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan" or "continue." These forward-looking statements are based on the current plans and expectations of our management and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. These factors include, but are not limited to: economic conditions in the telecommunications industry; our ability to service and repay our debt financing; increased competition in the industry; our dependence on a certain customer; the availability of and costs associated with potential sources of financing; difficulties associated with managing future growth; our inability to manage our customer’s projects; our ability to continue as a going concern; our ability to raise funds to operate; the loss of key personnel; and our ability to attract and retain new qualified personnel.
 
For a discussion of the factors that could cause actual results to differ materially from the forward-looking statements see the "Liquidity and Capital Resources" section under "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in this item of this report and the other risks and uncertainties that are set forth elsewhere in this report or detailed in our other SEC reports and filings. We believe it is important to communicate our expectations. However, our management disclaims any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.
 
Overview

Verecloud, Inc. (the "Company" or "Verecloud") is headquartered in Englewood, Colorado and is developing a cloud services brokerage platform known as Nimbus CSB ("Nimbus") focused on enabling communication service providers ("CSPs") to capture market share in the growing cloud computing market.  
 
For the past four years, Verecloud has driven operational improvements and innovation with clients across the telecommunications landscape through professional services contracts. From architecture design to solution, or technology selection to delivery and implementation, Verecloud has provided professional service solutions in areas of operational support systems (service creation, order fulfillment, inventory, activation and provisioning, assurance and billing, among others).  For the periods covered by this Quarterly Report on Form 10-Q, the Company’s revenue stream consists solely of billable professional services.  No software or product revenue has yet occurred.
 
While professional services remain the Company’s sole source of revenue as of the date of this Quarterly Report on Form 10-Q, the Company’s objective is  to develop a unique platform known as Nimbus CSB ("Nimbus"), which it hopes will position the Company to exploit the opportunity created by the continued growth in cloud computing. Nimbus is expected to bridge the gap between (i) small and medium businesses that want expanded and integrated services via the "cloud," (ii) CSPs who need innovative, high-margin services to drive growth, and (iii) innovative cloud computing solution providers who want access to the large distribution channel that CSPs have developed for voice and data services. The Company believes that Nimbus can potentially open new revenue opportunities, protect investments made in existing services, and create a new distribution model for both CSPs and cloud computing solution providers in a low cost, high return manner.  The success of the Company’s plan will depend on several major factors.  First, its ability to fund the development of Nimbus.  Second, the successful development of Nimbus into a commercially viable and competitive cloud-based solution.  Third, the Company’s ability to effectively market and sell the Nimbus solution to CSPs. The Company is actively engaged in business development efforts to acquire new customers for the Nimbus solution.

Significant Accounting Policies and Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 

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The Company’s significant accounting policies are more fully described in Note 2 to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
 
Recent Accounting Pronouncements
 
The Company evaluates pronouncements of various authoritative accounting organizations, primarily the FASB, the SEC, and EITF, to determine the impact of new pronouncements on GAAP and the preparation of our financial statements.  The Company has adopted the following new accounting standards:
 
In October 2009, FASB published ASU, 2009-14, Certain Revenue Arrangements That Include Software Elements, to provide guidance for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and non-software components that function together to deliver the product’s essential functionality are excluded from the software revenue guidance in ASC Subtopic 985-605, Software-Revenue Recognition . In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance. ASU 2009-14 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. This pronouncement did not have any impact on the Company’s condensed consolidated unaudited financial statements for the three and six months ended December 31, 2010 and 2009.
 
In January 2010, FASB published ASU 2010-06, Improving Disclosures about Fair Value Measurement, which requires additional disclosures regarding the activity in fair value measurements classified as Level 3 in the fair value hierarchy. Disclosure of activity in Level 3 fair value measurements is required for fiscal years beginning after December 15, 2010. Early adoption is permitted. We do not have activity that requires disclosure in accordance with this pronouncement.
 
There were no other accounting standards and interpretations issued recently which are expected to have a material impact on the Company’s financial position, operations or cash flows.
 
Outlook
 
Our business model seeks to provide solutions to traditional CSPs, enabling them to innovate and provide value-added services to their customers via cloud computing. We expect to accomplish our business model by utilizing the core competencies of our team to deliver and deploy Nimbus within the CSPs operating environment.
 
We are currently targeting domestic and international tier 1 and tier 2 CSPs who have a desire to transform their operations to deliver highly optimized cloud-based services to their customers. In particular, we will place a high priority on partnering with CSPs who intend to target the small-and-medium business customer, due to size of the opportunity for incremental services and revenue via cloud computing in the near term.
 
Revenue
 
With this market opportunity, Verecloud is targeting four key revenue streams:
 
professional services revenue;
nimbus implementation and integration;
ongoing system upgrades;
transactions fees on CSPs new products and services.
 
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As our revenues increase, we plan to continue to invest in marketing and sales, in addition to software development and research and development, by increasing our presence within the industry and well as continued targeted sales efforts within and outside the telecommunications industry.

Cost of Goods Sold
 
Our costs of goods sold include direct staff costs associated with professional service activities as well as, going forward, ongoing costs associated with Nimbus upgrades and deployments and customer support. Our gross margins are expected to remain in the 50-60% range as we gain scale and efficiencies with each added customer.
 
Operating Expenses
 
With the expected growth in revenue, general, legal and administrative expenses are expected to increase. We expect to continue to add supporting staff in finance and operations as we grow the business.  As we expand our customer base and increase our professional services and integration revenue, our overall staffing (employees and contractors) is expected to increase on a variable basis (revenue led hiring).
 
 Results of Operations

Comparison of the Three and Six Months Ended December 31, 2010 and 2009

The following table sets forth the results of our operations for the periods indicated as a percentage of revenues:

   
Three months ended December 31, (Unaudited)
   
Six Months Ended December 31, (Unaudited)
 
   
2010
   
2009
   
2010
   
2009
 
         
% of
         
% of
         
% of
         
% of
 
   
Amount
   
Revenues
   
Amount
   
Revenues
   
Amount
   
Revenues
   
Amount
   
Revenues
 
   
in dollars except percentages
   
in dollars except percentages
 
                                                 
Revenue
  $ 1,593,685       100 %   $ 1,367,131       100 %   $ 3,104,227       100 %   $ 4,866,153       100 %
                                                                 
Cost of goods sold
    691,094       43 %     511,363       37 %     1,368,525       44 %     2,169,536       45 %
                                                                 
Gross profit
    902,591       57 %     855,768       63 %     1,735,702       56 %     2,696,616       55 %
                                                                 
Operating expenses
    850,059       53 %     1,037,864       76 %     1,804,386       58 %     1,822,197       37 %
                                                                 
Operating income (loss)
    52,532       3 %     (182,096 )     -13 %     (68,684 )     -2 %     874,419       18 %
                                                                 
Other income (expense)
    (34,808 )     -2 %     (41,757 )     -3 %     (61,442 )     -2 %     (93,731 )     -2 %
                                                                 
Income tax expense (benefit)
    -       0 %     (34,128 )     -2 %     -       0 %     64,310       1 %
                                                                 
Net income (loss)
  $ 17,724       1 %   $ (189,724 )     -14 %   $ (130,127 )     -4 %   $ 716,379       15 %

Three Months Ended December 31, 2010

Revenue: Revenue for the three months ended December 31, 2010 increased 17% compared to 2009 driven by higher revenue from LightSquared in 2010 compared to 2009. In November 2009, LightSquared temporarily terminated its contract with us. Beginning in May 2010, the Company re-engaged with LightSquared and we continue to provide professional services in support of their network development efforts.
 
Cost of Goods Sold:  Cost of goods sold, which consists mainly of staff related expenses (employees and contractors) and travel expenses for the three months ended December 31, 2010 increased 35% compared to the three months ended December 31, 2009. The increase is driven by a change in mix to slightly higher costs resources in our work at LightSquared compared to the prior year. Our gross profit was 57% for the three months ended December 31, 2010, a slight decrease from the 63% in the three months ended December 31, 2009.
 
 
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Operating Expenses: Operating expenses for the three months ended December 31, 2010 decreased 18% or $187,804 versus the comparable period in 2009.   This decrease is driven primarily by four factors – Lower employee related costs due to high billable productivity of our internal staff, our Nimbus development costs that are no longer considered research and development and are now being capitalized, lower legal and accounting costs (down 73%) offset by increased sales and marketing expenses associated with expanding business development and company awareness efforts.
 
Other Income (Expense): Other income (expense) for the three months ended December 31, 2010 was ($34,808) vs. ($41,757) for the comparable period in 2009 and consists primarily of interest expense. For the three months ended December 31, 2010 and 2009, interest expense was $34,901 and $44,327, respectively. For the three months ended December 31, 2010, interest expense relates to the outstanding line of credit. In 2009, the interest expense was related to the note payable balance outstanding as of December 31, 2009.
 
Net Income (Loss): For the three months ended December 31, 2010, we reported net income of $17,724 compared to a net loss of $189,724 for the three months ended December 31, 2009.
 
Six Months Ended December 31, 2010

Revenue: Revenue for the six months ended December 31, 2010 decreased 36% compared to 2009 driven primarily by lower revenue from LightSquared in 2010 vs. 2009. Prior to the temporary termination of our contract with LightSquared in November 2009, the monthly revenue run rate was approximately $1 million per month versus approximately $500,000 in the current quarter.
 
Cost of Goods Sold:  Cost of goods sold, which consists mainly of staff related expenses (employees and contractors) and travel expenses for the six months ended December 31, 2010 decreased 37% versus the six months ended December 31, 2009. The increase is commensurate with the decline in revenue noted above.
  
Operating Expenses: Operating expenses for the six months ended December 31, 2010 declined 1% versus the comparable period in 2009.   While the overall decrease is minimal, the mix of spending shifted from research and development and legal costs to capitalized software costs and marketing expenses. 

Other Income (Expense): Other income (expense) for the six months ended December 31, 2010 was ($61,442) compared to ($93,731) for the comparable period in 2009 and consists primarily of interest expense. For the six months ended December 31, 2010 and 2009, interest expense was $61,668 and $96,374, respectively. For the six months ended December 31, 2010, interest expense relates to the outstanding line of credit. In 2009, the interest expense was related to the higher note payable balance outstanding as of December 31, 2009.
 
Net Income (Loss): For the six months ended December 31, 2010, we reported a net loss of $130,127 compared to net income of $716,379 for the six months ended December 31, 2009.
 
Liquidity and Capital Resources

Cash Flow Activity
 
Cash and cash equivalents were $562,574 and $197,151 as of December 31, 2010 and June 30, 2010, respectively.
 
The change in cash and cash equivalents during the periods presented was as follows:

   
Three months ended
December 31,
   
Six months ended
December 31,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Net cash from (used in) operating activities
  $ (57,695 )   $ 1,544,276     $ 79,771     $ 2,064,248  
Investing Activities
    (414,238 )     -       (455,998 )     (18,193 )
Financing Activities
    291,650       (280,000 )     741,650       (1,066,623 )
Net increase (decrease) in cash and cash equivalents
  $ (180,283 )   $ 1,264,276     $ 365,423     $ 979,432  
Cash and cash equivalents at the beginning of the period
    742,857       255,635       197,151       540,479  
Cash and cash equivalents at the end of the period
  $ 562,574     $ 1,519,911     $ 562,574     $ 1,519,911  

 

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Three Months Ended December 31, 2010

Operations: Net cash used in operating activities during the three months ended December 31, 2010 was $57,695, compared to net cash from operating activities of $1,544,276 during the comparable period of 2009, a decrease of $1,601,971.  This decrease is mainly due to the timing of collecting LightSquared receivables in 2009.

Investing: Net cash used in investing activities, consisting primarily of capital expenditures and capitalized software costs, for the three months ended December 31, 2010 was $414,238, compared to $0 for three months ended December 31, 2009.  The increase is driven by capitalization of software costs of $411,869 in the three months ended December 31, 2010. Our capital expenditures consist mainly of office and computer equipment.
 
Financing: Net cash from financing activities for the three months ended December 31, 2010 was $291,650. This is driven by draws on our existing line of credit of $250,000 plus the exercise of stock options which generated $41,650. The activity for the three months ended December 31, 2009 consists of one debt payment of $280,000.
 
Six Months Ended December 31, 2010

Operations: Net cash from operating activities during the six months ended December 31, 2010 was $79,771, compared to net cash from operating activities of $2,064,248 during the comparable period of 2009, a decrease of $1,984,477.  This decrease is mainly due to the lower revenue from LightSquared in 2010 versus 2009.

Investing: Net cash used in investing activities, consisting primarily of capital expenditures and capitalized software costs, for the six months ended December 31, 2010 was $455,998, compared to $18,193 for six months ended December 31, 2009.  The increase is driven by capitalization of software costs of $451,970 in the six months ended December 31, 2010. Our capital expenditures consist mainly of office and computer equipment.
 
Financing: Net cash from financing activities for the six months ended December 31, 2010 was $741,650. This is driven by net draws on our existing line of credit of $700,000 plus the exercise of stock options which generated $41,650. The activity for the six months ended December 31, 2009 consists of two debt payments totaling $560,000 and member distributions of $506,623 prior to the Share Exchange on September 1, 2009.

As of December 31, 2010, total current assets were $1,156,923, which consisted of $562,574 of cash, $536,523 of accounts receivable and $57,825 of other current assets.

Accounts receivable at December 31, 2010 were $536,523 compared to $632,962 at June 30, 2010. All accounts receivable outstanding at December 31, 2010 have been collected or are within normal collection terms as of February 14, 2011.

Accounts payable and accrued liabilities at December 31, 2010 were $540,867 compared to $494,798 at June 30, 2010.  This increase of $46,069 was driven primarily by the increase in accrued interest on our outstanding line of credit.
 
As of December 31, 2010, we had a working capital balance of $616,056, consisting of current assets of $1,156,923 and current liabilities of $540,867. This represents an increase of $246,498 from the working capital balance of $369,558 at June 30, 2010.  This increase is driven by the increase in revenue from our major customer, LightSquared. Our current assets consist primarily of cash, which is deposited in short term, interest bearing accounts, and accounts receivable. The Company intends to fund operations for the twelve months ending June 30, 2011 through a combination of (i) ongoing cash flow provided by existing professional services engagements, (ii) expanding professional services engagements, (iii) potential new customers from the deployment of the Nimbus platform and (iv) management of variable expenses. In addition, to fully execute on its planned growth strategy, the Company will require additional capital of approximately $1.2 million to fund operations through June 30, 2011. If the Company is unable to raise the needed capital, the Company believes it can still fund operations through June 30, 2011 through significant cost reductions in product development, business development, marketing and general overhead.
 
 
 
 
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Off-Balance Sheet Arrangements
 
As of and subsequent to December 31, 2010, we have no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable to smaller reporting companies.
 
Item 4. Controls and Procedures
 
(a) Evaluation of Disclosure Controls and Procedures
 
Our chief executive and chief financial officers evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our chief executive and chief financial officers concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our president, as appropriate to allow timely decisions regarding disclosure.
  
Changes in Internal Control over Financial Reporting. There were no other changes in Verecloud’s internal controls over financial reporting, known to the chief executive officer or the chief financial officer, that have materially affected, or are reasonably likely to materially affect Verecloud’s internal control over financial reporting.
 
 
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings

We are not a party and our property is not subject to any material pending legal proceedings nor are we aware of any threatened or contemplated proceeding by any governmental authority against the Company.

Item 1A. Risk Factors

Not applicable to smaller reporting companies.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
On November 10, 2010, the Company entered into an agreement with Changewave, Inc. ("Changewave") in which Changewave will provide investor relations and shareholder marketing services for the Company. The term of agreement is November 1, 2010 to October 31, 2011. As compensation for these services, Changewave will receive 1,200,000 restricted shares of common stock over the term of the agreement. These shares are earned and payable quarterly beginning on November 1, 2010 with the final installment due on August 1, 2011. The contract may be terminated by the Company without cause with ten days notice to Changewave. In the event of termination, the Company is obligated for only those shares issued prior to the date of termination. In connection with payment of the first installment, the Company's chief executive officer has surrendered 300,000 shares of common stock on December 10, 2010 and issued 300,000 shares of common stock to Changewave and recorded operating expense of $4,064 in the three months ended December 31, 2010.
 
Issuance of the shares described above were not registered under the Securities Act of 1933, as amended. The issuance of these shares were exempt from registration pursuant to to Section 4(2) of the Securities Act of 1933, as amended and Regulation D and Rule 506 promulgated thereunder. The Company believes that Changewave is accredited and/or a sophisticated investor. The Company engaged Changewave to provide public company investor relations services and Changewave is familiar with working with public companies of similar size and stage of development of the Company. Changewave's executives had the opportunity to meet with the Company and had an opportunity to learn about the Company's business, operations, customers, financial position, management and prospects, among other things. The issuance of restricted common stock to Changewave in exchange for Changewave's investor relations services is customary with the Company's past practice. Because of Changewave's experience with similar companies and the customary nature of this arrangement, the Company believes that Changewave is experienced with analyzing the risks associated with acquiring the Company's common stock and that such acquisition could result in a loss of all or part of its value. Furthermore, for these reasons, the Company also believes that Changewave understands the illiquid nature of the Company's common stock and anticipates that it may need to hold the securities indefinitely.
 
Item 3. Defaults Upon Senior Securities

None.
 
Item 4. [Removed and Reserved]


Item 5. Other Information

None.

Item 6. Exhibits

Exhibits:
   
31.1
 
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
31.2
 
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
32.1
 
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
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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.
 
 
 
VERECLOUD, INC.
 
       
Date:  February 14, 2011
By:
/s/ John McCawley
 
   
John McCawley
 
   
Chief Executive Officer
 
 
     
Date: February 14, 2011
By:
/s/ James R. Buckley
 
   
James R. Buckley
 
   
Chief Financial Officer and Principal Accounting Officer
 
 
 
 
 
 
 
 

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