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EX-31.1 - CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER FILED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002. - Unilava Corpexhibit_31-1.htm
EX-32.1 - CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002. - Unilava Corpexhibit_32-1.htm
EX-31.2 - CERTIFICATIONS OF PRINCIPAL FINANCIAL OFFICER FILED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002. - Unilava Corpexhibit_31-2.htm
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EX-32.2 - CERTIFICATIONS OF PRINCIPAL FINANCIAL OFFICER FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002. - Unilava Corpexhibit_32-2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10−Q /A
Amendment No. 1
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: June 30, 2011
 
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 Number: 000-25108

 

 
UNILAVA CORPORATION

(Exact Name of Registrant as Specified in Its Charter)


Wyoming
 
80-0568736
(State or other jurisdiction of incorporation
or organization)
 
(I.R.S. Employer Identification No.)

353 Sacramento Street, Suite 1500
San Francisco, CA 94111

(Address of principal executive offices, Zip Code)
 
(415) 321-3490

(Registrant’s telephone number, including area code)
 
N/A

(Former name, former address and former fiscal year, if changed since last report)

 
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   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 (§ 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    x No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer 
  o
 
 Accelerated filer
  o
         
 Non-accelerated filer
 
(Do not check if a smaller reporting company) 
  o
 
 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   o   No x
 
The number of shares outstanding of each of the issuer’s classes of common stock, as of August 15, 2011 is as follows:
 
Class of Securities
 
Shares Outstanding
Common stock, no par value
 
100,051,107
 

 
1

 



Quarterly Report on Form 10-Q
  Three and Six Months Ended June 30, 2011


TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION
   
Page(s)
 Item 1.   
 Financial Statements
3
     
 Item 2.
 Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
     
 Item 3.
 Quantitative and Qualitative Disclosures About Market Risk
29
     
 Item 4.
 Controls and Procedures
29
     
   PART II
OTHER INFORMATION
     
 Item 1.  
 Legal Proceedings
31
     
 Item 1A. 
 Risk Factors
31
     
 Item 2. 
 Unregistered Sales of Equity Securities and Use of Proceeds
31
     
 Item 3.
 Defaults Upon Senior Securities
31
     
 Item 4.    
 (Removed and Reserved)
31
     
 Item 5. 
 Other Information
32
     
 Item 6.  
 Exhibits
32
     
 
 Signatures
33
 
 



                                                        
 
EXPLANATORY NOTE
 
The sole purpose of this Amendment to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2011 (the “10-Q”), is to furnish the Interactive Data File exhibits pursuant to Rule 405 of Regulation S-T. No other changes have been made to the 10-Q, and this Amendment has not been updated to reflect events occurring subsequent to the filing of the 10-Q.


 
 

 
 
 
2

 
 

 


PART I
FINANCIAL INFORMATION
 
ITEM 1.          FINANCIAL STATEMENTS.

The accompanying consolidated balance sheet of Unilava Corporation at June 30, 2011, the consolidated statements of operations for the three and six months ended June 30, 2011 and 2010 and the consolidated statements of cash flows for the six months ended June 30, 2011 and 2010, have been prepared by the Company's management, in conformity with principles generally accepted in the United States of America.  In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature.




UNILAVA CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010

 
 Financial Statements
  Page(s)
     
 
Consolidated Balance Sheets (Unaudited)
 4
     
 
Consolidated Statements of Operations and Comprehensive Income (Unaudited)
 5
     
 
Consolidated Statements of Cash Flows (Unaudited)
 6
     
 
 Notes to Consolidated Financial Statements (Unaudited)
 7-20
 
 
 


 

 
 
 
3

 
 


 
 
 
UNILAVA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

   
June 30,
   
December 31,
 
   
2011
   
2010
 
ASSETS
 
(unaudited)
   
(audited)
 
CURRENT ASSETS
           
Cash
  $ 45,006     $ 89,822  
Certificates of deposit - current
    27,541       28,363  
Accounts receivable, net
    358,194       510,531  
Other current assets
    32,298       44,344  
                 
Total current assets
    463,039       673,060  
                 
Fixed assets, net
    1,768,043       1,846,459  
Certificates of deposit
    -       50,000  
Goodwill
    1,835,873       1,835,873  
Other Assets
    96,084       98,979  
                 
TOTAL ASSETS
  $ 4,163,039     $ 4,504,371  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
CURRENT LIABILITIES
               
Accounts payable and accrued expenses
  $ 2,305,828     $ 2,099,995  
Deferred rent - current
    47,771       42,038  
Line of credit
    1,718,208       1,892,500  
Notes payable
    1,414,106       1,094,176  
Notes payable - related party
    340,125       137,125  
                 
TOTAL CURRENT LIABILITIES
    5,826,038       5,265,834  
                 
Deferred rent - non current
    61,341       85,535  
TOTAL LIABILITIES
    5,887,379       5,351,369  
                 
STOCKHOLDERS' DEFICIT
               
Preferred stock, no par value 5,000,000 shares authorized; issued and outstanding 0 and  0 outstanding at June 30, 2011 and December 31, 2010, respectively.
    -       -  
                 
Common stock, no par value 120,000,000 shares authorized; issued but not outstanding 100,052,888 and 100,052,888, respectively; issued and outstanding 100,051,107 and  100,051,107 at June 30, 2011 and December 31, 2010, respectively.
    1,519,074       1,519,074  
Treasury stock, 1,781 and 1,781 shares at June 30, 2011 and December 31, 2010, respectively
    -       -  
Accumulated deficit
    (3,228,146 )     (2,384,472 )
Accumulated other comprehensive loss
               
     (Foreign translation adjustment)
    (62,922 )     (63,694 )
                 
STOCKHOLDERS' DEFICIT OF UNILAVA
    (1,771,994 )     (929,092 )
Non-controlling interest
    47,654       82,094  
                 
TOTAL STOCKHOLDERS' DEFICIT
    (1,724,340 )     (846,998 )
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
  $ 4,163,039     $ 4,504,371  
 

See accompanying notes to the unaudited consolidated financial statements.


 
 
 

 
 
 
4

 
 


 



UNILAVA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

 
   
For the Three Months Ended
   
For the Six Months Ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Revenue
  $ 887,256     $ 1,445,799     $ 1,825,313     $ 2,860,716  
Cost of revenue
    425,040       650,066       895,974       1,242,139  
Gross profit
    462,216       795,733       929,339       1,618,577  
                                 
Costs and Expenses
                               
Salaries and payroll taxes
    387,770       441,040       759,639       941,946  
Selling, general & administrative
    352,154       521,347       748,553       1,061,934  
Depreciation and amortization
    38,845       41,975       78,680       84,273  
Total costs and expenses
    778,769       1,004,362       1,586,872       2,088,153  
                                 
Loss from operations
    (316,553 )     (208,629 )     (657,533 )     (469,576 )
                                 
Other Income (Expense)
                               
Interest income
    20       98       48       252  
Other income
    101       37,186       197       181,305  
Interest expense
    (118,550 )     (103,677 )     (220,826 )     (213,109 )
Other expense
    -       (7,817 )     -       (7,817 )
Total other income (expense)
    (118,429 )     (74,210 )     (220,581 )     (39,369 )
                                 
Loss before non-controlling interest
    (434,982 )     (282,839 )     (878,114 )     (508,945 )
Net loss allocable to non-controlling interest
    17,062       5,209       34,440       8,236  
Net loss
  $ (417,920 )   $ (277,630 )   $ (843,674 )   $ (500,709 )
                                 
Comprehensive loss:
                               
Foreign currency translation adjustment
  $ (179 )   $ 56,564     $ 772     $ 110,852  
Total comprehensive loss
  $ (418,099 )   $ (221,066 )   $ (842,902 )   $ (389,857 )
                                 
                                 
Net loss per common share:
                               
   Basic
  $ (0.00 )   $ (0.00 )   $ (0.01 )   $ (0.01 )
Weighted average common shares outstanding:
                               
   Basic
    100,051,107       100,051,107       100,051,107       100,051,107  


 
See accompanying notes to the unaudited consolidated financial statements.



 
 
 
5

 
 


 


UNILAVA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


 
   
For the Six Months Ended
 
   
June 30,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (843,674 )   $ (500,709 )
Adjustments to reconcile net loss
               
to net cash provided (used) in operating activities:
               
Depreciation and amortization
    78,680       84,273  
Change in deferred rent
    (18,461 )     17,224  
Net loss allocated to non-controlling interest
    (34,440 )     (8,236 )
CHANGES IN OPERATING ASSETS AND LIABILITIES:
               
Accounts receivable
    152,337       572,976  
Other current assets
    12,046       (7,347 )
Other assets
    2,895       5,941  
Accounts payable and accrued expenses
    205,833       (116,709 )
                 
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    (444,784 )     47,413  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Redemption of certificates of deposit
    50,822       -  
Purchase of furniture and equipment
    (199 )     (1,682 )
                 
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
    50,623       (1,682 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Bank overdraft
    -       (49,384 )
Proceeds from notes payable
    319,930       -  
Proceeds from line of credit
    48       -  
Repayment of line of credit
    (174,340 )     (66,514 )
Proceeds from related party notes payable
    212,000          
Repayment of related party notes payable
    (9,000 )     (14,500 )
                 
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    348,638       (130,398 )
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    707       110,852  
NET INCREASE (DECREASE) IN CASH
    (44,816 )     26,185  
CASH, beginning of period
    89,822       155,439  
CASH, end of period
  $ 45,006     $ 181,624  
                 
Interest paid
  $ 172,020     $ 28,853  
Taxes paid
  $ -     $ -  

See accompanying notes to the unaudited consolidated financial statements.

 
 
 

 
 
 
6

 
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Note 1 - Organization

Unilava Corporation, a Wyoming corporation, was formerly known as IWI Holding Limited (“IWI”), and was engaged in the international jewelry business through a US subsidiary.  IWI went public via an initial public offering in 1994, and disposed of the subsidiary on December 31, 2007. On September 21, 2009, IWI entered into an Agreement pursuant to which IWI acquired all of the outstanding shares of Telava Networks, Inc., a Nevada corporation (“TelavaNV”), in exchange for 55 million shares of common stock. In addition, preferred stock of IWI which had been issued in 1994 totaling 3,644,880 shares were converted into 45 million shares of common stock.  In connection with the closing of the acquisition, the TelavaNV management was appointed as the members of IWI management, the name of IWI was changed to Unilava, Corporation (“Unilava or the “Company””) and the corporation was reincorporated from the British Virgin Islands to Wyoming via Articles of Continuation.

The Company consists of several subsidiaries which make up the consolidated financial statements.  The parent company is Unilava Corporation which is a holding company for the operating subsidiaries.  Local Area Yellow Pages has significant operating revenue.  Telava Wireless has significant assets.  Local Info Pages has overseas operations in Korea.  Telava Acquisitions is insignificant to the Company financial position and operating results.  Telava Mobile has minimal assets and operations.  IBFA has significant assets, liabilities and revenue.
 
TelavaNV, a privately owned company, was incorporated in Nevada on July 23, 2003 as Local Area Yellow Pages to provide advertising and directory listings for small and medium sized businesses on its internet website in a “Yellow Pages” format.  The Company provides those services to its subscribers for a monthly fee.  These services are provided primarily to small and medium sized businesses throughout the United States.  On July 10, 2007, Local Area Yellow Pages amended its Articles of Incorporation to change the name of the corporation to Telava Networks, Inc. (“TelavaNV”) for the purpose of launching its network to provide the next generation fixed and mobile WiMAX broad band solutions to small and medium businesses, public safety organizations, and others in various markets through its network.  TelavaNV continues its Yellow Pages operations while, at the same time, expanding its WiMAX network.  During the six months ended June 30, 2011, nearly 30% of the Company’s revenues have been generated by its Yellow Pages business.
 
On January 19, 2006, TelavaNV formed Local Info Pages, Inc. (“LIP”), headquartered in Seoul, South Korea, as a wholly owned subsidiary of TelavaNV. LIP is one of the leading direct marketing and business service companies in Korea. LIP connects advertisers to targeted audiences through its network advertising products and services. On January 3, 2007, the Company acquired a website which brings value to the Company because of its large customer base which enables the Company to target and market its products to those customers.  Another division of LIP is the second largest coupon company in South Korea which enables advertisers to directly reach consumers with branded media products, coupons and other advertisements. Many consumers depend on the Company to deliver the best values in town via direct and online coupons. For advertisers, LIP offers business advertising solutions by enabling them to sell their products and services in person, online or through the mail.
 
On May 17, 2006, TelavaNV  formed Telava Wireless, Inc. (“Telava Wireless”) as a subsidiary for the purpose of entering the mobile WiMAX broad band solutions market.  On November 6, 2006, the Company acquired 40 microwave towers in exchange for 25% of Telava Wireless.
 
On September 11, 2007, TelavaNV formed Telava Acquisitions, Inc. as a wholly owned subsidiary for the purpose of acquiring other related businesses.

On January 16, 2008, Telava Acquisitions, Inc. (“Telava”), a Delaware corporation, and IBFA Acquisition Company, LLC (“IBFA”) a Michigan corporation and James Grabowski and Casimir Wojciechowski (the “Members”) entered into a Membership Interest Purchase Agreement (“MIPA”) whereby Telava agreed to purchase (the “Acquisition”) 100% of IBFA member interests from the Members for a purchase price of $2,250,000 subject to certain conditions such as a Management Agreement described below.  An initial $1,750,000 was paid in fiscal year 2008 with $500,000 deferred and payable at the rate of $25,000 to $50,000 per month based on a specific calculation.  During 2009, the Company paid $272,750 of deferred payments.  The remaining $227,750 was subject to “True-up” provisions as of the effective date of the Acquisition on January 11, 2009 (See discussion below).  Upon final settlement, The Company received concessions totaling $177,578 and made final payments totaling $95,172. Payment made related to the organization totaled $2,117,922.  The cost of acquisition totaling $1,835,873 has been entirely allocated to Goodwill which represents the overall cost of acquisition in excess of the fair value of tangible assets and identifiable intangible assets.

On November 12, 2008, TelavaNV formed Telava Mobile, Inc. (“TM”) as a 80% majority-owned subsidiary for the purpose of entering the mobile services businesses offering prepaid mobile calling cards and unlimited mobile services throughout the United States of America.


 
 
 
7

 
 
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
Note 2 – Going Concern

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which contemplate continuation of the Company as a going concern.  The Company has recently sustained operating losses and has an accumulated deficit of $3,228,146 at June 30, 2011.  In addition, the Company has negative working capital of $5,362,999 at June 30, 2011.
 
The Company has and will continue to use significant capital to grow and acquire market share.    These factors raise substantial doubt about the ability of the Company to continue as a going concern.  In this regard, management is proposing to raise any necessary additional funds not provided by operations through loans or through sales of their common stock.  There is no assurance that the Company will be successful in raising this additional capital or in achieving profitable operations.  The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty.

Note 3 - Summary of Significant Accounting Policies

Basis of Presentation

The unaudited consolidated financial statements include the accounts of Unilava Corporation and its subsidiaries, Telava Networks, Inc. (100% owned), Telava Acqusitions, Inc. (100% owned), Telava Wireless, Inc. (75% owned), Telava Mobile, Inc. (80% owned), Local Info Pages, Inc. (100% owned Korea-based entity) and IBFA Acqusitions LLC (100% owned) which are 100% consolidated in the financial statements as adjusted for various minority interests.  All material intercompany accounts and transactions have been eliminated. All significant intercompany transactions and balances are eliminated on consolidation.

The accompanying unaudited consolidated financial statements as of June 30, 2011 and for the three and six month periods ended June 30, 2011 and 2010 have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and of Regulation S-X.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. In the opinion of management, these unaudited consolidated interim financial statements include all adjustments and disclosures considered necessary to a fair statement of the results for the interim periods presented.  All adjustments are of a normal recurring nature.  The results of operations for the three and six months ended June 30, 2011 are not necessarily indicative of the results for the full fiscal year ending December 31, 2011.  

You should read this discussion in conjunction with the consolidated financial statements, accompanying notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2010.




 
 
 

 
 
 
8

 
 
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Note 3 - Summary of Significant Accounting Policies (Continued)

Fair Value of Financial Instruments

Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, requires disclosing fair value to the extent practicable for financial instruments that are recognized or unrecognized in the balance sheet. Fair value of financial instruments is the amount at which the instruments could be exchanged in a current transaction between willing parties. The Company considers the carrying amounts of cash, restricted cash, accounts receivable, related party and other receivables, accounts payable, notes payable, related party and other payables, customer deposits, and short term loans approximate their fair values because of the short period of time between the origination of such instruments and their expected realization. The Company considers the carrying amount of long term bank loans to approximate their fair values based on the interest rates of the instruments and the current market rate of interest.

Level 1 The preferred inputs to valuation efforts are “quoted prices in active markets for identical assets or liabilities,” with the caveat that the reporting entity must have access to that market.  Information at this level is based on direct observations of transactions involving the same assets and liabilities, not assumptions, and thus offers superior reliability. However, relatively few items, especially physical assets, actually trade in active markets.

Level 2 FASB acknowledged that active markets for identical assets and liabilities are relatively uncommon and, even when they do exist, they may be too thin to provide reliable information. To deal with this shortage of direct data, the board provided a second level of inputs that can be applied in three situations.

Level 3 If inputs from levels 1 and 2 are not available, FASB acknowledges that fair value measures of many assets and liabilities are less precise. The board describes Level 3 inputs as “unobservable,” and limits their use by saying they “shall be used to measure fair value to the extent that observable inputs are not available.” This category allows “for situations in which there is little, if any, market activity for the asset or liability at the measurement date”. Earlier in the standard, FASB explains that “observable inputs” are gathered from sources other than the reporting company and that they are expected to reflect assumptions made by market participants.

Foreign Currency Adjustments

The financial position and results of operations of the Company’s foreign subsidiary, LIP, is measured using the foreign subsidiary’s local currency as the functional currency.  Revenues and expenses of the subsidiary have been translated into U.S. dollars at average exchange rates prevailing during the period.  Assets and liabilities have been translated at the rates of exchange on the balance sheet date.  The resulting translation gain and loss adjustments are recorded as a separate component of stockholders’ equity, unless there is a sale or complete liquidation of the underlying foreign investments. 

Cash and Cash Equivalents

This includes all short-term highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less.  The Company has a restricted cash balance of $27,541 and $78,363 on June 30, 2011 and December 31, 2010, respectively, which is comprised of Certificates of Deposit.   The restricted cash is held in certificates of deposit at various banking institutions.  The Company is expected to maintain the amounts in the certificates of deposit per agreements with certain vendors.

Accounts Receivable
 
Accounts receivable are reported at the customers' outstanding balances less any allowance for doubtful accounts. Interest is not accrued on overdue accounts receivable.  The Company evaluates receivables on a regular basis for potential reserve.
 

 



 
 
 
9

 
 
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Note 3 - Summary of Significant Accounting Policies (Continued)
 
Fixed Assets
 
Fixed assets are stated at cost.  Major renewals and improvements are charged to the asset accounts while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed.  At the time property and equipment are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts.  Gains or losses from retirements or sales are credited or charged to income.
 
The Company depreciates its fixed assets on a straight line basis at the following rates:
 
 Microwave towers 
 25 years
   
 Computer equipment   
 5 years
   
 Furniture and equipment 
 7 years
   
 Software 
 3 years
   
 Leasehold improvements 
 5 years
 
Long-lived Assets
 
Accounting for the Impairment or Disposal of Long-Lived Assets requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may not be recovered.  The Company assesses recoverability of the carrying value of an asset by estimating the fair value of the asset.  If the fair value is less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value.  The Company has never recognized an impairment charge.
 
Goodwill and Other Intangible Assets
 
Goodwill and other intangible assets arising from an acquisition of a business are periodically assessed for impairment rather than amortized on a straight-line basis.  Accordingly, the Company annually reviews the carrying value of this goodwill and other intangible assets to determine whether impairment, as measured by fair market value, may exist.  Specifically, goodwill and other intangible asset impairment is determined using a two-step process.  The first step of the goodwill and other intangible asset impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount.  If the fair value of a reporting unit exceeds its carrying amount, then the goodwill and other intangible assets of the reporting unit are not considered to be impaired and the second step of the impairment test is unnecessary.  If the carrying amount of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any.  The second step of the impairment test compares the implied fair value of the reporting unit's goodwill and other intangible assets with their carrying amount.  If the carrying amount of the reporting unit's goodwill and other intangible assets exceeds their implied fair value, then an impairment loss is recognized in an amount equal to that excess.

Goodwill consisted of $1,835,873 as of June 30, 2011 and December 31, 2010 as a result of the IBFA purchase disclosed in the Company’s December 31, 2010 Form 10-K.

Accounting for Share-Based Compensation
 
The Company records stock based compensation in accordance with the guidance in ASC Topic 505 and 718 which requires the Company to recognize expenses related to the fair value of its employee stock option awards.  This eliminates accounting for share-based compensation transactions using the intrinsic value and requires instead that such transactions be accounted for using a fair-value-based method. The Company recognizes the cost of all share-based awards on a graded vesting basis over the vesting period of the award. 
 
The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 718-10 and the conclusions reached by the FASB ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by FASB ASC 505-50.
 

 
 
 
10

 
 
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Note 3 - Summary of Significant Accounting Policies (Continued)
 
Revenue Recognition

Telava NV and LIP: The Company’s revenue is generated by customer subscriptions of directory and advertising services.  Revenue is billed and recognized monthly for services subscribed in that specific month.  The Company utilizes outside billing companies to transmit billing data, much of which is forwarded to Local Exchange Carriers (“LEC’s”) that provide local telephone service.

LEC Billing:   When a customer subscribes to the Company’s service, an electronic customer file is created which is the basis for the billing.  The Company submits gross billings electronically to third party billing aggregators. These billing aggregators compile and format electronic customer files and forward the billing records to the appropriate LEC’s.  The billing for our service flows through to monthly bills of the individual LEC customers.  The LEC’s collect the Company’s billing and remit amounts to the billing aggregators, which in turn remit funds to the Company.  The following are significant accounting estimates and assumptions used in the revenue recognition process with respect to these billings.
 
Customer refunds:   The Company’s customer refund policy allows the customer to request a refund if they are not satisfied with the service within the first 30 days of the subscription.  The Company accrues for refunds based on historical experience of refunds as a percentage of new billings in that 30-day period.  Customer refunds historically have been insignificant and therefore there is no reserve against gross revenue.

Non-paying customers:   There are customers who may not pay the fee for our services even though the Company believes they are valid subscribers.  Included in cost of services is an accrual for estimated non-paying customers that are recorded at the time of billing.

Dilution:   The Company recognizes revenue during the month for which the service is provided based on net billings accepted by the billing aggregators and recognizes revenue only for accepted records.  However, subsequent to this acceptance, there are instances in the LEC billing process where a customer cannot be billed due to changes in telephone numbers, telephone carriers, data synchronization issues, etc.  These amounts that ultimately cannot be billed, as well as certain minor billing adjustments by the LEC’s, are commonly referred to as “dilution.”  Such unbillable accounts and chargebacks are estimated at the time of billing and charged against net revenues.
 
Fees:  Both the billing aggregator and the LEC charge processing fees.  Additionally, the LEC charges fees for responding to billing inquiries by its customers, processing refunds, and other customer-related services.  Such fees are estimated at the time of billing and charged to cost of services.

Revenue for billings to certain customers are billed directly by the Company and not through the LEC’s, is recognized based on estimated future collections.   The Company continuously reviews this estimate for reasonableness based on its collection experience. 

Telava Wireless:   Leasing revenue for towers are recognized on a monthly basis based on the terms and conditions of the lease agreements. 
 
LIP:   Printing revenue for coupon books are recognized as services are performed.

IBFA:  Wireless services and wireline voice and data communication services. Revenue is recognized at the time of delivery of the products or services, and the collectibility is reasonably assured. The Group assesses its revenue arrangements against specific criteria in order to determine if it is acting as principal or agent.

Service revenue includes the value of all telecommunications services provided, net of free usage allocations and discounts. Revenue is recognized when earned, and are net of the share of other foreign and local carriers and content providers, if any, under existing correspondence and interconnection and settlement agreements.

Revenue is stated at amounts billed or invoiced and accrued to subscribers or other carriers and content providers, taking into consideration the bill cycle cut-off (for postpaid subscribers), and charges against preloaded airtime value (for prepaid subscribers), and excludes value-added tax (VAT) and overseas communication tax.


 
 

 
 
 
11

 
 
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Note 3 - Summary of Significant Accounting Policies (Continued)

Advertising Costs

The Company incurs advertising costs that are not considered direct response advertising and are expensed when incurred.  For the three months ended June 30, 2011 and 2010, the Company incurred approximately $1,840 and $750, respectively, in marketing and advertising expense.  For the six months ended June 30, 2011 and 2010, the Company incurred approximately $3,044 and $3,260, respectively, in marketing and advertising expense.

Income Taxes
 
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.  Under this method, deferred tax assets and liabilities are determined based on differences between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized.  In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.  A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition.  In the event the Company were to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.  Income tax provisions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods.

Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
 
Earnings Per Common Share

The Company reports both basic and diluted earnings per share.  Basic earnings per share are calculated using the weighted average number of common shares outstanding in the period.  Diluted earnings per share includes potentially dilutive securities such as outstanding options and warrants using the “treasury stock” method and convertible securities using the “if-converted” method.   For the three and six  months  ended June 30, 2011 and 2010,  there were no potential common  equivalent  shares used in the  calculation of dilutive weighted  average  common shares  outstanding as the effect would be anti-dilutive because of the net loss.
 
Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

Significant estimates made in connection with the accompanying financial statements include the estimate of dilution and fees associated with LEC billings and the estimated reserve for doubtful accounts receivable.
 
Other Comprehensive Income (Loss)

Comprehensive income/(loss) consists of net income and other gains and losses affecting stockholders’ equity that, under generally accepted accounting principles are excluded from net income.  For the Company, such items consist solely of foreign currency translation gains and losses.
 
 

 
 
 
12

 
 
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Note 3 - Summary of Significant Accounting Policies (Continued)

Recent Accounting Pronouncements
 
The Company has evaluated the recent accounting pronouncements through ASU 2011-07 and believes that none of them will have a material effect on the Company’s financial statements, except for the following.

In December 2010, the FASB issued ASU 2010-28 - “Intangibles – Goodwill and Other—When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts”, ASU 2010-28 is effective for fiscal years and interim periods within those years, beginning on or after December 15, 2010.  Early adoption is not permitted. We are currently evaluating the impact of ASU 2010-28 on our financial position, results of operations or cash flows of the Company.

Concentrations of Credit Risk
 
The Company has maintained balances in excess of federally insured limits from time to time during the fiscal year.  Management periodically reviews the adequacy and strength of the financial institutions and deems this to be an acceptable risk.
 
For the three months ended June 30, 2011 and 2010, approximately 5.3% and 4.0% of the Company's net sales were made to customers outside the United States.  For the six months ended June 30, 2011 and 2010, approximately 5.4% and 6.7% of the Company's net sales were made to customers outside the United States.  

Note 4 – Accounts Receivable

The Company provides billing information to a third party billing company for the majority of its monthly billings.  Billings submitted are “filtered” by this billing company and the LEC’s. Net accepted billings are recognized as revenue and accounts receivable.  The billing company remits payments to the Company on the basis of cash ultimately received from the LEC’s by the billing company.  The billing company and LEC’s charge fees for services, which are netted against the gross accounts receivable balance. The billing companies also apply holdbacks to the remittance for potentially uncollectible accounts.  These dilution amounts will vary due to numerous factors and the Company may not be certain as to the actual amounts of dilution on any specific billing submittal until several months after that submittal.  The Company estimates the amount of these charges and holdbacks based on historical experience and subsequent information received from the billing companies.  The Company also estimates uncollectible account balances and provides an allowance for such estimates.  As of June 30, 2011 and December 31, 2010, the amount reserved for uncollectible account balances is $4,428 and $8,943, respectively.

The billing companies retain certain holdbacks that may not be collected by the Company for a period extending beyond one year. The balances are charged to bad debt expense.  However, when true-up balances occur with the LEC after six to eighteen months, the money received will be classified as revenue to offset current bad debt expenses.

The Company experiences significant dilution of its gross billings by the billing company.  The Company negotiates collections with the billing companies on the basis of the contracted terms and historical experience.  The Company’s cash flow may be affected by holdbacks, fees, and other matters, which are determined by the LEC’s and the billing company.  The Company processes its billings through the primary billing company.


 
 
 

 
 
 
13

 
 
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Note 5 – Fixed Assets
 
Property and equipment consisted of the following at June 30, 2011 and December 31, 2010: 
 
   
June 30,
2011
   
December 31,
2010
 
Microwave towers
 
$
1,999,152
   
$
1,999,152
 
                 
Computer equipment
   
225,053
     
225,053
 
                 
Furniture & equipment
   
118,112
     
117,406
 
                 
Software
   
35,858
     
35,858
 
                 
Tenant improvements
   
186,949
     
186,949
 
     
2,565,124
     
2,564,418
 
Accumulated depreciation
   
(797,081
)
   
(717,959
)
                 
Fixed assets, net
 
$
1,768,043
   
$
1,846,459
 
 
Depreciation expense for the three months ended June 30, 2011 and 2010 was $38,845 and $41,975, respectively.  Depreciation expense for the six months ended June 30, 2011 and 2010 was $78,680 and $84,273, respectively.




 
 

 
 
 
14

 
 
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Note 6 – Line of Credit and Notes Payable

As of June 30, 2011, the amount, maturity date and term of each of our loans and line of credit were as follows:
 
Lender
 
Principal Amount
   
Interest Rate
 
Maturity Date
Thermo Credit LLC
  $ 1,718,208       14.50 %
January 17, 2011
AHAP
    40,000    
Various
 
Upon Demand
Brilliant Capital
    374,930       8.00 %
Upon Demand
InfoCity, LLC and Others
    999,176       8.00 %
Upon Demand
Dr. Dicken Yung (related party)
    172,000       3.25 %
Upon Demand
Baldwin Yung (related party)
    167,000       0.00 %
Upon Demand
Boaz Yung (related party)
    1,125       0.00 %
Upon Demand
                   
    $ 3,472,439            

As of December 31, 2010, the amount, maturity date and term of each of our loans and line of credit were as follows:
 
Lender
 
Principal Amount
   
Interest Rate
 
Maturity Date
Thermo Credit LLC
  $ 1,892,500       14.50 %
January 17, 2011
AHAP
    40,000       8.00 %
Upon Demand
Brilliant Capital
    170,000       8.00 %
Upon Demand
InfoCity, LLC and Others
    884,176       8.00 %
Upon Demand
Dr. Dicken Yung (related party)
    126,000       3.25 %
Upon Demand
Baldwin Yung (related party)
    10,000       0.00 %
Upon Demand
Boaz Yung (related party)
    1,125       0.00 %
Upon Demand
                   
    $ 3,123,801            

We have a $2,000,000 revolving line of credit with the Thermo Credit LLC, pursuant to a credit agreement, dated July 17, 2010, between the Company and the bank. On April 2011 agreement was signed by Thermo Credit LLC, ESBI and LAYP to pay the collection on accounts receivable to Thermo Credit LLC directly.  This was set up to facilitate the direct pay down to the principle of the Line of Credit. This revolving line of credit is guaranteed/secured by the all of the assets of the Company including cash, accounts receivable and fixed assets (See Note 4 Accounts Receivable and Note 5 Fixed Assets). The credit agreement had certain debt covenants that the Company did not comply with during the years ended December 31, 2010 and 2009.  The first covenant was that the Company must maintain a ratio of cash flow to scheduled principal payments plus all accrued interest payments on funded debt of not less than 1 to 1 as of the end of each fiscal quarter.  The second covenant was that the Company must maintain a tangible net worth of not less than $0 as of the last day of each fiscal quarter.  The credit agreement terminated on January 17, 2011 and the Company is renegotiating the terms with the lender. As of June 30, 2011 the Line of Credit is in default status. (See Note 12, Subsequent Events)


 



 
 
 
15

 
 
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Note 7 – Stockholders’ Equity (Deficit)
 
Preferred Stock

The Company has authorized 5,000,000 shares of no par value preferred stock available for issuance.  No shares of preferred stock are outstanding as of June 30, 2011.  Commensurate with the merger, the Company converted the former IWI Holdings outstanding Preferred Stock of 3,664,880 shares into 45,000,000 shares of common stock.

Common Stock

The authorized common stock is 120,000,000 shares at no par value.  As of June 30, 2011 and December 31, 2010, the Company had 100,052,888 and 100,052,888 shares of common stock issued but not outstanding, respectively.  The Company had 100,051,107 and 100,051,107 shares of common stock issued and outstanding, respectively.  As of June 30, 2011 and December 31, 2010, the Company had 1,781 and 1,781 shares of treasury stock. 

During the year ended December 31, 2009, the Company issued 52,888 shares of common stock and 3,644,880 shares of preferred related to the reverse merger with IWI Holding Limited.
 
Note 8 – Segment Reporting

Our segments are various subsidiaries that offer different products and services over various technology platforms and are managed accordingly.  We analyze our various operating segments based on segment income before income taxes.  The customers and assets of our reportable segments are predominantly in the United States.  We have four reportable segments: (1) Advertising Solutions, (2) Wireless, (3) Wireline, and (4) Other.

The Advertising Solutions segment includes the operations of Telava Networks, Inc. (100% owned) and Local Info Pages, Inc. (100% owned Korea-based entity).
 
The Wireless segment includes the operations of Telava Wireless, Inc. (75% owned) and Telava Mobile, Inc. (80% owned).
 
The Wireline segment includes the operations of IBFA Acquisitions (100% owned).
 
The Other segment includes results from all corporate operations.
 
In the following tables, we show how our segment results are reconciled to our consolidated results reported in accordance with GAAP.  The Advertising Solutions, Wireless and Wireline and Other columns represent the segment results of each such operating segment.  The consolidation and elimination column adds in those line items that we manage on a consolidated basis only.  This column also eliminates any intercompany transactions included in each segment’s results.  In the Segment assets line item, we have eliminated the value of our investments in our fully consolidated subsidiaries and the intercompany financing assets as these have no impact to the segments’ operations.

 

 



 
 
 
16

 
 
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Note 8 – Segment Reporting (Continued)

For the three months ended June 30, 2011

   
Advertising Solutions
   
Wireless
   
Wireline
   
Other
   
Elimination
   
Consolidated
 
Revenue from external customers
  $ 258,767     $ 53,483     $ 575,006     $ -     $ -     $ 887,256  
Cost of revenue
    66,963       67,752       290,325       -       -       425,040  
                                                 
Gross profit
    191,804       (14,269 )     284,681       -       -       462,216  
      74 %     (27 )%     50 %                     52 %
Operations and support expenses
    481,201       17,484       234,006       7,233       -       739,924  
Depreciation and amortization
    18,486       19,987       372       -       -       38,845  
                                                 
Total segment operating expenses
    499,687       37,471       234,378       7,233       -       778,769  
                                                 
Segment operating income
    (307,883 )     (51,740 )     50,303       (7,233 )     -       (316,553 )
                                                 
Total other income (expense)
    (102,208 )     (16,220 )     -       -       -       (118,429 )
Net loss allocable to minority interest
            17,062                               17,062  
Segment income before income taxes
  $ (410,091 )   $ (50,898 )   $ 50,303     $ (7,233 )   $ (1 )   $ (417,920 )
                                                 
Segment assets
  $ 2,815,984     $ 1,676,083     $ 2,133,155     $ 56     $ (2,462,239 )   $ 4,163,039  


For the three months ended June 30, 2010
 
   
Advertising Solutions
   
Wireless
   
Wireline
   
Other
   
Elimination
   
Consolidated
 
Revenue from external customers
  $ 639,551     $ 5,337     $ 800,911     $ -     $ -     $ 1,445,799  
Cost of revenue
    270,943       27,199       351,924       -       -       650,066  
                                                 
Gross profit
    368,608       (21,862 )     448,987       -       -       795,733  
      58 %     (410 )%     56 %                        
Operations and support expenses
    691,188       20,843       248,469       1,888       -       962,388  
Depreciation and amortization
    21,987       19,987       -       -       -       41,974  
                                                 
Total segment operating expenses
    713,175       40,830       248,469       1,888       -       1,004,362  
                                                 
Segment operating income
    (344,567 )     (62,692 )     200,518       (1,888 )     -       (208,629 )
                                                 
Total other income (expense)
    (84,158 )     16,898       (6,950 )     -       -       (74,210 )
Net loss allocable to minority interest
            5,209                               5,209  
Segment income before income taxes
  $ (428,725 )   $ (40,585 )   $ 193,568     $ (1,888 )   $ -     $ (277,630 )
                                                 
Segment assets
  $ 886,664     $ 1,781,606     $ 2,257,870     $ 531     $ -     $ 4,926,671  


 


 

 
 
 
17

 
 
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 Note 8 – Segment Reporting (Continued)

For the six months ended June 30, 2011

   
Advertising Solutions
   
Wireless
   
Wireline
   
Other
   
Elimination
   
Consolidated
 
Revenue from external customers
  $ 550,920     $ 73,645     $ 1,200,748     $ -     $ -     $ 1,825,313  
Cost of revenue
    193,895       101,358       600,721       -       -       895,974  
                                                 
Gross profit
    357,025       (27,713 )     600,027       -       -       929,339  
      65 %     (38 )%     50 %                     51 %
Operations and support expenses
    974,993       39,348       483,949       9,902       -       1,508,192  
Depreciation and amortization
    37,962       39,975       743       -       -       78,680  
                                                 
Total segment operating expenses
    1,012,955       79,323       484,692       9,902       -       1,586,872  
                                                 
Segment operating income
    (655,930 )     (107,036 )     115,335       (9,902 )     -       (657,533 )
                                                 
Total other income (expense)
    (188,322 )     (32,259 )     -       -       -       (220,581 )
Net loss allocable to minority interest
    -       34,440       -       -       -       34,440  
Segment income before income taxes
  $ (844,252 )   $ (104,855 )   $ 115,335     $ (9,902 )   $ -     $ (843,674 )
                                                 
Segment assets
  $ 2,815,984     $ 1,676,083     $ 2,133,155     $ 56     $ (2,462,239 )   $ 4,163,039  

For the six months ended June 30, 2010

   
Advertising Solutions
   
Wireless
   
Wireline
   
Other
   
Elimination
   
Consolidated
 
Revenue from external customers
  $ 1,371,796     $ 14,126     $ 1,474,794     $ -     $ -     $ 2,860,716  
Cost of revenue
    460,579       55,240       726,320       -       -       1,242,139  
                                                 
Gross profit
    911,217       (41,114 )     748,474       -       -       1,618,577  
      66 %     (291 )%     51 %                        
Operations and support expenses
    1,401,180       58,901       534,965       8,834       -       2,003,880  
Depreciation and amortization
    44,297       39,975       -       -       1       84,273  
                                                 
Total segment operating expenses
    1,445,477       98,876       534,965       8,834       1       2,088,153  
                                                 
Segment operating income
    (534,260 )     (139,990 )     213,509       (8,834 )     (1 )     (469,576 )
                                                 
Total other income (expense)
    (137,427 )     104,991       (6,933 )     -       -       (39,369 )
Net loss allocable to minority interest
            8,236                               8,236  
Segment income before income taxes
  $ (671,687 )   $ (26,763 )   $ 206,576     $ (8,834 )   $ (1 )   $ (500,709 )
                                                 
Segment assets
  $ 886,664     $ 1,781,606     $ 2,257,870     $ 531     $ -     $ 4,926,671  



 
 
 
18

 
 
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 9 –Commitments

A portion of our facilities are under operating leases that expire at various dates through 2014.  Rent expense was $135,360 and $142,325 for the three months ended June 30, 2011 and 2010, respectively.  Rent expense was $271,182 and $299,723 for the six months ended June 30, 2011 and 2010, respectively.

Minimum rental commitments under all non-cancelable leases with an initial term in excess of one year were as follows as of June 30, 2011:
 
Year Payable
Amount
 
 2011
 
$
279,664 
 
2012
   
568,001
 
2013
   
221,352
 
2014 and Thereafter
   
7,763
 
Total
 
1,076,780
 

Note 10 – Litigation
 
Vermont Attorney General Investigation Against Local Area Yellow Pages (“LAYP”)

The Vermont Attorney General has an active investigation into the business practices of LAYP focusing on whether certain notices and a three day right to cancel were provided to customers.  The Vermont Attorney General has proposed to settle if, LAYP will agree to issue a full refund to all Vermont customers whose telephone bills were charged and a payment of $10,000 in civil penalties and injunctive relief.  The amount for the full refund to all Vermont customers is difficult to estimate.  The suit was filed in the Superior Court of Vermont.

Illinois Agricultural Association v. IBFA Acquisition Co. LLC (“IBFA”) and Telava Acquisitions, LLC

The Illinois Agricultural Association claims that IBFA and Telava Acquisitions, LLC has past due referral fees in the amount of approximately $95,000.  We have denied the allegations and are defending our position in arbitration.  The matter is in the discovery stage and a hearing has been set for June 2011.  The suit was filed with the American Arbitration Association – Commercial Dispute Unit of Illinois.
 
Chen v. Unilava Corporation, et al.

In June 2010, Chris Chen, former Executive Vice President of Sales, filed a lawsuit against Unilava Corporation and Local Area Yellow Pages, Inc. (“LAYP”)  Mr. Chen seeks $49,613 in unpaid wages, $12,000 in statutory waiting time penalties and 4,300,000 shares of common stock or the fair market value of the common stock and attorneys’ fees.  In July 2010, Unilava and LAYP filed a cross-complaint seeking compensatory damages of no less than $3,000,000, punitive damages and attorneys’ fees.  The Court has ordered the parties to participate in mediation and they are in the process of selecting a mediator.

Note 11 – Related Party Transactions

As of December 31, 2010, Dicken Yung, Chairman, had a loan balance of $126,000.  The amounts are due on demand and bear no interest.  During the six months ended June 30, 2011, the Company received a total of $55,000 in loans and repaid $9,000.  As of June 30, 2011, the balance owed was $172,000.

As of December 31, 2010, Baldwin Yung, CEO, had a loan balance of $10,000.  The amounts are due on demand and bear no interest.  During the six months ended June 30, 2011, the Company received a total of $157,000 in loans.  As of June 30, 2011, the balance owed was $167,000.

As of December 31, 2010, Baldwin Yung, CEO, had an outstanding accounts payable totaling $38,141 which is still owed by the Company.  As of June 30, 2011, the balance owed was $49,332.

As of December 31, 2010, Boaz Yung, EVP, had a loan balance of $1,125 as outstanding notes payable which is still owed by the Company.  The amounts are due on demand and bear no interest.  As of June 30, 2011, the balance owed was $1,125.

There were no other related party transactions in 2011.


 



 
 
 
19

 
 
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Note 12 – Subsequent Events
 
The Company had signed a Memorandum of Understanding on December 7, 2009 to acquire 80% interest in China Dragon Telecom Limited and its affiliates based in Hong Kong, China.  The negotiations and execution of definitive agreements, regulatory approval and other customary conditions is expected to be completed in late 2011.  As of June 30, 2011, China Dragon Telecom Limited is still being audited by an accounting firm.

The Company has an outstanding line of credit facility with Thermo Credit LLC (“Thermo Credit”) which is currently in default.  However,  the Company and the managing members of Thermo Credit have agreed to extend the facility, the terms and conditions of extending the facility are being negotiated as of the date of filing.  We anticipate that the terms and conditions will be finalized no later than the next quarterly report filing date.


 


 
 
 
 
 
 
 
 
 

 

 
 
 

 
 
 
20

 
 

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Special Note Regarding Forward Looking Statements

Statements contained herein include “forward-looking statements” within the meaning of such term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements.  These risks and uncertainties include, but are not limited to, the factors described in the section captioned “Risk Factors” below. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements include, among other things, statements relating to:

 
·
our anticipated growth strategies and our ability to manage the expansion of our business operations effectively;
 
·
our dependence on the growth of our target market in the areas in which we do business; and
 
·
our ability to maintain or increase our market share in the competitive markets in which we do business.

Also, forward-looking statements represent our estimates and assumptions only as of the date hereof.  Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

You should read this discussion in conjunction with the consolidated financial statements, accompanying notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2010.

Use of Terms

Except as otherwise indicated by the context, references herein to “Unilava,” “we,” “us,” “our,” “our Company,” or “the Company” are to the combined business of Unilava Corporation, a Wyoming corporation, and its consolidated subsidiaries, Telava Networks, Inc. (100% owned), Telava Acqusitions, Inc. (100% owned), Telava Wireless, Inc. (75% owned), Telava Mobile, Inc. (80% owned), Local Info Pages, Inc. (100% owned Korea-based entity) and IBFA Acqusitions LLC (100% owned) which are 100% consolidated in the financial statements as adjusted for various minority interests.  In addition, unless the context otherwise requires:

 
·
“Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
 
·
“IBFA” refers to IBFA Acquisitions LLC, a Michigan limited liability company and wholly owned subsidiary of the Company;
 
·
“LIP” refers to Local Info Pages, Inc., a Korean corporation and wholly owned subsidiary of Telava Networks;
 
·
“SEC” refers to the Securities and Exchange Commission;
 
·
“Securities Act” refers to the Securities Act of 1933, as amended;
 
·
“Telava Acquisitions” refers to Telava Acquisitions, Inc., a Delaware corporation and wholly owned subsidiary of the Company;
 
·
“Telava Networks” refers to Telava Networks, Inc., a Nevada corporation and wholly owned subsidiary of the Company;
 
·
“Telava Mobile” refers to Telava Mobile, Inc., a Delaware corporation and 80% owned subsidiary of the Company;
 
·
“Telava Wireless” refers to Telava Wireless, Inc., a Wyoming corporation and 75% owned subsidiary of Telava Networks; and
 
·
“U.S. dollars,” “dollars” and “$” refer to the legal currency of the United States.



 
 
 

 
 
 
21

 
 

 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
Overview of Our Business

Unilava Corporation, a Wyoming corporation, was formerly known as IWI Holding Limited (“IWI”), and was engaged in the international jewelry business through a US subsidiary. IWI went public via an initial public offering in 1994, and disposed of the subsidiary on December 31, 2007. On September 21, 2009, IWI entered into an Agreement pursuant to which IWI acquired all of the outstanding shares of Telava Networks, Inc., a Nevada corporation (“Telava Networks”), in exchange for 55 million shares of stock. In addition, certain preferred stock of IWI which had been issued in 1994 for 3,644,880 was converted into 45 million shares of common stock. In connection with the closing of the acquisition, the Telava management was appointed as the members of IWI management, the name of IWI was changed to Unilava Corporation (“Unilava” or the “Company”) and the corporation was reincorporated from the British Virgin Islands to Wyoming via Articles of Continuation.

Unilava, with its operations primarily conducted by its subsidiaries, provides a variety of communications services, products, and equipment that address the needs of small and medium sized enterprise businesses and consumers under the Unilava corporate brand which includes our retail brands consisting of TelavaTM, CountryconnectTM, TelavaTM Mobile, Local Area Yellow Pages, Ttoore, Counia, and Nationwide Roadside Assistance. We are licensed to provide long distance services in 41 States and local phone services in 11 States. Through our carrier-grade microwave wireless broadband infrastructure and broadband Internet access partners, we offer mobile and high-definition IP-hosted voice services to residential, small and medium enterprises. We deliver small business a comprehensive and integrated suite of fee-based online and mobile advertising and web services. Headquartered in San Francisco, we have regional offices in Chicago, Seoul, Hong Kong, and Beijing.

Our goal is to become a leading provider of communications services in the United States and the world. We offer our services and products to consumers, businesses, and other providers in the U.S. and worldwide. The services and products that we offer vary by market, and include:  wireless communications, local exchange services, long-distance services, data/broadband and Internet services, video services telecommunications equipment, wholesale services and directory advertising and publishing. We group our operating subsidiaries as follows, corresponding to our operating segments for financial reporting purposes:

 
·
Wireless subsidiaries provide both wireless voice and data communications services across the U.S. and, through agreements, in a substantial number of foreign countries;
 
·
Wireline subsidiaries provide primarily landline voice and data communication services, high-speed broadband and voice services;
 
·
Advertising solutions subsidiaries publish Local Area Yellow Pages directories and sell directory advertising and Internet-based advertising and local search; and
 
·
Other subsidiaries provide results from all corporate and other operations.

Second Quarter Financial Performance Highlights

The following summarizes certain key financial information for the second fiscal quarter of 2011.

 
·
Total Sales: Total Sales was $887,256 for the three months ended June 30, 2011, a decrease of $558,543, or 39%, from $1,445,799 for the same period last year..

 
·
Gross Profit and Margin: Gross profit was $462,216 for the three months ended June 30, 2011, a decrease of $333,517, or 42%, from $795,733 for the same period last year. Gross margin was 52% for the three months ended June 30, 2011, as compared to 55% for the same period last year.  

 
·
Net Loss: Net loss was $417,920 for the three months ended June 30, 2011, an increase of $140,290, or approximately 51%, from $277,630 for the same period of last year.

 

 
 
 
22

 
 

 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
 
Results of Operations

Comparison of Three Months Ended June 30, 2011 and 2010

The following table shows key components of our results of operations during the three months ended June 30, 2011 and 2010, in both dollars and as a percentage of our total sales.

U.S. dollars, except percentages
 
Three Months Ended
June 30, 2011
   
Three Months Ended
June 30, 2010
 
         
Percent of
         
Percent of
 
   
Dollars
   
Total Sales
   
Dollars
   
Total Sales
 
Total sales
 
$
887,256
     
100
%
 
$
1,445,799
     
100
%
Cost of sales
   
425,040
     
48
%
   
650,066
     
45
%
Gross profit
   
462,216
     
52
%
   
795,733
     
55
%
                                 
Salaries and payroll
   
387,770
     
44
%
   
441,040
     
31
%
Selling, general and administrative expenses
   
352,154
     
40
%
   
521,347
     
36
%
Depreciation and amortization
   
38,845
     
4
%
   
41,975
     
3
%
Income (loss) from operations
   
(316,553
)
   
(36
)%
   
(208,629
)
   
(14
)%
                                 
Other income  (expense)
   
(118,429
)
   
(13
)%
   
(74,210)
     
(5
)%
Loss before non-controlling interest
   
(434,982
)
   
(49
)%
   
(282,839
)
   
(20
)%
Net loss allocable to non-controlling interest
   
17,062
     
2
   
5,209
     
-
 
Net loss
 
$
(417,920
)
   
(47
)%
 
$
(277,630
)
   
(19
)%

Total Sales. Our total sales decreased 39% to $887,256 in the three months ended June 30, 2011 from $1,445,799 in the same period last year, primarily as a result of a decrease in sales in our online advertising business.

Cost of sales. Our cost of sales decreased 35% to $425,040 in the three months ended June 30, 2011, from $650,066 in the same period last year, mainly due to a decrease in sales and an increase in costs associated with our marketing campaign and training costs for our underperforming marketing centers during the 2011 period.

Gross profit and gross profit margin. Our gross profit decreased 42% to $462,216 in the three months ended June 30, 2011, from $795,733 in the same period last year. The gross profit margin (gross profit as a percentage of total sales) was 52% for the three months ended June 30, 2011 and 55% for the three months ended June 30, 2010. The decrease in the gross profit margin was primarily due to a decrease in overall sales.

Salaries and payroll.   Our salaries and payroll expenses decreased 12% to $387,770 in the three months ended June 30, 2011 from $441,040 in the same period last year, mainly due to a reduction in personnel and related payroll expenses during the 2011 period.

Selling, general and administrative expenses. Our selling, general and administrative expenses decreased 32% to $352,154 in the three months ended June 30, 2011, from $521,347 in the same period last year, mainly due to a decrease in rent expense in connection with our sublease of part of our office space and a decrease in promotional expenses.

Other income and expenses. Interest expense increased 14% to $118,550 in the three months ended June 30, 2011, from $103,677 in the same period in 2010, primarily due to an increase in loan interest associated with our continued payment of principal on the Thermo Credit LLC loan and increased borrowing.  

 

 
 
 
23

 
 

 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued


Comparison of Three Months Ended June 30, 2011 and 2010 - continued

Income taxes. Income taxes remained flat at zero dollars in the three months ended June 30, 2011 from the same period in 2010, mainly due to recurring losses.

Net loss. As a result of the foregoing reasons, net loss increased 51% to $417,920 in the three months ended June 30, 2011, from $277,630 in the same period last year.

Segment Data

Net (loss) for the advertising solutions segment decreased 4% to ($410,091) in the three months ended June 30, 2011, from ($428,725) in the same period last year, mainly due to a decrease in sales, less efforts in direct marketing and higher attrition ratio.

Total assets for the advertising solutions segment increased 218% to $2,815,984 as of June 30, 2011 from $886,664 as of June 30, 2010, mainly due to increase in  receivables from intercompany accounts.

Net (loss) for the wireless segment increased 25% to ($50,898) in the three months ended June 30, 2011, from net loss of ($40,585) in the same period last year, mainly due to cancelations of co-location agreements.

Total assets for the wireless segment decreased 6% to $1,676,083 as of June 30, 2011, from $1,781,606 as of June 30, 2010, mainly due to amortization on tower assets.

Net income for the wireline segment decreased 74% to $50,303 in the three months ended June 30, 2011, from $193,568 in the same period last year, mainly due to an increase in marketing of wireless marketing and operating costs.

Total assets for the wireline segment decreased 6% to $2,133,155 as of June 30, 2011, from $2,257,870 as of June 30, 2011, mainly due to customer attrition.

 Comparison of Six Months Ended June 30, 2011 and 2010
 
The following table shows key components of our results of operations during the six months ended June 30, 2011 and 2010, in both dollars and as a percentage of our total sales.
 
U.S. dollars, except percentages
 
Six Months Ended
June 30, 2011
   
Six Months Ended
June 30, 2010
 
         
Percent of
         
Percent of
 
   
Dollars
   
Total Sales
   
Dollars
   
Total Sales
 
Total sales
 
$
1,825,313
     
100
%
 
$
2,860,716
     
100
%
Cost of sales
   
895,974
     
49
%
   
1,242,139
     
43
%
Gross profit
   
929,339
     
51
%
   
1,618,577
     
57
%
                                 
Salaries and payroll
   
759,639
     
42
%
   
941,946
     
33
%
Selling, general and administrative expenses
   
748,553
     
41
%
   
1,061,934
     
37
%
Depreciation and amortization
   
78,680
     
4
%
   
84,273
     
3
%
Income (loss) from operations
   
(657,533
)
   
(36
)%
   
(469,576
)
   
(16
)%
                                 
Other income  (expense)
   
(220,581
)
   
(12
)%
   
(39,369)
     
(1
)%
Loss before non-controlling interest
   
(878,114
)
   
(48
)%
   
(508,945
)
   
(18
)%
Net loss allocable to non-controlling interest
   
34,440
     
2
   
8,236
     
(1
)% 
Net loss
 
$
(843,674
)
   
(46
)%
 
$
(500,709
)
   
(18
)%

 
Total Sales. Our total sales decreased 36% to $1,825,313 in the six months ended June 30, 2011 from $2,860,716 in the same period last year, primarily as a result of a decrease in sales in our online advertising business.
 

 
 
 
24

 
 

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
 
Cost of sales. Our cost of sales decreased 28% to $895,974 in the six months ended June 30, 2011, from $1,242,139 in the same period last year, mainly due to a decrease in sales and an increase in costs associated with our marketing campaign and training costs for our underperforming marketing centers during the 2011 period.
 
Gross profit and gross profit margin. Our gross profit decreased 43% to $929,339 in the six months ended June 30, 2011, from $1,618,577 in the same period last year. The gross profit margin (gross profit as a percentage of total sales) was 51% for the six months ended June 30, 2011 and 57% for the six months ended June 30, 2010. The decrease in the gross profit margin was primarily due to a decrease in overall sales.
 
Salaries and payroll.   Our salaries and payroll expenses decreased 19% to $759,639 in the six months ended June 30, 2011 from $941,946 in the same period last year, mainly due to a reduction in personnel and related payroll expenses during the 2011 period.
 
Selling, general and administrative expenses. Our selling, general and administrative expenses decreased 30% to $748,553 in the six months ended June 30, 2011, from $1,061,934 in the same period last year, mainly due to a decrease in rent expense in connection with our sublease of  part of our office space and a decrease in promotional expenses.
 
Other income and expenses. Interest expense increased 4% to $220,826 in the six months ended June 30, 2011, from $213,109 in the same period in 2010, primarily due to a increase in loan interest associated with our Thermo Credit LLC loan and increased borrowing.  
 
Income taxes. Income taxes remained flat at zero dollars in the six months ended June 30, 2011 from the same period in 2010, mainly due to recurring losses.
 
Net loss. As a result of the foregoing reasons, net loss increased 68% to $843,674 in the six months ended June 30, 2011, from $500,709 in the same period last year.
 
Segment Data
 
Net (loss) for the advertising solutions segment increased 26% to ($844,252) in the six months ended June 30, 2011, from ($671,687) in the same period last year, mainly due to a decrease in sales, less efforts in direct marketing and higher attrition ratio.
 
Total assets for the advertising solutions segment increased 218% to $2,815,984 as of June 30, 2011 from $886,664 as of June 30, 2010, mainly due to increase in  receivables from intercompany accounts.
 
Net (loss) for the wireless segment increased 292% to ($104,855) in the six months ended June 30, 2011, from net loss of ($26,763) in the same period last year, mainly due to cancelations of co-location agreements.
 
Total assets for the wireless segment decreased 6% to $1,676,083 as of June 30, 2011, from $1,781,606 as of June 30, 2010, mainly due to amortization on tower assets.
 
Net income for the wireline segment decreased 44% to $115,335 in the six months ended June 30, 2011, from $206,576 in the same period last year, mainly due to an increase in marketing of wireless marketing and operating costs.
 
Total assets for the wireline segment decreased 6% to $2,133,155 as of June 30, 2011, from $2,257,870 as of June 30, 2011, mainly due to customer attrition.
 

 
 
 
25

 
 



ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

Liquidity and Capital Resources

As of June 30, 2011, we had cash and cash equivalents of approximately $45,006. The following table provides a summary of our net cash flows from operating, investing, and financing activities. To date, we have financed our operations primarily through net cash flow from operations, augmented by short-term bank and personal borrowings and equity contributions by our shareholders.

U.S. Dollars
 
Six Months Ended June 30,
 
   
2011
   
2010
 
Net cash provided by (used in) operating activities
 
$
(444,784
 
$
47,413
 
Net cash provided by (used in) investing activities
   
50,623
     
(1,682
Net cash provided by (used in) financing activities
   
348,638
     
(130,398
Net increase (decrease) in cash and cash equivalents
 
$
(44,816
)
 
$
26,185
 

Operating Activities

Net cash used in operating activities was $444,784 in the six months ended June 30, 2011, compared to $47,413 provided by operating activities in the same period last year. Net loss after adjustment for noncash items was $(817,895) in the six months ended June 30, 2011.  This increase was primarily due to increased legal costs of underperforming subsidiaries.

Investing Activities

Net cash provided in investing activities in the six months ended June 30, 2011 was $50,623, compared to $(1,682) used in investing activities in the same period last year. The increase was mainly due to a redemption of a Certificate of Deposit.
 
Financing Activities

Net cash provided by financing activities in the six months ended June 30, 2011 was $348,638, compared to $(130,398) of net cash used in financing activities in the same period in 2010. The increase in net cash provided by financing activities was mainly due to cash proceeds from unrelated third-party loans offset by a repayment of the facility provided by Thermo Credit, LLC.

Capital Expenditures

Our capital expenditures for the six months ended June 30, 2011 and 2010 were $199 and $1,682, respectively. As of June 30, 2011, we had cash and cash equivalents of $45,006, primarily consisting of cash on hand and demand deposits.

To date, we have financed our operations primarily through cash flows from operations, augmented by short-term bank and personal loans and unrelated third-party loans. We believe that our cash on hand and cash flow from operations will meet a portion of our present cash needs and we will require additional cash resources, including loans, to meet our expected capital expenditures and working capital requirements for the next 12 months. We may, however, in the future, require additional cash resources due to changed business conditions, implementation of our strategy to expand our marketing efforts and increase brand awareness, or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.
 
 
 

 
 
 
26

 
 


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
 
Loan Commitments

As of June 30, 2011, the amount, maturity date and term of each of our loans and line of credit were as follows:

Bank/Person(s)
 
Amount Outstanding
   
Interest Rate
 
Maturity Date
 
Thermo Credit LLC
 
$
1,718,208
   
14.50%
 
Jan 17, 2011
 
                   
Dr. Dicken Yung
 
$
172,000
   
3.25%
 
Upon demand
 
                   
Baldwin Yung
 
$
167,000
   
0%
 
Upon demand
 
                   
Boaz Yung
 
$
1,125
   
0%
 
Upon demand
 
                   
AHAP
 
$
40,000
   
8%
 
Upon demand
 
                   
Brilliant Capital
 
$
374,930
   
8%
 
Upon demand
 
                   
InfoCity LLC and others
 
$
999,176
   
8%
 
Upon demand
 
                   
TOTAL 
 
$
3,472,439
           

We have a $2,000,000 revolving line of credit with the Thermo Credit LLC, pursuant to a credit agreement, dated July 17, 2010, between the Company and the bank. In April 2011 an agreement was signed by Thermo Credit LLC, ESBI and LAYP to pay the collection on accounts receivable to Thermo Credit LLC directly. This was set up to facilitate the direct pay down of principle to the Line of Credit. This revolving line of credit is guaranteed/secured by the all of the assets of the Company including cash, accounts receivable and fixed assets. The credit agreement had certain debt covenants that the Company did not comply with during the years ended December 31, 2010 and 2009.  The first covenant was that the Company must maintain a ratio of cash flow to scheduled principal payments plus all accrued interest payments on funded debt of not less than 1-to-1 as of the end of each fiscal quarter.  The second covenant was that the Company must maintain a tangible net worth of not less than $0 as of the last day of each fiscal quarter.  The credit agreement terminated on January 17, 2011 and the Company is renegotiating the terms with the lender. Although the line of credit is currently in default status, the Company believes that a plan or an amendment of the facility can be negotiated.

Inflation

Inflation and changing prices have not had a material effect on our business, and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor price changes in the economies and industries in which we operate and continually maintain effective cost controls in operations.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity or capital expenditures, or capital resources that are material to an investment in our securities.

Seasonality

Our operating results and operating cash flows historically have not been subject to dramatic seasonal variations, although there is an increase in advertising and selling expenses when we begin sales of new products or services. New market opportunities or new product and new service introductions could change any perceived patterns, seasonal or operational. 

 

 
 
 

 
 
 
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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
 
Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates, and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operations. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements.

 
·
Basis of Consolidation and Presentation. The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). In the opinion of management, the accompanying balance sheets, and statements of operations, and cash flows and include all adjustments, consisting only of normal recurring items, considered necessary to give a fair presentation of operating results for the periods presented. All material intercompany transactions and balances have been eliminated in consolidation.
 
 
·
Business Combinations. The Company adopted the accounting pronouncements relating to business combinations (primarily contained in ASC Topic 805 "Business Combinations"), including assets acquired and liabilities assumed arising from contingencies. These pronouncements established principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree as well as provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. In addition, these pronouncements eliminate the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria and require an acquirer to develop a systematic and rational basis for subsequently measuring and accounting for acquired contingencies depending on their nature. Our adoption of these pronouncements will have an impact on the manner in which we account for any future acquisitions.

 
·
Use of estimates. The preparation of consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

 
·
Allowance for doubtful accounts. The Company reduces gross trade accounts receivable by an allowance for doubtful accounts. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company reviews its allowance for doubtful accounts on a regular basis and all past due balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

 
·
Impairment of long-lived assets. The Company reviews the carrying amount of its long-lived assets, including intangibles, for impairment, each reporting period. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is considered not recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flow. For periods ended June 30, 2011 and December 31, 2010, the Company determined no impairment charges were necessary.

 
·
Property, plant and equipment, net. Property and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. Any gain or loss arising on the sale or disposal of the asset is included in the income statement in the period the item is sold or otherwise disposed. Maintenance and repairs of property and equipment are charged to operations when incurred.


 



 
 
 
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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

Recent Accounting Pronouncements

In December 2010, the FASB issued ASU 2010-28 - “Intangibles – Goodwill and Other—When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts”, ASU 2010-28 is effective for fiscal years and interim periods within those years, beginning on or after December 15, 2010.  Early adoption is not permitted. We are currently evaluating the impact of ASU 2010-28 on our financial position, results of operations or cash flows of the Company.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

None.
 
ITEM 4.
CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
As required by Rule 13a-15(e), our management has carried out an evaluation, with the participation and under the supervision of our Chief Executive Officer and Chief Financial Officer, Mr. Baldwin Yung, of the effectiveness of the design and operation of our disclosure controls and procedures, as of June 30, 2011. Based upon, and as of the date of this evaluation, Mr. Yung, determined that, for the reasons disclosed below, as of June 30, 2011, and as of the date of this Report, our disclosure controls and procedures were not effective.
 
 

 
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ITEM 4.
CONTROLS AND PROCEDURES - continued
 
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as based on framework established in Internal Control Integrated Framework issued by the committee of Sponsoring Organizations of the Treadway Commission (COSO) as of June 30, 2011. During our management’s review of our internal control over financial reporting as of June 30, 2011, our management identified the following material weaknesses in the company’s internal control over financial reporting:
 
 
-
Management’s ability to override procedures
 
 
-
Insufficient quarterly and annual financial closing procedures
 
 
-
Insufficient cutoff for recording revenue
 
 
-
Insufficient cutoff for recording payables
 

It is Management’s opinion that the above weaknesses exist due to the small size of operating staff and the current phase of operations. In an effort to remediate the identified material weakness and enhance our internal controls, we have initiated, or plan to initiate, the following measures:

 
·
We plan to increase our personnel resources and technical accounting expertise within the accounting function when funds are available to us.