Network Cadence, Inc. - FORM 10-Q

Network Cadence, Inc. - FORM 10-Q - November 14, 2011

Attached files

Attached files

Network Cadence, Inc. Reports

file	filename
EX-31.2 - EXHIBIT 31.2 - Network Cadence, Inc.	exh31_2.htm
EX-31.1 - EXHIBIT 31.1 - Network Cadence, Inc.	exh31_1.htm
EX-32.1 - EXHIBIT 32.1 - Network Cadence, Inc.	exh32_1.htm
EXCEL - IDEA: XBRL DOCUMENT - Network Cadence, Inc.	Financial_Report.xls

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______.

Commission file No. 000-52882

VERECLOUD, INC.

(Exact name of registrant as specified in its charter)

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

6560 South Greenwood Plaza Boulevard

Number 400

Englewood, Colorado 80111

(Address of principal executive offices)

(877) 711-6492

(Registrant's telephone number, including area code)

____________________________________________________________________

(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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of November 14, 2011, there were 72,372,198 shares of the registrant’s common stock, par value $0.001 per share, issued and outstanding.

Table of Contents

VERECLOUD, INC.

FORM 10-Q for the Quarterly Period Ended September 30, 2011

TABLE OF CONTENTS


		PAGE
Part I Financial Information

Item 1. Financial Statements		1

Condensed Consolidated Balance Sheets as of September 30, 2011 (unaudited) and June 30, 2011		1

Condensed Consolidated Statements of Operations for the three months ended September 30, 2011 and 2010 (unaudited)		2

Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2011 and 2010 (unaudited)		3

Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit) for the three months ended September 30, 2011 (unaudited)		4

Notes to Condensed Consolidated Financial Statements		5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3. Quantitative and Qualitative Disclosures About Market Risk		21

Item 4. Controls and Procedures		21

Part II Other Information		22

Item 1. Legal Proceedings		22

Item 1A. Risk Factors		22

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		22

Item 3. Defaults Upon Senior Securities		22

Item 4. [Removed and Reserved]		22

Item 5. Other Information		22

Item 6. Exhibits		24

Signatures		25

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

VERECLOUD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


		September 30,			June 30,
		2011			2011
		(Unaudited)

ASSETS

Current assets
	Cash	$	74,259		$	202,256
	Accounts receivable		122,550			128,050
	Other current assets		72,347			62,537
	Total current assets		269,156			392,843

Property and equipment (Note 3)
	Computer related		91,139			89,307
	Equipment and machinery		40,372			40,372
	Other property and equipment		16,444			36,330
	Subtotal		147,955			166,009
	Accumulated depreciation		(127,934	)		(136,026	)
	Net property and equipment		20,022			29,983

Other assets
	Capitalized software, net (Note 2)		518,962			614,837
	Total assets	$	808,140		$	1,037,663

LIABILITIES AND STOCKHOLDERS' (DEFICIT)

Current liabilities
	Accounts payable	$	171,432		$	271,126
	Current portion of long term debt (Note 6)		3,324,000			2,414,000
	Accrued liabilities		584,383			485,380
	Total current liabilities		4,079,816			3,170,505

Long term debt (Note 6)			-			-

	Total liabilities		4,079,816			3,170,505

Commitments and contingencies (Notes 2,4,5,6,7,9,10,11,12)

Stockholders' (deficit)
	Preferred stock - $0.001 par value, 5,000,000 shares authorized:		-			-
	No shares issued or outstanding
	Common stock - $0.001 par value, 200,000,000 shares authorized:		72,372			71,791
	72,372,198 and 71,791,068 shares issued and outstanding, respectively
	Additional paid-in capital		5,319,150			5,192,072
	Accumulated (deficit)		(8,663,197	)		(7,396,705	)
	Total stockholders' (deficit)		(3,271,676	)		(2,132,842	)

	Total liabilities and stockholders' (deficit)	$	808,140		$	1,037,663

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

VERECLOUD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended September 30,

	2011			2010

Revenue	$	140,862		$	1,510,542

Cost of goods sold		295,046			677,431

Gross profit		(154,184	)		833,111

Operating expenses
Employee related (1)		328,303			392,927
Marketing expense		163,298			250,656
Legal and accounting		41,509			127,421
Consulting expense (1)		180,415			64,427
Research and development		249,324			28,579
Rent		22,500			22,435
Travel and entertainment		9,866			23,396
Information technology		5,340			13,534
Depreciation		6,824			10,614
Other		41,661			20,338
Total operating expenses		1,049,039			954,327

Operating income (loss)		(1,203,223	)		(121,216	)

Other income (expense)
Interest income		-			133
Interest (expense)		(71,501	)		(26,768	)
Sale of Assets		8,230			-
Total other income (expense)		(63,271	)		(26,634	)

Pretax income (loss)		(1,266,494	)		(147,851	)

Income tax expense (benefit)		-			-

Net income (loss)	$	(1,266,494	)	$	(147,851	)


Basic net income (loss) per common share	$	(0.02	)	$	(0.00	)

Basic weighted average common shares		71,998,534			70,098,000

(1) Includes stock-based compensation as follows:
Salary and wages	$	41,932		$	51,656
Consulting expenses	$	78,560		$	-

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

VERECLOUD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Three Months Ended
	September 30,
Operating Activities	2011			2010
Net income (loss)	$	(1,266,494	)	$	(147,851	)
Adjustments to reconcile net income to
net cash from operations
Depreciation and amortization		228,920			10,614
Stock for services		78,560			-
Stock-based compensation		41,932			51,656
Gain on sale of assets		(8,230	)		-
Change in assets and liabilities
Accounts receivable		5,500			41,796
Other current assets		(9,810	)		(75,645	)
Accounts payable		(99,693	)		242,216
Other current liabilities		99,002			14,680
Net cash provided by (used in) operating activities		(930,313	)		137,467

Investing Activities
Purchase of computer related		(1,832	)		-
Purchase of equipment and machinery		-			(1,659	)
Proceeds from sale of assets		13,200			-
Capitalized software		(126,219	)		(40,101	)
Net cash (used in) investing activities		(114,852	)		(41,760	)

Financing Activities
Issuance of common stock		7,167			-
Reduction in note payable		-			(100,000	)
Increase (decrease) in line of credit		910,000			550,000
Net cash provided by (used in) financing activities		917,167			450,000

Decrease in cash for period	$	(127,999	)	$	545,707
Cash at beginning of period		202,256			197,151
Cash at end of period	$	74,259		$	742,858

Schedule of Noncash Investing and Financing Activities
Share Exchange Agreement	$	-		$	-
Note Purchase Agreement	$	-		$	-

Supplemental disclosure:
Cash paid for interest during the year	$	-		$	26,768
Cash paid for income taxes during the year	$	-		$	-

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

VERECLOUD, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)

For the period from June 30, 2011 to September 30, 2011

											Total
	Common Stock					Additional Paid in		Accumulated Earnings			Stockholders Equity
	Shares			Amount		Capital		(Deficit)			(Deficit)
Balance at June 30, 2011		71,791,068		$	71,791	$	5,192,072	$	(7,396,705	)	$	(2,132,841	)

Stock option exercises		108,333			108		7,058		-			7,167

Surrender of stock for no consideration (Note 5)		(300,000	)		-		-		-			-

Surrender and issuance of stock for services (Note 5,8)		300,000			-		24,000		-			24,000

Stock for services		472,797			473		54,087		-			54,560

Stock-based compensation - Options - Emp (Note 9)		-			-		41,932		-			41,932

Net income (loss)		-			-		-		(1,266,492	)		(1,266,492	)

Balance at September 30, 2011		72,372,198		$	72,372	$	5,319,150	$	(8,663,197	)	$	(3,271,676	)

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

VERECLOUD, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Organization

Verecloud, Inc. (the "Company" or "Verecloud") is headquartered in Englewood, Colorado and is the developer and operator of Cloudwrangler™, a proprietary cloud service brokerage platform. Using its Cloudwrangler™ platform, Verecloud integrates and delivers a customer-specific suite of multiple, diverse cloud services.

History of Verecloud

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

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

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

This Quarterly Report on Form 10-Q for the three months ended September 30, 2011 reflects the financial statements and related disclosures for Verecloud.

2. Summary of Significant Accounting Policies

The unaudited interim condensed consolidated balance sheet as of September 30, 2011 and the unaudited interim condensed consolidated financial statements as of and for the three months ended September 30, 2011 and 2010, have been prepared in accordance with the instructions for Form 10-Q. In compliance with those instructions, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted. We believe that the disclosures made are adequate such that the information presented is not misleading.

In the opinion of management, these statements include all normal recurring adjustments necessary to fairly present our unaudited condensed consolidated results of operations, financial position and cash flows as of September 30, 2011 and 2010 and for all periods presented. These unaudited condensed consolidated financial statements should therefore be read in conjunction with the consolidated financial statements and notes thereto for the year ended June 30, 2011, included in our Form 10-K filed on September 28, 2011.

The unaudited condensed consolidated statements of operations, the unaudited condensed consolidated statement of changes in stockholder’s equity (deficit) and the unaudited condensed consolidated statements of cash flows for the three months ended September 30, 2011 are not necessarily indicative of the results or cash flows expected for the full year.

Critical Accounting Policies and Estimates

Basis of Presentation

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

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of Verecloud and its wholly owned subsidiary, Network Cadence. For the three months ended September 30, 2011 and 2010, there were no equity investments in companies over which Verecloud has the ability to exercise significant influence, but does not hold a controlling interest. Verecloud has eliminated all significant intercompany accounts and transactions.

Reclassifications

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

Cash and Cash Equivalents

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

Concentration of Credit Risk

The Company primarily sells its services to small-to-medium sized business in the United States on an uncollateralized, open credit basis. For the three months ended September 30, 2011 and 2010, two customers (LightSquared) accounted for 39% and 82% of the revenue and (Gigaspaces) accounted for 61% and 0% of the revenue, respectively. As of September 30, 2011 all professional services work for both Light Squared and Gigaspaces has been completed.

Cash is maintained at financial institutions. The Federal Deposit Insurance Corporation ("FDIC") currently insures accounts at each institution for up to $250,000. At times, cash balances may exceed the FDIC insurance limit of $250,000.

Accounts Receivable

Accounts receivable include uncollateralized customer obligations due under normal trade terms and do not bear interest.

Allowances for doubtful accounts are maintained for estimated losses resulting from the inability of our customers to make required payments. The allowances are based on our regular assessment of the credit worthiness and financial condition of specific customers, as well as its historical experience with bad debts and customer deductions, receivables aging, current economic trends, geographic or country-specific risks and the financial condition of its distribution channels. All outstanding accounts receivable as of September 30, 2011 were either collected subsequent to year end or are deemed collectible based on the collection history of the customer.

Revenue Recognition

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

Property and Equipment

Equipment and furniture are carried at historical cost, net of accumulated depreciation. Depreciation is computed using straight-line methods over the estimated useful lives of the assets, ranging from three to seven years. Expenditures for repairs and maintenance which do not materially extend the useful lives of equipment and furniture are charged to operations.

Fair Value Financial Instruments

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September 30, 2011. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, accounts receivable, accounts payable and accrued expenses. Fair values are assumed to approximate carrying values for these financial instruments because they are short term in nature, or are receivable or payable on demand.

Capitalized Software

The Company accounts for the costs of software within its products in accordance with Accounting Standards Codification ("ASC") Topic 985-20 "Costs of Software to be Sold, Leased or Marketed", under which certain software costs incurred subsequent to the establishment of technological feasibility are capitalized and amortized over the estimated lives of the related products. The Company determines technological feasibility to be established upon the internal release of a detailed program design, or to the extent that a detailed program design is not pursued, upon completion of a working model that has been confirmed by testing to be consistent with the product design, as specified by ASC Topic 985-20. Upon the general release of the product to customers, development costs for that product will be amortized over periods not exceeding one year. The Company began capitalizing software cost in September 2010 for the development of its Cloudwrangler™ platform, which includes Nimbus 1.0, Spiceworks Plug-in, and Cloudwrangler™. As a result, as of September 30, 2011, the Company capitalized $977,666 of software costs and recorded $458,704 in accumulated amortization. With regard to the recoverability of capitalized software and development costs, the Company regularly performs an assessment of its ability to recover the costs invested in these assets. The recoverability analysis considers projected future cash flows from the utilization of the underlying software in the respective components of the business. The Company’s projections of future cash flows are affected by such factors as technological changes, competitive offerings, marketplace expectations and project development. Changes in any of these factors may result in future write-downs of the carrying value of these or other assets.

Research and Development Costs

Costs related to research, design and development of the Cloudwrangler™ platform, which consist primarily of personnel, product design and infrastructure expenses, are expensed as they are incurred. For the three months ended September 30, 2011 and 2010, the Company incurred research and development costs of $249,324 and $28,579 respectively.

Marketing and Advertising Costs

Marketing and advertising costs are expensed when incurred. For the three months ended September 30, 2011 and 2010, the Company incurred marketing expenses of $163,298 and $250,956 respectively.

Segment Information

Certain information is disclosed based on the way management organizes financial information for making operating decisions and assessing performance. The Company currently operates in one business segment and will evaluate additional segment disclosures if it expands operations.

Significant Customers

For the three months ended September 30, 2011 and 2010, the Company had a substantial business relationship with two major customers, LightSquared and Gigaspaces. LightSquared accounted for 39% and 82% of the Company’s total revenue for the three months ended September 30, 2011 and 2010, respectively. Gigaspaces accounted for 61% and 0% of the Company’s total revenue for the three months ended September 30, 2011 and 2010, respectively.

Long-Lived Assets

The Company accounts for its long-lived assets in accordance with Accounting for the Impairment or Disposal of Long-Lived Assets ("ASC 360"). Its primary long-lived assets are property and equipment and capitalized software costs. ASC 360 requires a company to assess the recoverability of its long-lived assets whenever events and circumstances indicate the carrying value of an asset or asset group may not be recoverable from estimated future cash flows expected to result from its use and eventual disposition. Additionally, the standard requires expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are incurred, rather than as of the measurement date. For property and equipment, our assets consist primarily of computers and office equipment. The Company has compared the net book value of these assets to market-based pricing for similar used equipment. The Company accounts for the costs of software within its products in accordance with the ASC Topic 985-20 "Costs of Software to be Sold, Lease, or Marketed" under which certain software costs incurred subsequent to the establishment of technological feasibility are capitalized and amortized over the estimated lives of the related products (Note 2). As of September 30, 2011, the depreciated value of the assets materially reflects the estimated fair value of similar used equipment in the marketplace.

Stock Based Compensation Expense

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

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

Accounting for Income Taxes

Income tax expense or benefit is recognized for the amount of taxes payable or refundable for the current year’s results and for deferred tax assets and liabilities related to the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns.

Net Income (Loss) Per Common Share

Basic net income (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the year. Diluted net income (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents outstanding. During the periods when they are anti-dilutive, common stock equivalents, if any, are not considered in the computation.

Recent Pronouncements

The Company evaluates pronouncements of various authoritative accounting organizations, primarily the Financial Accounting Standards Board ("FASB"), the SEC, and the Emerging Issues Task Force, to determine the impact of new pronouncements on GAAP and the preparation of our financial statements. The Company has adopted the following new accounting standards:

In October 2009, FASB published Accounting Standards Update ("ASU") 2009-14, Certain Revenue Arrangements That Include Software Elements ("ASU 2009-14"), to provide guidance for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and non-software components that function together to deliver the product’s essential functionality are excluded from the software revenue guidance in ASC Subtopic 985-605, Software-Revenue Recognition . In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance. ASU 2009-14 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. This pronouncement did not have any impact on the Company’s condensed consolidated unaudited financial statements for the three months ended September 30, 2011 and 2010.

In January 2010, FASB published ASU 2010-06, Improving Disclosures About Fair Value Measurement ("ASU 2010-06") , which requires additional disclosures regarding the activity in fair value measurements classified as Level 3 in the fair value hierarchy. Disclosure of activity in Level 3 fair value measurements is required for fiscal years beginning after December 15, 2010. Early adoption is permitted. The Company does not expect the adoption of ASU 2010-06 to have a material impact on its consolidated financial statements.

In April 2010, the FASB published ASU 2010-13 , Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. ASU 2010-13 provides that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company's adoption of ASU 2010-13 in the first quarter of fiscal year 2011 did not impact the Company's consolidated financial statements.

In May 2011, the FASB issued an accounting standard update to provide guidance on achieving a consistent definition of and common requirements for measurement of and disclosure concerning fair value as between U.S. GAAP and International Financial Reporting Standards. This accounting standard update is effective for the Company beginning in the third quarter of fiscal 2012. The Company does not expect it will have a material impact on its consolidated financial statements.

There were no other accounting standards and interpretations issued recently which are expected to have a material impact on the Company’s financial position, operations or cash flows.

3. Property and Equipment

Property and equipment are recorded at cost. Replacements and major improvements are capitalized while maintenance and repairs are charged to expense as incurred. Depreciation is provided using primarily straight line methods over the estimated useful lives of the related assets.

Property and equipment at September 30, 2011 and June 30, 2011 consisted of the following:


	Sept 30,			June 30,
	2011			2011

Computer related	$	91,139		$	89,307
Equipment and machinery		40,372			40,372
Other property and equipment		16,444			36,330
Subtotal		147,955			166,009
Accumulated depreciation		(127,934	)		(136,026	)
Net property and equipment	$	20,022		$	29,983

4. Going Concern

The Company's financial statements have been prepared on the basis of accounting principles applicable to a going concern. However, at September 30, 2011, the Company had negative working capital and a stockholder’s deficit and required additional funding to executive on its business plan. This raises substantial doubt about its ability to continue as a going concern. The Company's ability to continue as a going concern is dependent on its ability to raise additional capital and implement our business plan. Based on the Company's current business plan and projections, it will need approximately $5 million to meet our cash requirements for the next twelve months. This plan is the basis of discussion with potential investors and strategic partners. Of this amount, approximately $1 million will be used for ongoing Cloudwrangler ™ development and product enhancements, approximately $2 million for sales and marketing and approximately $2 million is needed for general working capital and administrative expenses. The Company is exploring funding options that include debt financing, equity investments and strategic alliances. Its current lender, TMG Colorado, is providing interim funding through the existing loan agreement on a month to month basis, as amended (See Note 7 to the financial statements for additional information). TMG Colorado has funded operations through September 2011 and has indicated a willingness to fund operations in the short term. However, no assurances can made that TMG Colorado will continue to fund the company in the short term. As of November 14, 2011, the Company has not secured any additional financing or commitments. Assurances cannot be given that adequate financing can be obtained to meet its capital needs. If the Company is unable to generate profits and are unable to obtain financing to meet its working capital requirements, it may have to curtail business sharply or cease operations altogether. Its continuation as a going concern is dependent upon the Company's ability to generate sufficient cash flow to meet its obligations on a timely basis to retain its current financing, to obtain additional financing, and, ultimately, to attain profitability. Should any of these events not occur, the Company will be adversely affected and may have to cease operations. Failure to secure additional financing in a timely manner and on favorable terms would have a material adverse effect on financial performance, results of operations and stock price and require it to curtail or cease operations, sell off its assets, seek protection from its creditors through bankruptcy proceedings, or otherwise. Furthermore, additional equity financing may be dilutive to the holders of the Company’s common stock, and debt financing, if available, may involve restrictive covenants, and strategic relationships, if necessary to raise additional funds, and may require that the Company relinquish valuable rights.

5. Commitments and Contingencies

On February 24, 2010, the Company issued 898,000 shares of restricted common stock to various other consultants to the Company for financial, marketing and business development services. For the three months ended September 30, 2011, the Company expensed $54,560 for the fair market value of these services.

On June 10, 2010, the Company entered into the Consulting Agreement with The Mesa Group, Inc., a Texas corporation (“TMG”). On March 31, 2011, the Company entered a first amendment to the Consulting Agreement with TMG (the “Amended Consulting Agreement”). Under the Amended Consulting Agreement, the first payment of $62,000 is due and payable upon the earlier of: (i) thirty days following the date that the Company secures and closes upon long term financing in a principal amount not less than $3,000,000; or (ii) September 30, 2011. As of September 30, 2011, the Company is in negotiations to extend this first payment to July 1, 2012. The Company will then make 11 quarterly payments of $62,000 on the last day of every calendar quarter (December 31, March 31, June 30 and September 30) through the term of the Amended Consulting Agreement which is contemplated to end on December 31, 2014. The total aggregate payments under the Amended Consulting Agreement remain at $744,000. As of September 30, 2011, the Company had accrued $252,960 associated with the consulting agreement. The Company currently has the Loan Agreement with TMG's affiliate, TMG Holdings Colorado, LLC, a Texas limited liability company (“TMG Colorado”), and another affiliate of TMG, TMG Holdings, LLC, is the Company's second largest stockholder.

On November 10, 2010, the Company entered into an agreement with ChangeWave, Inc. ("ChangeWave") in which ChangeWave will provide investor relations and shareholder marketing services for the Company. The term of agreement is November 1, 2010 to October 31, 2011. As compensation for these services, ChangeWave will receive 1,200,000 shares of restricted common stock over the term of the agreement. These shares are earned and payable quarterly beginning on November 1, 2010 with the final installment due on August 1, 2011. The contract may be terminated by the Company without cause with ten days notice to ChangeWave. In the event of termination, the Company is obligated for only those shares issued prior to the date of termination. As of September 30, 2011the Company's chief executive officer has surrendered 1,200,000 shares of common stock and the Company has re-issued 1,200,000 shares of common stock to ChangeWave. The Company has recorded stock for services of $24,000 for the period ended September 30, 2011.

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

Operating Leases

The Company has a lease commitment for its office facility. This lease has a monthly rental payment of $7,500 and expires in December 2011.

Employment Agreements

On June 22, 2010, the Company entered into employment agreements (the "Employment Agreements") with the following executives: (i) its President, William E. Wood, III; (ii) its Chief Financial Officer, James R. Buckley; (iii) its Chief Operating Officer, Michael P. Cookson; and (iv) its Chief Technology Officer, William Perkins.

Pursuant to the Employment Agreements:

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

(b) Mr. Buckley is to receive a base salary of $180,000 per annum and options to purchase 1,900,000 shares of the Company's common stock at $0.02 per share. Mr., Buckley tendered his resignation effective September 30, 2011.

(c) Mr. Cookson is to receive a base salary of $180,000 per annum and options to purchase 500,000 shares of the Company's common stock at $0.02 per share. Mr. Cookson was terminated for no cause effective September 15, 2011.

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

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

Effective March 1, 2011, Mr. McCawley (not subject to an employment agreement), Mr. Wood, and Mr. Perkins agreed to a temporary 25% reduction in their base salary. This reduction remained in effective through September 30, 2011. These individuals waived their right to reimbursement of the reduction. In addition, the Employment Agreements provide that each of the executives is eligible to participate in the Company's benefit plans (including, as they become available, savings, profit-sharing, life, disability, health, accident and other programs), will accrue three weeks paid vacation per year and be entitled to paid holidays in accordance with the Company's vacation policy.

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

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

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

6. Borrowings

On June 10, 2010, the Company entered into a loan agreement (as amended by the Loan Amendment (as defined below), the "Loan Agreement") with TMG Colorado. Pursuant to the Loan Agreement, TMG Colorado agreed to provide the Company with a revolving line of credit in the principal amount of up to $1,564,000 (as renewed, extended and increased by the Amended Loan (as defined below), the "Loan") pursuant to a revolving credit note (the "Note"). On March 31, 2011 (the "Effective Date"), the Company entered into a first amendment to the Loan Agreement (the "Loan Amendment") with TMG Colorado. Pursuant to the Loan Amendment, TMG Colorado agreed to provide the Company with a renewal and extension of its revolving line of credit in the principal amount of up to an aggregate of $2,564,000 (the "Amended Loan"), an increase of $1,000,000 over the original Loan. Interest accrues on the outstanding principal amount of the Note at the rate of 10% per annum. In accordance with the Loan Amendment, the first of such interest payments shall be due and payable upon the earlier of: (i) thirty days following the date that the Company secures and closes upon long term financing in a principal amount not less than $3,000,000; or (ii) September 30, 2011. As of September 30, 2011, the Company is in negotiations to extend this first interest payment to July 1, 2012. Subsequent interest payments shall be due and payable thereafter on the last day of every calendar quarter (December 31, March 31, June 30 and September 30) during the term of the Loan Agreement. The Amended Loan matures on June 30, 2012 and may be prepaid at anytime without premium or penalty. As a result, the outstanding balance at September 30, 2011 is classified as a current liability. Aside from the changes described above, the remaining provisions of the Loan Agreement remain in full force and effect. As of September 30, 2011, the Company had borrowed $2,564,000 under the Note and an additional $760,000 which will be subject to the revised Note currently under negotiation.

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

7. Related Parties

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

On June 10, 2010, the Company entered into the Consulting Agreement with TMG. On March 31, 2011, the Company entered a first amendment to the Consulting Agreement with TMG (the “Amended Consulting Agreement”). Under the Amended Consulting Agreement, the first payment of $62,000 is due and payable upon the earlier of: (i) thirty days following the date that the Company secures and closes upon long term financing in a principal amount not less than $3,000,000; or (ii) September 30, 2011. As of September 30, 2011, the Company is in negotiations to extend this first payment to July 1, 2012. The Company will then make 11 quarterly payments of $62,000 on the last day of every calendar quarter (December 31, March 31, June 30 and September 30) through the term of the Amended Consulting Agreement which is contemplated to end on December 31, 2014. The total aggregate payments under the Amended Consulting Agreement remain at $744,000. As of September 30, 2011, the Company had accrued $252,960 associated with the consulting agreement. The Company currently has the Loan Agreement with TMG's affiliate, TMG Colorado, and another affiliate of TMG, TMG Holdings, LLC, is the Company's second largest stockholder.

8. Capital Stock

As of September 30, 2011, there were 72,372,198 outstanding shares of common stock and no issued and outstanding shares of preferred stock.

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

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

On January 25, 2010, the Company conducted a four-for-one forward split of its common stock, in which each share of our issued and outstanding common stock as of January 25, 2010 was converted into four shares of common stock. Accordingly, all share amounts referenced herein are calculated on a post-split basis notwithstanding that certain grants or issuances were made prior to the date of the forward split. In addition, all references in the accompanying financial statements to the number of common shares and per share amounts have been retroactively adjusted to reflect the forward stock split.

9. Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth, as of September 30, 2011, certain information related to the Company’s compensation plans under which shares of its common stock are authorized for issuance.

Plan Category	Number of securities to be Issued upon Exercise of Outstanding Options (a)		Average Exercise Price of Outstanding Options		Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders		12,405,001	$	0.05		1,982,501

Equity compensation plans not approved by security holders		-	$	-		-
Total		12,405,001	$	0.05		1,982,501

On October 27, 2009, the Company's board of directors adopted the Verecloud 2009 Equity Incentive Plan (the "Incentive Plan"). The purpose of the Incentive Plan is to benefit the Company’s stockholders by furthering the growth and development of the Company by affording an opportunity for stock ownership to attract, retain and provide incentives to employees and directors of, and non-employee consultants to, the Company and its affiliates, and to assist the Company in attracting and retaining new employees, directors and consultants; to encourage growth of the Company through incentives that are consistent with the Company’s goals; to provide incentives for individual performance; and to promote teamwork.

Under the Incentive Plan, the board of directors in its sole discretion, may grant stock options, stock appreciation rights, restricted stock, restricted stock units, bonus stock, deferred stock or other equity-based awards (each an "Award") to the Company’s employees, directors and consultants (or those of the Company’s affiliates). The Awards available under the Incentive Plan also include performance-based Awards, which would have pre-established performance goals that relate to the achievement of the Company’s business objectives. The performance-based stock Awards available under the Incentive Plan are intended to comply with the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended, to allow such Awards, when payable, to be tax deductible by the Company.

On June 22, 2010, the board of directors of Verecloud approved the increase in the amount of shares reserved for issuance under the Incentive Plan from 8,000,000 shares of common stock to 16,000,000 shares. To the extent that an Award expires, ceases to be exercisable, is forfeited or repurchased by the Company, any shares subject to the Award may be used again for new grants under the Incentive Plan. In addition, shares tendered or withheld to satisfy the grant or exercise price or tax withholding obligation with respect to any Award (other than with respect to options) may be used for grants under the Incentive Plan. The maximum number of shares of common stock that may be subject to one or more Awards to a participant pursuant to the Incentive Plan during any fiscal year of the Company is 8,000,000 shares.

As of September 30, 2011, 14,017,499 options to acquire shares of common stock and restricted shares have been issued under the Incentive Plan leaving 1,982,501 shares of common stock remaining available for option and stock awards. Of the 14,017,499 options to acquire shares of common stock issued, 108,333 were exercised in the three months ended September 30, 2011. In general, each option vests evenly on the last day of each fiscal quarter, based on a three-year period commencing upon the employee's original date-of-hire. As of September 30, 2011, 9,879,167 options have vested.

The following table summarizes the activity under the Company’s stock option plans:


	Number of Shares		Weighted- Average Exercise Price		Aggregate Intrinsic Value (1)
Outstanding as of June 30, 2011		14,115,835	$	.05	$	-
Granted		200,000	$	.20		-
Exercised		(108,333)	$	.07		-
Expired		(1,802,500)	$	.06		-
Outstanding as of September 30, 2011		12,405,001	$	.05	$	-

(1)	Amounts represent the difference between the exercise price and the fair market value of common stock at each period end for all in the money options outstanding.

Stock Based Compensation

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

There were 200,000 stock options granted and subsequently cancelled, due to not meeting the performance goals of the options, in the three months ended September 30, 2011. As of September 30, 2011, there was $78,933 of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted average service period of 5.3 years. The Company used the publicly traded market price on the date of grant as the fair market value of the Company’s stock. The Company utilizes historical volatility of other entities in a similar line of business for a period commensurate with the contractual term of the underlying financial statements. As of September 30, 2011, the Company had issued 14,017,499 options to purchase common stock and 9,879,167 of the Company’s stock options have vested. The Company recognized stock-based compensation expense of $41,932 for the three months ended September 30, 2011.

10. Stock Warrants

On June 11, 2010, the Company issued to Pat and Ann Burke (collectively, the "Burkes") a common stock purchase warrant pursuant to which the Burkes may purchase up to 1,250,000 shares of the Company's common stock at $.01 per share. The warrant is exercisable for five years and may be exercised on a cashless basis.

On August 12, 2010, upon approval by the Company board of directors, Phillip Tonge was elected as a director (the "Tonge Appointment"). In connection with the Tonge Appointment, the Company issued Mr. Tonge a warrant (the "Tonge Warrant") to purchase 200,000 shares of common stock at $0.02 per share. The shares underlying the Tonge Warrant will vest equally over five consecutive quarters commencing on September 30, 2010 with full vesting occurring on September 30, 2011. As of September 30, 2011, 200,000 shares had vested and the value of these vested shares was estimated at $1,614 using the Black-Scholes option-pricing model. It was recorded as an increase to additional paid in capital.

On August 24, 2010, upon approval by the Company board of directors, Dr. Hossein Eslambolchi was elected as a director (the "Eslambolchi Appointment"). In connection with the Eslambolchi Appointment, the Company issued to Dr. Eslambolchi a warrant (the "Eslambolchi Warrant") to purchase 600,000 shares of the Company's common stock, at $0.07 per share. As consideration for Dr. Eslambolchi's prior advisory service to the Company over a two-year period commencing January 29, 2009, 450,000 of the shares underlying the Eslambolchi Warrant vested as of August 24, 2010. As of September 30, 2011, 600,000 shares had vested and the value of these vested shares was estimated at $9,682 using the Black-Scholes option-pricing model. It was recorded as an increase to additional paid in capital.

On March 31, 2011 and in connection with the Consuting Agreement discussed in Note 6, the Company also entered into a warrant purchase agreement (the "Purchase Agreement") with TMG. Pursuant to the Purchase Agreement, the Company issued TMG a common stock purchase warrant (the "Warrant"), pursuant to which TMG may purchase up to 10,000,000 shares of the Company's common stock for $.01 per share. The Warrant is exercisable for three years and may be exercised on a cashless basis. The Purchase Agreement also provided for customary representations and warranties regarding the accredited investor status of TMG under Rule 501 of Regulation D, promulgated pursuant to the Securities Act of 1933, as amended. On the date of the grant, Verecloud’s common stock closed at $0.30 per share. Under generally accepted accounting principles, the trading price of the shares was used as the calculated fair market value on the date of issuance. Using the Black-Scholes model, the value of the warrant issued to TMG was calculated as $2,827,928. Since the First Amendment did not result in additional services being performed by TMG, this entire amount has been booked to expense and classified as stock based compensation in the year ended June 30, 2011.

On January 26, 2010, the board of directors adopted the Verecloud, Inc. Unit Bonus Plan (the "Unit Bonus Plan") and granted unit awards ("Unit Awards") to certain current key employees of the Company pursuant to the terms of the Unit Bonus Plan. The Unit Bonus Plan provides that a participant’s Unit Award will vest and become payable only upon one of the following events: (i) a change in control of the Company; (ii) a valuation of the Company equal to or greater than $30 million that is sustained for a period of 15 consecutive days (a "Market Valuation Event"); or (iii) the participant’s involuntary separation from service by the Company without cause or by reason of the participant’s death or disability. On September 16, 2010, the Company’s board of directors voted to eliminate a Market Evaluation Event as a trigger to pay a Unit Award. On June 29, 2011, the Board approved the termination of the Unit Bonus Plan effective June 30, 2011 and authorized the Company's officers to obtain written consent of the Unit Bonus Plan termination from each individual who participated in the Unit Bonus Plan. In connection with the termination of the Unit Bonus Plan, the Board granted each individual who participated in the Unit Bonus Plan a fully vested Common Stock Purchase Warrant (each, a "Common Stock Purchase Warrant") with an exercise price of $0.20, which was the closing price of the Company's common stock on June 30, 2011, the date of grant. Using the Black-Scholes model, the value of the warrants issued to participants below was calculated as $1,201,260. Each Common Stock Purchase Warrant has a 10 year term and provides for a cashless exercise. The Common Stock Purchase Warrants entitle the holder thereof to purchase the following number of shares of the Company's common stock for a period of 10 years following the date of grant:

Participant	Common Stock Purchase Warrants
Mark Faris, Chairman of the Board		3,480,000
Mike Cookson, Chief Operating Officer		1,740,000
William Perkins, Chief Technology Officer		1,740,000
David Loomis, Vice President, Technical Solutions		1,395,000
Total		8,355,000

12. Subsequent Events

In October 2011, the Company borrowed $350,000 pursuant to the Amended Loan described in Note 6 and, as of November 10, 2011, had $3,674,000 outstanding under the Loan Agreement.

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

The following discussion and analysis should be read in conjunction with our consolidated financial statements, including the notes thereto, appearing in our Annual Report on Form 10-K for the year ended June 30, 2011 filed on September 28, 2011.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q and other materials we will file with the SEC contain, or will contain, disclosures which are forward-looking statements. Forward-looking statements include all statements that do not relate solely to historical or current facts, such as, but not limited to, the discussion of economic conditions in market areas and their effect on revenue growth, the discussion of our growth strategy, the effectiveness of our management information systems, and the availability of financing and working capital to meet funding requirements, and can generally be identified by the use of words such as "may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan" or "continue." These forward-looking statements are based on the current plans and expectations of our management and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. These factors include, but are not limited to: economic conditions in the telecommunications industry; our ability to service and repay our debt financing; increased competition in the industry; our dependence on a certain customer; the availability of and costs associated with potential sources of financing; difficulties associated with managing future growth; our inability to manage our customer’s projects; our ability to continue as a going concern; our ability to raise funds to operate; the loss of key personnel; and our ability to attract and retain new qualified personnel.

For a discussion of the factors that could cause actual results to differ materially from the forward-looking statements see the "Liquidity and Capital Resources" section under "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in this item of this report and the other risks and uncertainties that are set forth elsewhere in this report or detailed in our other SEC reports and filings. We believe it is important to communicate our expectations. However, our management disclaims any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

Overview

For the past five years, Verecloud has driven operational improvements and innovation with clients across the telecommunications landscape through professional services contracts. From architecture design to solution, or technology selection to delivery and implementation, Verecloud has provided professional service solutions in areas of operational support systems (service creation, order fulfillment, inventory, activation and provisioning, assurance and billing, among others). For the periods covered by this Quarterly Report on Form 10-Q, the Company’s revenue stream consists of both billable professional services and subscription fees.

In early 2011, the Company shifted the primary focus of its strategy from marketing Cloudwrangler™ directly to communication service providers ("CSPs") to aggregating and integrating the diverse offerings of multiple cloud service vendors and delivering the services as a complete, customized suite. Verecloud will reach users directly or through channel partners. Channel partners include value added resellers ("VARs"), managed service providers ("MSPs") and CSPs. These channel partners have direct access to the SMB market and Verecloud can use these relationships to reach a broader target market. Its primary customer base is small and medium sized businesses (referred to as "SMB" and broadly defined as business organizations with fewer than 500 employees). In the United States also, there are more than 8 million SMBs ranging in size from a single employee business to up to 500 employees. In addition, opportunities exist for Verecloud to market and sell its services internationally.

The success of this new strategy will depend on several major factors. First, Verecloud's ability to acquire additional funding to execute on the business which consists of: (i) continued development and upgrade of Cloudwrangler™; (ii) executing on the go-to-market strategy of directly marketing, selling and serving SMB customers; and (iii) successfully proving the business model in the marketplace and driving customer growth in the next 12 months. The Company is currently selling cloud offerings to SMBs. However, the Company does not expect to generate significant revenue until early 2012 and expects to operate at a loss until that time. The Company is aggressively moving forward on executing on their strategy and concurrently, is actively engaged in discussions to secure long term funding of $5-$20 million. If long term funding is not received, the Company will either have to obtain additional short term funding or will be required to significantly curtail operations to continue as a going concern.

Significant Accounting Policies and Estimates

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

The Company’s significant accounting policies are more fully described in Note 2 to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

Recent Accounting Pronouncements

The Company evaluates pronouncements of various authoritative accounting organizations, primarily the Financial Accounting Standards Board ("FASB"), the Securities and Exchange Commission (the "SEC"), and Emerging Issues Task Force, to determine the impact of new pronouncements on GAAP and the preparation of our financial statements. The Company has adopted the following new accounting standards:

In October 2009, FASB published Accounting Standards Update ("ASU"), 2009-14, Certain Revenue Arrangements That Include Software Elements ("ASU 2009-14") , to provide guidance for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and non-software components that function together to deliver the product’s essential functionality are excluded from the software revenue guidance in Accounting Standards Codification Subtopic 985-605, Software-Revenue Recognition . In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance. ASU 2009-14 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. This pronouncement did not have any impact on the Company’s condensed consolidated unaudited financial statements for the three and six months ended December 31, 2010 and 2009.

In January 2010, FASB published ASU 2010-06, Improving Disclosures about Fair Value Measurement, which requires additional disclosures regarding the activity in fair value measurements classified as Level 3 in the fair value hierarchy. Disclosure of activity in Level 3 fair value measurements is required for fiscal years beginning after December 15, 2010. Early adoption is permitted. We do not have activity that requires disclosure in accordance with this pronouncement.

There were no other accounting standards and interpretations issued recently which are expected to have a material impact on the Company’s financial position, operations or cash flows.

SELECTED OPERATING STATISTICS

We periodically review certain key business metrics, within the context of our articulated performance goals, in order to evaluate the effectiveness of our operational strategies, allocate resources and maximize the financial performance of our business. The selected operating statistics include the following:

	Selected Operating Statistics

	September 30,			June 30,
	2011			2011

Net business users (1)		32			0

Business user churn (2)		0.0	%		0.0	%

Total business users (3)		32			0

Average monthly revenue
per business user	$	13.00		$	0.00

Overall gross margin		N/A	*		0.0	%

Business user acquisition cost		N/A	*	$	0.00

Average number of services
per business user		1.46			0

Total business customers (4)		14			0

Average number of business
users per business customer		2.29			0

Outlook

With the change in our overall strategy in March 2011, we are now focused on aggregating and integrating the diverse offerings of multiple cloud service vendors and delivering the services as a complete, customized suite. We will reach users directly or through channel partners. Channel partners include VARs, MSPs and CSPs. These channel partners have direct access to the SMB market and we can use these relationships to reach a broader target market. Our primary customer base is the SMBs. In the United States there are more than 8 million SMBs ranging in size from single employee business to up to 500 employees. In addition, opportunities exist to market and sell our services internationally.

Revenue

Our long term strategy is to drive revenue from selling Cloudwrangler™ directly to SMBs. As noted above, we do not expect significant revenue from this new strategy until 2012. Prior to this shift in our long term strategy, LightSquared made up approximately 90% of our revenue in the prior year but will provide minimal revenue going forward.

Cost of Goods Sold and Operating Expenses

Our strategy reflects a new approach to offering cloud services to SMBs. As a result, we are in the process of fully developing our go-to-market strategy and expected cost structure. However, our expense structure is expected to focus on: (i) branding and marketing to drive awareness of our offering; (ii) customer support costs to serve our customer base from a technical and operations perspective; (iii) ongoing development of our platform; and (iv) continued expansion of the products and services that we offer to customers. We expect overhead costs to remain fairly consistent with most staffing growth driven by variable changes in the business.

Results of Operations

Comparison of the Three Months Ended September 30, 2011 and 2010

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


	Three months ended September 30,
	2011						2010
				% of						% of
	Amount			Revenues			Amount			Revenues
	in dollars except percentages

Revenue	$	140,862			100	%	$	1,510,542			100	%

Cost of goods sold (1)		295,046			209	%		677,431			45	%

Gross profit		(154,184	)		-109	%		833,111			55	%

Operating expenses		1,049,039			745	%		954,327			63	%

Operating income (loss)		(1,203,223	)		-854	%		(121,216	)		-8	%

Other income (expense)		(63,271	)		-45	%		(26,634	)		-2	%

Income tax expense (benefit)		-			0	%		-			0	%

Net income (loss)	$	(1,266,494	)		-899	%	$	(147,851	)		-10	%

(1) Includes software amortization of $222,096

Three Months Ended September 30, 2011

Revenue: Revenue for the three months ended September 30, 2011 decreased 91% compared to 2010. This decrease was driven by lower revenue from LightSquared in 2011 compared to 2010.

Cost of Goods Sold: Cost of goods sold, which consists mainly of staff related expenses (employees and contractors) and travel expenses for the three months ended September 30, 2011 decreased 56% compared to the three months ended September 30, 2010. The decrease is driven both by the lower revenue in 2011 versus 2010 and lower billable rates at LightSquared in 2011 compared to comparable professional service engagements in 2010. Cost of goods sold for the three months ended September 30, 2011 also included $222,096 associated with amortization of capitalized software cost.

Operating Expenses: Operating expenses for the three months ended September 30, 2011 increased 10% or $94,712 versus the comparable period in 2010. This increase is mainly driven by increases in consulting expenses and research and development cost.

Other Income (Expense): Other income (expense) for the three months ended September 30, 2011 was ($63,271) versus $(26,634) for the comparable period in 2010 and consists primarily of interest expense. For the three months ended September 30, 2011 and 2010, interest expense was $71,501 and $26,768, respectively. For the three months ended September 30, 2011, interest expense relates to the outstanding line of credit. In 2010, the interest expense was related to the note payable balance outstanding as of September 30, 2010.

Net Income (Loss): For the three months ended September 30, 2011, we reported a net loss of $1,266,494 compared to a net loss of $147,851 for the three months ended September 30, 2010.

Liquidity and Capital Resources

Cash Flow Activity

Cash and cash equivalents were $74,259 as of September 30, 2011.

The change in cash and cash equivalents during the periods presented was as follows:

	Three months ended September 30,
	2011			2010


Net cash from (used in) operating activities	$	(930,313	)	$	137,467
Investing Activities		(114,852	)		(41,760	)
Financing Activities		917,167			450,000
Net (decrease) in cash and cash equivalents	$	(127,998	)	$	545,707
Cash and cash equivalents at the beginning of the period		202,256			197,151
Cash and cash equivalents at the end of the period	$	74,259		$	742,858

Three Months Ended September 30, 2011

Operations: Net cash used in operating activities during the three months ended September 30, 2011 was $930,313 compared to net cash provided in operating activities of $137,466 during the comparable period of 2010, an increase of $1,067,779. This increase is mainly driven by higher revenue in the current quarter versus the prior year.

Investing: Net cash used in investing activities, consisting primarily of capital expenditures and capitalized software costs, for the three months ended September 30, 2011 was $114,852 compared to $41,760 for three months ended September 30, 2010. The increase is driven by capitalization of software costs of $126,219 in the three months ended September 30, 2011. Our capital expenditures consist mainly of office and computer equipment.

Financing: Net cash provided by financing activities for the three months ended September 30, 2011 was $917,167 compared to 450,000 for the three months ended September 30, 2010. The increase is driven by an increase in the Line of Credit.

As of September 30, 2011, total current assets were $269,156, which consisted of $74,259 of cash, $122,550 of accounts receivable and $72,347 of other current assets.

Accounts receivable at September 30, 2011 were $122,550 compared to $128,050 at June 30, 2011. All accounts receivable outstanding at September 30, 2011 have been collected or are within normal collection terms as of September 30, 2011.

Accounts payable and accrued liabilities at September 30, 2011 were $755,815 compared to $756,506 at June 30, 2011.

As of September 30, 2011, we had a negative working capital balance of $3,810,660, consisting of current assets of $269,156 and current liabilities of $4,079,816. This represents a decrease of $1,032,997 from a negative working capital balance of $2,777,662 at June 30, 2011. Our current assets consist primarily of cash, which is deposited in short term, interest bearing accounts, and accounts receivable. The Company intends to fund operations for the twelve months ending June 30, 2012 through a combination of (i) ongoing cash flow provided by cloud services sales to SMBs, (ii) the additional expected funding from TMG, and (iii) management of variable expenses.

Off-Balance Sheet Arrangements

As of and subsequent to September 30, 2011, we have no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable to smaller reporting companies.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Our chief executive officer and President evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and President concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our president, as appropriate to allow timely decisions regarding disclosure.

Changes in Internal Control over Financial Reporting. During the three months ended September 30, 2011, there were no changes in Verecloud’s internal controls over financial reporting, known to the chief executive officer or the chief financial officer, that have materially affected, or are reasonably likely to materially affect Verecloud’s internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Not applicable to smaller reporting companies.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On November 10, 2010, the Company entered into an agreement with ChangeWave, Inc. ("ChangeWave") in which ChangeWave will provide investor relations and shareholder marketing services for the Company. The term of agreement is November 1, 2010 to October 31, 2011. As compensation for these services, ChangeWave will receive 1,200,000 shares of restricted common stock over the term of the agreement. These shares are earned and payable quarterly beginning on November 1, 2010 with the final installment due on August 1, 2011. The contract may be terminated by the Company without cause with ten days notice to ChangeWave. In the event of termination, the Company is obligated for only those shares issued prior to the date of termination. During the period covered by this Quarterly Report on Form 10-Q, the Company issued the second installment of 300,000 shares of common stock to ChangeWave. As of September 30, 2011 and in connection with payment of the installments, the Company's chief executive officer has surrendered 1,200,000 shares of common stock and the Company has re-issued 1,200,000 shares of common stock to ChangeWave. The Company has recorded operating expense of $24,000 in the three months ended September 30, 2011.

Issuance of the shares described above were not registered under the Securities Act of 1933, as amended. The issuance of these shares were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. The Company believes that ChangeWave is accredited and/or a sophisticated investor. The Company engaged ChangeWave to provide public company investor relations services and ChangeWave is familiar with working with public companies of similar size and stage of development of the Company. ChangeWave's executives had the opportunity to meet with the Company and had an opportunity to learn about the Company's business, operations, customers, financial position, management and prospects, among other things. The issuance of restricted common stock to ChangeWave in exchange for ChangeWave's investor relations services is customary with the Company's past practice. Because of ChangeWave's experience with similar companies and the customary nature of this arrangement, the Company believes that ChangeWave is experienced with analyzing the risks associated with acquiring the Company's common stock and that such acquisition could result in a loss of all or part of its value. Furthermore, for these reasons, the Company also believes that ChangeWave understands the illiquid nature of the Company's common stock and anticipates that it may need to hold the securities indefinitely.

Aside from the issuance described above, all unregistered issuances of equity securities during the period covered by this report have been previously included in Current Reports on Form 8-K.

Item 3. Defaults Upon Senior Securities

None.

Item 4. [Removed and Reserved]

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.		Description

10.1		First Amendment to Loan Agreement by and between Verecloud, Inc. and TMG Holdings Colorado, LLC, dated March 31, 2011. (Incorporated herein by reference to Exhibit 10.1 to Form 8-K for Verecloud, Inc. filed on April 6, 2011) (File No. 000-52882).
10.2		Revolving Credit Note dated March 31, 2011 by Verecloud, Inc. (Incorporated herein by reference to Exhibit 10.2 to Form 8-K for Verecloud, Inc. filed on April 6, 2011) (File No. 000-52882).
10.3		Warrant Purchase Agreement by and between Verecloud, Inc. and The Mesa Group, Inc., dated March 31, 2011. (Incorporated herein by reference to Exhibit 10.3 to Form 8-K for Verecloud, Inc. filed on April 6, 2011) (File No. 000-52882).
10.4		Common Stock Purchase Warrant by Verecloud, Inc., dated March 31, 2011. (Incorporated herein by reference to Exhibit 10.4 to Form 8-K for Verecloud, Inc., filed on April 6, 2011 (File No. 000-52882).
10.5		First Amendment to Independent Contractor Consulting Agreement by and between Verecloud, Inc. and The Mesa Group, Inc., dated March 31, 2011. (Incorporated herein by reference to Exhibit 10.5 to Form 8-K for Verecloud, Inc., filed on April 6, 2011) (File No. 000-52882).
31.1		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith).
31.2		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934 (filed herewith).
32.1		Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema
101.CAL		XBRL Taxonomy Extension Calculation Linkbase
101.DEF		XBRL Taxonomy Extension Definition Linkbase
101.LAB		XBRL Taxonomy Extension Label Linkbase
101.PRE		XBRL Taxonomy Extension Presentation Linkbase

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	VERECLOUD, INC.

Date: November 14, 2011	By:	/s/ John McCawley
		John McCawley
		Chief Executive Officer

Date: November 14, 2011	By:	/s/ William E. Wood III
		William E. Wood III
		President, Principle Accounting Officer, and Interim Chief Financial Officer

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