UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

S

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

 

For the Quarterly Period Ended June 30, 2012

 

OR

 

£

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: 0-26053

 

MDU COMMUNICATIONS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		84-1342898
(State of incorporation)		(I.R.S. Employer Identification No.)
60-D Commerce Way, Totowa, New Jersey		07512
(Address of principal executive offices)		(Zip Code)

 

(973) 237-9499

(Registrant’s telephone number, including area code)

 

None

(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 (§32.405 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 ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act: Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class		Outstanding at August 14, 2012
Common Stock, $0.001 par value per share		5,672,820 shares

 

 

 

MDU COMMUNICATIONS INTERNATIONAL, INC.

INDEX

				Page
PART I.	FINANCIAL INFORMATION			3
	Item 1.	Financial Statements		3
		Condensed Consolidated Balance Sheets – June 30, 2012 (unaudited) and September 30, 2011		3
		Condensed Consolidated Statements of Operations – Nine and Three Months Ended June 30, 2012 and 2011 (unaudited)		4
		Condensed Consolidated Statement of Stockholders’ Deficiency - Nine Months Ended June 30, 2012 (unaudited)		5
		Condensed Consolidated Statements of Cash Flows - Nine Months Ended June 30, 2012 and 2011 (unaudited)		6
		Notes to Condensed Consolidated Financial Statements (unaudited)		8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		26
	Item 4.	Controls and Procedures		26
PART II.	OTHER INFORMATION			27
	Item 1.	Legal Proceedings		27
	Item 1A.	Risk Factors		27
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		28
	Item 3.	Defaults upon Senior Securities		28
	Item 4.	Mine Safety Disclosures		28
	Item 5.	Other Information		28
	Item 6.	Exhibits		28

 

 

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

 

MDU COMMUNICATIONS INTERNATIONAL, INC.

Condensed Consolidated Balance Sheets

June 30, 2012 (Unaudited) and September 30, 2011 (See Note 1)

 

		June 30,				September 30,
		2012				2011
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	104,096			$	84,747
Accounts and other receivables, net of an allowance of $1,609,786 and $1,390,686			1,181,755				1,780,362
Prepaid expenses and deposits			122,209				613,314
TOTAL CURRENT ASSETS			1,408,060				2,478,423
Telecommunications equipment inventory			657,424				554,515
Property and equipment, net of accumulated depreciation of $36,809,366 and $32,941,454			17,474,580				19,867,246
Intangible assets, net of accumulated amortization of $8,863,762 and $8,212,000			1,327,205				2,024,451
Deposits, net of current portion			69,313				67,214
Deferred finance costs, net of accumulated amortization of $1,505,479 and $1,248,252			217,969				275,197
TOTAL ASSETS		$	21,154,551			$	25,267,046
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
CURRENT LIABILITIES
Accounts payable		$	2,319,463			$	2,511,776
Other accrued liabilities			690,947				1,240,756
Credit line borrowing, net of debt discount			29,537,965				—
Current portion of deferred revenue			604,963				815,514
TOTAL CURRENT LIABILITIES			33,153,338				4,568,046
Deferred revenue, net of current portion			33,707				87,788
Credit line borrowing, net of debt discount			—				27,138,457
TOTAL LIABILITIES			33,187,045				31,794,291
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ DEFICIENCY
Preferred stock, par value $0.001; 5,000,000 shares authorized, none issued			—				—
Common stock, par value $0.001; 35,000,000 shares authorized, 5,542,958 and 5,503,111 shares issued and 5,525,516 and 5,485,669 outstanding			5,544				5,504
Additional paid-in capital			61,952,159				61,843,689
Accumulated deficit			(73,921,873	)			(68,308,114	)
Less: Treasury stock; 17,442 shares			(68,324	)			(68,324	)
TOTAL STOCKHOLDERS’ DEFICIENCY			(12,032,494	)			(6,527,245	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY		$	21,154,551			$	25,267,046

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

 

MDU COMMUNICATIONS INTERNATIONAL, INC.

Condensed Consolidated Statements of Operations

Nine and Three Months Ended June 30, 2012 and 2011

(Unaudited) 

 

		Nine Months Ended June 30,								Three Months Ended June  30,
		2012				2011				2012				2011
REVENUE		$	20,802,991			$	20,254,067			$	6,834,792			$	6,815,207
OPERATING EXPENSES
Direct costs			10,136,900				9,099,461				3,322,766				3,130,141
Sales expenses			1,101,715				1,084,501				341,417				363,603
Customer service and operating expenses			4,660,344				4,432,407				1,441,597				1,479,022
General and administrative expenses			3,191,920				3,376,774				993,532				1,210,875
Depreciation and amortization			4,895,143				5,665,545				1,670,757				1,923,371
Gain on sale of customers and property and equipment			(250,566	)			(60,416	)			(159,797	)			—
TOTALS			23,735,456				23,598,272				7,610,272				8,107,012
OPERATING LOSS			(2,932,465	)			(3,344,205	)			(775,480	)			(1,291,805	)
Other income (expense)
Interest income			—				19				—				—
Interest expense			(2,681,294	)			(2,203,711	)			(910,916	)			(762,217	)
NET LOSS		$	(5,613,759	)		$	(5,547,897	)		$	(1,686,396	)		$	(2,054,022	)
BASIC AND DILUTED LOSS PER COMMON SHARE		$	(1.02	)		$	(1.02	)		$	(0.31	)		$	(0.37	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING			5,513,857				5,420,287				5,525,516				5,480,359

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

 

MDU COMMUNICATIONS INTERNATIONAL, INC.

Condensed Consolidated Statement of Stockholders’ Deficiency

Nine Months Ended June 30, 2012 (Unaudited)

 

		Common stock								Treasury stock								Additional				Accumulated
		Shares				Amount				Shares				Amount				paid -in capital				deficit				Total
Balance, October 1, 2011			5,503,111			$	5,504				(17,442	)		$	(68,324	)		$	61,843,689			$	(68,308,114	)		$	(6,527,245	)
Issuance of common stock through employee stock purchase plan			2,837				3												5,397								5,400
Issuance of common stock for employee bonuses			8,500				8												10,617								10,625
Issuance of restricted common stock for compensation for services rendered			28,510				29												56,196								56,225
Share-based compensation - employees																			36,260								36,260
Net loss																							(5,613,759	)			(5,613,759	)
Balance, June 30, 2012			5,542,958			$	5,544				(17,442	)		$	(68,324	)		$	61,952,159			$	(73,921,873	)		$	(12,032,494	)

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

 

MDU COMMUNICATIONS INTERNATIONAL, INC.

Condensed Consolidated Statements of Cash Flows

Nine Months Ended June 30, 2012 and 2011 (Unaudited)

 

		Nine Months Ended June 30,
		2012				2011
OPERATING ACTIVITIES
Net loss		$	(5,613,759	)		$	(5,547,897	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Bad debt provision			222,874				349,934
Depreciation and amortization			4,895,143				5,665,545
Share-based compensation expense - employees			36,260				38,784
Charge to interest expense for amortization of deferred finance costs and debt discount			290,446				261,279
Compensation expense for issuance of common stock through employee stock purchase plan			—				28,930
Compensation expense for issuance of common stock for employee bonuses			10,625				31,767
Compensation expense for issuance of common stock for employee services			—				59,790
Compensation expense for issuance of common stock for compensation			56,225				88,770
Compensation expense accrued to be settled through the issuance of restricted common stock			73,652				—
Gain on sale of customers and property and equipment			(250,566	)			(60,416	)
Loss on write-off of property and equipment			10,261				33,446
Changes in operating assets and liabilities:
Accounts  receivable			375,733				(631,419	)
Prepaid expenses and deposits			489,006				(33,114	)
Accounts payable			(192,313	)			492,192
Other accrued liabilities			(618,061	)			(614,380	)
Deferred revenue			(264,632	)			237,458
Net cash provided by (used in) operating activities			(479,106	)			400,669
INVESTING ACTIVITIES
Purchases of property and equipment			(2,005,610	)			(2,673,151	)
Proceeds from the sale of customers and property and equipment			337,775				89,651
Acquisition of intangible assets			—				(621,220	)
Net cash used in investing activities			(1,667,835	)			(3,204,720	)
FINANCING ACTIVITIES
Net proceeds from credit line borrowing			2,366,290				2,792,701
Deferred financing costs			(200,000	)			(200,000	)
Proceeds from purchase of common stock through employee stock purchase plan			—				7,135
Net cash provided by financing activities			2,166,290				2,599,836
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			19,349				(204,215	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			84,747				324,524
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	104,096			$	120,309

 

 

		Nine Months Ended June 30,
		2012				2011
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of  26,090 shares of restricted common stock for services rendered		$	53,224			$	—
Issuance of 2,837 shares of common stock for accrued compensation		$	5,400			$	—
Issuance of 34,255 shares of common stock for employee bonuses		$	—			$	104,862
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid		$	2,361,184			$	1,918,842

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

 

MDU COMMUNICATIONS INTERNATIONAL, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.

BASIS OF PRESENTATION AND OTHER MATTERS

 

Basis of Presentation:

 

The accompanying unaudited condensed consolidated financial statements of MDU Communications International, Inc. and its subsidiaries (“Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“United States GAAP”) for interim financial information for public companies and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with United States GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the financial statements include all material adjustments necessary (which are of a normal and recurring nature) for the fair presentation of the financial statements for the interim periods presented. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto (“Audited Financial Statements”) contained in the Company’s Annual Report for the fiscal year ended September 30, 2011 on Form 10-K filed with the Securities and Exchange Commission on December 23, 2011. The results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year. The accompanying condensed consolidated balance sheet as of September 30, 2011 has been derived from the audited balance sheet as of that date included in the Form 10-K.

 

Liquidity Issues:

 

As of June 30, 2012, the Company had available cash and remaining available Credit Facility (see Note 5), collectively, of $521,840. Based on current projections, the Company does not expect its available cash, estimated revenues and remaining Credit Facility to be sufficient to cover liquidity needs for the next twelve months. Without additional funding sources or proceeds from asset sales, the Company forecasts that its available capital may be depleted sometime during its first or second fiscal quarter of 2013. Additionally, the Company will be facing maturity and repayment of its $30 million Credit Facility on June 30, 2013.

 

In order for the Company to continue operations and to fully implement its business plan, it needs to raise additional capital. The Company has been actively pursuing various initiatives aimed at resolving its need for additional capital, namely asset sales or a merger. The asset sale negotiations have met with some success for individual out-of-market assets, but have not yet resulted in larger asset sales. The Company has previously discussed and disclosed the option of merger as a viable alternative to continue its business operations and growth. In furtherance thereof, on July 10, 2012, the Company executed a merger agreement with Multiband Corporation, whereby the Company would effectively become an operating subsidiary of Multiband. Although several conditions precedent still exist, the Company is working toward closing the merger in its first fiscal quarter of 2013. However, the Company’s ability to close asset sales or to consummate the merger remains uncertain. Unless the Company is able, in the near-term, to raise additional capital or enter into a merger, there is substantial doubt about the Company’s ability to continue as a going concern.

 

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

 

Description of Business:

 

The Company provides delivery of digital satellite television programming and high-speed (broadband) Internet service to residents of multi-dwelling unit properties such as apartment buildings, condominiums, gated communities and universities. Management considers all of the Company’s operations to be in one industry segment.

 

 

Use of Estimates:

 

The preparation of the consolidated financial statements in conformity with United States GAAP 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 revenues and expenses during the reporting period.

 

Significant estimates are used for, but not limited to, revenue recognition with respect to a new subscriber activation subsidy, allowance for doubtful accounts, useful lives of property and equipment and amortizable intangible assets, fair value of equity instruments and valuation of deferred tax assets. Actual results could differ from those estimates.

 

Principles of Consolidation:

 

The unaudited, condensed consolidated financial statements include the accounts of MDU Communications International, Inc. and its wholly owned subsidiary, MDU Communications (USA) Inc. All intercompany balances and transactions are eliminated.

 

Recently Issued and Not Yet Effective Accounting Pronouncements:

 

In September 2011, the FASB approved a revised standard “Goodwill Impairment Testing” that simplifies how entities test goodwill for impairment. The revised standard permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The standard does not address impairment testing of indefinite-lived intangibles. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect the adoption of the revised standard to have an effect on its consolidated results of operations and financial position, when adopted, as required, on October 1, 2012.

 

In December 2011, the FASB approved an amendment in certain pending paragraphs in Accounting Standards “Comprehensive Income: Presentation of Comprehensive Income” to effectively defer only those changes that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendments will be temporary to allow the FASB time to re-deliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements. The amendment to “Comprehensive Income: Presentation of Comprehensive Income” is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect the adoption of the revised standard to have an effect on its consolidated results of operations and financial position, when adopted, as required, on October 1, 2012.

 

Recently Adopted Accounting Pronouncements:

 

In March 2011, accounting standards update on “Troubled Debt Restructuring” was issued. The update clarifies which loan modifications constitute troubled debt restructurings. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist, (a) the restructuring constitutes a concession, and (b) the debtor is experiencing financial difficulties. For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011. The Company evaluated the effect that the adoption of this standard will have on its consolidated results of operations, financial position and cash flows, and has determined the adoption will have no material impact.

 

 

In April 2011, accounting standards update on “Reconsideration of Effective Control for Repurchase Agreements” was issued. The amendments in this update remove from the assessment of effective control, (a) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (b) the collateral maintenance implementation guidance related to that criterion. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. The guidance is effective for the first interim or annual period beginning on or after December 15, 2011. The Company evaluated the effect that the adoption of this standard will have on its consolidated results of operations, financial position and cash flows, and has determined the adoption will have no impact.

 

2.

EARNINGS (LOSS) PER COMMON SHARE

 

The Company presents “basic” earnings (loss) per common share and, if applicable, “diluted” earnings per common share. Basic earnings (loss) per common share is computed by dividing the net income or loss by the weighted average number of common shares outstanding for the period. The calculation of diluted earnings per common share is similar to that of basic earnings per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, such as those issuable upon the exercise of stock options and warrants, were issued during the period and the treasury stock method was applied.

 

For the nine and three months ended June 30, 2012 and 2011, basic and diluted loss per share were the same, as the Company had net losses for these periods and the effect of the assumed exercise of options and warrants would be anti-dilutive. For the nine and three months ended June 30, 2012 and 2011, the Company had potentially dilutive common shares attributable to options and warrants that were exercisable (or potentially exercisable) into shares of common stock as presented in the following table:

 

		Nine and Three Months Ended June 30,
		2012				2011
Warrants			75,000				175,000
Options			200,780				285,230
Potentially dilutive common shares			275,780				460,230

 

3.

COMMON STOCK, STOCK OPTION AND WARRANT ACTIVITY

 

Share-Based Compensation:

 

The cost of share-based payments to employees, including grants of employee stock options, are recognized in the financial statements based on the portion of their grant date fair values expected to vest over the period during which the employees are required to provide services in exchange for the equity instruments. The Company has selected the Black-Scholes method of valuation for share-based compensation. During the nine months ended June 30, 2012 and 2011, the Company recognized share-based compensation expense for employees of $36,260 and $38,784, respectively, and $9,543 and $16,097 for the three months ended June 30, 2012 and 2011, respectively.

 

Stock Option Plan:

 

The Company’s 2001 Stock Option Plan was approved by the stockholders in 2001 and 560,000 shares of common stock were reserved. Stock options awards are generally granted with an exercise price equal to the market price of the Company’s stock on the date of the grant. The option awards vest quarterly over three years and have a five-year contractual life. Per the terms of the 2001 Stock Option Plan, as of March 20, 2011, the plan expired and no further grants can be made. The following table summarizes information about all of the Company’s stock options outstanding and exercisable as of and for the nine months ended June 30, 2012:

 

 

		Number of Options Outstanding				Weighted Average Exercise Price Per Share				Weighted Average Remaining Contractual Term (years)				Aggregate Intrinsic Value
Outstanding at September 30, 2011			285,230			$	4.00
Granted			—				—
Expired / Forfeited (1)			(84,450	)		$	5.47
Exercised			—				—
Outstanding at June 30, 2012			200,780			$	3.03				2.1			$	-
Exercisable at June 30, 2012			152,743			$	3.24				1.5			$	-

 

 

(1)

During the quarter ended December 31, 2011, 43,500 options expired with an exercise price of $7.50 and a fair market value of $3.80 per share. The entire 43,500 options were vested and the entire fair market value of $165,300 in noncash expense had been recognized in general and administrative expense since their issuance. During the quarter ended March 31, 2012, 5,500 options expired with 500 having an exercise price of $4.00 and a fair market value of $1.29 per share, and 5,000 having an exercise price of $3.00 and a fair market value of $2.54 per share. Of the 500 options, 335 options were vested and of the 5,000 options, 1,668 options were vested with $432 and $4,232 in fair market value noncash expense recognized, respectively, in general and administrative expense since their issuance. During the quarter ended June 30, 2012, 35,450 options expired with 9,500 options having an exercise price of $4.50 and a fair market value of $1.10 per share, 12,500 options having an exercise price of $2.00 and a fair market value of $0.50 per share, 10,500 options having an exercise price of $4.00 and a fair market value of $1.30 per share, and 2,950 options with an exercise price of $2.94 and a fair market value of $2.79 per share. Of the 35,450 options, 30,858 were vested and $29,681 in fair market value noncash expense recognized in general and administrative expense since their issuance.  Due to the expiration of the 2001 Stock Option Plan, the expired options are no longer available to the Company for reissuance.

 

An additional noncash charge of approximately $40,000 is expected to vest and be recognized subsequent to June 30, 2012 over a weighted average period of 17 months for granted options. The charge will be amortized to general and administrative expenses as the options vest in subsequent periods.

 

Employee Stock Purchase Plan:

 

In April of 2009, the stockholders approved the 2009 Employee Stock Purchase Plan (“2009 ESPP”) with a reservation of 150,000 shares of common stock. The purchase price per share under the 2009 ESPP is equal to 85% of the fair market value of a share of Company common stock at the beginning of the purchase period (quarter) or on the last day in a purchase period, whichever is lower. The 2009 ESPP shall terminate on April 23, 2016, or upon the maximum number of shares being issued, or sooner per the discretion of the Board of Directors.

 

During the nine months ended June 30, 2012, the Company issued 2,837 shares of common stock from the 2009 ESPP for employee purchases in the amount of $5,400. The entire $5,400 amount was accrued in the year ended September 30, 2011, but such shares were not issued until fiscal 2012.

 

Additionally, during the nine months ended June 30, 2012, the Company issued 8,500 shares of common stock from the 2009 ESPP for bonus amounts of $10,625, which, pursuant to the 2009 ESPP, employees can apply up to 100% of a bonus award to the 2009 ESPP in return for shares of common stock. As of June 30, 2012, only 2,152 shares remain available for issuance under the 2009 ESPP.

 

Warrants:

 

During the nine and three months ended June 30, 2012, no warrants were granted or exercised, and no warrants expired. As of June 30, 2012, 75,000 warrants remained outstanding at a weighted average exercise price of $5.69 per share.

 

 

Restricted Stock:

 

During the three months ended March 31, 2012, the two independent members of the Board of Directors were each granted 1,210 shares of restricted common stock as compensation in lieu of certain monthly cash payments. As a result, 2,420 shares of restricted common stock were issued during the quarter ended March 31, 2012 with a fair value of $3,001 based on the quoted market price at the grant date. The Company recognized the full expense during the quarter ended March 31, 2012.

 

During the three months ended December 31, 2011, the two independent members of the Board of Directors were each granted (i) 9,000 shares of restricted common stock as part of their approved compensation for Board terms beginning in 2011 and ending in 2012, and (ii) 2,942 shares of restricted common stock as compensation in lieu of certain monthly cash payments. As a result, 23,884 shares of restricted common stock were issued during the quarter ended December 31, 2011 with a fair value of $48,724 based on the quoted market price at the grant date. The Company recognized expense of $48,724 and $9,180 during the nine and three months ended June 30, 2012, respectively.

 

During the three months ended December 31, 2011, the Company also issued 2,206 shares of restricted common stock to a former Board of Directors member as compensation in lieu of certain monthly cash payments previously owed. As a result, the Company recognized expense of $4,500 based on the quoted market price at the grant date.

 

During the three month period April 1, 2012 through June 30, 2012, in an effort to conserve cash and improve EBITDA for financial covenants, the Board approved a voluntary employee salary forfeiture and incentive plan with the reduction and incentive to be compensated in Company restricted common stock at a price of $1.00 per share, which was the stock price on April 1^st (as well as on June 30^th), with amounts being settled through the issuance of 147,304 shares of restricted common stock, which were issued subsequent to the quarter ended June 30, 2012.

 

4.

COMMITMENTS AND CONTINGENCIES

 

The Company previously entered into an open ended management agreement with a senior executive that provides for annual compensation, excluding bonuses, of $275,000. The Company can terminate this agreement at any time upon four (4) weeks notice and the payment of an amount equal to 24 months of salary. In the event of a change in control of the Company, either party may, during a period of 12 months from the date of the change of control, terminate the agreement upon reasonable notice and the payment by the Company of an amount equal to 36 months of salary.

 

From time to time, the Company may be involved in various claims, lawsuits, and disputes with third parties incidental to the normal operations of the business. The Company is not currently involved in any litigation which it believes could have a material adverse effect on its financial position, results of operations or cash flows.

 

5.

CREDIT FACILITY

 

On September 11, 2006, the Company entered into a Loan and Security Agreement with FCC, LLC, d/b/a First Capital, and Full Circle Funding, LP for a senior secured $20 million credit facility (“Credit Facility”) to fund the Company’s subscriber growth. On June 30, 2008, the Company entered into an Amended and Restated Loan and Security Agreement with these same parties for a senior secured $10 million increase to its original $20 million Credit Facility. The Credit Facility, up to $30 million, has a five-year term ending June 30, 2013 under which the Company will pay interest on actual principal drawn during the full term of the agreement. The amount that the Company can draw from the Credit Facility is equal to the lesser of $30 million or the Company's borrowing base which, in large part, is determined by future revenues and costs accruing from the Company's access agreements. The borrowing base of the Company was approximately $31 million at June 30, 2012. The Credit Facility can be prepaid upon thirty days notice with a penalty of 0% to 2% of the outstanding principal balance depending on the prepayment timing. The Credit Facility is secured by the assets of the Company.

 

The Company borrowed $2,366,290 on its Credit Facility during the nine months ended June 30, 2012, with total borrowing at $29,582,256, which is reflected in the accompanying consolidated balance sheet as of June 30, 2012, net of debt discount of $44,291. As of June 30, 2012, $417,744 remains available for borrowing under the Credit Facility.

 

 

The Company is subject to annual costs when it accesses and continues to access a $5 million increment. In the nine months ended June 30, 2012, the Company incurred an additional annual $200,000 deferred finance cost that is being amortized to interest expense using the straight-line method over twelve month periods ending in November 2012, January 2013, February 2013 and May 2013. As a result of deferred finance costs previously incurred under the Credit Facility in prior periods, the Company amortized to interest expense $290,446 and $96,815 for the nine and three months ended June 30, 2012, respectively.

 

The Credit Facility is secured by the Company’s cash and temporary investments, accounts receivable, inventory, access agreements and certain property, plant and equipment. The Credit Facility contains covenants limiting the Company’s ability to, without the prior written consent of FCC, LLC, d/b/a First Capital, and Full Circle Funding, LP, among other things:

 

·

incur other indebtedness;

·

incur other liens;

·

undergo any fundamental changes;

·

engage in transactions with affiliates;

·

issue certain equity, grant dividends or repurchase shares;

·

change our fiscal periods;

·

enter into mergers or consolidations;

·

sell assets; and

·

prepay other debt.

 

The Credit Facility also includes certain events of default, including nonpayment of obligations, bankruptcy and change of control. Borrowings will generally be available subject to a borrowing base and to the accuracy of all representations and warranties, including the absence of a material adverse change and the absence of any default or event of default.

 

6.

GAIN ON SALE OF CUSTOMERS AND PLANT AND EQUIPMENT

 

On June 15, 2012, the Company sold two properties and subscribers and certain related property and equipment to Charter Communications Entertainment II, LLC (“CCE II), for total proceeds of $191,964 ($966 per subscriber) resulting in a net gain of $159,797.

 

During the nine months ended June 30, 2012, the Company, as part of the Connected Properties initiative with DIRECTV, sold DIRECTV six properties and certain related plant and equipment for total proceeds of $145,811 resulting in a gain of $90,769.

 

7.

INCOME TAXES

 

The Company had pre-tax losses but did not incur a provision or record any benefits for Federal or other income taxes for the three and nine months ended June 30, 2012 and 2011 because (i) it has incurred losses in each period since its inception, and (ii) although such losses, among other things, have generated future potential income tax benefits, there is significant uncertainty as to whether the Company will be able to generate income in the future to enable it to realize any of those benefits and, accordingly, it has recorded a full valuation reserve against those potential benefits.

 

 

The Company maintains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefits as the largest amount that has a greater than 50% likelihood of being realized upon effective settlement. The standards also provide guidance on de-recognition, classification, interest and penalties, and other matters. Interest and penalties, if any, would be included in the income tax provision. The tax years 2009 through 2011 remain open to examination by the major taxing jurisdictions to which the Company is subject.

 

8.

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The fair value of the Company’s cash and cash equivalents, accounts and other receivables, accounts payable and other accrued liabilities for the nine months ended June 30, 2012 are estimated to approximate their carrying values due to the relative liquidity of these instruments. The Credit Facility carrying value for the nine months ended June 30, 2012 approximates fair value based on other rates and terms available for comparable companies in the marketplace for similar debt and risk.

 

9.

SUBSEQUENT EVENTS

 

On July 10, 2012, the Company executed a merger agreement with Multiband Corporation.

 

On July 17, 2012, the Company sold subscribers and certain related property and equipment for total proceeds of $198,000 ($1,000 per subscriber) resulting in a net gain of $187,924.

 

On July 18, 2012, the Company sold subscribers and certain related property and equipment for total proceeds of $81,562 ($966 per subscriber) resulting in a net gain of $49,086.

 

On July 19, 2012, the Company issued 147,304 shares of fully-vested but restricted common stock to employees and directors pursuant to a cost-saving salary reduction and incentive plan approved by the Board for the quarter April 1, 2012 through June 30, 2012.

 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The purpose of this discussion is to provide an understanding of the Company’s financial results and condition by focusing on changes in certain key measures from year to year. Management’s Discussion and Analysis is organized in the following sections:

 

·

Forward-Looking Statements

·

Overview

·

Summary of Results and Recent Events

·

Critical Accounting Policies and Estimates

·

Recently Adopted Accounting Pronouncements

·

Results of Operations - Nine and Three Months Ended June 30, 2012 Compared to Nine and Three Months Ended June 30, 2011

 

·

Liquidity and Capital Resources - Nine Months Ended June 30, 2012

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

The statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations that are not historical in nature are forward-looking within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. In some cases, you can identify forward-looking statements by our use of words such as “may,” “will,” “should,” “could,” “expect,” ”plan,” “intend,” “anticipate,” “believe,” “estimate,” “potential” or “continue,” or the negative, or other variations of these words, or other comparable words or phrases. Factors that could cause or contribute to such differences include, but are not limited to, the fact that we are dependent on our program providers for satellite signals and programming, our ability to successfully expand our sales force and marketing programs, changes in our suppliers’ or competitors’ pricing policies, the risks that competition, technological change or evolving customer preferences could adversely affect the sale of our products, the integration and performance of acquisitions, unexpected changes in regulatory requirements and other factors identified from time to time in the Company’s reports filed with the Securities and Exchange Commission, including, but not limited to our Annual Report on Form 10-K filed on December 23, 2011 for the year ended September 30, 2011.

 

 

Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements or other future events. Moreover, neither we nor anyone else assumes responsibility for the accuracy and completeness of forward-looking statements. We are under no duty to update any of our forward-looking statements after the date of this report. You should not place undue reliance on forward-looking statements.

 

In this discussion, the words “MDU Communications,” “the Company,” “we,” “our,” and “us” refer to MDU Communications International, Inc. together with its subsidiaries, where appropriate.

 

OVERVIEW

 

MDU Communications International, Inc. is a national provider of digital satellite television, high-speed Internet, digital voice and other information and communication services to residents living in the United States multi-dwelling unit (“MDU”) market - estimated to include 26 million residences. MDUs include apartment buildings, condominiums, gated communities, universities and other properties having multiple units located within a defined area. The Company negotiates long-term access agreements with the owners and managers of MDU properties allowing it the right to design, install, own and operate the infrastructure and systems required to provide digital satellite television, high-speed Internet, digital voice, and potentially other services, to their residents.

MDU properties present unique technological, management and marketing challenges to conventional providers of these services, as compared to single family homes. The Company’s proprietary delivery and design solutions and access agreements differentiate it from other multi-family service providers through a unique strategy of balancing the information and communication needs of today’s MDU residents with the technology concerns of property managers and owners and providing the best overall service to both. To accomplish this objective, the Company has partnered with DIRECTV, Inc. and has been working with large property owners and real estate investment trusts (REITs) such as AvalonBay Communities, Post Properties, Roseland Property Company, Related Companies, the U.S. Army, as well as many others, to understand and meet the technology and service needs of these groups.

 

The Company derives revenue through the sale of subscription services to owners and residents of MDUs resulting in monthly annuity-like revenue streams. The Company offers two types of satellite television service, Direct to Home (“DTH”) and Private Cable (“PC”) programming. The DTH service uses a set-top digital receiver for residents to receive state-of-the-art digital satellite and local channel programming. For DTH, the Company primarily offers DIRECTV® programming packages. From the DTH offerings the Company receives the following revenue, (i) an upfront subscriber commission from DIRECTV for each new subscriber, (ii) a percentage of the fees charged by DIRECTV to the subscriber each month for programming, (iii) a per subscriber monthly fee billed to subscribers for “protection plan” maintenance and services, and (iv) occasional other marketing incentives or subsidies from DIRECTV. Secondly, the Company offers a Private Cable video service where analog or digital satellite television programming can be tailored to the needs of an individual MDU property and received through normal cable-ready televisions. In Private Cable deployed properties, a bundle of programming services is delivered to the resident’s cable-ready television without the requirement of a set-top digital receiver in the residence. Net revenues from Private Cable result from the difference between the wholesale prices charged by programming providers and the price charged by the Company to subscribers for the private cable programming package. The Company provides DTH, Private Cable, Internet services and digital voice on an individual subscriber basis, but in many properties it provides these services in bulk (100% of the units), directly to the property owner, resulting in one invoice and thus minimizing churn, collection and bad debt exposure. These subscribers are referred to in the Company’s periodic filings as Bulk DTH or Bulk Choice Advantage (“BCA”) type subscribers in DIRECTV deployed properties or Bulk PC type subscribers in Private Cable deployed properties. From subscribers to the Internet service, the Company earns a monthly Internet access service fee. Again, in many properties, this service is provided in bulk and is referred to as Bulk ISP.

 

 

The Company’s common stock trades under the symbol “MDTV” on the OTC Bulletin Board. Its principal executive offices are located at 60-D Commerce Way, Totowa, New Jersey 07512 and its telephone number is (973) 237-9499. The Company’s website is located at www.mduc.com.

 

SUMMARY OF RESULTS AND RECENT EVENTS

 

Total revenue for the quarter ended June 30, 2012 increased slightly when compared to the same period in fiscal 2011 from $6,815,207 to $6,834,792. Total revenue for the nine month period ended June 30, 2012 increased 3% over the same period in fiscal 2011 from $20,254,067 to $20,802,991. EBITDA (as adjusted) increased for the quarter ended June 30, 2012 to $987,652, compared to EBITDA (as adjusted) for the quarter ended June 30, 2011 of $888,016. EBITDA (as adjusted) for the nine month period ended June 30, 2012 decreased from $2,919,334 to $2,362,314. A significant contributor to the EBITDA disparity for the nine months ended June 30, 2012 compared to the nine months ended June 30, 2011 was still the impact of the (i) expansion of the Company’s customer care and direct sales capabilities by outsourcing certain call center functions, which resulted in one-time set up and training charges and generated higher than normal customer service and operating expense, (ii) operating costs associated with the planned transfer of properties to the DIRECTV Connected Properties program and other costs associated with the Company’s participation in the discontinued DIRECTV Connected Properties program as a dealer, and (iii) properties that the Company acquired and transitioned in the third and fourth quarters of 2011 that are currently producing a lower than average gross margin due to higher direct programming costs, which the Company bears.

 

The Company’s sales expense, general and administrative expense and customer service and operating expense all decreased for the quarter ended June 30, 2012 compared to the quarter ended June 30, 2011 due mainly to cost reductions. Direct costs increased in dollars and 3% as a percent of revenue for the quarter ended June 30, 2012 compared to the quarter ended June 30, 2011 due mainly to the acquisition of subscribers during the periods for which the Company bears the entire programming cost. Depreciation and amortization expense decreased 4%, as a percent of revenue, between the periods.

 

The Company reports 73,590 subscribers to its services as of June 30, 2012, a slight reduction in total subscribers when compared to the previous fiscal quarter ended March 31, 2012, due mainly to (i) approximately 1,000 seasonal disconnects, and (ii) the sale of two properties and subscribers. The reduction year over year was due to the aforementioned, as well as (i) the transfer of six properties to DIRECTV under the Connected Properties program, (ii) the non-renewal of certain private cable bulk properties and certain choice properties that the Company chose not to upgrade to digital services for economic reasons, and (iii) a reduction in activations due to DIRECTV’s tightening of its customer credit policies for DTH choice and exclusive type subscribers. During the quarter ended June 30, 2012, the Company had 18 properties and 4,262 units in work-in-process that should contribute to organic growth in the upcoming quarters. Due to capital constraints, the Company is currently only deploying services to new properties where those properties are willing to pay for systems and installation services. The Company’s breakdown of total subscribers by type is outlined below:

 

Service Type		Subscribers as of June 30, 2011				Subscribers as of Sept. 30, 2011				Subscribers as of Dec. 31, 2011				Subscribers as of Mar. 31, 2012				Subscribers as of June 30, 2012
Bulk DTH			20,328				20,272				20,491				21,136				21,361
Bulk BCA			10,403				9,880				9,880				9,106				8,681
DTH -Choice/Exclusive			22,577				22,541				20,527				20,320				19,427
Bulk Private Cable			13,125				13,125				12,188				12,188				12,178
Private Cable Choice/ Exclusive			2,669				2,351				2,782				2,740				1,995
Bulk ISP			5,887				5,576				5,363				5,363				5,361
ISP Choice or Exclusive			4,818				4,966				5,034				4,986				4,565
Voice			18				14				19				20				22
Total Subscribers			79,825				78,725				76,284				75,859				73,590

 

 

The Company’s average revenue per unit (“ARPU”) at June 30, 2012 was $30.37, a 2% increase from the year ended September 30, 2011 ARPU of $29.88. ARPU is calculated by dividing average monthly revenues for the period (total revenues during the period divided by the number of months in the period) by average subscribers for the period. The average subscribers for the period is calculated by adding the number of subscribers as of the beginning of the period and for each quarter end in the current year or period and dividing by the sum of the number of quarters in the period plus one. The Company believes that its recurring revenue and ARPU will continue to be positively impacted by (i) an increasing DIRECTV ARPU (the average revenue generated by a DIRECTV subscriber was up 3.6% in DIRECTV’s fiscal quarter ending March 31, 2012 to $91.99, as disclosed in DIRECTV’s public filings), (ii) an increasing ARPU generated from the sale of incremental high-speed Internet services to the Company’s subscribers, and (iii) a general increase in recurring revenue realized from the upgrade of properties to the new DIRECTV HD platform and the associated advanced services.

 

On February 6, 2012 and April 6, 2012, the Company entered into agreements to sell three properties to certain divisions of Charter Communications at an average price of $966 per subscriber. Consents from the properties were received and the properties closed in two closings on June 15, 2012 and July 18, 2012. Additionally, the Company entered into an agreement on June 19, 2012 to sell two properties to Summit Broadband at a price of $1,000 per subscriber. Consents from the property were received and the properties closed on July 17, 2012. Negotiations for smaller asset sales are continuing and progressing.

 

On July 10, 2012, the Company signed a definitive agreement pursuant to which the Company will merge into Multiband Corporation (“Multiband”) and will effectively continue to operate as a subsidiary of Multiband in its MDU business segment. Multiband will issue 4.3 million shares of its common stock for all issued and outstanding shares of MDU Communications common stock, with certain potential adjustments. Multiband, as a whole, operates with 3,700 employees in 33 states with 33 field offices. The companies anticipate the merger to close in October 2012. For further information please review the Company’s 8-K filed with the Securities and Exchange Commission on July 10, 2012.

 

To assist the Company in assessing its future strategic plans, the Company previously retained the investment advisory firm of Berkery, Noyes & Co. (“BN”). BN is representing the Company in the merger with Multiband and continues to pursue interest generated from a distributed executive overview of larger asset clusters that the Company would entertain purchase offers. The Company makes no representations that the above-mentioned merger or asset sales will result in any closed transactions.

 

On a going forward basis, based on current projections, the Company does not expect its available cash and remaining Credit Facility to be sufficient to cover estimated liquidity needs for the next twelve months. Without additional funding sources or significant asset sales, the Company forecasts that its capital may be depleted sometime during its first or second fiscal quarter of 2013. To conserve capital, the Company has been actively pursuing a number of initiatives intended to reduce costs, including layoffs, reductions in benefits, limitation on travel, scaled back marketing efforts, restricted stock for forfeited salary and across-the-board employee salary reductions. The Company is in a holding pattern and is no longer deploying services into new properties unless the cost of systems is partially or completely funded by the ownership group. Although these measures assist in conserving cash, the Company’s ability to continue to operate is dependent on the ability to raise additional capital, sell a significant number of assets, or enter into a merger, however, there can be no assurance that these efforts will be successful. Additionally, the Company will be facing maturity and repayment of its $30 million Credit Facility on June 30, 2013.

 

 

Use of Non-GAAP Financial Measures

 

The Company uses the performance gauge of EBITDA (as adjusted by the Company) to evidence earnings exclusive of mainly noncash events, as is common in the technology, and particularly the cable and telecommunications, industries. EBITDA (as adjusted) is an important gauge because the Company, as well as investors who follow this industry frequently, use it as a measure of financial performance. The most comparable GAAP reference is simply the removal from the Company’s net income (or loss) of interest, depreciation, amortization and noncash charges related to its shares, warrants and stock options. The Company adjusts EBITDA by then adding back any provision for bad debts and inventory reserves. EBITDA (as adjusted) is not, and should not be considered, an alternative to income from operations, net income, net cash provided by operating activities, or any other measure for determining our operating performance or liquidity, as determined under accounting principles generally accepted in the United States of America. EBITDA (as adjusted) also does not necessarily indicate whether cash flow will be sufficient to fund working capital, capital expenditures or to react to changes in our industry or the economy generally. For the nine months ended June 30, 2012 and 2011, the Company reported EBITDA (as adjusted) of $2,362,314 and $2,919,334, respectively. For the three months ended June 30, 2012 and 2011, the Company reported EBITDA (as adjusted) of $987,652 and $888,016, respectively. The following table reconciles the comparative EBITDA (as adjusted) of the Company to its consolidated net loss as computed under accounting principles generally accepted in the United States of America:

 

		For The Nine Months Ended June 30,								For The Three Months Ended June 30,
		2012				2011				2012				2011
EBITDA		$	2,362,314			$	2,919,334			$	987,652			$	888,016
Interest expense			(2,390,848	)			(1,942,432	)			(814,101	)			(669,568	)
Deferred finance costs and debt discount amortization (interest expense)			(290,446	)			(261,279	)			(96,815	)			(92,649	)
Provision for doubtful accounts			(222,874	)			(349,934	)			—				(140,975	)
Depreciation and amortization			(4,895,143	)			(5,665,545	)			(1,670,757	)			(1,923,371	)
Share-based compensation expense - employees			(36,260	)			(38,784	)			(9,543	)			(16,097	)
Compensation expense for issuance of common stock through Employee Stock Purchase Plan			—				(28,930	)			—				(10,608	)
Compensation expense for issuance of common stock for employee bonuses			(10,625	)			(31,767	)			—				(31,767	)
Compensation expense for issuance of common stock for employee services			—				(59,790	)			—				(28,970	)
Compensation expense accrued to be settled through the issuance of common stock			(73,652	)			—				(73,652	)			60,737
Compensation expense through the issuance of restricted common stock for services rendered			(56,225	)			(88,770	)			(9,180	)			(88,770	)
Net loss		$	(5,613,759	)		$	(5,547,897	)		$	(1,686,396	)		$	(2,054,022	)

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Significant estimates are used for, but not limited to, revenue recognition with respect to a new subscriber activation subsidy, allowance for doubtful accounts, useful lives of property and equipment, fair value of equity instruments and valuation of deferred tax assets and long-lived assets. On an on-going basis, the Company evaluates its estimates. Estimates are based on historical experience and on other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results could differ from these estimates under different assumptions or conditions. During the three months ended June 30, 2012, there were no material changes to accounting estimates or judgments.

 

 

RECENTLY ISSUED AND NOT YET EFFECTIVE ACCOUNTING PRONOUNCEMENT

 

In September 2011, the FASB approved a revised standard “Goodwill Impairment Testing” that simplifies how entities test goodwill for impairment. The revised standard permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The standard does not address impairment testing of indefinite-lived intangibles. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect the adoption of the revised standard to have an effect on its consolidated results of operations and financial position, when adopted, as required, on October 1, 2012.

 

In December 2011, the FASB approved an amendment in certain pending paragraphs in Accounting Standards “Comprehensive Income: Presentation of Comprehensive Income” to effectively defer only those changes that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendments will be temporary to allow the FASB time to re-deliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements. The amendment to “Comprehensive Income: Presentation of Comprehensive Income” is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect the adoption of the revised standard to have an effect on its consolidated results of operations and financial position, when adopted, as required, on October 1, 2012.

 

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

In March 2011, accounting standards update on “Troubled Debt Restructuring” was issued. The update clarifies which loan modifications constitute troubled debt restructurings. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist, (a) the restructuring constitutes a concession, and (b) the debtor is experiencing financial difficulties. For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011. The Company evaluated the effect that the adoption of this standard will have on its consolidated results of operations, financial position and cash flows, and has determined the adoption will have no material impact.

 

In April 2011, accounting standards update on “Reconsideration of Effective Control for Repurchase Agreements” was issued. The amendments in this update remove from the assessment of effective control, (a) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (b) the collateral maintenance implementation guidance related to that criterion. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. The guidance is effective for the first interim or annual period beginning on or after December 15, 2011. The Company evaluated the effect that the adoption of this standard will have on its consolidated results of operations, financial position and cash flows, and has determined the adoption will have no material impact.

 

RESULTS OF OPERATIONS

 

The following discussion of results of operations and financial condition of the Company should be read in conjunction with the Company’s Condensed Consolidated Financial Statements included elsewhere in this quarterly report on Form 10-Q.

 

 

NINE MONTHS ENDED JUNE 30, 2012 COMPARED TO NINE MONTHS ENDED JUNE 30, 2011

 

The following table sets forth for the nine months ended June 30, 2012 and 2011 the percentages which selected items in the Statement of Operations bear to total revenue and dollar and percentage changes between the periods:

 

		Nine Months  Ended June 30, 2012								Nine Months  Ended June 30, 2011								Change ($)				Change (%)
REVENUE		$	20,802,991				100	%		$	20,254,067				100	%		$	548,924				3	%
Direct costs			10,136,900				49	%			9,099,461				45	%			1,037,439				11	%
Sales expenses			1,101,715				5	%			1,084,501				5	%			17,214				2	%
Customer service and operating expenses			4,660,344				22	%			4,432,407				22	%			227,937				5	%
General and administrative expenses			3,191,920				15	%			3,376,774				17	%			(184,854	)			-5	%
Depreciation and amortization			4,895,143				24	%			5,665,545				28	%			(770,402	)			-14	%
Gain on sale of customers and property and equipment			(250,566	)			-1	%			(60,416	)			0	%			(190,150	)			-
OPERATING LOSS			(2,932,465	)			-14	%			(3,344,205	)			-17	%			411,740				-12	%
Interest expense			(2,681,294	)			-13	%			(2,203,692	)			-10	%			(477,602	)			22	%
NET LOSS		$	(5,613,759	)			-27	%		$	(5,547,897	)			-27	%		$	(65,862	)			1	%

 

Revenue. Revenue for the nine months ended June 30, 2012 increased 3% to $20,802,991, compared to revenue of $20,254,067 for the nine months ended June 30, 2011. This increase in recurring revenue is mainly attributable to the higher ARPU due to instituted price increases, a higher percentage of customers subscribing to advanced services, and low margin subscribers being converted to higher margin services. The Company expects total revenue to remain constant or slightly decline during the remainder of fiscal 2012 as the Company continues in a growth holding pattern. Revenue has been derived, as a percent, from the following sources:

 

		Nine Months Ended  June 30, 2012								Nine Months Ended  June 30, 2011
Private cable programming revenue		$	2,420,980				11	%		$	3,125,207				15	%
DTH programming revenue and subsidy			14,470,373				70	%			12,900,916				64	%
Internet access fees			2,309,331				11	%			2,413,618				12	%
Installation fees, wiring  and other revenue			1,602,307				8	%			1,814,326				9	%
Total Revenue		$	20,802,991				100	%		$	20,254,067				100	%

 

DTH revenue continued to increase due mainly to an increase in APRU and the conversion of certain properties from low average revenue private cable subscribers to DIRECTV service subscribers, which conversely explains the decrease in private cable programming revenue. The decrease in installation and other revenue was due to higher revenue received in the period ended June 30, 2011 from the DIRECTV Connected Properties program. Because the Company has no immediate plans for growth, revenue from these sources is expected to remain fairly constant for the remainder of fiscal 2012.

 

Direct Costs. Direct costs are comprised of programming costs, monthly recurring Internet broadband circuits and costs relating directly to installation services. Direct costs increased to $10,136,900 for the nine months ended June 30, 2012, as compared to $9,099,461 for the nine months ended June 30, 2011. Direct costs are linked to the type of subscribers the Company adds. Choice and exclusive DTH DIRECTV subscribers have no associated programming cost and therefore little to no direct cost, while DTH DISH subscribers, private cable and broadband subscribers have associated programming and circuit costs and therefore a higher direct cost. As a result of the recent acquisition of ATTVS DISH subscribers (whereby the Company incurs the full programming cost), direct costs increased over the nine months ended June 30, 2011. Direct costs are expected to remain constant or decrease slightly during the remainder of fiscal 2012 as the Company remains in a growth holding pattern.

 

Sales Expenses. Sales expenses were $1,101,715 for the nine months ended June 30, 2012, compared to $1,084,501 for the nine months ended June 30, 2011. The slight increase was due mainly to an increase in marketing efforts associated with the discontinued DIRECTV Connected Properties program. During the remainder of fiscal 2012, the Company expects these expenses to remain fairly constant or decrease slightly as sales and marketing efforts are scaled back and remain strictly focused.

 

 

Customer Service and Operating Expenses. Customer service and operating expenses are comprised of expenses related to the Company’s call center, technical support, project management and general operations. Customer service and operating expenses were $4,660,344 and $4,432,407 for the nine months ended June 30, 2012 and 2011, respectively. The expenses increased period over period primarily in connection with one-time expenses associated with the outsourcing of the call center. Customer service and operating expenses are generally expected to remain constant during the remainder of fiscal 2012 as the Company has no immediate plans for growth. A breakdown of customer service and operating expenses is as follows:

 

		Nine Months  Ended June 30, 2012								Nine Months  Ended June 30, 2011
Call center expenses		$	1,920,789				41	%		$	1,647,972				37	%
General operation expenses			807,189				17	%			806,776				18	%
Property system maintenance expenses			1,932,366				42	%			1,977,659				45	%
Total customer service and operation expense		$	4,660,344				100	%		$	4,432,407				100	%

 

Call center expenses increased for the reasons mentioned above, but should remain constant during the remainder of fiscal 2012. Property system maintenance is generally proportional to the number of properties the Company services (not necessarily the number of subscribers), so the decrease was primarily due to cost reductions and a slightly less number of properties due to property sales, transfers and non-renewals.

 

Additionally, the Company wrote-off obsolete fixed assets during the nine months ended June 30, 2012 in the amount of $10,261, which is reported in customer service and operating expenses.

 

General and Administrative Expenses. General and administrative expenses for the nine months ended June 30, 2012 and 2011, of $3,191,920 and $3,376,774, respectively, decreased 2% as a percent of revenue. Of the general and administrative expenses for the nine months ended June 30, 2012 and 2011, the Company had total noncash charges included of $374,600 and $583,833, respectively.

 

Excluding the $374,600 and $583,833 in noncash charges from the nine months ended June 30, 2012 and 2011, respectively, general and administrative expenses were $2,817,320 (14% of revenue) compared to $2,792,941 (14% of revenue), respectively. General and administrative expenses are fairly fixed and should remain constant throughout the remainder of fiscal 2012, but may increase with any expenses related to an asset sale or merger.

 

The Company recognized noncash share-based compensation expense for employee options based upon the fair value at the grant dates for awards to employees for the nine months ended June 30, 2012 and 2011, amortized over the requisite vesting period, of $36,260 and $38,784, respectively. The total share-based compensation expense not yet recognized and expected to vest over the next 17 months is approximately $40,000.

 

Other Noncash Charges. Depreciation and amortization expenses decreased from $5,665,545 during the nine months ended June 30, 2011 to $4,895,143 during the nine months ended June 30, 2012, a 4% decrease as a percent of revenue. The decrease is indicative of large capital expenditures in prior periods becoming fully depreciated. Interest expense included noncash charges of $290,446 for the amortization of deferred finance costs and debt discount.

 

Net Loss. Primarily as a result of the above, and total noncash charges of $5,535,225, the Company reported a net loss of $5,613,759 for the nine months ended June 30, 2012, compared to noncash charges of $6,524,799 and a reported net loss of $5,547,897 for the nine months ended June 30, 2011.

 

 

THREE MONTHS ENDED JUNE 30, 2012 COMPARED TO THREE MONTHS ENDED JUNE 30, 2011

 

The following table sets forth for the three months ended June 30, 2012 and 2011 the percentages which selected items in the Statements of Operations bear to total revenue and dollar and percentage changes between the periods:

 

		Three Months  Ended June 30, 2012								Three Months  Ended June 30, 2011								Change ($)				Change (%)
REVENUE		$	6,834,792				100	%		$	6,815,207				100	%		$	19,585				0	%
Direct costs			3,322,766				49	%			3,130,141				46	%			192,625				6	%
Sales expenses			341,417				5	%			363,603				5	%			(22,186	)			-6	%
Customer service and operating expenses			1,441,597				21	%			1,479,022				22	%			(37,425	)			-3	%
General and administrative expenses			993,532				15	%			1,210,875				18	%			(217,343	)			-18	%
Depreciation and amortization			1,670,757				24	%			1,923,371				28	%			(252,614	)			-13	%
Gain on sale of customers and property and equipment			(159,797	)			-2	%			-				0	%			(159,797	)			-
OPERATING LOSS			(775,480	)			-12	%			(1,291,805	)			-19	%			516,325				-40	%
Interest expense			(910,916	)			-13	%			(762,217	)			-11	%			(148,699	)			20	%
NET LOSS		$	(1,686,396	)			-25	%		$	(2,054,022	)			-30	%		$	367,626				-18	%

 

Revenue. Revenue for the three months ended June 30, 2012 was $6,834,792, compared to revenue of $6,815,207 for the three months ended June 30, 2011. This increase in recurring revenue is mainly attributable to higher ARPU due to instituted price increases, a higher percentage of customers subscribing to advanced services, and low margin subscribers being converted to higher margin services. The Company expects total revenue to remain constant or slightly decrease during the remainder of fiscal 2012 as the Company remains in a growth holding pattern. Revenue has been derived, as a percent, from the following sources:

 

		Three Months  Ended June 30, 2012								Three Months  Ended June 30, 2011
Private cable programming revenue		$	789,826				12	%		$	947,158				14	%
DTH programming revenue and subsidy			4,829,144				71	%			4,536,816				67	%
Internet access fees			760,527				11	%			774,847				11	%
Installation fees, wiring and other revenue			455,295				6	%			556,386				8	%
Total Revenue		$	6,834,792				100	%		$	6,815,207				100	%

 

DTH revenue continued to increase due mainly to an increase in APRU and the conversion of certain properties from low average revenue private cable subscribers to DIRECTV service subscribers, which conversely explains the decrease in private cable programming revenue. The decrease in installation and other revenue was due to higher revenue received in the period ended June 30, 2011 from the DIRECTV Connected Properties program. Because the Company has no immediate plans for growth, revenue from these sources is expected to remain fairly constant for the remainder of fiscal 2012.

 

Direct Costs. Direct costs are comprised of programming costs, monthly recurring broadband circuits and costs relating directly to installation services. Direct costs increased to $3,322,766 for the three months ended June 30, 2012, as compared to $3,130,141 for the three months ended June 30, 2011. Direct costs are linked to the type of subscribers the Company adds. Choice and exclusive DTH DIRECTV subscribers have no associated programming cost and therefore little to no direct cost, while DTH DISH subscribers, private cable and broadband subscribers have associated programming and circuit costs and therefore a higher direct cost. As a result of the recent acquisition of ATTVS DISH subscribers (whereby the Company incurs the full programming cost), direct costs increased over the quarter ended June 30, 2011. Direct costs are expected to remain constant or decrease slightly during the remainder of fiscal 2012 as the Company remains in a growth holding pattern.

 

Sales Expenses. Sales expenses decreased to $341,417 for the three months ended June 30, 2012, compared to $363,603 for the three months ended June 30, 2011. During the remainder of fiscal 2012, the Company expects these expenses to remain fairly constant or decrease slightly as sales and marketing efforts are scaled back and remain strictly focused.

 

 

Customer Service and Operating Expenses. Customer service and operating expenses are comprised of expenses related to the Company’s call center, technical support, project management and general operations. Customer service and operating expenses were $1,441,597 and $1,479,022 for the three months ended June 30, 2012 and 2011, respectively, a 1% reduction as a percent of revenue. Customer service and operating expenses are generally expected to remain constant during the remainder of fiscal 2012 as the Company has no immediate plans for growth. A breakdown of customer service and operating expenses is as follows:

 

		Three Months  Ended June 30, 2012								Three Months  Ended June 30, 2011
Call center expenses		$	623,486				43	%		$	553,715				37	%
General operation expenses			231,404				16	%			275,010				19	%
Property system maintenance expenses			586,707				41	%			650,297				44	%
Total customer service and operation expense		$	1,441,597				100	%		$	1,479,022				100	%

 

Call center expenses increased over the same period in the previous year due to additional costs related to transitioning to the outsourced call center. General operations expenses decreased due to cost reductions. Property system maintenance is generally proportional to the number of properties the Company services (not necessarily the number of subscribers), so the decrease was due primarily to cost reductions and a slightly less number of properties due to property sales, transfers and non-renewals.

 

Additionally, the Company wrote-off obsolete fixed assets during the three months ended June 30, 2012 in the amount of $2,539, which is reported in customer service and operating expenses.

 

General and Administrative Expenses. General and administrative expenses for the three months ended June 30, 2012 and 2011, of $993,532 and $1,210,875, respectively, declined 3% as a percent of revenue, due mainly to cost reductions. Of the general and administrative expenses for the three months ended June 30, 2012 and 2011, the Company had total noncash charges included of $77,964 and $256,450, respectively.

 

Excluding the $77,964 and $256,450 in noncash charges from the three months ended June 30, 2012 and 2011, respectively, general and administrative expenses were $915,568 (13% of revenue) compared to $954,425 (14% of revenue), respectively. General and administrative expenses are fairly fixed and should remain constant throughout the remainder of fiscal 2012, but may increase with any expenses related to an asset sale or merger.

 

The Company recognized noncash share-based compensation expense for employee options based upon the fair value at the grant dates for awards to employees for the three months ended June 30, 2012 and 2011, amortized over the requisite vesting period, of $9,543 and $16,097, respectively. The total share-based compensation expense not yet recognized and expected to vest over the next 17 months is approximately $40,000.

 

Other Noncash Charges. Depreciation and amortization expenses decreased from $1,923,371 for the three months ended June 30, 2011, to $1,670,757 for the three months ended June 30, 2012, a 4% decrease as a percent of revenue. The decrease is indicative of large capital expenditures in prior periods becoming fully depreciated. Interest expense included noncash charges of $96,815 for the amortization of deferred finance costs and debt discount.

 

Net Loss. Primarily as a result of the above, and total noncash charges of $1,809,947, the Company reported a net loss of $1,686,396 for the three months ended June 30, 2012, compared to noncash charges of $2,272,470 and a reported net loss of $2,054,022 for the three months ended June 30, 2011.

 

LIQUIDITY AND CAPITAL RESOURCES

 

During the nine months ended June 30, 2012 and 2011, the Company recorded net losses of $5,613,759 and $5,547,897, respectively. Company operations used net cash of $479,106 and had positive cash flow from operations of $400,669 during the nine months ended June 30, 2012 and 2011, respectively. At June 30, 2012, the Company had an accumulated deficit of $73,921,873.

 

 

On September 11, 2006, the Company entered into a Loan and Security Agreement with FCC, LLC, d/b/a First Capital, and Full Circle Funding, LP for a senior secured $20 million non-amortizing revolving five-year credit facility (“Credit Facility”) to fund the Company's subscriber growth. On June 30, 2008, the Company entered into an Amended and Restated Loan and Security Agreement with the same parties for a $10 million increase to the Credit Facility and a new five-year term.

 

The Credit Facility requires interest payable monthly only on the principal outstanding and is specially tailored to the Company's needs by being divided into six $5 million increments. The Company is under no obligation to draw an entire increment at one time. The first $5 million increment carries an interest rate of prime plus 4.1%, the second $5 million at prime plus 3%, the third $5 million at prime plus 2%, the fourth $5 million at prime plus 1%, and the new $10 million in additional Credit Facility is also divided into two $5 million increments with the interest rate on these increments being prime plus 1% to 4%, depending on the Company's ratio of EBITDA to the total outstanding loan balance. As defined in the Credit Facility, “EBITDA” shall mean the Company’s net income (excluding extraordinary gains and non-cash charges) before provisions for interest expense, taxes, depreciation and amortization. As defined in the Credit Facility, “prime” shall be a minimum of 7.75%.

 

The Company borrowed $2,366,290 on its Credit Facility for the nine months ended June 30, 2012, and as of that date, the Company has borrowed a total of $29,582,256 (not including debt discount of $44,291), which is due on June 30, 2013. As of June 30, 2012, $417,744 remains available for borrowing under the Credit Facility.

 

The Credit Facility is secured by the Company’s cash and temporary investments, accounts receivable, inventory, access agreements and certain property, plant and equipment. The Credit Facility contains covenants limiting the Company’s ability to, without the prior written consent of FCC, LLC, d/b/a First Capital, and Full Circle Funding, LP, among other things:

 

·	incur other indebtedness;
·	incur other liens;
·	undergo any fundamental changes;
·	engage in transactions with affiliates;
·	issue certain equity, grant dividends or repurchase shares;
·	change our fiscal periods;
·	enter into mergers or consolidations;
·	sell assets; and
·	prepay other debt.

 

The Credit Facility also includes certain events of default, including nonpayment of obligations, bankruptcy and change of control. Borrowings will generally be available subject to a borrowing base and to the accuracy of all representations and warranties, including the absence of a material adverse change and the absence of any default or event of default.

 

The Company did not incur or record a provision for income taxes for the nine months ended June 30, 2012 and 2011 due to the net loss. The net operating loss carry forward expires on various dates through 2031, therefore, the Company should not incur cash needs for income taxes for the foreseeable future.

 

As of June 30, 2012, the Company had available cash and remaining available Credit Facility, collectively, of $521,840. Based on current projections, the Company does not expect its available cash, estimated revenues and remaining Credit Facility to be sufficient to cover liquidity needs for the next twelve months. Without additional funding sources or proceeds from asset sales, the Company forecasts that its available capital may be depleted sometime during its first or second fiscal quarter of 2013. Additionally, the Company will be facing maturity and repayment of its $30 million Credit Facility on June 30, 2013.

 

 

In order for the Company to continue operations and to fully implement its business plan, it needs to raise additional capital. The Company has been actively pursuing various initiatives aimed at resolving its need for additional capital, namely asset sales or a merger. The asset sale negotiations have met with some success for individual out-of-market assets, but have not yet resulted in larger asset sales. The Company has previously discussed and disclosed the option of merger as a viable alternative to continue its business operations and growth. In furtherance thereof, on July 10, 2012, the Company executed a merger agreement with Multiband Corporation, whereby the Company would effectively become an operating subsidiary of Multiband. Although several conditions precedent still exist, the Company is working toward closing the merger in its first fiscal quarter of 2013. However, the Company’s ability to close asset sales or to consummate the merger remains uncertain. Unless the Company is able, in the near-term, to raise additional capital or enter into a merger, there is substantial doubt about the Company’s ability to continue as a going concern.

 

NINE MONTHS ENDED JUNE 30, 2012 AND 2011

 

During the nine months ended June 30, 2012 and 2011, the Company recorded net losses of $5,613,759 and $5,547,897. At June 30, 2012, the Company had an accumulated deficit of $73,921,873.

 

Cash Balance. At June 30, 2012, the Company had cash and cash equivalents of $104,096, compared to $84,747 at September 30, 2011. The Company maintains little cash, as revenues are deposited against the balance of the Credit Facility to reduce interest cost. During the nine months ended June 30, 2012, the Company increased the amount borrowed against the Credit Facility by $2,366,290. Based on current projections, the Company does not expect its available cash, estimated revenues and remaining Credit Facility to be sufficient to cover liquidity needs for the next twelve months. Without additional funding sources or significant asset sales, the Company forecasts that its available cash may be depleted sometime during its first or second fiscal quarter of 2013. Additionally, the Company will be facing maturity and repayment of its $30 million Credit Facility on June 30, 2013.

 

Operating Activities. Company operations used net cash of $479,106 during the nine months ended June 30, 2012, and provided net cash of $400,669 during the nine months ended June 30, 2011. Net cash (used in) provided by operating activities included a decrease of $810,374 and $122,188 in accounts payable and other accrued liabilities during the nine months ended June 30, 2012 and 2011, respectively. Additionally, during the nine months ended June 30, 2012 and 2011, there was a decrease of $375,733 and an increase of $631,419 in accounts and other receivables, respectively, and prepaid expenses decreased $489,006 and increased $33,114, respectively. During the nine months ended June 30, 2012 and 2011, deferred revenue decreased $264,632 and increased $237,458, respectively.

 

Net loss for the nine months ended June 30, 2012 and 2011 was $5,613,759 and $5,547,897, respectively, inclusive of net noncash charges associated primarily with depreciation and amortization and stock options and warrants of $5,535,225 and $6,524,799, respectively.

 

Investing Activities. During the nine months ended June 30, 2012 and 2011, the Company purchased $2,005,610 and $2,673,151, respectively, of equipment relating to subscriber additions and HD upgrades for the periods and for future periods. During the nine months ended June 30, 2012 and 2011, the Company paid $0 and $621,220, respectively, for the acquisition of intangible assets and related fees. During the nine months ended June 30, 2012, the Company received $145,811 in proceeds for the sale of subscribers and related property and equipment to DIRECTV as part of the Connected Properties program, and $191,964 in proceeds for the sale of subscribers and related property and equipment to Charter Communications Entertainment II, LLC, and for the nine months ended June 30, 2011, the Company received $89,651 in proceeds from the sale of subscribers and related property and equipment to Comcast.

 

Financing Activities. During the nine months ended June 30, 2012 and 2011, the Company incurred $200,000 in deferred financing costs in each period, and increased by $2,366,290 and $2,792,701, the amount borrowed through the Credit Facility, respectively. Equity financing activity provided $7,135 from 2,785 shares of common stock purchased by employees through the Employee Stock Purchase Plan during the nine months ended June 30, 2011, with $0 during the nine months ended June 30, 2012.

 

 

Working Capital. As of June 30, 2012, the Company had negative working capital of $31,745,278, compared to negative working capital of $2,089,623 as of September 30, 2011, with the increase due to the Credit Facility due on June 30, 2013 being classified as current debt. To minimize the draw on the Credit Facility and the liability, the Company expects to have negative working capital in fiscal 2012. Based on current projections, the Company does not expect its available cash, estimated revenues and remaining Credit Facility to be sufficient to cover liquidity needs for the next twelve months. Without additional funding sources or significant asset sales, the Company forecasts that its available cash may be depleted sometime during its first or second fiscal quarter of 2013, and it will be facing maturity and repayment of its $30 million Credit Facility on June 30, 2013.

 

Capital Commitments and Contingencies. The Company has access agreements with the owners of multiple dwelling unit properties to supply digital satellite programming and Internet systems and services to the residents of those properties, however, the Company has no obligation to build out those properties and no penalties will accrue if it elects not to do so.

 

Future Capital Requirements. For the Company to continue operations and capitalize on future strategic plans, it will be required to raise additional capital. The Company has been actively pursuing various initiatives aimed at resolving its need for additional capital, specifically asset sales. These negotiations have met with some success for individual out-of-market assets, but have not resulted in larger asset sales. The Company’s ability to raise sufficient additional capital, through asset sales or otherwise, on acceptable terms or at all, remains uncertain. Additionally, the Company will be facing maturity and repayment of its $30 million Credit Facility on June 30, 2013.

 

The Company has for the past twelve months disclosed the option of merger as a viable alternative to continue its business operations and growth. On July 10, 2012, the Company executed a merger agreement with Multiband Corporation, whereby the Company would effectively become an operating subsidiary of Multiband. Although several conditions precedent still exist, the Company is working toward closing the merger in its first fiscal quarter of 2013, however, there can be no assurance that the merger will close.

 

Unless the Company is able, in the near-term, to raise additional capital or enter into a merger, there is substantial doubt about the Company’s ability to continue as a going concern.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required under Regulation S-K for “smaller reporting companies.”

 

Item 4. CONTROLS AND PROCEDURES

 

We maintain "disclosure controls and procedures," as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, who is also our Chief Financial Officer, or our Vice President of Finance and Administration, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

 

As of June 30, 2012 (the end of the period covered by this Report), we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer, who is also our Chief Financial Officer, and our Vice President of Finance and Administration, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e). Based on this evaluation, our Chief Executive Officer and our Vice President of Finance and Administration concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in our periodic reports is recorded, processed, summarized and reported within the time periods specified for each report and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

 

There has been no change in the Company’s internal control over financial reporting during the quarter ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting subsequent to the date of the evaluation referred to above.

 

PART II - OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

 

From time to time, the Company may be subject to legal proceedings, which could have a material adverse effect on its business. As of June 30, 2012 and through the date of this filing, the Company does have litigation in the normal course of business, however, it does not expect the outcome of this litigation to have a material effect on the Company.

 

Item 1A. RISK FACTORS

 

Our business is subject to many risks and uncertainties, which may materially and adversely affect our future business, prospects, financial condition and results of operations, including (i) the risk factors set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, filed on December 23, 2011, and (ii) the risk factors set forth below, which supplement and modify the risk factors set forth in our 10-K.

 

We believe we will require additional capital in the near term to meet our liquidity needs for the next twelve months and will also need additional capital in the long-term to maintain our current business plans or to pursue alternative plans and strategies; such additional capital may not be available on acceptable terms or at all.

 

Based on our current projections, we do not expect our available cash and remaining Credit Facility as of June 30, 2012 to be sufficient to cover our estimated liquidity needs for the next 12 months. We also do not expect our operations to generate positive cash flows during the next 12 months. Without additional funds or financing sources, we forecast that our cash and remaining Credit Facility would be depleted sometime in our first or second fiscal quarter of 2013. Thus, we will be required to raise additional capital in the near term in order to continue operations. Further, we also need to raise additional capital over the long-term to fully implement our business plans. However, our ability to raise sufficient additional capital in the near and long-term on acceptable terms, or at all, remains uncertain. Additionally, unless we are able to refinance our $30 million Credit Facility, which is uncertain, we will be facing maturity and repayment on June 30, 2013.

 

Our ability to continue to operate our business is substantially dependent on our ability to raise additional capital in the near term. We are actively pursuing a number of possible funding options, but there can be no assurance that these efforts will be successful. Our expected continued losses from operations and the uncertainty about our ability to obtain sufficient additional capital raise substantial doubt about our ability to continue as a going concern. For additional information on our liquidity issues, see “Liquidity and Capital Resources” on page 23.

 

As a part of our cost savings initiatives we have instituted across-the-board salary reductions which may have an adverse effect on our workforce and cause our business to be materially and adversely affected.

 

As part of a company-wide cost savings initiative we have implemented across the board, but graduated, salary reductions. These reductions may be met with resistance by employees, lower moral, lower productivity and incite certain employees to terminate their employment. We may have a problem retaining and/or attracting qualified personnel. As a result, our business could be materially and adversely affected.

 

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

Item 4. MINE SAFETY DISCLOSURES

 

None.

 

Item 5. OTHER INFORMATION

 

None.

 

Item 6. EXHIBITS

 

31.1- Rule 13a-14(a)/15d-14(a) Certification, executed by Sheldon Nelson, Chairman, Board of Directors, Chief Executive Officer and Chief Financial Officer of MDU Communications International, Inc.

 

31.2- Rule 13a-14(a)/15d-14(a) Certification, executed by Carmen Ragusa, Jr., Vice President of Finance and Administration of MDU Communications International, Inc.

 

32.1- Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350), executed by Sheldon Nelson, Chairman, Board of Directors, Chief Executive Officer and Chief Financial Officer of MDU Communications International, Inc.

 

32.2- Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350), executed by Carmen Ragusa, Jr., Vice President of Finance and Administration of MDU Communications International, Inc.

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	MDU COMMUNICATIONS INTERNATIONAL, INC.
Date: August 14, 2012	By:	/s/ SHELDON NELSON
		Sheldon Nelson
		Chief Financial Officer

 

	MDU COMMUNICATIONS INTERNATIONAL, INC.
Date: August 14, 2012	By:	/s/ CARMEN RAGUSA, JR.
		Carmen Ragusa, Jr.
		Vice President of Finance and Administration