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



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

FORM 10−Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: September 30, 2012
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____________ to _____________
 
Commission File Number: 000-25108

UNILAVA CORPORATION  

(Exact Name of Registrant as Specified in Its Charter)


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

353 Sacramento Street, Suite 1500
San Francisco, CA 94111

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   x   No   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   o No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer 
  o
 
 Accelerated filer
  o
         
 Non-accelerated filer
  o
 
 Smaller reporting company
  x
  (Do not check if a smaller reporting company) 
     
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   o   No x
 
The number of shares outstanding of each of the issuer’s classes of common stock, as of October 31, 2012 is as follows:
 
Class of Securities
 
Shares Outstanding
Common stock, no par value
 
100,051,107
 
 

 
 
1

 

 

 

Quarterly Report on Form 10-Q
  September 30, 2012

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION
   
Page(s)
 Item 1.   
 Financial Statements
3
     
 Item 2.
 Management’s Discussion and Analysis of Financial Condition and Results of Operations
20
     
 Item 3.
 Quantitative and Qualitative Disclosures About Market Risk
28
     
 Item 4.
 Controls and Procedures
28
     
   PART II
OTHER INFORMATION
     
 Item 1.  
 Legal Proceedings
30
     
 Item 1A. 
 Risk Factors
30
     
 Item 2. 
 Unregistered Sales of Equity Securities and Use of Proceeds
30
     
 Item 3.
 Defaults Upon Senior Securities
30
     
 Item 4.    
 (Removed and Reserved)
30
     
 Item 5. 
 Other Information
30
     
 Item 6.  
 Exhibits
31
     
 
 Signatures
32
 
 



                                                        


 
 
 
 
 

 


 

 
2

 
 

 

 

 
   
 

PART I
FINANCIAL INFORMATION
 
ITEM 1.          FINANCIAL STATEMENTS.

The accompanying consolidated balance sheet of Unilava Corporation at September 30, 2012, the consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2012 and 2011 and the consolidated statements of cash flows for the nine months ended September 30, 2012 and 2011, have been prepared by the Company's management, in conformity with principles generally accepted in the United States of America.  In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature.



UNILAVA CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

 
 Financial Statements
  Page(s)
     
 
Consolidated Balance Sheets (Unaudited)
 4
     
 
Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
 5
     
 
Consolidated Statements of Cash Flows (Unaudited)
 6
     
 
Notes to Consolidated Financial Statements (Unaudited)
 7-19
 
 
 


 
 
 
 

 


 

 
3

 
 

 

 

 
    UNILAVA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

   
September 30,
   
December 31,
 
   
2012
   
2011
 
ASSETS
 
CURRENT ASSETS
           
Cash
 
$
-
   
$
51,704
 
Certificates of deposit
   
28,110
     
28,078
 
Accounts receivable, net
   
289,923
     
320,587
 
Other current assets
   
26
     
5,409
 
                 
Total current assets
   
318,059
     
405,778
 
                 
Fixed assets, net
   
1,545,981
     
1,651,953
 
Goodwill
   
767,873
     
767,873
 
Other assets
   
127,959
     
95,306
 
                 
TOTAL ASSETS
 
$
2,759,872
   
$
2,920,910
 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
 
CURRENT LIABILITIES
               
   
$
39,577
   
$
-
 
Accounts payable and accrued expenses
   
3,346,412
     
2,718,824
 
Accounts payable and accrued expenses – related party
   
180,625
     
141,001
 
Deferred rent - current
   
51,461
     
47,099
 
Line of credit
   
1,507,176
     
1,507,176
 
Notes payable
   
2,070,069
     
1,694,075
 
Notes payable - related party
   
879,613
     
699,477
 
                 
TOTAL CURRENT LIABILITIES
   
8,074,933
     
6,807,652
 
                 
Deferred rent - non current
   
-
     
40,684
 
TOTAL LIABILITIES
 
$
8,074,933
   
$
6,848,336
 
                 
STOCKHOLDERS' DEFICIT
               
Preferred stock, no par value 5,000,000 shares authorized; issued and outstanding   0 and  0 outstanding at September 30, 2012 and December 31, 2011, respectively.
   
-
     
-
 
                 
Common stock, no par value 120,000,000 shares authorized; issued but not outstanding 100,052,888 and 100,052,888, respectively; issued and outstanding 100,051,107 and  100,051,107 at September 30, 2012 and December 31, 2011, respectively.
   
1,519,074
     
1,519,074
 
Common stock payable
   
-
     
-
 
Treasury stock, 1,781 and 1,781 shares at September 30, 2012 and December 31, 2011, respectively
   
-
     
-
 
Accumulated deficit
   
(6,751,762
)
   
(5,370,761
)
Accumulated other comprehensive loss
               
(Foreign translation adjustment)
   
(63,792
)
   
(63,974
)
                 
STOCKHOLDERS' DEFICIT OF UNILAVA
   
(5,282,280
)
   
(3,915,661
)
Non-controlling interest
   
(32,781
)
   
(11,765
)
                 
TOTAL STOCKHOLDERS' DEFICIT
   
(5,315,061
)
   
(3,927,426
)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
 
$
2,759,872
   
$
2,920,910
 
 
See accompanying notes to the unaudited consolidated financial statements.
 
 

 


 

 
4

 
 

 

 


 
 UNILAVA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenue
 
$
1,596,250
   
$
871,594
   
$
2,417,137
   
$
2,696,907
 
Cost of revenue
   
877,073
     
400,150
     
1,266,135
     
1,296,124
 
Gross profit
   
719,177
     
471,444
     
1,151,002
     
1,400,783
 
Costs and Expenses
                               
Salaries and payroll taxes
   
562,313
     
315,624
     
894,368
     
1,075,263
 
Selling, general & administrative
   
770,380
     
349,838
     
1,215,199
     
1,098,391
 
Depreciation and amortization
   
69,925
     
37,987
     
106,641
     
116,667
 
Total costs and expenses
   
1,402,618
     
703,449
     
2,216,208
     
2,290,321
 
                                 
Loss from operations
   
(683,441
)
   
(232,005
)
   
(1,065,206
)
   
(889,538
)
                                 
Other Income (Expense)
                               
Interest income
   
40
     
2
     
57
     
50
 
Other income
   
24,103
     
160,355
     
66,225
     
160,552
 
Interest expense
   
(253,694
)
   
(132,817
)
   
(388,891
)
   
(353,643
)
Other expense
   
10,000
     
(409
   
-
     
(409
Total other income (expense)
   
(219,551
)
   
27,131
     
(322,609
)
   
(193,450
)
                                 
Loss before non-controlling interest
   
(902,992
)
   
(204,874
)
   
(1,387,815
)
   
(1,082,988
)
Net loss allocable to non-controlling interest
   
12,382
     
(22,413
   
21,014
     
12,027
 
Net loss
 
$
(890,610
)
 
$
(227,287
)
 
$
(1,366,801
)
 
$
(1,070,961
)
                                 
Comprehensive loss:
                               
Foreign currency translation adjustment
 
$
1,265
   
$
2,181
   
$
(182
 
$
2,953
 
Total comprehensive loss
 
$
(889,345
)
 
$
(225,106
)
 
$
(1,366,983
)
 
$
(1,068,008
)
                                 
Net loss per common share:
                               
   Basic
 
$
(0.01
)
 
$
(0.00
)
 
$
(0.01
)
 
$
(0.01
)
Weighted average common shares outstanding:
                               
   Basic
   
100,051,107
     
100,051,107
     
100,051,107
     
100,051,107
 

See accompanying notes to the unaudited consolidated financial statements.
 
 
 

 


 

 
5

 
 

 

   

UNILAVA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
For the Nine Months Ended
 
   
September 30,
 
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
 
$
(1,366,801
)
 
$
(1,070,961
)
Adjustments to reconcile net loss
               
to net cash used in operating activities:
               
Shares to be issued for services
   
-
     
-
 
Depreciation and amortization
   
106,641
     
116,667
 
Change in deferred rent
   
(36,322
)
   
(29,602
)
Net loss allocated to non-controlling interest
   
(21,016
)
   
(12,027
)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
               
Accounts receivable
   
30,664
     
122,092
 
Other current assets
   
5,383
     
(3,644
Other assets
   
(32,653
)
   
4,935
 
Accounts payable and accrued expenses
   
627,588
     
211,900
 
Accounts payable and accrued expenses – related party
   
39,624
     
21,760
 
                 
CASH USED IN OPERATING ACTIVITIES
   
(646,892
)
   
(638,880
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Interest earned on certificates of deposit
   
(32
)
   
-
 
Redemption of certificates of deposit
   
-
     
50,820
 
Purchase of furniture and equipment
   
(669
)
   
(199
)
                 
CASH USED IN (PROVIDED BY) INVESTING ACTIVITIES
   
(701
)
   
50,621
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Bank overdraft
   
39,577
     
3,870
 
Proceeds from notes payable
   
375,994
     
404,899
 
Proceeds from line of credit
   
-
     
284
 
Repayment of line of credit
   
-
     
(350,903
)
Proceeds from related party notes payable
   
197,742
     
457,000
 
Repayment of related party notes payable
   
(17,606
)
   
(14,119
)
                 
CASH PROVIDED BY FINANCING ACTIVITIES
   
595,707
     
501,031
 
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
   
182
     
(2,594
NET DECREASE IN CASH
   
(51,704
)
   
(89,822
)
CASH, beginning of period
   
51,704
     
89,822
 
CASH, end of period
 
$
-
   
$
-
 
                 
Interest paid
 
$
186,456
   
$
290,525
 
Taxes paid
 
$
-
   
$
-
 
 
See accompanying notes to the unaudited consolidated financial statements.
 
 
 


 

 
6

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

Note 1 - Organization

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

The Company consists of several subsidiaries which make up the consolidated financial statements.  The parent company is Unilava Corporation which is a holding company for the operating subsidiaries.  Local Area Yellow Pages has significant operating revenue.  Telava Wireless has significant assets.  Local Info Pages has overseas operations in Korea.  Telava Acquisitions is insignificant to the Company financial position and operating results.  Telava Mobile has minimal assets and operations.  IBFA has significant assets, liabilities and revenue.
 
TelavaNV, a privately owned company, was incorporated in Nevada on July 23, 2003 as Local Area Yellow Pages to provide advertising and directory listings for small and medium sized businesses on its internet website in a “Yellow Pages” format.  The Company provides those services to its subscribers for a monthly fee.  These services are provided primarily to small and medium sized businesses throughout the United States.  On July 10, 2007, Local Area Yellow Pages amended its Articles of Incorporation to change the name of the corporation to Telava Networks, Inc. (“TelavaNV”) for the purpose of launching its network to provide the next generation fixed and mobile WiMAX broad band solutions to small and medium businesses, public safety organizations, and others in various markets through its network.  TelavaNV continues its Yellow Pages operations while, at the same time, expanding its WiMAX network.  During the nine months ended September 30, 2012, nearly 4% of the Company’s revenues have been generated by its Yellow Pages business.
 
On January 19, 2006, TelavaNV formed Local Info Pages, Inc. (“LIP”), headquartered in Seoul, South Korea, as a wholly owned subsidiary of TelavaNV. LIP is one of the leading direct marketing and business service companies in Korea. LIP connects advertisers to targeted audiences through its network advertising products and services. On January 3, 2007, the Company acquired a website which brings value to the Company because of its large customer base which enables the Company to target and market its products to those customers.  Another division of LIP is the second largest coupon company in South Korea which enables advertisers to directly reach consumers with branded media products, coupons and other advertisements. Many consumers depend on the Company to deliver the best values in town via direct and online coupons. For advertisers, LIP offers business advertising solutions by enabling them to sell their products and services in person, online or through the mail.
 
On May 17, 2006, TelavaNV formed Telava Wireless, Inc. (“Telava Wireless”) as a subsidiary for the purpose of entering the mobile WiMAX broad band solutions market.  On November 6, 2006, the Company acquired 40 microwave towers in exchange for 25% of Telava Wireless.
 
On September 11, 2007, TelavaNV formed Telava Acquisitions, Inc. as a wholly owned subsidiary for the purpose of acquiring other related businesses.

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

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

   
 

 


 

 
7

 
 
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
Note 2 – Going Concern
 
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which contemplate continuation of the Company as a going concern.  The Company has recently sustained operating losses and has an accumulated deficit of $6,737,562 at September 30, 2012.  In addition, the Company has negative working capital of $7,756,874 at September 30, 2012.
 
The Company has and will continue to use significant capital to grow and acquire market share.    These factors raise substantial doubt about the ability of the Company to continue as a going concern.  In this regard, management is proposing to raise any necessary additional funds not provided by operations through loans or through sales of their common stock.  There is no assurance that the Company will be successful in raising this additional capital or in achieving profitable operations.  The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty.

Note 3 - Summary of Significant Accounting Policies

Basis of Presentation

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

The accompanying unaudited consolidated financial statements as of September 30, 2012 and for the three and nine month periods ended September 30, 2012 and 2011 have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and of Regulation S-X.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. In the opinion of management, these unaudited consolidated interim financial statements include all adjustments and disclosures considered necessary to a fair statement of the results for the interim periods presented.  All adjustments are of a normal recurring nature.  The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results for the full fiscal year ending December 31, 2012.  

You should read this discussion in conjunction with the consolidated financial statements, accompanying notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2011.




 
 
 
 
 

 
 


 

 
8

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

Note 3 - Summary of Significant Accounting Policies (Continued)

Fair Value of Financial Instruments

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

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

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

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

Foreign Currency Adjustments

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

Cash and Cash Equivalents

This includes all short-term highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less.  The Company has a restricted cash balance of $28,110 and $28,078 on September 30, 2012 and December 31, 2011, respectively, which is comprised of Certificates of Deposit.   The restricted cash is held in certificates of deposit at various banking institutions.  The Company is expected to maintain the amounts in the certificates of deposit per agreements with certain vendors.

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

 

 
 
 

 


 

 
9

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

Note 3 - Summary of Significant Accounting Policies (Continued)
 
Fixed Assets
 
Fixed assets are stated at cost.  Major renewals and improvements are charged to the asset accounts while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed.  At the time property and equipment are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts.  Gains or losses from retirements or sales are credited or charged to income.
 
The Company depreciates its fixed assets on a straight line basis at the following rates:
 
 Microwave towers 
 25 years
   
 Computer equipment   
 5 years
   
 Furniture and equipment 
 7 years
   
 Software 
 3 years
   
 Leasehold improvements 
 5 years

 Long-lived Assets
 
Accounting for the Impairment or Disposal of Long-Lived Assets requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may not be recovered.  The Company assesses recoverability of the carrying value of an asset by estimating the fair value of the asset.  If the fair value is less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value.  
 
Goodwill and Other Intangible Assets
 
Goodwill and other intangible assets arising from an acquisition of a business are periodically assessed for impairment rather than amortized on a straight-line basis.  Accordingly, the Company annually reviews the carrying value of this goodwill and other intangible assets to determine whether impairment, as measured by fair market value, may exist.  Specifically, goodwill and other intangible asset impairment is determined using a two-step process.  The first step of the goodwill and other intangible asset impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount.  If the fair value of a reporting unit exceeds its carrying amount, then the goodwill and other intangible assets of the reporting unit are not considered to be impaired and the second step of the impairment test is unnecessary.  If the carrying amount of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any.  The second step of the impairment test compares the implied fair value of the reporting unit's goodwill and other intangible assets with their carrying amount.  If the carrying amount of the reporting unit's goodwill and other intangible assets exceeds their implied fair value, then an impairment loss is recognized in an amount equal to that excess. Goodwill consisted of $767,873 as of September 30, 2012 and December 31, 2011 as a result of the IBFA purchase as disclosed in the Company’s December 31, 2011 Form 10-K.

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

 

 
10

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

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

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

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

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

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

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

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

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

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

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

 
11

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

Note 3 - Summary of Significant Accounting Policies (Continued)

Advertising Costs

The Company incurs advertising costs that are not considered direct response advertising and are expensed when incurred.  For the three months ended September 30, 2012 and 2011, the Company incurred approximately $727 and $4,398, respectively, in marketing and advertising expense.  For the nine months ended September 30, 2012 and 2011, the Company incurred approximately $1,531 and $1,354, respectively, in marketing and advertising expense. 

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

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

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

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

The Company reports both basic and diluted earnings per share.  Basic earnings per share are calculated using the weighted average number of common shares outstanding in the period.  Diluted earnings per share includes potentially dilutive securities such as outstanding options and warrants using the “treasury stock” method and convertible securities using the “if-converted” method.   For the nine months ended September 30, 2012 and 2011, there were no potential common  equivalent  shares used in the  calculation of dilutive weighted  average  common shares  outstanding as the effect would be anti-dilutive because of the net loss.
 
Use of Estimates

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

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

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


 

 
12

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

Note 3 - Summary of Significant Accounting Policies (Continued)

Recent Accounting Pronouncements
 
The Company has evaluated the recent accounting pronouncements through August 2012 and believes that none of them will have a material effect on the Company’s financial statements.

Concentrations of Credit Risk
 
The Company has maintained balances in excess of federally insured limits from time to time during the fiscal year.  Management periodically reviews the adequacy and strength of the financial institutions and deems this to be an acceptable risk.
 
For the three months ended September 30, 2012 and 2011, approximately 1.2% and 5.4% of the Company's net sales were made to customers outside the United States. For the nine months ended September 30, 2012 and 2011, approximately 4.0% and 2.5% of the Company's net sales were made to customers outside the United States. 
 
Reclassification
 
Certain reclassifications have been made to prior years’ financial statements to conform to the current year presentation.  These reclassifications had no effect on previously reported results of operations or accumulated deficit.  The Company reclassified $141,001 accounts payable to accounts payable – related party.
 
Note 4 – Accounts Receivable

The Company provides billing information to a third party billing company for the majority of its monthly billings.  Billings submitted are “filtered” by this billing company and the LEC’s. Net accepted billings are recognized as revenue and accounts receivable.  The billing company remits payments to the Company on the basis of cash ultimately received from the LEC’s by the billing company.  The billing company and LEC’s charge fees for services, which are netted against the gross accounts receivable balance. The billing companies also apply holdbacks to the remittance for potentially uncollectible accounts.  These dilution amounts will vary due to numerous factors and the Company may not be certain as to the actual amounts of dilution on any specific billing submittal until several months after that submittal.  The Company estimates the amount of these charges and holdbacks based on historical experience and subsequent information received from the billing companies.  The Company also estimates uncollectible account balances and provides an allowance for such estimates.  As of September 30, 2012 and December 31, 2011, the amount reserved for uncollectible account balances is $882 and $4,465, respectively.

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

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


 
 
 
 
 

 


 

 
13

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

Note 5 – Fixed Assets
 
Property and equipment consisted of the following at September 30, 2012 and December 31, 2011: 
 
   
September 30,
2012
   
December 31,
2011
 
Microwave towers
 
$
1,949,019
   
$
1,949,019
 
                 
Computer equipment
   
226,265
     
226,265
 
                 
Furniture & equipment
   
118,413
     
117,106
 
                 
Software
   
35,858
     
35,858
 
                 
Tenant improvements
   
186,949
     
186,949
 
     
2,516,504
     
2,515,197
 
Accumulated depreciation
   
(970,523
)
   
(863,304
)
                 
Fixed assets, net
 
$
1,545,981
   
$
1,651,953
 
 
Depreciation expense for the three months ended September 30, 2012 and 2011 was $34,654 and $37,987, respectively.
Depreciation expense for the nine months ended September 30, 2012 and 2011 was $106,641 and $116,667, respectively.

Note 6 – Line of Credit and Notes Payable

As of September 30, 2012, the amount, maturity date and term of each of our loans were as follows:
 
Lender
 
Principal Amount
   
Interest Rate
 
Maturity Date
Thermo Credit LLC
 
$
1,507,176
     
17.00
%
January 17, 2011
AHAP
   
40,000
   
Various
 
Upon Demand
Brilliant Capital
   
888,893
     
8.00
%
Upon Demand
InfoCity, LLC and Others
   
1,141,176
     
8.00
%
Upon Demand
Dr. Dicken Yung (related party)
   
218,746
     
0.00
%
Upon Demand
Baldwin Yung (related party)
   
382,000
     
0.00
%
Upon Demand
Boaz Yung (related party)
   
1,125
     
0.00
%
Upon Demand
Cherie Yung (related party)
   
277,742
     
0.00
%
Upon Demand
   
$
4,456,858
           

As of December 31, 2011, the amount, maturity date and term of each of our loans were as follows:
 
Lender
 
Principal Amount
   
Interest Rate
 
Maturity Date
Thermo Credit LLC
 
$
1,507,176
     
17.00
%
January 17, 2011
AHAP
   
40,000
     
8.00
%
Upon Demand
Brilliant Capital
   
574,899
     
8.00
%
Upon Demand
InfoCity, LLC and Others
   
1,079,176
     
8.00
%
Upon Demand
Dr. Dicken Yung (related party)
   
176,352
     
0.00
%
Upon Demand
Baldwin Yung (related party)
   
387,000
     
0.00
%
Upon Demand
Boaz Yung (related party)
   
1,125
     
0.00
%
Upon Demand
Cherie Yung (related party)
   
135,000
     
0.00
%
Upon Demand
   
$
3,900,728
           

We have a $2,000,000 revolving line of credit with the Thermo Credit LLC, pursuant to a credit agreement, dated July 17, 2010, between the Company and the bank. This revolving line of credit is guaranteed/secured by the all of the assets of the Company including cash, accounts receivable and fixed assets (See Note 4 Accounts Receivable and Note 5 Fixed Assets). The credit agreement had certain debt covenants that the Company did not comply with during the quarter ended September 30, 2012 and the year ended December 31, 2011.  The first covenant was that the Company must maintain a ratio of cash flow to scheduled principal payments plus all accrued interest payments on funded debt of not less than 1 to 1 as of the end of each fiscal quarter.  The second covenant was that the Company must maintain a tangible net worth of not less than $0 as of the last day of each fiscal quarter.  The credit agreement terminated on January 17, 2011, the line is in default and as such cash proceeds from the Company’s receivables and sale of assets have been directed to serve as collateral. (See Note 12, Subsequent Events)

 

 
14

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

Note 7 – Stockholders’ Equity (Deficit)
 
Preferred Stock

The Company has authorized 5,000,000 shares of no par value preferred stock available for issuance.  No shares of preferred stock are outstanding as of September 30, 2012.  Commensurate with the merger, the Company converted the former IWI Holdings outstanding Preferred Stock of 3,664,880 shares into 45,000,000 shares of common stock.

Common Stock

The authorized common stock is 120,000,000 shares at no par value.  As of September 30, 2012 and December 31, 2011, the Company had 100,052,888 and 100,052,888 shares of common stock issued but not outstanding, respectively.  The Company had 100,051,107 and 100,051,107 shares of common stock issued and outstanding, respectively.  As of September 30, 2012 and December 31, 2011, the Company had 1,781 and 1,781 shares of treasury stock. 

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

On September 8, 2011, the Company agreed to issue 3,500,000 shares of common stock to the directors of the Company valued at the fair market value of the shares totaling $35,000.  As of September 30, 2012, the shares have not been issued.

Note 8 – Segment Reporting

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

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

 

 


 
 

 


 

 
15

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

Note 8 – Segment Reporting (Continued)

For the three months ended September 30, 2012

   
Advertising Solutions
   
Wireless
   
Wireline
   
Other
   
Elimination
   
Consolidated
 
Revenue from external customers
  $ 114,245     $ 265,635     $ 480,461     $ -     $ (1 )   $ 860,340  
Cost of revenue
    64,935       178,496       233,888       -       1       477,320  
                                                 
Gross profit
    172,331       87,139       246,573       -       (2 )     383,020  
                                                 
Operations and support expenses
    407,636       21,859       187,084       38,586       (1 )     655,164  
Depreciation and amortization
    14,960       19,323       371       -       -       34,654  
                                                 
Total segment operating expenses
    422,596       41,182       187,455       38,586       (1 )     689,818  
                                                 
Segment operating income
    (250,265 )     45,957       59,118       (38,586 )     (1 )     (306,798 )
                                                 
Total other income (expense)
    (109,279 )     (16,516 )     2,188       -       (1 )     (123,608 )
                                                 
Net loss allocable to minorty interest
            (1,062 )                             (1,062 )
                                                 
Segment income before income taxes
  $ (359,544 )   $ 28,379     $ 60,306     $ (38,586 )   $ (2 )   $ (431,468 )
                                                 
Segment assets
  $ 2,317,063     $ 1,572,727     $ 1,030,537     $ (731 )   $ (2,199,301 )   $ 2,720,295  

For the three months ended September 30, 2011

   
Advertising Solutions
   
Wireless
   
Wireline
   
Other
   
Elimination
   
Consolidated
 
Revenue from external customers
 
$
191,806
   
$
68,894
   
$
475,210
   
$
-
   
$
-
   
$
735,910
 
Cost of revenue
   
68,784
     
81,309
     
249,660
     
-
     
-
     
399,753
 
Gross profit
   
123,022
     
(12,415)
     
225,550
     
-
     
-
     
336,157
 
                                                 
Operations and support expenses
   
456,221
     
21,068
     
194,848
     
5,391
     
1
     
642,530
 
Depreciation and amortization
   
15,577
     
19,322
     
372
     
-
     
-
     
35,271
 
                                                 
Total segment operating expenses
   
471,798
     
40,390
     
195,220
     
5,391
     
1
     
712,800
 
                                                 
Segment operating income
   
(348,776
)
   
(52,805
)
   
30,330
     
(5,391
)
   
(1
   
(376,643
)
                                                 
Total other income (expense)
   
(97,178
)
   
1,237
     
-
     
-
     
-
     
(95,941
)
                                                 
Net loss allocable to minority interest
   
-
     
13,442
     
-
     
-
     
-
     
13,442
 
                                                 
Segment income before income taxes
 
$
(445,954
)
 
$
(38,126
)
 
$
30,330
   
$
(5,391
)
 
$
(1
 
$
(459,142
)
                                                 
Segment assets
 
$
2,564,739
   
$
1,526,627
   
$
1,031,261
   
$
44
   
$
(2,326,286
)
 
$
2,796,385
 




 
 
 
 

 
16

 
 

  UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 
 
Note 8 – Segment Reporting (Continued)
 
For the nine months ended September 30, 2012
 
   
Advertising Solutions
   
Wireless
   
Wireline
   
Other
   
Elimination
   
Consolidated
 
Revenue from external customers
  $ 519,148     $ 418,995     $ 1,478,995     $ -     $ (1 )   $ 2,417,137  
Cost of revenue
    197,814       320,476       747,844       -       1       1,266,135  
                                                 
Gross profit
    321,334       98,519       731,151       -       (2 )     1,151,002  
                                                 
Operations and support expenses
    1,367,933       55,883       639,658       46,095       (2 )     2,109,567  
Depreciation and amortization
    47,560       57,968       1,114       -       (1 )     106,641  
Gain on disposal of asset
    -       -       -       -       -       -  
Goodwill impaiment
    -       -       -       -       -       -  
                                                 
Total segment operating expenses
    1,415,493       113,851       640,772       46,095       (3 )     2,216,208  
                                                 
Segment operating income
    (1,094,159 )     (15,332 )     90,379       (46,095 )     1       (1,065,206 )
                                                 
Total other income (expense)
    (293,384 )     (31,447 )     2,223       -       (1 )     (322,609 )
                                                 
Net loss allocable to minorty interest
            21,014                               21,014  
                                                 
Segment income before income taxes
  $ (1,387,543 )   $ (25,765 )   $ 92,602     $ (46,095 )   $ -     $ (1,366,801 )
                                                 
Segment assets
  $ 2,317,063     $ 1,572,727     $ 1,030,537     $ (731 )   $ (2,199,301 )   $ 2,720,295  


For the nine months ended September 30, 2011

   
Advertising Solutions
   
Wireless
   
Wireline
   
Other
   
Elimination
   
Consolidated
 
Revenue from external customers
 
$
804,378
   
$
119,595
   
$
1,772,935
   
$
-
   
$
-
   
$
2,696,907
 
Cost of revenue
   
245,567
     
160,601
     
889,957
     
-
     
-
     
1,296,124
 
                                                 
Gross profit
   
558,811
     
(41,006
)
   
882,978
     
-
     
-
     
1,400,783
 
                                                 
Operations and support expenses
   
1,415,232
     
59,300
     
685,615
     
13,506
     
3
     
2,173,654
 
Depreciation and amortization
   
55,590
     
59,963
     
1,114
     
-
     
-
     
116,667
 
                                                 
Total segment operating expenses
   
1,470,821
     
119,263
     
686,729
     
13,506
     
3
     
2,290,321
 
                                                 
Segment operating income
   
(912,010
)
   
(160,269
)
   
196,249
     
(13,506
)
   
(3
)
   
(889,538
)
                                                 
Total other income (expense)
   
(305,028
)
   
111,578
     
-
     
-
     
-
     
(193,450
)
                                                 
Net loss allocable to minority interest
   
-
     
12,027
     
-
     
-
     
-
     
12,027
 
                                                 
Segment income before income taxes
 
$
(1,217,038
)
 
$
(36,664
)
 
$
196,249
   
$
(13,506
)
 
$
(3
)
 
$
(1,070,961
)
                                                 
Segment assets
 
$
2,636,662
   
$
1,682,023
   
$
2,124,165
   
$
137
   
$
(2,319,468
)
 
$
4,123,519
 
  


 
  
 

 


 

 
17

 
  
UNILAVA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
Note 9 – Commitments

A portion of our facilities are under operating leases that expire at various dates through 2014.  Rent expense was $143,552 and $136,024 for the three months ended September 30, 2012 and 2011, respectively. Rent expense was $431,444 and $407,206 for the nine months ended September 30, 2012 and 2011, respectively.

Minimum rental commitments under all non-cancelable leases with an initial term in excess of one year were as follows as of September 30, 2012:
 
Year Payable
Amount
 
2012
 
 $
280,109
 
2013
   
221,352
 
2014 and Thereafter
   
7,763
 
Total
 
509,224
 

Note 10 – Litigation

Telava Networks v. Pacific EIH

On April 26, 2012, Pacific EIH Sacramento Corporation (“The Company’s Landlord at 353 Sacramento in San Francisco) and the Company, entered into a Stipulation of Entry for Judgment and Order thereon at the Superior Court of California, County of San Francisco to stipulate and agree to settle lease payments owed in the amount of $136,528 and $1,150 in attorney fees. As of September 30, 2012, the Company is current on its rental payments and in good terms with the Landlord.

Vermont Attorney General Investigation v. Local Area Yellow Pages (“LAYP”)

The Vermont Attorney General has an active investigation into the business practices of LAYP focusing on whether certain notices and a three day right to cancel were provided to customers.  The Vermont Attorney General has proposed to settle if, LAYP will agree to issue a full refund to all Vermont customers whose telephone bills were charged and a payment of $10,000 in civil penalties and injunctive relief.  The amount for the full refund to all Vermont customers is estimated at approximately $65,000.  The suit was filed in the Superior Court of Vermont.  The Company has accrued for the contingent liability.
 
Illinois Agricultural Association v. IBFA Acquisition Co. LLC (“IBFA”) and Telava Acquisitions, LLC

The Illinois Agricultural Association (IAA) claimed that IBFA and Telava Acquisitions, LLC had past due referral fees in the amount of approximately $95,000.  We denied the allegations and defended our position in arbitration.  The matter was in the discovery stage and a hearing was set for September 2011.  The suit was filed with the American Arbitration Association – Commercial Dispute Unit of Illinois.  On September 8, 2011, the AAA granted the award to IAA in the amount of $118,971.11 in full settlement of the case. The Company has accrued for the contingent liability.
 
Chen v. Unilava Corporation, et al.

In September 2010, Chris Chen, former Executive Vice President of Sales, filed a lawsuit against Unilava Corporation and Local Area Yellow Pages, Inc. (“LAYP”)  Mr. Chen seeks $49,613 in unpaid wages, $12,000 in statutory waiting time penalties and 4,300,000 shares of common stock or the fair market value of the common stock and attorneys’ fees.  In July 2010, Unilava and LAYP filed a cross-complaint seeking compensatory damages of no less than $3,000,000, punitive damages and attorneys’ fees.  The Court has ordered the parties to participate in mediation.  In September 2011, both parties entered into an agreement to settle the case for $50,000 with prejudice.

McLane v. Unilava Corporation, et al.
 
In February 2011, Caron McLane, former employee, filed a lawsuit against Unilava Corporation and Local Area Yellow Pages, Inc. (“LAYP”) and claimes that she was wrongly terminated by the company.  Ms. McLane seeks for damages for the wrongly termination claims. The company intends to vigorously defend the case and does not intend to settle the case with Ms. McLane. The Company has not accrued for the contingent liability.  On September 11, 2012, the Superior Court of the State of California- County of San Francisco ruled in favor of the Company and had ordered to dismiss the case with prejudice.
 
 

 
 

 
18

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

Note 11 – Related Party Transactions
 
As of March 31, 2012, Dicken Yung, Chairman, had a loan balance of $170,766 and $4,945 as outstanding accounts payable which is still owed by the Company. The amounts are due on demand and bear no interest.  During the six months ended September 30, 2012, the Company received additional financing of $55,000 and repaid $12,605.  As of September 30, 2012, the balance owed was $218,746 and $30,125.
 
As of March 31, 2012, Baldwin Yung, CEO, had a loan balance of $387,000 and $47,705 as outstanding accounts payable which is still owed by the Company.  The amounts are due on demand and bear no interest.  As of September 30, 2012, the balance owed was $382,000 and $45,564.
 
As of March 31, 2012, Boaz Yung, EVP, had a loan balance of $1,125 and $10,084 as outstanding accounts payable which is still owed by the Company.  The amounts are due on demand and bear no interest.  As of September 30, 2012, the balance owed was $1,125 and $10,172.
 
As of March 31, 2012, Cherie Yung, Director, had a loan balance of $170,000 and $66,184, as outstanding accounts payable which is still owed by the Company.   The amounts are due on demand and bear no interest.  As of September 30, 2012, the balance owed was $260,000 and $82,212.
 
There were no other related party transactions in 2012. 

Note 12 – Subsequent Events
 
The Company has an outstanding line of credit facility with Thermo Credit LLC (“Thermo Credit”) which is currently in default.  

The Company signed a Memorandum of Understanding on December 7, 2009 to acquire an 80% interest in China Dragon Telecom Limited ("China Dragon Telecom") and its affiliates based in Hong Kong, China. The negotiations and execution of definitive agreements, regulatory approval and the performance of other customary conditions is expected to be completed by the end of 2012 due to additional audit procedures that are needed to issue the audited financials of China Dragon Telecom. As of September 30, 2012, China Dragon Telecom was still being audited by an accounting firm.


 


 
 
 
 
 
 
 
 
 

 

 
 
 
 
 

 


 

 
19

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

Special Note Regarding Forward Looking Statements

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

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

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

You should read this discussion in conjunction with the consolidated financial statements, accompanying notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Use of Terms

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

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



 
 
 
 
 
 

 


 

 
20

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

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

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

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

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

Second Quarter Financial Performance Highlights

The following summarizes certain key financial information for the fiscal quarter ended September 30, 2012.
 
 
·
Total Sales : Total Sales was $860,340 for the three months ended September 30, 2012, a decrease of $11,254, or 1%, from $871,594 for the same period last year.

 
·
Gross Profit and Margin : Gross profit was $383,020 for the three months ended September 30, 2012, a decrease of $88,424, or 19%, from $471,444 for the same period last year. Gross margin was 45% for the three months ended September 30, 2012, as compared to 54% for the same period last year.

 
·
Net Loss: Net loss was $431,468 for the three months ended September 30, 2012, an increase of $204,181, or approximately 90%, from $227,287 for the same period of last year.
 
 
·
Basic net income per share : Basic net income per share was approximately $0.00 for the three months ended September 30, 2012, as compared to approximately $0.00 for the same period last year.
 
 
 
 

 


 

 
21

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

Comparison of Three Months Ended September 30, 2012 and 2011

The following table shows key components of our results of operations during the three months ended September 30, 2012 and 2011, in both dollars and as a percentage of our total sales.
 
U.S. dollars, except percentages
 
Three Months Ended
September 30, 2012
   
Three Months Ended
September 30, 2011
 
         
Percent of
         
Percent of
 
   
Dollars
   
Total Sales
   
Dollars
   
Total Sales
 
Total sales
 
$
860,340
     
100
%
 
$
871,594
     
100
%
Cost of sales
   
477,320
     
55
%
   
440,150
     
46
%
Gross profit
   
383,020
     
45
%
   
471,444
     
54
%
                                 
Salaries and payroll
   
246,980
     
29
%
   
315,624
     
36
%
Depreciation and amortization
   
34,654
     
4
%
   
37,987
     
4
%
Selling, general and administrative expenses
   
408,184
     
47
%
   
349,838
     
40
%
Income (loss) from operations
   
(306,798
)
   
(36)
%
   
(232,005
)
   
(27
)%
                                 
Other income  (expense)
   
(123,608
)
   
(14)
%
   
27,543
     
3
%
Loss before non-controlling interest
   
(430,406
)
   
(50)
%
   
(204,462
)
   
(23
)%
Net loss allocable to non-controlling interest
   
(1,026
   
0
   
22,413
     
3
Net loss
 
$
(431,468
)
   
          (50)
%
 
$
(226,875
)
   
(26
)%
 
Total sales . Our total sales decreased 1% to $860,340 in the three months ended September 30, 2012 from $871,594, in the same period last year, primarily as a result of a decrease in sales in our online advertising business and attrition of customer base of a subsidiary.


Cost of sales . Our cost of sales increased 17% to $477,320 in the three months ended September 30, 2012, from $400,150 in the same period last year, mainly due to a decrease in sales and an increase in costs associated with our launching of new products and our marketing campaign and training costs for our underperforming marketing centers during the 2012 period.
 
Gross profit and gross profit margin . Our gross profit decreased 19% to $383,020 in the three months ended September 30, 2012, from $471,444 in the same period last year. The gross profit margin (gross profit as a percentage of total sales) was 45% for the three months ended September 30, 2012 and 54% for the three months ended September 30, 2011. The decrease in the gross profit margin was primarily due to a decrease in overall sales.

Salaries and payroll.   Our salaries and payroll expenses decreased 22% to $246,980 in the three months ended September 30, 2012 from $315,624 in the same period last year, mainly due to a reduction in personnel and related payroll expenses during the 2012 period.
 
Selling, general and administrative expenses . Our selling, general and administrative expenses increased 17% to $408,184 in the three months ended September 30, 2012, from $349,838 in the same period last year, mainly due to an increase in legal expense in connection with our operations.
 
Other income and expenses . Interest expense decreased 5% to $126,861 in the three months ended September 30, 2012, from $132,817 in the same period in 2011, primarily due to an decrease in loan interest payments associated with the Thermo Credit LLC loan.  Increase in other income was due to the write off of open checks pertaining to a settlement with a former employee.

Net loss . As a result of the foregoing reasons, net loss increased 90% to $431,468 in the three months ended September 30, 2012, from $227,287 in the same period last year.

 
 
 

 
22

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

Net loss for the advertising solutions segment decreased 3% to ($359,544) in the three months ended September 30, 2012, from ($372,377) in the same period last year, mainly due to a decrease in sales, less efforts in direct marketing and higher attrition ratio.

Total assets for the advertising solutions segment decreased 12% to $2,317,063 as of September 30, 2012 from $2,636,662 as of September 30, 2011, mainly due to decrease in  receivables from intercompany accounts.

Net income for the wireless segment decreased 58% to $28,379 in the three months ended September 30, 2012, from net income of $68,191 in the same period last year, mainly due to cancelations of co-location agreements.

Total assets for the wireless segment decreased 9% to $1,572,727 as of September 30, 2012, from $1,682,023 as of September 30, 2011, mainly due to amortization on tower assets.

Net income for the wireline segment decreased 24% to $61,306 in the three months ended September 30, 2012, from $80,914 in the same period last year, mainly due to an increase in marketing of wireless marketing and operating costs.
 
Total assets for the wireline segment decreased 51% to $1,030,537 as of September 30, 2012, from $2,124,165 as of September 30, 2011, mainly due to impairment of goodwill during the year ended December 31, 2011.

Comparison of Nine Months Ended September 30, 2012 and 2011

The following table shows key components of our results of operations during the six months ended September 30, 2012 and 2011, in both dollars and as a percentage of our total sales.
 
U.S. dollars, except percentages
 
Nine Months Ended
September 30, 2012
   
Nine Months Ended
September 30, 2011
 
         
Percent of
         
Percent of
 
   
Dollars
   
Total Sales
   
Dollars
   
Total Sales
 
Total sales
 
$
2,417,137
     
100
%
 
$
4,123,868
     
100
%
Cost of sales
   
1,266,135
     
52
%
   
1,813,329
     
44
%
Gross profit
   
1,151,002
     
48
%
   
2,310,539
     
56
%
                                 
Salaries and payroll
   
894,368
     
37
%
   
1,349,075
     
33
%
Depreciation and amortization
   
106,641
     
4
%
   
124,963
     
3
%
Selling, general and administrative expenses
   
1,215,199
     
50
%
   
1,665,507
     
40
%
Income (loss) from operations
   
(1,065,206
)
   
(44)
%
   
(829,006
)
   
(20
)%
                                 
Other income  (expense)
   
(322,609
)
   
(13)
%
   
(137,506
   
(3
)%
Loss before non-controlling interest
   
(1,387,815
)
   
(57)
%
   
(966,512
)
   
(23
)%
Net loss allocable to non-controlling interest
   
21,014
     
1
   
25,315
     
1
Net loss
 
$
(1,366,801
)
   
          (57)
%
 
$
(841,197
)
   
(23
)%
 
Total Sales . Our total sales decreased 10% to $2,417,137 in the nine months ended September 30, 2012 from $2,696,907, in the same period last year, primarily as a result of a decrease in sales in our online advertising business and attrition of customer base of a subsidiary.
 
Cost of sales . Our cost of sales decreased 2% to $1,266,135 in the nine months ended September 30, 2012, from $1,296,124 in the same period last year, mainly due to a decrease in sales and an increase in costs associated with our new product and our marketing campaign and training costs for our underperforming marketing centers during the 2012 period.

Gross profit and gross profit margin . Our gross profit decreased 18% to $1,151,002 in the nine months ended September 30, 2012, from $1,400,783 in the same period last year. The gross profit margin (gross profit as a percentage of total sales) was 48% for the nine months ended September 30, 2012 and 52% for the nine months ended September 30, 2011. The decrease in the gross profit margin was primarily due to a decrease in overall sales.

 

 
23

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

Comparison of Nine Months Ended September 30, 2012 and 2011 - continued

Salaries and payroll.   Our salaries and payroll expenses decreased 17% to $894,368 in the nine months ended September 30, 2012 from $1,075,263 in the same period last year, mainly due to a reduction in personnel and related payroll expenses during the 2012 period.
 
Selling, general and administrative expenses. Our selling, general and administrative expenses increased 11% to $1,215,199 in the nine months ended September 30, 2012, from $1,098,391 in the same period last year, mainly due to an increase in legal expense in connection with our operations.
 
Other income and expenses . Interest expense increased 10% to $388,891 in the nine months ended September 30, 2012, from $353,643 in the same period in 2011, primarily due to an increase in loan interest associated with the Thermo Credit LLC loan.  Increase in other income was due to the write off of open checks pertaining to a settlement with a former employee.

 Net loss . As a result of the foregoing reasons, net loss increased 28% to $1,366,801 in the nine months ended September 30, 2012, from $1,070,961 in the same period last year.
 
Segment Data

Net loss for the advertising solutions segment increased 14% to ($1,387,543) in the nine months ended September 30, 2012, from ($1,217,039) in the same period last year, mainly due to a decrease in sales, less efforts in direct marketing and higher attrition ratio.

Total assets for the advertising solutions segment decreased 12% to $2,317,063 as of September 30, 2012 from $2,636,662 as of September 30, 2011, mainly due to decrease in  receivables from intercompany accounts.

Net loss for the wireless segment decreased 30% to ($25,765) in the nine months ended September 30, 2012, from net loss of ($36,664) in the same period last year, mainly due to cancelations of co-location agreements.

Total assets for the wireless segment decreased 9% to $1,572,727 as of September 30, 2012, from $1,682,023 as of September 30, 2011, mainly due to amortization on tower assets.

Net income for the wireline segment decreased 53% to $92,602 in the six months ended September 30, 2012, from $196,249 in the same period last year, mainly due to an increase in marketing of wireless marketing and operating costs.
 
Total assets for the wireline segment decreased 51% to $1,030,537 as of September 30, 2012, from $2,124,165 as of September 30, 2011, mainly due to impairment of goodwill during the year ended December 31, 2011.