|
CALIBRUS, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) Certain statements in this Report constitute "forward-looking statements." Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, performance or achievements to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Factors that might
cause such a difference include, among others, uncertainties relating to general
economic and business conditions; industry trends; changes in demand for our
products and services; uncertainties relating to customer plans and commitments
and the timing of orders received from customers; announcements or changes in
our pricing policies or that of our competitors; unanticipated delays in the
development, market acceptance or installation of our products and services; our
ability to repay our debt obligations; changes in government regulations;
availability of management and other key personnel; our ability to raise
additional capital and the availability and terms of such capital, if available;
relationships with third-party equipment suppliers; and worldwide political
stability and economic growth. The words "believe", "expect", "anticipate",
"intend" and "plan" and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date the statement was made.
27
--------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the audited Financial Statements and accompanying notes. Management
bases its estimates on historical experience and on various other assumptions
which are believed to be reasonable under the circumstances. Actual results
could differ from these estimates under different assumptions or
conditions. Calibrus believes there have been no significant changes to
accounting policies and estimates made during the year ended December 31,
2011. Calibrus believes that the following represents Calibrus' most critical
accounting policies.
We recognize revenue in accordance with FASB ASC 605-10-S99, Revenue Recognition
(formerly "SAB 104"). Under this guidance revenue is recognized at the point of
passage to the customer of title and risk of loss, when there is persuasive
evidence of an arrangement, the sales price is determinable, and collection of
the resulting receivable is reasonably assured. Our customers are charged
either on a per call basis or per minute basis according to the terms of the
contract and the service provided to that customer. Live agent TPV customers are
generally charged on a per call basis which is defined as a call that is
answered by the Company's agent. Call recording services are charged on a per
minute basis for the length of the call being recorded.
The Company from time to time executes outbound sales campaigns for customers,
primarily for the sale of telecommunications services. Although this revenue
source has been immaterial, the Company recognizes the commissions earned on
these campaigns on a net basis in accordance with FASB ASC 605-45 Reporting
Revenue Gross as a Principal versus Net as an Agent. The Company is not
currently operating any outbound calling campaigns.
Our allowance for doubtful accounts is maintained to provide for losses arising
from customers' inability to make required payments. If there is deterioration
of our customers' credit worthiness and/or there is an increase in the length of
time that the receivables are past due greater than the historical assumptions
used, additional allowances may be required.
Stock-Based Compensation. The Company has stock-based compensation plans.
Stock-based compensation expense for all stock-based compensation awards granted
after January 1, 2006 is based on the grant date fair value estimated in
accordance with the Black Scholes Pricing Model. The value of the compensation
cost is amortized on a straight-line basis over the requisite service periods of
the award (the option vesting term).
Assumptions used in the Black Scholes Pricing Model to estimate compensation
expense are determined as follows:
· Expected term is determined using an average of the contractual term and
vesting period of the award;
· Expected volatility of award grants made under the Company's plans is measured
using the historical daily changes in the market price of similar industry
indices, which are publicly traded, over the expected term of the award;
· Risk-free interest rate is equivalent to the implied yield on zero-coupon U.S.
Treasury bonds with a remaining maturity equal to the expected term of the
awards; and,
· Forfeitures are based on the history of cancellations of awards granted by the
Company and management's analysis of potential forfeitures.
We account for income taxes in accordance with FASB ASC 740 (formerly SFAS No.
109). Under this guidance, deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which the differences are
expected to reverse. Deferred tax assets will be reflected on the balance sheet
when it is determined that it is more likely than not that the asset will be
realized.
28
--------------------------------------------------------------------------------
The Company capitalizes certain software costs in accordance with FASB ASC 350
40 Internal-Use Software. The JabberMonkey website was under development through
November 2010 and reached availability for general commercial use in December
2010. Capitalized costs will be amortized over the estimated economic life of
the product which is estimated to be 3 years. Amortization expense for the year
ended December 31, 2011 was $917,164.
On December 31, 2011 the Company reviewed the carrying value of its capitalized
software development and decided to record an impairment against the remaining
value. This determination was predicated by the fact that the Company currently
lacks sufficient funds to actively market the product. Given the lead time
necessary to market the product, develop a client base and generate a revenue
stream, it could not generate sufficient cash flows to offset the remaining two
years of its estimated life. Therefore, management determined that an impairment
was justified at this time. The Company recorded impairment expense of
$1,757,898 related to this impairment.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Third Party Verification market size has been shrinking over the last four (4)
years. Calibrus' business has been severely impacted by industry consolidation
and increased competition. The telecommunications industry has been experiencing
consolidation between the major Incumbent Local Exchange Carriers (ILEC). Over
the past decade the major telecommunications players have been Verizon, SBC
Communications, BellSouth Communications, AT&T, Sprint, MCI, Adelphia
Communications and Qwest Communications. In the past three years SBC
Communications acquired AT&T and Bellsouth Communications. CenturyLink and Qwest
have merged. Adelphia Communications and MCI are no longer in business. The
remaining players are Verizon, AT&T, Sprint and Frontier. The result is that the
number of potential Calibrus ILEC/ TPV customers has declined and may shrink
even further over the next several years, reducing the overall TPV market size
even further.
Calibrus' overall business has also been affected by increased competition from
Wireless, Cable and Broadband Industries which have reduced revenue and market
share for our business. For sometime the ILEC's have been experiencing
tremendous pressure in their core business offerings (Local and Long Distance
phone service). Wireless, Cable and Broadband companies are impacting the way in
which customers are buying communication services. VOIP is also beginning to add
to existing pressures on the Telecommunications companies' revenue growth and
creating upward pressures on capital spending. In order to fight the increased
competition the ILEC's are reinventing their business models by expanding their
offerings from Local and Long Distance phone service. ILEC's are providing a
multi-service offering, i.e. Local and Long Distance phone service, Broadband,
VOIP and TV services to their customers. ILEC's have just begun to incorporate a
business strategy of "bundling" services, where a service provider includes DSL
service, Cable or Satellite TV along with Telephone or VOIP services all at
discounted rates. This is a proven strategy designed to increase revenue per
customer, promote customer loyalty and increase retention, making it more
difficult for customers to switch to another company. It is clear to us that
our TPV volume will continue to decrease due to increased competition from
service providers offering multiple services to customers.
Our contract with AT&T expired on December 31, 2009. We signed two short-term
contract extensions with modified pricing through March 2010. On April 8, 2010
the Company signed a new contract with AT&T. The contract sets forth our pricing
terms and provides the conditions on which we are to provide service to AT&T
including that our services are deemed performed when provided. AT&T renewed the
contract for a one year period in 2011. The renewal included a 2.5% pricing
discount per the terms of the original contract signed in 2010. The Company
also signed a new contract with Frontier Communications in May of 2011 which was
done in conjunction with Frontier's acquisition of 13 Verizon state landline
operations.
With the decline of the TPV market, Calibrus is looking to penetrate new markets
with its products and services. Over the next twelve (12) months Calibrus will
be focusing on more Automated Hosted Business Solutions that require little to
no labor involvement. Calibrus' management strongly believes in trying to
significantly reduce one of its highest costs, its Live Operator
workforce. Industries that we have targeted for our Automated Hosted Business
solutions are the Insurance, Internet, Real Estate, and Financial
Industries. Automated Hosted Business programs while typically generating less
top line revenue tend to have significantly higher margins. Going forward,
Calibrus plans to focus its time and efforts into pursuing these types of
products and services that shall return a higher margin than what we are able to
achieve from Live Operator programs.
29
--------------------------------------------------------------------------------
The Company did generate positive cash flow from the TPV and hosted call
recording operations for the year ended December 31, 2011.
It is anticipated that additional hardware and software may be required, as well
as additional employees, particularly software programmers and web developers,
may be needed in order to complete certain products and services. We believe
within the next twelve (12) months in order to further develop, implement,
market and sell Automated Hosted Business services we will need to raise
additional capital. We currently anticipate it will cost an additional
$1,000,000 to successfully market our new product. This is only an estimate and
may change substantially as we move forward with our new products. Additionally,
with the current economic conditions facing the country, we may have to raise
more funds if we are not able to generate sufficient revenues from the new and
existing product lines. There can be no assurance that we will be able to raise
any funds or that the funds raised will be sufficient to cover ongoing expenses.
With the launch of JabberMonkey in 2010 and Fanatic Fans in 2011 we will begin
to focus more time and capital on the social networking side of our operations
and ancillary offerings related to software development and marketing related to
social networking. We believe this will take an increasing amount of our
management time and financial resources, but believe it offers long term
opportunities that the Hosted Business Solutions does not offer.
The Company has no acquisition plans at this time.
Results of Operations
December 31, 2011
For the year ended December 31, 2011, we had revenues of $3,563,265 compared to
revenues of $3,745,876 for the year ended December 31, 2010, a decrease of
4.87%. The reduction in revenues is the result of less third party verification
work available as the telecommunication industry continued to consolidate and
our overall call volumes continue to decline. Year over year call volumes
related to our largest 5 customers decreased by 2.01% from 2010 to 2011. Since
we currently represent some of the largest telecommunication companies, we do
not believe we will see a significant increase in revenues from this
source. Accordingly, we are actively expanding our product offerings to leverage
our core technology and capabilities to cover other needs of businesses. Since
these efforts to expand our products and services have only recently begun, we
cannot say if we will be successful in bringing in additional revenues.
Over the last two years we have been successful at reducing our core operating
expenses to better match our current revenue stream and signed new contracts or
contract extensions with existing customers that provide for higher pricing as
discussed above. As such, out cost of revenues, as a percentage of sales have
remained consistent at 36% over the last two years. Research and development
expense for the year ended December 31, 2011 was $1,472,113 as compared to
$232,327 for the year ended December 31, 2010. This increase was the result of
the Company capitalizing costs related to the development of its
JabberMonkey.com website through November of 2010. Substantially, all research
and development expenses in 2011 related directly to the Fanatic Fans mobile
application. General and administrative expenses for 2011 remained largely flat
when compared to 2010. On December 31, 2011 the Company reviewed the carrying
value of its capitalized software development and decided to record an
impairment against the remaining value. This determination was predicated by the
fact that the Company currently lacks sufficient funds to actively market the
product. Given the lead time necessary to market the product, develop a client
base and generate a revenue stream, it could not generate sufficient cash flows
to offset the remaining two years of its estimated life. Therefore, management
determined that an impairment was justified at this time. The Company recorded
impairment expense of $1,757,898 related to this impairment. Interest expense
for the year was significantly higher, primarily due to increased interest
related to the Company's convertible debentures and the inclusion of $2,735,189
in conversion expense related to the conversion of the debentures. The Company
will likely see large reductions in interest expense for the year ended December
31, 2012 as the Company reduced its debt as a result of the conversion of
$1,540,000 of debt to equity.
30
--------------------------------------------------------------------------------
The Company had negative cash-flow from operations of approximately $1,033,172
for the year ended December 31, 2011. With the exception of research and
development expenses related to Fanatic Fans, the Company would have generated
positive cash flow from operations for the year ended December 31, 2011 of
approximately $439,000 (unaudited). This is indicative of the Company's success
in stabilizing the TPV business even given the downturn in volumes and revenues
through increased pricing and higher volumes of IVR services. The Company
believes that it is in a position to dramatically reduce or eliminate its R&D
expenses and cash flows attributable to its social networking projects at any
time and operate in a cash flow positive state if needed.
Seasonality and Cyclicality
We do not believe our business is cyclical.
Liquidity and Capital Resources
As of December 31, 2011 we had cash on hand of $11,065 and negative working
capital of $824,196 with current assets of $551,072 and current liabilities of
$1,375,268.
Our working capital as of December 31, 2011, decreased from negative working
capital of $1,692,763 at December 31, 2010, largely as a result of conversion of
existing debt to equity. However, the Company continued to invest resources into
the development of our social networking product offerings. We have been
working to reduce our dependence on third party verification revenues by
expanding our product offerings and generating alternative revenue sources. This
expansion has increased our usage of capital. From December 31, 2011 through
April 4, 2012 the Company has received an additional $45,000 in short-term
advances from the Company's CEO.
The Company believes it is in a position to dramatically reduce or eliminate
expenditures related to its JabberMonkey website and Fanatic Fans mobile
application if the need arises or the Company is not able to raise additional
capital to fund these projects. Research and development expense related to the
projects for the year ended December 31, 2011 totaled $1,472,113. With the
exception this expense, the Company would have generated positive proforma cash
flow of approximately $439,000 (unaudited).
Although we have been expanding our product offerings, which have increased our
need for capital, we have also reduced our long term expenses by reducing the
amount of rentable square feet in our current location. We were also able to
reduce expenses through a reduction in our workforce. We are hopeful these
changes along with our new product offerings, which are not as labor intensive,
will allow us to return to profitability, but can offer no assurances in this
regard.
As we try to expand our product offerings, we will need to seek additional
capital. As of April 4, 2012, we believe we have sufficient capital to fund
operations for the next 12 months based on our current cashflow from operations
and management's expectation of its ability to raise additional capital and
reduce expenses related to our social networking projects. Management intends to
raise additional capital either through an equity or debt placement to help
expand our marketing efforts and to be able to aggressively market our new
product offerings, including JabberMonkey and Fanatic Fans. We have estimated
our capital needs based on the potential revenues from existing clients and our
current burn rate over the previous months as we continue to investment money in
the development of our social networking projects. Our monthly burn rate is
averaging $50,000 beyond our cash receipts as of April 4, 2012. We have been
able to fund these negative amounts through cash flows from our existing core
business and through the financing of $1,575,000 via the issuance of Debentures
through October 31, 2011. The Company has received an additional $45,000
short-term advance from its CEO through April 4, 2012. We anticipate that
expenditures related to the development of JabberMonkey and Fanatic Fans will be
further reduced and focus more on maintenance and improvements to the developed
product as well. However, we will need to increase expenditures in marketing to
successfully attract users to both products. Our revenue figures may not come
to fruition given the current economic conditions in the United States and the
world in general. If we have revenue short falls, we may have to reevaluate our
ability to survive unless we have additional revenue sources on line. This may
cause us to curtail or cease development and marketing expenditures related to
our social networking projects. There can be no guarantee our new products will
increase revenues or that we can achieve profitability before our assets are
depleted.
31
--------------------------------------------------------------------------------
We estimate we will need an additional $1,000,000 in capital to cover our
ongoing expenses and to successfully market our new product offerings. This is
only an estimate and may change as we receive feedback from customers and have a
better feel of the demand and revenues from our new products. Our estimates
assume that prior discussions with interested potential customers will lead to
sales and that we will be able to maintain current revenue figures and gross
profit margins, although we can offer no assurances in this regard. With the
current economic conditions, both of these factors may change and we may not be
able to raise the necessary capital and if we are able to, that it may not be at
favorable rates.
Given the current state of Calibrus and our revenues, we do not believe bank
financing will be feasible and if we need additional capital it will be in the
form of an equity or debt offering. To this end, management has made the
decision to position Calibrus to be more attractive to investors, particularly
angel investors.
Off-Balance Sheet Arrangements
We have no off balance sheet arrangements.
[ Back To Mobile Security Homepage's Homepage ]
|
Follow Us