UNITED STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
| [ X ] |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
| |
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|
| |
For the quarterly period ended September 30, 2004
|
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|
| [ ] |
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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| |
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For the transition period from __________ to __________ |
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Commission File No.
0-26917
UCN, INC.
(Exact Name of
Registrant as Specified in Its Charter)
|
|
|
| Delaware |
|
87-0528557 |
(State or Other Jurisdiction of
Incorporation or Organization)
|
|
(IRS Employer Identification No.) |
14870 Pony Express
Road, Bluffdale, Utah 84065
(Address of Principal
Executive Offices)
(801) 320-3300
(Registrant’s
Telephone Number, Including Area Code)
(Former Name, Address and Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]
No [X]
APPLICABLE ONLY TO
CORPORATE ISSUERS:
Indicate the number of shares
outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date: 14,226,818 shares of common stock as of November 1, 2004.
FORM 10-Q
UCN, INC.
INDEX
| PART I. |
FINANCIAL INFORMATION |
Page |
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Item 1. |
Financial Statements |
|
| |
|
|
|
| |
|
Condensed Consolidated Balance Sheets as of September 30, 2004,
and December 31, 2003 (unaudited) |
3 |
| |
|
|
|
| |
|
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2004 and 2003 (unaudited) |
4 |
| |
|
|
|
| |
|
Condensed Consolidated Statements of Operations for the
Nine Months Ended September 30, 2004 and 2003 (unaudited) |
5 |
| |
|
|
|
| |
|
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2004 and 2003 (unaudited) |
6 |
| |
|
|
|
| |
|
Condensed Consolidated Statements of Stockholders' Equity
(Deficit) for the Nine Months Ended September 30, 2004 (unaudited) |
8 |
| |
|
|
|
| |
|
Notes to Condensed Consolidated Financial Statements (unaudited) |
9 |
| |
|
|
|
| |
Item 2. |
Management's Discussion and Analysis of Financial Condition
and Results of Operations |
15 |
| |
|
|
|
| |
Item 4. |
Controls and Procedures |
19 |
|
|
|
|
| PART II. |
OTHER INFORMATION |
|
|
|
|
|
|
|
| |
|
|
|
| |
Item 2. |
Changes in Securities and Use of Proceeds |
20 |
| |
|
|
|
| |
Item 6. |
Exhibits and Reports on Form 8-K |
20 |
| |
|
|
|
2
UCN, INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS — (Unaudited)
|
September 30, 2004
|
December 31, 2004
|
| ASSETS |
|
|
| Current assets: |
|
|
|
|
|
|
|
|
| Cash and cash equivalents | | |
$ | 1,007,296 |
|
$ | 3,055,384 |
|
| Restricted cash | | |
| 1,627,636 |
|
| 1,569,336 |
|
| Accounts and other receivables, net | | |
| 7,922,964 |
|
| 8,162,483 |
|
| Other current assets | | |
| 442,411 |
|
| 243,844 |
|
|
| Total current assets | | |
| 11,000,307 |
|
| 13,031,047 |
|
| |
| Property and equipment, net | | |
| 3,181,210 |
|
| 2,424,642 |
|
| Intangible assets, net | | |
| 6,617,414 |
|
| 8,018,682 |
|
| Other assets | | |
| 479,913 |
|
| 496,787 |
|
|
| |
| Total assets | | |
$ | 21,278,844 |
|
$ | 23,971,158 |
|
|
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | |
| Current liabilities: | | |
| Line of credit | | |
$ | 1,920,328 |
|
$ | 4,093,782 |
|
| Current portion of long-term debt and capital lease obligations | | |
| 1,985,462 |
|
| 7,781,484 |
|
| Trade accounts payable | | |
| 7,055,113 |
|
| 11,248,152 |
|
| Accrued liabilities | | |
| 1,921,255 |
|
| 1,828,864 |
|
|
| Total current liabilities | | |
| 12,882,158 |
|
| 24,952,282 |
|
| |
| Long-term debt and capital lease obligations | | |
| 30,489 |
|
| 646,126 |
|
|
| Total liabilities | | |
| 12,912,647 |
|
| 25,598,408 |
|
| |
| Commitments and contingencies (note 10) | | |
| -- |
|
| -- |
|
| Stockholders' equity (deficit): | | |
| Preferred stock, $0.0001 par value, 15,000,000 shares authorized; | | |
| Series A 8% cumulative convertible preferred stock; 1,827,500 | | |
| and 1,865,000 shares issued and outstanding (liquidation values | | |
| of $3,655,000 and $3,730,000) | | |
| 183 |
|
| 187 |
|
| Series B 8% cumulative convertible preferred stock; 417,800 and | | |
| 721,729 shares issued and outstanding (liquidation values | | |
| of $4,178,000 and $7,217,290) | | |
| 42 |
|
| 72 |
|
| Common stock, $0.0001 par value; 100,000,000 shares authorized; | | |
| 13,896,818 and 7,604,584 shares issued and outstanding | | |
| 1,390 |
|
| 760 |
|
| Additional paid-in capital | | |
| 31,564,071 |
|
| 20,193,148 |
|
| Warrants and options outstanding | | |
| 3,352,172 |
|
| 3,928,110 |
|
| Accumulated deficit | | |
| (26,551,661 |
) |
| (25,749,527 |
) |
|
| Total stockholders' equity (deficit) | | |
| 8,366,197 |
|
| (1,627,250 |
) |
|
| Total liabilities and stockholders' equity (deficit) | | |
$ | 21,278,844 |
|
$ | 23,971,158 |
|
|
| | |
See accompanying notes
3
UCN, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS — (Unaudited)
|
Three Months Ended September 30,
|
|
2004
|
2003
|
| Revenues from telecommunications services |
|
|
$ |
15,711,720 |
|
$ |
16,439,065 |
|
| |
| Operating expenses: | | |
| Costs of revenues | | |
| 8,711,136 |
|
| 8,849,635 |
|
| General and administrative | | |
| 3,610,703 |
|
| 3,839,901 |
|
| Selling and promotion | | |
| 3,937,226 |
|
| 3,097,090 |
|
|
| Total operating expenses | | |
| 16,259,065 |
|
| 15,786,626 |
|
|
| Income (loss) from operations | | |
| (547,345 |
) |
| 652,439 |
|
| |
| Other income (expense): | | |
| Interest income | | |
| 7,325 |
|
| 3,689 |
|
| Interest expense | | |
| (138,837 |
) |
| (468,890 |
) |
|
| Total other expense, net | | |
| (131,512 |
) |
| (465,201 |
) |
|
| Net income (loss) | | |
| (678,857 |
) |
| 187,238 |
|
| 8% Preferred dividends on Series A and B preferred stock | | |
| (157,948 |
) |
| (237,124 |
) |
|
| Net loss applicable to common stockholders | | |
$ | (836,805 |
) |
$ | (49,886 |
) |
|
| |
| Net loss per common share: | | |
| Basic and diluted | | |
| ($ 0.06 |
) |
| ($ 0.01 |
) |
| |
| |
| Weighted average common shares outstanding: | | |
| Basic | | |
| 13,805,806 |
|
| 6,414,135 |
|
| Diluted | | |
| 14,466,112 |
|
| 7,372,521 |
|
| | |
See accompanying notes
4
UCN, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS — (Unaudited)
|
Nine Months Ended September 30,
|
|
2003
|
2004
|
| Revenues from telecommunications services |
|
|
$ |
49,183,336 |
|
$ |
48,211,821 |
|
| |
| Operating expenses: | | |
| Costs of revenues | | |
| 26,862,694 |
|
| 26,106,281 |
|
| General and administrative | | |
| 11,391,190 |
|
| 11,571,010 |
|
| Selling and promotion | | |
| 10,664,801 |
|
| 8,119,473 |
|
|
| Total operating expenses | | |
| 48,918,685 |
|
| 45,796,764 |
|
|
| Income from operations | | |
| 264,651 |
|
| 2,415,057 |
|
| |
| Other income (expense): | | |
| Interest income | | |
| 28,631 |
|
| 9,090 |
|
| Interest expense | | |
| (687,954 |
) |
| (1,460,985 |
) |
| Gain on early extinguishment of debt | | |
| 109,150 |
|
| -- |
|
|
| Total other expense, net | | |
| (550,173 |
) |
| (1,451,895 |
) |
|
| Net income (loss) | | |
| (285,522 |
) |
| 963,162 |
|
| |
| 8% Preferred dividends on Series A and B preferred stock | | |
| (516,612 |
) |
| (634,212 |
) |
|
| Net income (loss) applicable to common stockholders | | |
$ | (802,134 |
) |
$ | 328,950 |
|
|
| Net income (loss) per common share: | | |
| Basic and diluted | | |
$ | ( 0.07 |
) |
$ | 0.05 |
|
| |
| |
| Weighted average common shares outstanding: | | |
| Basic | | |
| 12,048,689 |
|
| 6,285,038 |
|
| Diluted | | |
| 13,175,148 |
|
| 6,330,183 |
|
See accompanying notes
5
UCN, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS — (Unaudited)
|
Nine Months Ended September 30,
|
|
2004
|
2003
|
| Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| Net income (loss) | | |
$ | (285,522 |
) |
$ | 963,162 |
|
| Adjustments to reconcile net income to net cash provided by | | |
| (used in) operating activities: | | |
| Depreciation and amortization | | |
| 3,056,694 |
|
| 3,034,514 |
|
| Amortization of discount on notes | | |
| -- |
|
| 5,312 |
|
| Amortization of discount on long-term debt | | |
| 122,562 |
|
| 340,480 |
|
| Amortization of note financing costs | | |
| 75,000 |
|
| 97,598 |
|
| Amortization of deferred consulting fees | | |
| -- |
|
| 15,626 |
|
| Changes in operating assets and liabilities: | | |
| Accounts and other receivables | | |
| 239,519 |
|
| (3,333,853 |
) |
| Other assets | | |
| (201,102 |
) |
| (692,807 |
) |
| Trade accounts payable | | |
| (4,198,105 |
) |
| 3,149,416 |
|
| Accrued liabilities | | |
| 458,187 |
|
| 569,406 |
|
|
|
Net cash provided by (used in) operating activities |
|
|
|
(732,767 |
) |
|
4,148,854 |
|
|
| |
| Cash flows from investing activities: |
|
|
| Decrease in other assets |
|
|
|
(22,207 |
) |
|
(52,125 |
) |
| Acquisition of customer base |
|
|
|
(757,856 |
) |
|
-- |
|
| Purchases of property and equipment |
|
|
|
(1,615,057 |
) |
|
(694,314 |
) |
|
|
Net cash used in investing activities |
|
|
|
(2,395,120 |
) |
|
(746,439 |
) |
|
| |
| Cash flows from financing activities: |
|
|
| Increase in restricted cash |
|
|
|
(58,300 |
) |
|
(579,584 |
) |
| Net borrowings and payments under line of credit |
|
|
|
(2,173,454 |
) |
|
1,588,412 |
|
|
Borrowings on long-term debt, net of debt issuance costs |
|
|
|
-- |
|
|
2,299,955 |
|
|
Proceeds from exercise of options and warrants |
|
|
|
1,944,500 |
|
|
-- |
|
|
Private placement of common stock, net of offering costs |
|
|
|
8,101,274 |
|
|
-- |
|
|
Repurchase of common stock | |
|
|
(500,000 |
) |
|
(4,852 |
) |
|
Principal payments on long-term debt |
|
|
|
(6,234,221 |
) |
|
(6,667,047 |
) |
|
|
Net cash provided by (used in) financing activities |
|
|
|
1,079,799 |
|
|
(3,363,116 |
) |
|
| |
| Net increase (decrease) in cash and cash equivalents | | |
| (2,048,088 |
) |
| 39,299 |
|
| Cash and cash equivalents at the beginning of the period | | |
| 3,055,384 |
|
| 994,360 |
|
|
| Cash and cash equivalents at the end of the period | | |
$ | 1,007,296 |
|
$ | 1,033,659 |
|
|
| | |
See accompanying notes
6
UCN, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS — (Unaudited)
|
Nine Months Ended September 30,
|
|
2004
|
2003
|
| Supplemental cash flow information: |
|
|
|
|
|
|
|
|
| Cash paid for interest | | |
$ | 645,819 |
|
$ | 860,827 |
|
| |
| Supplemental schedule of noncash investing and financing activities: | | |
| Issuance of common shares in payment of preferred stock dividend | | |
$ | 785,994 |
|
$ | 768,544 |
|
| Accrual of dividend payable on preferred stock | | |
| 516,612 |
|
| 634,212 |
|
| Issuance of common shares for officer's personal guaranty | | |
| -- |
|
| 36,300 |
|
| Issuance of warrants with private placement of common stock | | |
| 189,336 |
|
| -- |
|
| Issuance of warrants with consulting contract | | |
| 72,465 |
|
| -- |
|
| Retirement and replacement of note payable | | |
| -- |
|
| 800,000 |
|
| Conversion of note payable into common stock | | |
| 300,000 |
|
| -- |
|
| Conversion of accrued interest to note payable | | |
| -- |
|
| 435,388 |
|
| Increase in Touch America obligation with amended agreement | | |
| -- |
|
| 3,264,576 |
|
| Issuance of preferred stock to acquire VoIP assets | | |
| 91,348 |
|
| 1,400,738 |
|
| Capital expenditures financed with capital lease obligation | | |
| -- |
|
| 100,691 |
|
| | |
See accompanying notes
7
UCN, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) — (Unaudited)
| |
Preferred Stock
|
Common Stock
|
Additional
Paid-in |
Warrants/
Options |
Accumulated |
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Outstanding
|
Deficit
|
Total
|
| Balance at January 1, 2004 |
|
|
| 2,586,729 |
|
$ | 259 |
|
| 7,604,584 |
|
$ | 760 |
|
$ |
20,193,148 |
|
$ |
3,928,110 |
|
$ |
(25,749,527 |
) |
$ |
(1,627,250 |
) |
| |
| Issuance of preferred stock | | |
| in connection with the | | |
| acquisition of VoIP assets | | |
| 16,071 |
|
| 2 |
|
| -- |
|
| -- |
|
| 91,346 |
|
| -- |
|
| -- |
|
| 91,348 |
|
| Conversion of preferred shares | | |
| to common stock | | |
| (357,500 |
) |
| (36 |
) |
| 1,637,500 |
|
| 164 |
|
| (128 |
) |
| -- |
|
| -- |
|
| -- |
|
| Exercise warrants to purchase | | |
| common stock | | |
| -- |
|
| -- |
|
| 682,000 |
|
| 68 |
|
| 2,149,618 |
|
| (785,186 |
) |
| -- |
|
| 1,364,500 |
|
| Exercise employee options to | | |
| purchase common stock | | |
| -- |
|
| -- |
|
| 265,000 |
|
| 27 |
|
| 579,973 |
|
| -- |
|
| -- |
|
| 580,000 |
|
| Conversion of promissory note to | | |
| common stock | | |
| -- |
|
| -- |
|
| 150,000 |
|
| 15 |
|
| 299,985 |
|
| -- |
|
| -- |
|
| 300,000 |
|
| Expiration of warrants to | | |
| purchase common stock | | |
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| 52,553 |
|
| (52,553 |
) |
| -- |
|
| -- |
|
| Private placement of common stock, | | |
| net of offering costs | | |
| -- |
|
| -- |
|
| 3,782,000 |
|
| 378 |
|
| 7,911,560 |
|
| 189,336 |
|
| -- |
|
| 8,101,274 |
|
| Issuance of warrants for services | | |
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| 72,465 |
|
| -- |
|
| 72,465 |
|
| Preferred stock dividends | | |
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| (516,612 |
) |
| (516,612 |
) |
| Issuance of common shares as | | |
| payment of preferred stock | | |
| dividends | | |
| -- |
|
| -- |
|
| 290,294 |
|
| 29 |
|
| 785,965 |
|
| -- |
|
| -- |
|
| 785,994 |
|
| Repurchase of shares from | | |
| stockholder | | |
| -- |
|
| -- |
|
| (514,560 |
) |
| (51 |
) |
| (499,949 |
) |
| -- |
|
| -- |
|
| (500,000 |
) |
| Net loss | | |
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| (285,522 |
) |
| (285,522 |
) |
|
| Balance at September 30, 2004 | | |
| 2,245,300 |
|
$ | 225 |
|
| 13,896,818 |
|
$ | 1,390 |
|
$ | 31,564,071 |
|
$ | 3,352,172 |
|
$ | (26,551,661 |
) |
$ |
8,366,197 |
|
8
UCN, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
September 30, 2004
1. Basis of presentation
| |
These unaudited interim financial statements of UCN, Inc. and its subsidiary (collectively,
“UCN” or “the Company”) have been prepared in accordance with the
rules and regulations of the United States Securities and Exchange Commission (the
“Commission”). Such rules and regulations allow the omission of certain
information and footnote disclosures normally included in the financial statements
prepared in accordance with accounting principles generally accepted in the United States,
so long as the statements are not misleading. In the opinion of Company management, these
financial statements and accompanying notes contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the financial position and
results of operations for the periods shown. These interim financial statements should be
read in conjunction with the audited financial statements and notes thereto contained in
our Annual Report on Form 10-KSB for the year ended December 31, 2003, as filed with the
Commission on March 30, 2004. |
| |
The results of operations for the three and nine month periods ended September 30, 2004 are
not necessarily indicative of the results to be expected for the full year. Certain
reclassifications have been made to the financial statements for prior periods in order to
conform to the 2004 presentation. |
2.
Summary of significant accounting policies
| |
Net
Income (Loss) Per Common Share: Basic net income (loss) per common share (“Basic
EPS”) excludes dilution and is computed by dividing net income applicable to common
shareholders by the weighted average number of common shares outstanding during the
quarterly and year-to-date periods. Diluted net income (loss) per common share
(“Diluted EPS”) reflects the potential dilution that could occur if stock
options or other common stock equivalents were exercised or converted into common stock.
The computation of Diluted EPS does not assume exercise or conversion of securities that
would have an antidilutive effect on net income (loss) per common share, and is therefore
not presented. |
Following
is the reconciliation of Basic and Diluted EPS:
|
|
|
|
|
Three months ended
September 30, |
|
Nine Months
ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common
stockholders as reported |
|
|
$ |
(836,805 |
) |
$ |
(49,886 |
) |
$ |
(802,134 |
) |
$ |
328,950 |
|
|
| Basic EPS: | | |
| Weighted average number of common shares outstanding |
|
|
|
13,805,806 |
|
|
6,414,135 |
|
|
12,048,689 |
|
|
6,285,038 |
|
|
| Basic net (loss) income per share |
|
|
$ | (0.06 |
) |
$ | (0.01 |
) |
$ | (0.07 |
) |
$ |
0.05 |
|
|
| Diluted EPS: | | |
| Common and common equivalent shares outstanding: | |
|
| Weighted average number of common shares outstanding |
|
|
|
13,805,806 |
|
|
6,414,135 |
|
|
12,048,689 |
|
|
6,285,038 |
|
| Common stock equivalents from options and | | |
| warrants computed on the Treasury Stock | | |
| method, using the average fair market | | |
| value of common stock outstanding during | | |
| the period |
|
|
|
660,306 |
|
|
958,386 |
|
|
1,126,459 |
|
|
45,145 |
|
|
| Shares used in the computation |
|
|
|
14,466,112 |
|
|
7,372,521 |
|
|
13,175,148 |
|
|
6,330,183 |
|
|
| Diluted net income per share |
|
|
|
|
|
|
|
|
|
|
|
$ |
0.05 |
|
|
9
| |
Stock-Based Compensation:: Employee compensation expense is measured using the intrinsic method. No
stock-based compensation cost is reflected in net income applicable to common stockholders, since all options
had an exercise price equal to or greater than the market price of the underlying common stock at the date of
grant. The following table illustrates the effects on net income (loss) applicable to common stockholders and
earnings (loss) per share if expense was measured using the fair value recognition provision of Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation: |
|
|
|
|
|
Three months ended
September 30, |
|
Nine Months
ended September 30, |
|
|
|
|
|
|
|
|
| Net income (loss) applicable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As reported |
|
|
$ |
(836,805 |
) |
$ |
(49,886 |
) |
$ |
(802,134 |
) |
$ |
328,950 |
|
| Pro forma stock-option based compensation | | |
| (103,410 |
) |
| (57,567 |
) |
| (380,310 |
) |
| (215,376 |
) |
|
| Pro forma net income (loss) applicable to |
|
|
| common stockholders |
|
|
$ |
(940,215 |
) |
$ |
(107,453 |
) |
$ |
(1,182,444 |
) |
$ |
113,574 |
|
|
| Basic and diluted net income (loss) per common share: | | |
| As reported | | |
$ | (0.06 |
) |
$ | (0.01 |
) |
$ | (0.07 |
) |
$ | 0.05 |
|
| Pro forma basic and diluted net income (loss) per | | |
| common share | | |
$ | (0.07 |
) |
$ | (0.02 |
) |
$ | (0.10 |
) |
$ | 0.02 |
|
| |
We estimated the fair value of options granted under our employee stock-based compensation
arrangements at the date of grant using the Black-Scholes model with the following
weighted-average assumptions: |
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
|
| Dividend yield |
|
|
|
None |
|
|
None |
|
| Expected volatility |
|
|
|
63% |
|
|
83% |
|
| Risk-free interest rate |
|
|
|
3.45% |
|
|
2.12% |
|
| Expected life (years) |
|
|
|
5.0 |
|
|
4.2 |
|
| Weighted average fair value of grants |
|
|
|
$ 1.55 |
|
|
$ 1.29 |
|
Other
Comprehensive Income: There were no components of other comprehensive income other
than net income.
| |
Business Segments and Related Information: SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, establishes standards for the way public
business enterprises are to report information about operating segments in annual
financial statements and requires enterprises to report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosure about products and services, geographic areas
and major customers. The Company currently operates in only one business segment. |
| |
Long-Lived Assets: In accordance with SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, we evaluate the carrying value of long-lived assets,
including intangibles, when events or circumstances indicate the existence of a possible
impairment, based on projected undiscounted cash flows, and recognize impairment when such
cash flows will be less than the carrying values. Measurement of the amounts of
impairments, if any, is based upon the difference between carrying value and fair value.
Events or circumstances that could indicate the existence of a possible impairment include
obsolescence of the technology, an absence of market demand for the product, and/or
continuing technology rights protection. Management believes the net carrying amount of
long-lived assets will be recovered by future cash flows generated by commercialization of
the technology related to the long-lived asset and from cash flows generated from customer
lists. |
| |
Capitalized Software Costs: In accordance with Statement of Position 98-1, Accounting for Costs
of Computer Software Developed or Obtained for Internal Use, the Company
capitalizes certain costs incurred for the development of internal use software. These
costs include the costs associated with coding, software configuration, upgrades, and
enhancements. During the three and nine months ended September 30, 2004, the Company
capitalized $117,952 and $531,222, respectively. |
| |
10 |
| |
Recent Accounting Pronouncements: In March 2004, the Financial Accounting Standards Board
(“FASB”) reached a consensus on Emerging Issues Task Force (EITF) Issue No.03-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. This pronouncement provides guidance to determine the meaning of
other-than-temporary impairment and its application to investments classified as either
available-for-sale or held-to-maturity (including individual securities and investments in
mutual funds), and investments accounted for under the cost method or the equity method.
The guidance for evaluating whether an investment is other-than-temporarily impaired is to
be applied in other-than-temporary impairment evaluations made in reporting periods
beginning after June 15, 2004. The adoption of Issue No. 03-1 did not have a material
impact on the financial statements. |
3. Customer acquisitions
| |
UCN entered into an agreement to purchase 37 dedicated long distance customers from Source
Communications, LLC for $757,856 in cash in February 2004. The transaction was closed in
March 2004. The total purchase price was entirely allocated to customer lists acquired,
and is included in intangible assets in the accompanying condensed consolidated balance
sheets. |
4.
Gain on early extinguishment of debt
| |
During 2003 the Company entered into a Purchase Agreement to acquire approximately 12,000 long
distance customers from Glyphics Communications, Inc. Subsequently, the two parties agreed
that UCN would accelerate payments under the agreement in exchange for a discount on the
purchase price. The final payment under the agreement was made in February 2004, and the
Company recorded a $109,150 gain on the early extinguishment of the debt. |
5. Intangible assets
Intangible
assets consisted of the following:
|
|
|
|
|
September 30, 2004 |
|
December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Asset |
|
Accumulated
amortization |
|
Intangible
assets, net |
|
Gross
asset |
|
Accumulated
amortization |
|
Intangible
assets, net |
|
|
|
|
|
|
|
|
|
|
| Customer lists acquired |
|
|
$ | 11,518,164 |
|
$ | 5,752,517 |
|
$ | 5,675,647 |
|
$ | 10,760,307 |
|
$ | 3,840,679 |
|
$ | 6,919,628 |
|
| Technology and patents | | |
| 1,318,865 |
|
| 467,098 |
|
| 851,767 |
|
| 1,318,865 |
|
| 219,811 |
|
| 1,099,054 |
|
|
| | | |
$ | 12,837,029 |
|
$ | 6,219,615 |
|
$ | 6,617,414 |
|
$ | 12,079,172 |
|
$ | 4,060,490 |
|
$ | 8,018,68 |
2 |
|
| |
Total amortization expense of intangible assets was $728,672 for the three months ended
September 30, 2004, and $2,159,125 for the nine months ended September 30, 2004. Depending
on the type of customers, the useful lives of customer lists acquired range from 36 to 48
months, and are evaluated for recoverability on an annual basis. |
| |
Amortization expense for all intangible assets during the three months ended December 31, 2004, and
during the four-year period ending December 31, 2008 is expected to be $728,672, $2.7
million, $2.4 million, $791,585, and $31,577, respectively. |
6. Accrued liabilities
| |
Accrued liabilities consisted of the following: |
|
|
|
|
|
September 30,
2004 |
|
December 31,
2003 |
|
|
|
| Accrued commissions |
|
|
$ |
906,268 |
|
$ |
669,523 |
|
| Accrued dividends | | |
| 204,151 |
|
| 478,599 |
|
| Accrued payroll and related costs | | |
| 591,718 |
|
| 257,824 |
|
| Other | | |
| 219,118 |
|
| 422,918 |
|
|
| |
|
|
$ |
1,921,255 |
|
$ |
1,828,864 |
|
| |
11 |
7. Capital Transactions
| |
During the nine months ended September 30, 2004, investors exercised warrants to purchase a total
of 682,000 shares of common stock. Total proceeds received in these transactions was $1.4
million. Included in these amounts were warrants to purchase 297,500 shares exercised by
one of the Company’s directors, for which the Company received $595,000. |
| |
On March 15, 2004 the Company closed a private placement to institutional and accredited
investors. The Company sold 3,782,000 shares of common stock at $2.30 per share, or a
total of approximately $8.7 million. Net proceeds of the offering after placement fees and
expenses were approximately $8.1 million. A portion of the expenses associated with this
transaction was the issuance to the investment banking firm of 164,125 warrants to
purchase common shares at $2.76 per share that expire March 15, 2007. The fair market
value of the warrants, using the Black-Scholes pricing model, was $189,336. |
| |
In connection with the placement, Acceris Communications Inc., formerly I-link Incorporated
and the holder of 300,000 shares of Series B Convertible Preferred Stock, converted all of
its preferred stock to 1.5 million common shares. Acceris subsequently sold 750,000 of
those common shares to the investors in the private placement at $2.30 per share. |
| |
In January and February 2004, three Directors exercised options to purchase a total of
255,000 shares of Common Stock. Total proceeds received by the Company in connection with
these exercises was $555,000. |
| |
In December 2003, a holder of 100,000 shares of Series B Convertible Preferred Stock
converted all of those shares to 500,000 shares of common stock. In January 2004, the
holder sold those common shares plus 14,560 additional shares, or a total of 514,560
shares, to UCN for $500,000 in a privately negotiated transaction. |
| |
In May 2004, a holder of Preferred Stock converted a $300,000 promissory note into 150,000
shares of common stock at a conversion price of $2.00 per share. In June 2004, the Company
repaid two other promissory notes totaling $200,000 under prepayment terms that allowed
UCN to repay the notes two years earlier than the stated maturity dates. All three of
these promissory notes had been secured by equipment. |
8. Major suppliers
| |
For the three-month periods ended September 30, 2004 and 2003, approximately 53 and 70
percent, respectively, of the Company’s cost of revenue was generated from two
telecommunication providers. For the nine-month periods ended September 30, 2004 and 2003,
approximately 55 and 71 percent of cost of revenue was generated by the same two
providers. As of September 30, 2004 and December 31, 2003, respectively, the Company owed
$3.1 million and $3.0 million to these providers. |
9. Related party
transactions
| |
Related party transactions not previously disclosed include the following: |
| |
During the nine months ended September 30, 2004 the Company paid Theodore Stern, one of its
directors who also is Chief Executive Officer, $6,250 per month for consulting, marketing,
and capital raising activities. At September 30, 2004, there was no amount owed to Mr.
Stern. |
| |
During the nine months ended September 30, 2004, there were several debt arrangements with
directors more fully described in the Company’s Form 10-KSB filed with the Securities
and Exchange Commission on March 30, 2004. Interest expense on obligations owed to related
parties during the three and nine months ended September 30, 2004 was $36,638 and
$187,807, respectively. |
| |
On April 12, 2004, UCN repaid $2.3 million in promissory notes to one of its directors. The
director used $595,000 of the proceeds to exercise 297,500 warrants. |
12
On
April 26, 2004, the Company repaid a $50,000 note payable to another of its directors.
| |
Three of the Company’s current and prior directors participated in the 1999 Series A and
2000 Series B Preferred Stock issuances under the same terms as all other outside
investors. In February and August 2004 dividends of Common Stock were paid to all holders
of Preferred Stock. Of this amount, the participating directors received a total of 33,054
shares of Common Stock. |
10. Contingencies and
Commitments
| |
In May 2004, the Company entered into a one-year consulting agreement. As part of the
consultant’s compensation, UCN agreed to issue up to 140,000 five-year warrants to
purchase common stock at an exercise price of $4.00 per share. The fair market value of
the warrants were and will be calculated using the Black-Scholes method. Up to 90,000
warrants worth a total of $72,465 are to vest ratably over a period of one year, or until
the consulting agreement is terminated, whichever comes sooner. 50,000 warrants will vest
in January 2005 only upon the completion of certain performance measures. |
11. MyACD acquisition
| |
In October 2003, UCN acquired the exclusive right to sell and manage the enhanced
telecommunications functions of MyACD, Inc., a Utah corporation (“MyACD”). MyACD
develops and distributes telephony software solutions for call center traffic management
and related functions that UCN offers to customers over its VoIP network acquired earlier
in 2003. The agreement included a one-year option to purchase MyACD for approximately $6.2
million, paid over a three-year period beginning in January 2005. During the term of the
agreement, UCN had the sole right to manage sales and marketing efforts, customer service,
and billing of MyACD customers. In addition, MyACD continued to provide enhanced service
development and configuration, and UCN paid MyACD a fixed management fee for these
services. |
| |
On September 30, 2004, UCN, Inc. entered into a Purchase Option Exercise and Agreement on
Related Matters with MyACD, and with Michael L. Shelton (“Shelton”) and David O.
Peterson (“Peterson”), the holders of all the common stock of MyACD. Under this
Option Exercise Agreement: |
| |
UCN and MyACD extended the term of the October 2003 Cooperation and Management Agreement through the
end of 2004; |
| |
UCN exercised its option to purchase all of the capital stock of MyACD from
Shelton and Peterson under the October 2003 Purchase Option Agreement; and |
| |
UCN, Shelton, and Peterson amended the October 2003 Purchase Option Agreement to
schedule the acquisition closing on January 5, 2005, and modified terms of payment and
other provisions. |
| |
The total purchase price for MyACD is $6.2 million. The purchase price will be paid in January
2005 when UCN issues to Shelton a promissory note in the principal amount of $5.6 million,
and to Peterson a promissory note in the principal amount of $581,538. Both notes are
non-interest bearing. |
Payments
required under the Shelton note, which in no case will exceed the $5.6 million total, are:
| |
(a)
A payment of $1.4 million on January 5, 2005 and a payment of $35,255 on
January 15, 2005; |
| |
(b)
11 monthly payments on the 15th day of each month
beginning February 15, 2005 each in an amount equal to 15.4 percent of MyACD
product revenue in each calendar month, but in no event will each such payment
be less that $35,255 or greater than $135,956; |
|
(c)
12 monthly payments on the 15th day of each month beginning January
15, 2006 each in an amount equal to 15.4 percent of MyACD product revenue in
each calendar month, but in no event will each such payment be less that $90,640
or greater than $181,280; |
13
|
(d)
12 monthly payments on the 15th day of each month beginning January
15, 2007 each in an amount equal to 15.4 percent of MyACD product revenue in
each calendar month, but in no event will each such payment be less that
$135,956 or greater than $226,595; and |
|
(e)
Remaining unpaid principal, if
any, on or before January 15, 2008. |
| |
The first payment under the Shelton note of $1.4 million due on January 5, 2005 is payable
$231,492 in cash and by issuing to Shelton in lieu of money 562,985 shares of fully paid
and non-assessable common stock of UCN. However, if the average fair market value of the
common stock during the 60 trading-day period ending on and including December 31, 2004 is
less than $2.00 per share or if the fair market value of the common stock on January 4,
2005 is less than $2.00 per share, then in lieu of issuing to Shelton shares of common
stock UCN must make the balance of the payment of $1.1 million in cash. Fair market value
of UCN common stock will be determined on the basis of the average of the highest
“bid” and lowest “asked” quotations for a share of common stock in the
over-the-counter market. |
Payments
required under the Peterson note, which in no case will exceed $581,538, are:
| |
(a)
A payment of $195,385 on January 5, 2005 and a payment of $4,745 on January 15,
2005; |
| |
(b) 11 monthly payments on the 15th day of each month beginning
February 15, 2005 each in an amount equal to 1.6 percent of of MyACD product
revenue in each calendar month, but in no event will each such payment be less
that $4,745 or greater than $14,044; |
| |
(c)
12 monthly payments on the 15th day of each month beginning January
15, 2006 each in an amount equal to 1.6 percent of MyACD product revenue in each
calendar month, but in no event will each such payment be less that $9,360 or
greater than $18,720; |
| |
(d)
12 monthly payments on the 15th day of each month beginning January
15, 2007 each in an amount equal to 1.6 percent of MyACD product revenue in each
calendar month, but in no event will each such payment be less that $14,044 or
greater than $23,405; and (e) Remaining unpaid principal, if any, on or
before January 5, 2008. |
| |
Both notes will be secured by UCN pledging the common stock of MyACD acquired in the
transaction as collateral. UCN’s payment obligations under the notes may be
accelerated by the holders on the occurrence of events of default, which include
non-payment, insolvency or bankruptcy, breaches of certain representations and warranties
of UCN in the Option Purchase Agreement, or UCN’s termination without cause of
employment agreements with Shelton or Peterson. The stated term of both employment
agreements is up to the date of repayment in full of the two respective promissory notes. |
| |
MyACD
is the obligor on two promissory notes issued in October 2003 to a former stockholder of
MyACD. |
| |
Upon the acquisition of MyACD as a wholly owned subsidiary in January 2005 the
remaining payment obligations on these notes will appear on the balance sheet of UCN as a
result of its consolidation with MyACD for financial reporting purposes. One note in the
original principal amount of $575,000 is non-interest bearing, and is payable in monthly
installments of $11,275 beginning October 31, 2003 and continuing through December 31,
2008 when all remaining principal is due and payable in full. At October 1, 2004 the
remaining principal due on the foregoing note was $439,700, and at January 5, 2005 the
remaining principal due should be $405,875. The second note is in the principal amount of
$85,710, is non-interest bearing, and is payable in equal monthly installments of $2,381
commencing January 5, 2005 and continuing through December 5, 2007 when all remaining
principal is due and payable in full. The |
14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
| |
UCN, Inc. (formerly Buyers United,
Inc.) is a domestic telecommunications company that offers and sells a wide range of long
distance and related communication services to business and residential customers.
Historically we functioned as an aggregator and reseller of telecommunications services
provided by others. We intend to continue to pursue and develop this type of business. |
| |
In 2003 UCN purchased assets and
licensed in perpetuity software that enabled UCN to establish and operate a Voice over
Internet Protocol communications network (VoIP Network). With the VoIP Network UCN now
offers, as a provider, enhanced services such as automated call distribution. Furthermore,
UCN transmits data and other communication services for a portion of the journey over the
VoIP Network rather than entirely through third party providers. |
| |
In October 2003, UCN acquired the
exclusive right to sell and manage the enhanced telecommunications functions of MyACD,
Inc., a Utah corporation (“MyACD”), with a one-year option to purchase it at a
price of approximately $6.2 million. On September 30, 2004 UCN exercised the option, and
the acquisition of MyACD will be effective January 5, 2005. With the MyACD technology we
are now offering a new product approach that combines our national VoIP Network with
on-demand proprietary telephony software for contact handling/management applications. We
are changing the way mission critical applications are delivered and priced for the
contact center marketplace, or for any business or department seeking to improve how it
manages the productivity and quality of its customer contact opportunities. |
| |
UCN entered into an agreement to
purchase 37 dedicated long distance customers from Source Communications, LLC for $757,856
in February 2004. The transaction was completed in March 2004. |
| |
We generate internal growth by
pursuing multiple marketing avenues, including using independent agents, value-added
resellers, and selling through our direct sales force. |
Results of Operations
Revenues
| |
Total revenues decreased 4.4 percent
to $15.7 million for the three months ended September 30, 2004 as compared to $16.4
million for the same period in 2003. For the nine months ended September 30, 2004,
revenues increased 2.0 percent to $49.2 million as compared to $48.2 million for the same
period in 2003. The increase in revenue for the nine months ended September 20, 2004
compared to the same period in 2003 is due to new customers purchased throughout 2003 and
the acquisition of customers from Source Communication, LLC, which closed in March 2004.
We also generated growth internally from ongoing promotional efforts, primarily involving
independent agents. These revenue increases from new and existing customers during the
first nine months of 2004 were offset by attrition of our residential customer base. |
| |
Our plan since the beginning of 2004
is to focus our marketing effort on business users of telecommunication services, not
residential long distance users, because we believe there is a much greater opportunity
for a business of our size and resources to increase revenues through the sale of enhanced
telecommunications services to business customers rather than through the sale of
traditional long distance service to residential customers. With the technology we
acquired in 2003 we have developed a menu of enhanced communication services that we are
now introducing to our existing business customers and to new prospects through our
established independent agent sales channel. As a result of these dynamic changes in our business we are experiencing a transition in our sales mix, the effect of which is
reflected in the revenue decrease experienced during the three months ended September 30,
2004. We expect this transition period will continue through the end of 2004 and into
2005. During the transition we believe the downward trend in revenues will continue until
the growing momentum in sales of enhanced services overtakes diminished revenue caused by
attrition in our residential long distance customer base. |
15
Cost of revenues
| |
Cost of revenues for the three month
period ended September 30, 2004 was $8.7 million, a 1.6 percent decrease, compared to $8.8
million for the comparable period in 2003. For the nine month period ended September 30,
2004, cost of revenues increased to $26.9 million, a 2.9 percent increase as compared to
$26.1 million for the nine month period ended September 30, 2003. Cost of revenues as a
percentage of revenue for the three month period ended September 30, 2004 was 55.4 percent
as compared to 53.8 percent during 2003, and was 54.6 percent for the nine months ended
September 30, 2004 compared to 54.1 percent for the same period in 2003. The decrease in
gross margin in the third quarter of 2004 compared to the third quarter of 2003 is the
result of the combination of lower, more competitive pricing we adopted in some of the
newer long-distance rate plans and the change in our sales mix from residential customers
to business customers. |
| |
We expect competitive pressures will
continue to depress pricing for traditional long distance and have a negative impact on
gross margin for this service. However, enhanced telecommunication services are priced on
the basis of number of users and service features selected, so gross margin for that type
of revenue is not subject to the same downward pressure as long distance service. |
General and
administrative expenses
| |
General and administrative expenses
in the third quarter of 2004 decreased 6.0 percent to $3.6 million compared to $3.8
million in the third quarter of 2003, and for the nine months ended September 30, 2004
decreased 1.6 percent to $11.4 million as compared to $11.6 million for the nine months
ended September 30, 2003. A portion of the difference is attributable to the higher costs
we incurred in 2003 to integrate and improve the VoIP Network acquired at the beginning of
2003 compared to the costs of maintaining and upgrading the Network during the first nine
months of 2004. In addition, we have continued to improve operating efficiencies in this
area, resulting in decreased expenses during 2004. |
Selling and promotion
expenses
| |
Selling and promotion expenses
increased 27.1 percent to $3.9 million during the three month period ended September 30,
2004 from $3.1 million for the same period in 2003. Such expenses increased 31.3 percent
to $10.7 million for the nine months ended September 30, 2004 compared to $8.1 million
during the nine months ended September 30, 2003. The increases are the result of the
transition in our sales mix over the first nine months of 2004 as higher commissioned
business customers increased in the first nine months of 2004, and lower commissioned
residential customers decreased through attrition. In addition, during the second and
third quarters of 2004 we increased expenses related to our various sales channels,
including the addition of several sales-related personnel. |
Other income (expense)
| |
Interest expense for the three month
period ended September 30, 2004 was $138,837, compared to $468,890 in 2003, and for the
nine months ended September 30, 2004 interest expense was $687,954 compared to $1.5
million in 2003. The decreases were the result of a reduction in the outstanding debt
throughout 2004 compared to 2003. |
Other income (expense)
| |
During the third quarter of 2003, UCN
entered into a Purchase Agreement to acquire approximately 12,000 long distance customers
from Glyphics Communications, Inc. Subsequently, the two parties agreed that UCN would
accelerate payments under the agreement in exchange for a discount on the purchase price.
The final payment under the agreement was made in February 2004, and we recorded a
$109,150 gain during the first quarter of 2004 on the early extinguishment of the debt. |
16
Liquidity and Capital
Resources
| |
UCN completed a private placement of common stock on March 15, 2004. UCN sold 3,782,000 shares of common stock at $2.30 per
share, or a total of approximately $8.7 million. Net proceeds of the offering after
placement fees and expenses were approximately $8.1 million. The net proceeds of the
private placement have been used for various purposes, including sales and marketing
related programs, funding further development of our VoIP Network, reducing debt, and for
working capital and other general corporate purposes. |
| |
UCN’s current ratio as of
September 30, 2004 increased to 0.85:1 from 0.52:1 at December 31, 2003. The components of
current assets and current liabilities that changed most significantly since the end of
2003 were the line of credit, the current portion of long-term debt and capital lease
obligations, and accounts payable. |
| |
During the nine months ended September 30, 2004 long-term debt and the related current portion of long-term debt
decreased by $6.2 million. Included therein was $2.3 million in note repayments to one of
UCN’s directors. The director subsequently exercised warrants to purchase 297,500
shares of common stock. The proceeds received by UCN totaled $595,000. UCN also repaid a
$50,000 note payable to another of its directors. Also included in the long-term debt
decrease was the conversion of a $300,000 promissory note into 150,000 shares of common
stock. |
| |
UCN has a line of credit agreement
with RFC Capital Corporation that expires in January 2006. The available borrowing limit
is $5 million. Interest accrues at prime plus three percent. The facility allows UCN to
obtain financing on its eligible accounts receivable, including unbilled receivables and
regular monthly billings. The facility is collateralized by the underlying receivables. On
September 30, 2004, the amount outstanding, less applied draws by RFC, aggregated $1.9
million which was the maximum amount available based on eligible accounts receivable. The
facility requires UCN to maintain a restricted cash account for the collection of the
receivables. As of September 30, 2004, UCN had $1.42 million of restricted cash
specifically associated with the RFC arrangement. |
| |
UCN is potentially liable under
standby letters of credit aggregating $120,000 in favor of two municipalities with whom
UCN has contracts to provide long distance services. The municipalities routinely require
all telecommunication service providers to maintain such letters of credit. One of the
letters of credit is secured by restricted cash of $20,000. Additional restricted cash of
$160,000 provides collateral under wholesale purchase agreements with two vendors, and
$20,000 is on secured deposit with a financial institution that provides credit card
processing. |
| |
On September 10, 2003, UCN filed a
registration statement on Form SB-2 with the Securities and Exchange Commission to
register for resale up to approximately 8.8 million shares of common stock underlying
outstanding warrants, options and convertible debt. During 2003, investors exercised
warrants to purchase 522,500 shares of common stock providing cash to UCN of approximately
$1.0 million. As of September 30, 2004, investors had exercised warrants for an additional
682,000 shares of common stock, providing cash of $1.4 million. |
| |
In October 2003, UCN agreed with
MyACD, Inc. to acquire the exclusive right to sell their enhanced telecommunication
services, and to manage certain product development activities. Included in the agreement
was a one-year option for UCN to purchase MyACD. MyACD develops and distributes telephony
software solutions for call center traffic management that UCN presently offers to
business customers over its VoIP network. On September 30, 2004, UCN exercised its option
to purchase MyACD, scheduled the closing for January 5, 2005, and extended the selling and
developmental management rights until the end of 2004. The total purchase price is $6.2
million, to be paid in January 2005 when UCN will issue non-interest bearing promissory
notes to MyACD stockholders. Monthly payments on the notes will total 17 percent of the
previous month’s MyACD product and service revenue, with certain minimum and maximum
limitations varying over the following three years, and a final payment owing no later
than January 2, 2008. The initial payment due in January 2005 is $1.6 million, of which
$1.1 million is payable in shares of UCN common stock at a guaranteed price of $2.00. |
| |
As of September 30, 2004, UCN had a
working capital deficit of $1.9 million, and current portion of long-term debt and capital
lease obligations of $2.0 million. During November 2004, $250,000 of this debt was
converted into common stock at $2.00 per share. The remaining long-term debt is unsecured,
$461,325 is payable to the Company’s Chairman and CEO of which $112,500 is
convertible into common stock at $2.00 per share, and $500,000 is payable to a former
director and |
17
| |
current shareholder and convertible into common stock at $2.00 per share. The
remaining debt is non-recourse, has no stated maturity date, and principal payments are
variable dependent upon receivables collected from designated customers. Accordingly,
management believes that because of the relationships with the debt holders the Company
will be able to either extend the notes or renegotiate the terms in order to minimize any
negative impact on cash flow associated with payment obligations on the debt. |
| |
If the convertible debt holders
described in the preceding paragraph do not convert the outstanding debt to common stock,
or if management is unsuccessful in extending the maturity date on the debt, it may be
necessary for the Company to seek additional cash to fund the continuing operations of the
Company through new debt instruments or the issuance of additional equity securities. |
| |
Capital Commitments The
following table discloses aggregate information about our contractual obligations
including notes payable and lease obligations, and the periods in which payments are due
as of September 30, 2004: |
Contractual Obligations
|
Total
|
Less Than 1 Year
|
1-3 Years
|
4-5 Years
|
After 5 Years
|
| Notes payable1 |
|
|
$ |
1,962,793 |
|
$ |
1,962,793 |
|
$ |
-- |
|
$ |
-- |
|
$ |
-- |
|
| MyACD notes payable2 |
|
|
|
6,211,384 |
|
|
1,912,8464 |
|
|
4,298,538 |
|
| Capital lease obligations3 |
|
|
|
66,489 |
|
|
34,690 |
|
|
31,799 |
|
|
-- |
|
|
-- |
|
| Operating lease obligations | | |
| 1,720,986 |
|
| 521,406 |
|
| 1,199,580 |
|
| -- |
|
| -- |
|
|
| Total contractual obligations | | |
$ | 9,961,652 |
|
$ | 4,431,735 |
|
$ | 5,529,917 |
|
$ | -- |
|
$ | -- |
|
|
| |
1 — Before discount
of $7,993.
2 — Assumes January 2005 closing
as planned, and represents the minimum monthly amount owed over the maximum time-frame.
3
— Not including interest of $5,338.
4 — Of this amount, $1,125,970
is payable with shares of UCN common stock at $2.00 per share. |
Critical accounting
policies and estimates
| |
Revenue Recognition –
Revenue is derived primarily from business telephony services, including dedicated
transport, switched, long distance, and data services. UCN’s customers are
principally small and medium-sized businesses and residential customers located
nationwide. Revenue for the majority of switched access, dedicated, and long distance
service is generally billed on a transactional basis determined by customer usage with
some fixed rate elements billed in advance. The transactional elements of switched
services are billed in arrears and estimates are used to recognize revenue in the period
earned. The fixed rate elements billed in advance are recognized over the period the
services are provided. |
| |
Accounts Receivable and Allowance
for Doubtful Accounts – Accounts receivable is comprised of amounts billed and
billable to customers, net of an allowance for uncollectible amounts. The allowance for
doubtful accounts is estimated by management and is based on specific information about
customer accounts, past loss experience, and general economic conditions. An account is
written off by management when deemed uncollectible, although collections efforts may
continue. |
| |
Property and Equipment —
Property and equipment are stated at cost. Major additions and improvements are
capitalized, while minor repairs and maintenance costs are expensed when incurred. In
accordance with Statement of Position 98-1, “Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use,” UCN capitalizes certain costs
incurred for the development of internal use software. These costs include the costs
associated with coding, software configuration, upgrades, and enhancements. |
| |
Long-Lived Assets — Our
long-lived assets consist of acquired customer lists, patents, and acquired technology. As
September 30, 2004, the carrying value of these assets was $6,617,414, or 31% of total
assets. We evaluate the carrying value of long-lived assets, including intangibles, when
events or circumstances indicate the existence of a possible impairment. In our
evaluation, we estimate the net undiscounted cash flows expected to be generated by the
assets, and |
18
| |
recognize impairment when such cash flows will be less than carrying values.
Events or circumstances that could indicate the existence of a possible impairment include
obsolescence of the technology, an absence of market demand for the product, and/or the
partial or complete lapse of continuing technology rights protection. |
| |
Stock-Based Compensation
— We have a stock option plan that provides for the issuance of common stock options
to employees and service providers. Although SFAS No. 123, Accounting for Stock Based
Compensation, encourages entities to adopt a fair-value-based method of accounting for
stock options and similar equity instruments, it also allows an entity to continue
measuring compensation cost for stock-based compensation for employees and directors using
the intrinsic-value method of accounting prescribed by Accounting Principles Board
(“APB”) Opinion No 25, Accounting for Stock Issued to Employees. We have
elected to follow the accounting provisions of APB 25 and to furnish the pro forma
disclosures required under SFAS No. 123 for employees and directors, but we also issue
warrants to non-employees that are recognized as expense when issued in accordance with
the provisions of SFAS No. 123. We calculate compensation expense under SFAS No. 123 using
the Black-Scholes option pricing model. In so doing, we estimate certain key variables
used in the model. We believe the estimates we use are appropriate and reasonable |
| |
Debt Issuance Costs — As
an inducement to various investors, shareholders, and board members to lend monies to UCN,
shares of common stock and warrants to purchase shares of common stock were issued to
them. The fair market value of those shares at the date of issuance has been capitalized
as debt issuance costs and is being amortized over the life of the loans. |
| |
Income Taxes — UCN
recognizes a liability or asset for the deferred income tax consequences of all temporary
differences between the tax bases of assets and liabilities and their reported amounts in
the financial statements that will result in taxable or deductible amounts in future years
when the reported amounts of the assets and liabilities are recovered or settled. These
deferred income tax assets or liabilities are measured using the enacted tax rates that
will be in effect when the differences are expected to reverse. Recognition of deferred
tax assets is limited to amounts considered by management to be more likely than not of
realization in future periods. |
Forward-Looking
Statements
| |
The Private Securities Litigation
Reform Act of 1985 provides a safe harbor for forward-looking statements made by UCN,
except where such statements are made in connection with an initial public offering. All
statements, other than statements of historical fact, which address activities, actions,
goals, prospects, or new developments that we expect or anticipate will or may occur in
the future, including such things as expansion and growth of our operations and other such
matters are forward-looking statements. Any one or a combination of factors could
materially affect our operations and financial condition. These factors include
competitive pressures, success or failure of marketing programs, changes in pricing and
availability of services and products offered to customers, legal and regulatory
initiatives affecting customer marketing and rebate programs or long distance service, and
conditions in the capital markets. Forward-looking statements made by us are based on
knowledge of our business and the environment in which we operate as of the date of this
report. Because of the factors listed above, as well as other factors beyond its control,
actual results may differ from those in the forward-looking statements. |
Item 4. CONTROLS AND
PROCEDURES
| |
With the participation of management, UCN’s
chief executive officer and chief financial officer evaluated its disclosure controls and
procedures on November 4, 2004. Based on this evaluation, the chief executive officer and
the chief financial officer concluded that the disclosure controls and procedures are
effective in connection with UCN’s filing of its interim report on Form 10-Q for the
quarterly period ended September 30, 2004. |
| |
Subsequent to November 4, 2004,
through the date of this filing of Form 10-Q for the quarterly period ended September 30,
2004, there have been no significant changes in UCN’s internal controls or in other
factors that could significantly affect these controls, including any significant
deficiencies or material weaknesses of internal controls that would require corrective
action. |
19
PART II. OTHER
INFORMATION
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
| |
During the first half of 2004,
preferred stock dividends amounted to $358,664, consisting of $146,375 on outstanding
shares of Series A 8% cumulative convertible preferred stock, and $212,289 on outstanding
shares of Series B 8% cumulative convertible preferred stock. Virtually all of these
dividends were paid through the issuance of 119,239 shares of common stock to holders of
the preferred stock in August 2004. |
| |
Exhibits: Copies of
the following documents are included or furnished as exhibits to this report pursuant to
Item 601 of Regulation S-K. |
Item 6. EXHIBITS AND
REPORTS ON FORM 8-K
Exhibit
No. |
Title of Document |
| |
| 10.1 |
Purchase Option Exercise and Agreement on Related Matters between UCN, Inc., MyACD, Inc.,
Michael L. Shelton, and David O. Peterson dated
September 30, 2004*
Excluding:
Exhibit A - Form of Shelton Term Note;
Exhibit B - Form of Peterson Term Note; and
Exhibit C - Schedule IV - Monthly Budget Payments |
| |
|
| 31.1 |
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
| |
|
| 31.2 |
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
| |
|
| 32.1 |
Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
| 3 * |
This agreement was filed as an exhibit to UCN’s report on Form 8-K filed with the
Securities and Exchange Commission on October 4, 2004, and is incorporated herein by this
reference. |
Reports on Form 8-K:
| |
On July 23, 2004, a report on Form
8-K was filed with the Securities and Exchange Commission reporting under Item 4 a change
in our independent public accountants, and under Item 5 other information our Annual
Meeting of Shareholders held June 29, 2004, changes in the members of the Board of
Directors, and the termination of the Director Stock Option Plan. |
20
SIGNATURES
| |
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized. |
UCN, INC.
|
|
|
| Date: November 8, 2004 |
|
By: /s/ Theodore Stern, Chief Executive Officer |
| |
|
|
| |
|
|
| Date: November 8, 2004 |
|
By: /s/ David R. Grow, Chief Financial Officer |
|
|
|
21