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[May 20, 2014]
DATAJACK, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) Management's Discussion and Analysis contains various "forward-looking statements" within the meaning of the federal securities laws, regarding future events or the future financial performance of the Company that involve risks and uncertainties. Certain statements included in this Form 10-Q, including, without limitation, statements related to anticipated cash flow sources and uses, and words including but not limited to "anticipates", "believes", "plans", "expects", "future" and similar statements or expressions, identify forward-looking statements. Any forward-looking statements herein are subject to certain risks and uncertainties in the Company's business, including but not limited to, reliance on key customers and competition in its markets, market demand, product performance, technological developments, maintenance of relationships with key suppliers, difficulties of hiring or retaining key personnel and any changes in current accounting rules, all of which may be beyond the control of the Company. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth herein and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the Securities and Exchange Commission, the ("SEC") on April 14, 2014.
When used in this quarterly report, the terms the "Company," "DataJack," "we," "our," and "us" refers to DataJack, Inc. formerly known as Quamtel, Inc., a Nevada corporation. Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the unaudited condensed consolidated financial statements included herein. Further, this quarterly report on Form 10-Q should be read in conjunction with the Company's Consolidated Financial Statements and Notes to Consolidated Financial Statements included in its Annual Report on Form10-K for the fiscal year ended December 31, 2013, filed with the SEC on April 14, 2014.
Overview We were incorporated in 1999 under the laws of Nevada as a communications company offering, through our subsidiaries, a comprehensive range of mobile broadband and communications products and services that are designed to meet the needs of individual consumers, businesses, government subscribers and resellers.
Our operations are organized to meet the needs of our targeted subscriber groups through focused communications solutions that incorporate the capabilities of our mobile broadband and communications services.
We offer secure nationwide mobile broadband wireless data transmission services primarily under the DataJack brand. Through DataJack, we offer low cost, no contract, mobile broadband with various data plans. Our DataJack service is offered primarily through two devices - the DataJack MiFi Mobile Hotspot that can connect up to 8 Wi-Fi enabled devices and the DataJack USB, a Plug and Play USB Device.
Effective June 5, 2013, DataJack, Inc. sold substantially all of the assets of WQN, Inc., our wholly-owned subsidiary, to iTalk, Inc., a Nevada corporation (the "WQN Asset Sale"). The assets included in the sale included all intellectual rights of WQN, including trade names and trademarks, and all rights and interests to and in the all customers of the International Long Distance division of DataJack , Inc., including but without limitation all the customers and/or subscribers of the following products: My WQN, Easy Talk, Premium and ValuComm and also including all current and previously registered Customers as well as all databases. The purchase price was $300,000. WQN accounted for approximately 47% of the Company's consolidated revenues in 2012.
Effective November 21, 2013, ITG, Inc, (formerly WQN, Inc.) sold, transferred and delivered all its issued and outstanding common stock shares, with $0.01 par value, to WW Courier, Inc. for $500 and 10% of future revenue. All remaining outstanding liabilities related to WQN, Inc. were transferred with the stock sale.
21 -------------------------------------------------------------------------------- Results of Operations for the Three Months ended March 31, 2014 Compared to the Same Period in 2013 Revenues Our revenues for the three months ended March 31, 2014 and 2013 were $285,241 and $576,520, respectively. DataJack revenues decreased by $53,068 and the WQN Asset Sale caused revenues to drop substantially during the first quarter of 2014.
Cost of Sales and Gross Profit Cost of sales totaled $180,702 and $480,620 for the three months ended March 31, 2014 and 2013, respectively. This resulted in gross profit of $104,539 (37%) and $95,900 (17%) for the respective 2014 and 2013 periods. The decrease in cost of sales and the increase gross margin in 2014 were a result of the WQN Asset Sale.
Operating Expenses Operating expenses were $1,382,759 and $620,260 for the three months ended March 31, 2014 and 2013, respectively.
Compensation and consulting expenses increased to $1,035,179 for the three months ended March 31, 2014 compared to $405,179 for the same period in 2013.
Compensation and consulting expenses are primarily a result of the issuance of common shares for board of director fees in the amount of $291,875 and bonuses in the amount of $377,000.
General and administrative ("G&A") expenses were $332,984 and $192,772 for the three months ended March 31, 2014 and 2013, respectively.
Other Income and Expense Other income and expenses increased to a net other expense of $777,303 for the three months ended March 31, 2014 compared to a net other income of $274,955 for the three months ended March 31, 2013. The $1,052,258 increase in expense is directly attributable to the loss from change in fair value of derivative liability of $928,050 during the three months ended March 31, 2014 as compared to a gain of $470,445 for the same period last year. The loss was offset with a gain on settlement of debt of $384,883 for the three months ended March 31, 2014 compared to nil for the same period last year. In the three months ended March 31, 2014, the Company amortized $213,105 of debt discount as compared to $18,334 the same period, last year. Interest expense has decreased in the three months ended March 31, 2014 to $21,031 compared to $177,156 for the same period last year.
Net Loss An increase in compensation and consulting expenses, loss on derivative liability; off-set by gain on settlement of debt resulted in a net loss of $2,059,523 for the three months ended March 31, 2014, compared to a net loss of $249,405 for the same period in 2013.
Liquidity and Capital Resources Cash and cash equivalents were $148 at March 31, 2014. Our net cash used in operating activities for the three months ended March 31, 2014 was $407,556 due primarily to our net loss during this period.
Our primary sources of funding for the three months ended March 31, 2014 have been proceeds in the amount of $386,985 from advances from related parties, net of repayments of notes of $8,500.
At March 31, 2014, restricted cash consisted of a $150,000 security deposit in the form of an irrevocable letter of credit held in escrow related to our performance under a service contract with one of our telecommunication service providers.
22 -------------------------------------------------------------------------------- We believe that anticipated cash fows from operations will be insufficient to satisfy our ongoing capital requirements. Our ability to meet our obligations and continue to operate as a going concern is highly dependent on our ability to obtain new loans and/or successfully enter into settlement agreements with our vendors. We cannot predict whether this additional financing will be in the form of equity or debt, or be in another form. We may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all.
In any of these events, we may be unable to implement our current plans which circumstances would have a material adverse effect on our business, prospects, financial condition and results of operations.
Our accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate our continuation as a going concern.
We have incurred operating losses and negative cash flows from operations during the past two years, have incurred an accumulated deficit of $27,482,485 through March 31, 2014, and have been dependent on issuances of debt and equity instruments to fund our operations. We intend to generate future profitability and seek new sources or methods of financing or revenue to pursue our business strategy. However, there can be no certainty that we will be successful in this strategy. These factors raise substantial doubt about our ability to continue as a going concern. Accordingly, our independent auditors added an explanatory paragraph to their opinion on our consolidated financial statements for the year ended December 31, 2013, based on substantial doubt about our ability to continue as a going concern.
Our unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. We expect to raise any necessary additional funds through loans and additional sales of our common stock or debt instruments. There can be no assurance that we will be successful in raising additional capital in amounts or on terms acceptable to us, if at all.
Capital Expenditure Commitments We did not have any substantial outstanding commitments to purchase capital equipment at March 31, 2014.
Capital Needs We expect to adjust our operations and development to the level of capitalization, but we may not have sufficient capital resources to meet projected cash flow requirements for the next three months. If during that period or thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations, liquidity and financial condition.
Our future cash requirements include those associated with maintaining our status as a reporting entity. We believe that on an annual basis those costs would not exceed an average of $25,000 per month.
We presently do not have any available credit, bank financing or other external sources of liquidity. Due to our brief operating history and lack of substantial historical operating profits, our operations have not been a source of liquidity. We will need to obtain additional capital in order to fund our operations and become profitable. In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders.
There can be no assurance that we will be successful in obtaining additional funding in amounts or on terms acceptable to us, if at all.
Critical Accounting Policies The application of our accounting policies, which are important to our financial position and results of operations, requires significant judgments and estimates on the part of management. These estimates bear the risk of change due to the inherent uncertainty attached to the estimate and are likely to differ to some extent from actual results. A description of our critical accounting policies follows: 23 -------------------------------------------------------------------------------- 1. In accordance with FASB ASC 350 (formerly Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," the Company tests its intangible asset (goodwill) for impairment at least annually by comparing the fair value of this asset to its carrying value. If in the future the carrying value of our goodwill exceeds its fair value, the Company will recognize an impairment charge in an amount equal to that excess. For purposes of these tests, the excess of the fair value of the Company over the amounts assigned to its identified assets and liabilities is the implied fair value of its goodwill. In 2012, the Company recognized related impairment charges of $749,642 in its consolidated statement of operations. No additional impairment charges were recognized in 2013 or the three months ended March 31, 2014.
2. The Company has identified embedded derivatives related to certain of its notes payable. These embedded derivatives include certain conversion features and reset provisions. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of the above described Convertible Note Payable and to fair value as of each subsequent reporting date. For the three months ended March 31, 2014 and 2013, the Company recognized related derivative mark-to-market (charges) income of ($928,050) and $470,445, respectively, in its consolidated statement of operations.
3. The amount of cash paid and the value of common stock issued that are related to contract renegotiations and debt issuances are capitalized, and classified as a noncurrent deferred cost on the Company's consolidated balance sheet.
These deferred costs are amortized to expense over the term of the underlying contracts or debt instruments.
4. Compensation costs related to share-based payment transactions are recognized in the statement of operations. With limited exceptions, the amount of compensation cost will be measured based on the grant- date fair value of the equity or liability instruments issued. In addition, liability awards will be remeasured each reporting period. The Company's common shares issued as additional compensation and for consulting services have been valued at the shares' exchange-quoted market prices at their respective dates of issuance or commitment. Compensation costs are recognized over the period that an employee provides service in exchange for the award.
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