10Q Management's Discussion
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain information included in this Quarterly Report may be deemed to include forward-looking statements......Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that its expectations will be achieved.....
The following discussion should be read in conjunction with the Company's consolidated financial statements appearing elsewhere in this report.
General Operations
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Clariti's businesses consist of the IP/Internet Services division and the Wireless Messaging division.
Clariti's IP/Internet Services division ("Clariti IP") consists of the former MegaHertz-NKO, Inc., which was acquired on May 7, 1999 and the former NKA Communications Pty., Ltd. ("NKA"), which was acquired on October 12, 1999.
Clariti IP is a provider of enhanced telecommunications and Internet Protocol ("IP") telephony services (voice, data, fax and video) in the United States and Australia. Clariti IP is also an Internet Service Provider ("ISP") in the United States, offering dial up and dedicated access, customized Web hosting and e-commerce.
Clariti's Wireless Messaging division ("Clariti Wireless Messaging") is pursuing a business strategy of bringing innovative, affordable, wireless telecommunications products and services to markets worldwide. Clariti Wireless Messaging is currently developing the world's first low-cost Digital Voice Messaging System for use on FM radio frequencies based on the Company's ClariCAST(TM) technology.
Recent Developments
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The Company acquired GlobalFirst Holdings Limited ("GlobalFirst") in December 1998 and Mediatel Global Communications Limited ("Mediatel") in March 1999. At the time of their acquisitions, GlobalFirst, Mediatel and their respective subsidiaries (the "International Telecommunications Group") were telecommunications resellers operating in the residential, commercial and international calling card business sectors.
On October 11, 1999, at the request of the Company, the International Telecommunications Group filed for voluntary liquidation under the laws of the United Kingdom and ceased operations of the Group. This voluntary liquidation was undertaken because the Company concluded that the International Telecommunications Group could not pay its debts, including the advances made by Clariti to GlobalFirst and Mediatel.
The liquidation proceedings have discharged all liabilities of the International Telecommunications Group.
Results of Operations
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As of June 30, 1999 and for Fiscal 1Q00, the International Telecommunications Group was accounted for under the equity method of accounting because the Company's control was deemed to be temporary due to the fact that the Group filed for voluntary liquidation on October 11, 1999.
Three Months Ended September 30, 1999 v. Three Months Ended September 30, 1998
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For the three months ended September 30, 1999 ("Fiscal 1Q00"), the Company had net income of $27,961,000, or $0.22 per share, on revenue of $318,000 compared to a net loss of $1,366,000, or $0.06 per share, on no revenue for the three months ended September 30, 1998 ("Fiscal 1Q99"). Excluding a $32,502,000, or $0.26 per share, extraordinary gain, the Company had a net loss of $4,541,000, or $0.04 per share, in Fiscal 1Q00. The Fiscal 1Q00 revenues were generated by the IP/Internet Services division, which was acquired in May 1999.
On October 11, 1999, at the request of the Company, the International Telecommunications Group filed for voluntary liquidation and ceased operation of its businesses. As of June 30, 1999, the Company had written off all assets related to the International Telecommunications Group and had accrued for all of the Group's estimated losses from operations up to the date of liquidation. The liquidation proceedings have discharged all liabilities of the International Telecommunications Group, and as a result the Company recognized an extraordinary gain on the discharge of such indebtedness in Fiscal 1Q00.
Salaries and benefits in Fiscal 1Q00 increased $610,000, or 154%, to $1,005,000 as compared to $395,000 in Fiscal 1Q99. Of this increase, $340,000, or 56%, was attributable to the IP/Internet Services division, which was acquired in May 1999, and $270,000, or 44%, was attributable to increased employment in the Wireless Messaging division and Corporate staff.
Operating and marketing expenses in Fiscal 1Q00 were $72,000 and $287,000, respectively, as compared to no operating or marketing expenses in Fiscal 1Q99. All operating expenses were attributable to the IP/Internet Services division, and $174,000, or 61%, of the marketing expenses were attributable to the IP/Internet Services division.
All research and development expenses related to the development of the Digital Voice Messaging System. Such expenses in Fiscal 1Q00 increased $264,000, or 61%, to $695,000 as compared to $431,000 in Fiscal 1Q99 due to expansion and acceleration of the Company's efforts to complete development of the Digital Voice Messaging System.
General and administrative expenses in Fiscal 1Q00 increased $1,035,000, or 200%, to $1,553,000 as compared to $518,000 in Fiscal 1Q99. Of this increase, $192,000, or 19%, of the increase was attributable to the IP/Internet Services division which was acquired in May 1999, and $671,000 , or 65%, of the increase was due to the issuance of common stock warrants as compensation to consultants.
Depreciation and amortization in Fiscal 1Q00 increased from $34,000 to $1,037,000 primarily due to the May 1999 acquisition of the IP/Internet Services division, of which $635,000 related to the amortization of goodwill resulting from such acquisition.
Liquidity and Capital Resources
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At September 30, 1999, the Company had working capital of $5,240,000 (including a cash balance of $7,377,000) as compared to a working capital deficit of $35,500,000 (including a cash balance of $3,284,000) at June 30, 1999. The working capital increase of $40,740,000 is primarily due to the following:
- the forgiveness of debt of approximately $32,502,000 related to the liquidation of the International Telecommunications Group
- the sale of 3,973,333 shares of common stock for proceeds, net of commissions, of $8,850,000 during Fiscal 1Q00
These working capital improvements were partially offset by use of cash in operations during Fiscal 1Q00.
Management of the Company continues to make concerted efforts to raise additional capital through the sale of common stock. In addition to the funds raised during Fiscal 1Q00, the Company has received firm commitments for an additional $16,166,000 of equity funding to be received by the end of calendar year 1999.
Management believes that these funds will enable the Company to complete the process of developing its Digital Voice Messaging System and continue to fund expected negative cash flows and capital expenditures related to the growth of the IP/Internet Services Division for the remainder of the current fiscal year.
Management is aware however that significant additional funding will be required beyond its fiscal year-end to launch the Wireless Voice Messaging System in specified target markets and to meet expected negative operating cash flows and capital expenditure plans. There can be no assurances that such funding will be generated or available, or if available, on terms acceptable to the Company. |
