U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2006
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ________
COMMISSION FILE NUMBER: 333-70932
THE JACKSON RIVERS COMPANY
(Name of small business issuer in its charter)
FLORIDA 65-1102865
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
550 Greens Parkway, Suite 230, Houston, Texas 77067
(Address of principal executive offices) (Zip Code)
(619) 342-7449
(Issuer's telephone number)
Check whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 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 |_|
State the number of shares outstanding of each of
the issuer's classes of common equity, as of the
latest practicable date: As of August 15, 2006, the
issuer had 151,158,574 shares of its common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
PART I. FINANCIAL INFORMATION
THE JACKSON RIVERS COMPANY
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
2006 2005
----------- ------------
(restated)
Assets
Current assets
Cash and cash equivalents $ 145,752 $ 36,361
Accounts receivable, net of allowance 540,490 272,330
Inventory -- 19,633
Prepaid and other assets 175,003 32,681
----------- -----------
Total current assets 861,245 361,005
Property and equipment 1,392,477 1,106,234
Accumulated Depreciation (1,193,884) (854,839)
----------- -----------
198,593 251,395
Customer list, net of amortization 710,919 --
Goodwill 1,868,986 --
Other long term assets 28,206 --
----------- -----------
Total assets $ 3,667,949 $ 612,400
=========== ===========
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable and accrued expenses $ 920,811 $ 703,125
Curent derivative liability 350,488 --
Note payable - short term 745,322 --
Line of credit 430,000 --
Capital lease - current portion 8,350 10,287
Other current liabilities 38,225 --
----------- -----------
Total current liabilities 2,493,196 713,412
Derivative liability 1,300,436 --
Note payable - related parties 78,803 302,644
Note payable - long term -- 917,000
Capital lease - net of current portion 586 4,765
----------- -----------
Total Liabilities 3,873,021 1,937,821
Stockholders' deficit
Series A preferred stock, par value $.001 per share,
10,000,000 shares authorized; 960,000 shares issued and
outstanding at June 30, 2006 and December 31, 2005,
respectively 10 10
Series B preferred stock, par value $.001 per share,
10,000,000 shares authorized; 8,413,607 issued and
outstanding at June 30, 2006 1,000 1,000
Series C preferred stock, par value $1.00 2,200,000 shares
authorized, issued and outstanding as of completion of the
merger 2,200,000 --
Common stock, par value $.00001 per share, 990,000,000 shares
authorized, 151,158,574 issued and outstanding at June 30,
2006 1,511 495
Additional paid-in capital 1,038,696 507,755
Stock subscription receivable -- (92,400)
Accumulated deficit (3,369,825) (1,742,281)
Comprehensive Income - translation of non-dollar currency
financials of Branch
(76,464) --
----------- -----------
Total stockholders' deficit (205,072) (1,325,421)
----------- -----------
Total liabilities and stockholders' deficit $ 3,667,949 $ 612,400
=========== ===========
* No common shares were issued to effectuate the reverse acquisition of Diverse
Networks, Inc., or the acquisition of UTSI. Only preferred shares were issued.
See accompanying notes to consolidated financial statements
2
THE JACKSON RIVERS COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the three months For the six months
ended June 30, ended June 30,
------------------------- -------------------------
2006 2005 2006 2005
------------ ---------- ----------- -----------
Revenues $ 757,836 $ 33,303 $ 1,226,550 $ 41,210
Cost of goods sold 533,420 9,267 746,508 11,922
------------ ---------- ----------- -----------
Gross profit 224,416 24,036 480,042 29,288
Selling, general & administrative 872,392 293,581 1,693,741 1,515,666
Depreciation and amortization 71,544 578 107,676 1,156
------------ ---------- ----------- -----------
Total operating expenses 943,936 294,159 1,801,417 1,516,822
------------ ---------- ----------- -----------
Loss from operations (719,520) (270,123) (1,321,375) (1,487,534)
------------ ---------- ----------- -----------
Other income (expense)
Interest expense, net (237,811) 1 (200,255) 10
Gain/(loss) on derivative liability 130,794 -- -- --
Other income (expense) (43,537) -- (95,553) --
------------ ---------- ----------- -----------
Total other income (expense) (150,554) 1 (295,808) 10
------------ ---------- ----------- -----------
Net loss $ (870,074) $ (270,122) $(1,617,183) $(1,487,524)
============ ========== =========== ===========
Loss per share, basic and diluted $ (0.01) $ (0.06) $ (0.02) $ (0.60)
Weighted average number of shares
outstanding basic and diluted 149,414,689 4,655,116 92,041,137 2,481,402
See accompanying notes to consolidated financial statements
3
THE JACKSON RIVERS COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months
ended June 30,
-------------------------
2006 2005
----------- -----------
Cash flows from operating activities
Net loss $(1,617,183) (1,487,524)
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 107,676 1,156
Common stock issued for consulting services rendered 307,351 --
Common stock issued in exchange for employee services rendered 211,200 --
Common stock issued from stock subscription receivable 92,400 --
Accretion of discount on note payable 100,488 --
Changes in assets and liabilities
(Increase) decrease:
Accounts receivable (67,154) 15,102
Inventories 19,633 (38,022)
Other assets (142,322) (3,031)
Cash disbursed in excess of available funds -- (9,794)
Increase (decrease):
Accounts payable and accrued liabilities (172,356) 195,550
Other liabilities (6,637) --
----------- -----------
Net cash used in operating activities (1,166,904) (1,326,563)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (6,730) (450)
----------- -----------
Net cash used in investing activities (6,730) (450)
----------- -----------
Cash flows from financing activities
Proceeds from sale of stock 7,055 1,270,745
Proceeds from notes payable 1,088,270 --
Proceeds from notes payable - related parties 75,050 52,000
Payment for capital lease obligations (6,116)
Cash acquired in acquisition of UTSI 195,229 --
----------- -----------
Net cash provided by financing activities 1,359,488 1,322,745
----------- -----------
Net increase (decrease) in cash and cash equivalents 185,855 (4,268)
----------- -----------
Effect of exchange rate on cash and cash equivalents (76,464) --
Cash and cash equivalents - beginning of period 36,361 5,272
----------- -----------
Cash and cash equivalents - end of period $ 145,752 $ 1,004
=========== ===========
Supplemental disclosures of cash flow information
Cash paid for income taxes $ 1,544 $ 4,655
=========== ===========
Cash paid for interest $ 57,605 $ 19,361
=========== ===========
See accompanying notes to consolidated financial statements
4
THE JACKSON RIVERS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements for The Jackson
Rivers Company ("Jackson Rivers" or the "Company") have been prepared in
accordance with accounting principles generally accepted in the United States of
America and the rules of the Securities Exchange Act of 1934. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included and such adjustments are of
a normal recurring nature. Operating results for the six months ended June 30,
2006 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2006. The audited financial statements at December 31,
2005, which are included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2005, should be read in conjunction with these condensed
consolidated financial statements.
The accompanying unaudited consolidated financial statements for Jackson Rivers
have been restated from those previously reported. The previously reported
unaudited consolidated financial statements were prepared based on management's
then determination that the fair value of UTSI International Corporation
("UTSI") (see note 2) was more clearly evident and reliably measurable than the
fair value of Series C Preferred Stock. The accompanying unaudited consolidated
financial statements have been prepared based on management's current
determination that the fair value of the Series C Preferred Stock of Jackson
Rivers is more clearly evident and reliably measurable than the fair value of
UTSI. The effects of the restatement on the unaudited consolidated balance sheet
of Jackson Rivers as of June 30, 2006 are as follows:
Previously Reported Restated
------------------- ---------
Goodwill 659,281 1,868,986
Additional paid-in-capital (171,009) 1,038,696
2. ACQUISITION OF UTSI INTERNATIONAL CORPORATION
On May 5, 2006, the company through its wholly-owned subsidiary, JKRI
Acquisition Corp., a Texas corporation ("JKRI"), consummated its acquisition of
UTSI, a Texas corporation, pursuant to that certain Agreement and Plan of
Merger, dated May 5, 2006, by and among JRC, JKRI, UTSI, and each of the
stockholders of UTSI (the "Merger Agreement"). Pursuant to the Merger Agreement,
UTSI merged with and into JKRI, with JKRI as the surviving corporation, and each
share of UTSI common stock outstanding at the effective time of the merger was
converted into the right to receive 1.4380297 share of a JRC Series C Preferred
Stock (i.e., the 1,529,871 shares of common stock of UTSI outstanding are
convertible into an aggregate of 2,200,000 shares of Series C Preferred Stock of
JRC).
5
Each share of Series C Preferred Stock will initially be convertible,
starting after May 5, 2008, into that number of shares of The Jackson Rivers
Company common stock obtained by multiplying the number of shares to be
converted by a fraction, the numerator of which is $1.00 and the denominator
equal to the "market price" of The Jackson Rivers Company common stock at the
time of conversion subject to adjustment.
The Balance Sheet as of December 31, 2005, and the Statement of Operations for
the three and six months ending June 30, 2006 and 2005 and the Statement of Cash
Flows for the six months ending June 30, 2006 and 2005 are presented to include
the results of UTSI during those periods.
The following table summarizes the preliminary fair values assigned to the
assets and liabilities at the date of acquisition:
Current assets $ 389,884
Property and equipment 23,630
Customer List 735,433
Goodwill 1,868,986
----------
Total assets 3,017,933
Less:
Total liabilities 817,933
----------
$2,200,000
==========
Customer list was valued using the expected discounted cash flow of existing
customers discounted by a risk adjusted discount factor of 50%.
Jackson Rivers reviews the carrying value of its long-lived assets annually or
whenever events or changes in circumstances indicate that the historical
cost-carrying value of an asset may no longer be appropriate. Jackson Rivers
assesses recoverability of the carrying value of the asset by estimating the
future net cash flows expected to result from the asset, including eventual
disposition. If the future net cash flows are less than the carrying value of
the asset, an impairment loss is recorded equal to the difference between the
asset's carrying value and fair value.
The following pro forma information assumes the acquisition of UTSI on January
1, 2006 and January 1, 2005, respectively. The pro forma results are not
necessarily indicative of what actually would have occurred had the acquisition
been in effect for the period presented.
6
THE JACKSON RIVERS COMPANY
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the three months For the six months
ended June 30, ended June 30,
--------------------------- --------------------------
2006 2005 2006 2005
------------- ----------- ------------ -----------
Revenues $ 883,423 $ 1,315,788 $ 1,619,479 $ 2,736,915
Cost of goods sold 479,650 410,094 904,834 1,079,806
------------- ----------- ------------ -----------
Gross profit 403,773 905,694 714,645 1,657,109
Selling, general & administrative 1,143,721 943,519 2,471,674 3,236,042
Depreciation and amortization 71,544 84,100 113,543 162,991
------------- ----------- ------------ -----------
Total operating expenses 1,215,265 1,027,619 2,585,217 3,399,033
------------- ----------- ------------ -----------
Loss from operations (811,492) (121,925) (1,870,572) (1,741,924)
------------- ----------- ------------ -----------
Other income (expense)
Interest expense, net (108,192) (17,073) (153,610) (28,746)
Gain/(loss) on derivative liability 71,940 -- -- --
Other income (expense) (41,736) 1,605 (6,238) 624
------------- ----------- ------------ -----------
Total other income (expense) (77,988) (15,468) (159,848) (28,122)
------------- ----------- ------------ -----------
Loss before income taxes (889,480) (137,393) (2,030,420) (1,770,046)
------------- ----------- ------------ -----------
Income tax expense (benefit) -- 67,701 -- (92,349)
------------- ----------- ------------ -----------
Net loss $ (889,480) $ (205,094) $ (2,030,420) $(1,677,697)
============= =========== ============ ===========
Earnings (loss) per share, basic and diluted $ (0.01) $ (0.04) $ (0.02) $ (0.68)
Weighted average number of shares
outstanding basic and diluted 149,414,689 4,655,116 92,041,137 2,481,402
7
3. GOING CONCERN
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the accompanying
financial statements at June 30, 2006, Jackson Rivers has an accumulated deficit
of $3,369,825. In addition, Jackson Rivers' current liabilities exceeded its
current assets by $1,631,951 as of June 30, 2006. These factors among others may
indicate that Jackson Rivers will be unable to continue as a going concern for a
reasonable period of time. The Company's existence is dependent upon
management's ability to develop profitable operations and resolve its liquidity
problems. Management anticipates Jackson Rivers will attain profitable status
and improve its liquidity through the continued developing, marketing and
selling of its products and additional equity and debt investment in the
Company. The accompanying financial statements do not include any adjustments
that might result should Jackson Rivers be unable to continue as a going
concern.
In order to improve Jackson Rivers' liquidity, Jackson Rivers is actively
pursuing additional equity and debt financing through discussions with
investment bankers and private investors. There can be no assurance Jackson
Rivers will be successful in its effort to secure additional equity financing.
If operations and cash flows continue to improve through these efforts,
management believes that the Company can continue to operate. However, no
assurance can be given that management's actions will result in profitable
operations or the resolution of its liquidity problems.
4. NOTES PAYABLE
On January 2, 2006, Jackson Rivers issued an unsecured convertible note totaling
$250,000 to purchase shares of our common stock. The convertible note has a 1
year term and bears interest at six percent (6%). The note is convertible into
our common stock pursuant to a "variable conversion price" equaling 80% of
market, as defined.
On March 31, 2006, Jackson Rivers executed a Securities Purchase Agreement with
certain accredited investors pursuant to which they agreed to issue up to
$2,000,000 of principal amount of convertible promissory notes in three separate
tranches and warrants to purchase shares of our common stock (the "Securities
Purchase Agreement"). The tranches of notes are to be issued and sold as
follows: (i) $700,000 upon execution and delivery of the Securities Purchase
Agreement (issued March 31, 2006); (ii) $600,000 within 5 days of filing of a
registration statement with the Securities and Exchange Commission (the "SEC")
registering the shares of common stock issuable upon conversion of the notes and
exercise of the warrants issued pursuant to the Securities Purchase Agreement
(the "Registration Statement") and (iii) $700,000 within 5 days of the
Registration Statement being declared effective by the SEC The convertible notes
have a 3 year term and bear interest at six percent (6%). At this time, we have
received funding from the first and second tranch. The notes are convertible
into our common stock pursuant to a "variable conversion price" equal to the
"Applicable Percentage" multiplied by the "Market Price.' "Applicable
Percentage" is initially 50% provided, that, such percentage will be increased
to 55% if the Registration Statement is filed on or before April 30, 2006 and
further increased to 60% if the Registration Statement is declared effective by
the SEC on or before July 29, 2006. The Registration Statement was filed on time
and the "Applicable Percentage" used is 55% in valuing the convertible
promissory notes. "Market Price" means the average of the lowest three trading
prices (as defined) for our common stock during the 20 trading day period prior
to conversion. Upon an event of default (as defined), the notes are immediately
due and payable at an amount equal to the greater of (i) 140% of the then
outstanding principal amount of notes plus interest and (ii) the "parity value"
defined as (a) the highest number of shares of common stock issuable upon
conversion of the notes multiplied by (b) the highest closing price for our
common stock during the period beginning on the date of the occurrence of the
event of default and ending one day prior to the demand for prepayment due to
the event of default. The notes are secured by a first lien on all of our
assets, including all of our intellectual property.
8
Subject to certain terms and conditions set forth therein, the notes are
redeemable by us at a rate from 120% to 140% of the outstanding principal amount
of the notes plus interest. In addition, so long as the average daily price of
our common stock is below the "initial market price" (as defined) Jackson Rivers
may prepay a monthly portion due on the outstanding notes and the investors
agree that no conversions will take place during such month where this option is
exercised by us.
The notes were issued with warrants to purchase up to 50,000,000 shares of our
common stock at an exercise price of $0.07 per share, subject to adjustment.
In connection with the offer and sale of the notes and the warrants, Jackson
Rivers engaged Envision Capital LLC, as a finder for the transaction. Envision
will receive a ten percent (10%) cash commission on the sale of the notes and
warrants to purchase up to 5,000,000 shares of our common stock on the same
terms and conditions as the warrants issued to purchasers under the Securities
Purchase Agreement.
Jackson Rivers is accounting for the conversion option in the Convertible Note
and the conversion option in the Securities Purchase Agreement and the
associated warrants as derivative liabilities in accordance with SFAS 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") and
EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to and
Potentially Settled in a Company's Own Stock ("EITF 00-19") due to the fact that
the conversion feature and the warrants both have a variable conversion price.
The fair value of the Convertible Note was determined utilizing the
Black-Scholes stock option valuation model. The significant assumptions used in
the valuation are: the exercise prices as noted above; the stock price as of
June 30, 2006; expected volatility of 109%; risk free interest rate of
approximately 5.21%; and a term of one year.
9
The fair value of the Securities Purchase Agreement was determined utilizing the
Black-Scholes stock option valuation model. The significant assumptions used in
the valuation are: the exercise prices as noted above; the stock price as of
June 30, 2006; expected volatility of 109%; risk free interest rate of
approximately 5.13%; and a term of three years.
5. CAPITAL STOCK
During the six months ended June 30, 2006, the Company issued 79,250,000 shares
of common stock to consultants for services valued at $307,351. Valuation of
common stock issued for services was based upon the value of the services
rendered, which did not differ materially from the fair value of the Company's
common stock during the period the services were rendered. The Company issued
20,000,000 shares of common stock, valued at $211,200 to officers and employees
for stock options exercised. The Company received $179,520 of proceeds in
connection with common shares issued to employees for common stock subscribed
and stock options exercised, net of costs and fees.
Jackson Rivers evaluated the application of Statement of Financial Accounting
Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and Emerging Issues Task Force ("EITF") 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock" for the Series A and Series B Preferred Stock to determine
if the embedded conversion options should be bifurcated from the host and
accounted for separately. Based on the guidance of SFAS No. 133 and EITF 00-19,
Jackson Rivers concluded that the embedded conversion options were not required
to be accounted for as derivatives because the economic characteristics and
risks of the embedded conversion options are clearly and closely related to the
economic characteristics and risks of the Series A and Series B preferred stock.
6. STOCK OPTIONS
Jackson Rivers has stock option plans, which provide for the granting of
qualified and nonqualified options to employees of Jackson Rivers. A maximum of
5,000,000 shares of common stock may be issued under the plans. The option
price, number of shares, vesting schedule, holding period or other restrictions
and grant dates are determined at the discretion of a committee appointed by
Jackson Rivers' board of directors. Options granted under the plans are
exercisable for a period not to exceed ten years from the option grant date.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of FASB Statement No. 123R, Share-Based Payment, and related
interpretations using the modified-prospective transition method. Under that
method, compensation cost recognized in the first half of 2006 includes (a)
compensation cost for all share-based payments granted prior to, but not yet
vested as of, December 31, 2005 based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123 and (b) compensation
cost for all share-based payments granted on or subsequent to January 1, 2006,
based on the grant-date fair value estimated in accordance with the provisions
of SFAS No. 123R. Compensation is being recognized on a straight-line basis over
the requisite service period for the entire award in accordance with the
provisions of SFAS No. 123R. Results for the prior periods have not been
restated.
10
As part of the merger agreement with DNI, all of the options under DNI's 1999
Plan were assumed by Jackson Rivers and converted 1:1 to options for Jackson
Rivers' Series B Preferred Stock. DNI's 2000 Plan options that were not
forfeited or were "under water" were assumed by Jackson Rivers and converted 1:1
to options for Jackson Rivers' Series B Preferred Stock. As a result, 2,915,383
of DNI options with an average exercise price of $0.1555 and future value of
$0.0675 using the risk free rates of 1.66% to 3.94% were converted to the same
amount and the same option price at the time of the merger. As of June 30, 2006,
no options have been exercised, converted or forfeited, so the number and
average price of the options is the same at this time.
As a result of adopting Statement 123(R) on January 1, 2006, the Company's net
loss for the quarter ended June 30, 2006 is $4,215 higher, than if it had
continued to account for share-based compensation under Opinion 25. Basic and
diluted earnings per share for the quarter ended June 30, 2006 would have been
$(0.02) and $(0.02), respectively, if the Company had not adopted Statement
123(R), compare to reported basic and diluted earnings per share of $(0.02) and
$(0.02), respectively. We recorded share based compensation costs of $2,107 for
the second quarter of 2006.
The assumptions used in the Black-Scholes model were as follows for stock
options granted in 2005 and 2004:
Risk-free interest rate 1.66%-3.94%
Expected life (years) 10
Expected dividends None
Expected volatility 137%
There were no nonvested stock options at any point during the year ended
December 31, 2005 or the six months ended June 30, 2006.
The Black-Scholes option valuation model was developed for estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. Because option valuation models require the use of subjective
assumptions, changes in these assumptions can materially affect the fair value
of the options, and Jackson Rivers' options do not have the characteristics of
traded options, the option valuation models do not necessarily provide a
reliable measure of the fair value of its options.
The terms of awards issued to employees state that awards are forfeited upon
termination of employment with Jackson Rivers.
Pro Forma Information Under SFAS No.123 for Periods Prior to 2006
11
The Company accounted for stock options under the intrinsic value method
specified in APB 25 and adopted the disclosure-only provisions of SFAS No. 123
for periods prior to the quarter ending March 31, 2006. Accordingly,
compensation cost for prior reported periods has been recognized for grants
under the stock option plans only when the exercise prices of employee stock
options are less than the market prices or fair values of the underlying stock
on the date of grant.
The table below illustrates the effect on net earnings and earnings per share if
the Company had applied the fair value recognition provisions of SFAS No. 123 to
options granted in the three and six months ended June 30, 2005.
Three months ended Six months ended
June 30, 2005 June 30, 2005
------------------ ----------------
Net loss, as reported $ (270,122) $(1,487,524)
Deduct: Total stock-based employee/director
compensation expense under the fair value based
method for all awards, net of related tax effects (7,520) (15,039)
Pro forma net loss $ (277,642) $(1,502,563)
=========== ===========
Loss per share, pro forma basic and diluted $ (0.06) $ (0.61)
=========== ===========
Shares used in basic and diluted loss per share 4,655,116 2,481,402
=========== ===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction with our
unaudited consolidated financial statements and related notes included in this
report. This report contains "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. The statements contained
in this report that are not historic in nature, particularly those that utilize
terminology such as "may," "will," "should," "expects," "anticipates,"
"estimates," "believes," or "plans" or comparable terminology are
forward-looking statements based on current expectations and assumptions.
Various risks and uncertainties could cause actual results to differ materially
from those expressed in forward-looking statements. Factors that could cause
actual results to differ from expectations include, but are not limited to,
those set forth under the section "Risk Factors" set forth in this report.
The forward-looking events discussed in this quarterly report, the documents to
which is referred to the reader and other statements made from time to time by
the company or its representatives, may not occur, and actual events and results
may differ materially and are subject to risks, uncertainties and assumptions
about the company. For these statements, the company claims the protection of
the "bespeaks caution" doctrine. All forward-looking statements in this document
are based on information currently available to the company as of the date of
this report, and the company assumes no obligation to update any forward-looking
statements. Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results to differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements.
12
General
We build and operate large scale wireless networks and provide consulting and
engineering services to allow our customers to build and operate their networks.
We also provide data collection and management services between remote devices
called Machine to Machine or M2M services. We entered this industry upon the
acquisition of Diverse Networks, Inc. on December 2, 2005. The transaction was
accounted for as a recapitalization effected through a reverse merger, such that
Diverse Networks, Inc. was treated as the "acquiring company" for financial
reporting purposes
Our executive offices are located at 550 Greens Parkway, Suite 230, Houston,
Texas 77067 and telephone number (619) 342-7449. We maintain a website at
www.jacksonrivers.com.
Recent Developments
On May 5, 2006, we, through our wholly owned subsidiary, JKRI Acquisition Corp.,
a Texas corporation, acquired UTSI International Corporation, a Texas
corporation specializing in engineering and information solutions for the oil
and gas pipeline industry ("UTSI"). Pursuant to the definitive agreement, each
share of UTSI common stock was converted into the right to receive 1.438029742
shares of our Series C Preferred Stock, or 2,200,000 shares of our Series C
Preferred Stock in the aggregate. UTSI now operates as our wholly owned
subsidiary. The primary reason for the acquisition was that UTSI provides
supervisory control and data acquisition (SCADA), telecommunications and other
specialized services to major pipeline operators and utility companies
worldwide.
The following table summarizes the preliminary fair values assigned to the
assets and liabilities at the date of acquisition:
Current assets $ 389,884
Property and equipment 23,630
Customer List 735,433
Goodwill 1,868,986
----------
Total assets 3,017,933
Less:
Total liabilities 817,933
----------
$2,200,000
==========
13
The following pro forma information assumes the acquisition of UTSI on January
1, 2006 and January 1, 2005, respectively. The pro forma results are not
necessarily indicative of what actually would have occurred had the acquisition
been in effect for the period presented
THE JACKSON RIVERS COMPANY
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the three months For the six months
ended June 30, ended June 30,
--------------------------- --------------------------
2006 2005 2006 2005
------------- ----------- ------------ -----------
Revenues $ 883,423 $ 1,315,788 $ 1,619,479 $ 2,736,915
Cost of goods sold 479,650 410,094 904,834 1,079,806
------------- ----------- ------------ -----------
Gross profit 403,773 905,694 714,645 1,657,109
Selling, general & administrative 1,143,721 943,519 2,471,674 3,236,042
Depreciation and amortization 71,544 84,100 113,543 162,991
------------- ----------- ------------ -----------
Total operating expenses 1,215,265 1,027,619 2,585,217 3,399,033
------------- ----------- ------------ -----------
Loss from operations (811,492) (121,925) (1,870,572) (1,741,924)
------------- ----------- ------------ -----------
Other income (expense)
Interest expense, net (108,192) (17,073) (153,610) (28,746)
Gain/(loss) on derivative liability 71,940 -- -- --
Other income (expense) (41,736) 1,605 (6,238) 624
------------- ----------- ------------ -----------
Total other income (expense) (77,988) (15,468) (159,848) (28,122)
------------- ----------- ------------ -----------
Loss before income taxes (889,480) (137,393) (2,030,420) (1,770,046)
------------- ----------- ------------ -----------
Income tax expense (benefit) -- 67,701 -- (92,349)
------------- ----------- ------------ -----------
Net loss $ (889,480) $ (205,094) $ (2,030,420) $(1,677,697)
============= =========== ============ ===========
Earnings (loss) per share, basic and diluted $ (0.01) $ (0.04) $ (0.02) $ (0.68)
Weighted average number of shares
outstanding basic and diluted 149,414,689 4,655,116 92,041,137 2,481,402
14
Significant Accounting Policies
Revenue Recognition
We rely on the guidance provided by paragraph 45 of SOP 81-1 to measure the
extent of progress towards completion of our contracts for construction of large
scale wireless networks. Paragraph SOP 81-1 identifies three methods of
measuring percentage of completion: 1) costs, 2) units of work, and 3) value
added and further states that the method selected should be applied
consistently. Accordingly, upon receipt of a contract for construction of a
large scale wireless network, we establish certain "milestones" for discreet
units of work based upon the total cost of the project. Each milestone is
budgeted for a predetermined percentage of total cost and we recognize revenue
when each such milestone, or unit of work, is achieved. Each milestone is
budgeted to be x% of the cost of the project, and revenue is recognized using
the same percentage factor. However, many of our projects are completed within
one to two months, so revenue for the full project has been recognized in the
period when the project was completed.
Results of Continuing Operations
Basis of Presentation
The results of operations set forth below for the periods ended June 30, 2006
and June 30, 2005 are those of the continuing operations of The Jackson Rivers
Company, which include Diverse Networks, Inc. and UTSI International Corporation
on a consolidated basis
The following table sets forth, for the periods indicated, certain selected
financial data from continuing operations:
For the three months For the six months
ended June 30, ended June 30,
--------------------- -------------------------
2006 2005 2006 2005
--------- --------- ----------- -----------
Revenues $ 757,836 $ 33,303 $ 1,226,550 $ 41,210
Cost of goods sold 533,420 9,267 746,508 11,922
--------- --------- ----------- -----------
Gross profit 224,416 24,036 480,042 29,288
Selling, general & administrative 872,392 293,581 1,693,741 1,515,666
Depreciation and amortization 71,544 578 107,676 1,156
--------- --------- ----------- -----------
Total operating expenses 943,936 294,159 1,801,417 1,516,822
--------- --------- ----------- -----------
Loss from operations (719,520) (270,123) (1,321,375) (1,487,534)
--------- --------- ----------- -----------
15
Comparison of the Three Months and Six Months Ended June 30, 2006 and June 30,
2005
Net sales. Our net sales for operations increased to $757,836 and $1,226,550, or
an increase of approximately 2,176% and 2,876%, for the three months and six
months ended June 30, 2006, respectively. This increase is primarily due to the
acquisitions of Diverse Networks and UTSI.
Cost of Sales. Cost of sales increased to $533,420 and $746,508, or
approximately 5,656% increase and 6,162%, for the three months and six months
ended June 30, 2006, respectively. As a percentage of net sales, cost of sales
increased to 70% and 61% of net sales for the three and six months ended June
30, 2006, respectively, versus approximately 28% and 29% of sales for the three
and six months ended June 30, 2005. The increase is primarily due to the
inclusion of the full period of the cost of goods sold from Diverse Networks and
7 weeks of UTSI, respectively. As a result, the company generated a gross profit
of $224,416 and $480,042 for the three and six months ended June 30, 2006 with a
gross profit margin of approximately 30% and 39% for the three and six months
ended June 30, 2006, respectively.
Selling, general and administrative. Selling, general and administrative
expenses increased to $872,392 and $1,693,741 for the first three and six months
ending June 30, 2006, respectively. As a percentage of net sales, selling,
general and administrative expenses were approximately 115% and 138% for the
three and six months ended June 30, 2006, as compared to approximately 882% and
3,678% for the comparable period in 2005. Selling, general and administrative
expenses were 197% and 12% higher in the three months and six months ending June
30, 2006, respectively than the corresponding period last year, primarily due to
the inclusion of Diverse Networks and UTSI.
Depreciation and Amortization. Depreciation and amortization expense increased
to $71,544 and $107,676 for the three and six months ending June 30, 2006, from
$578 and $1,156 for the similar periods in 2005. This increase was primarily due
to the inclusion of depreciation for Diverse Networks and UTSI.
Operating loss. We incurred an operating loss of $719,520 and $1,321,375 for the
three and six months ended June 30, 2006, compared to an operating loss of
$270,123 and $1,487,534 for similar periods in 2005. The company had higher
operating losses in the six months ended June 30, 2006 compared to the prior
year primarily due to Diverse Networks and UTSI operating at a loss during the
respective periods and additional acquisition expenses.
Liquidity and Capital Resources
We have financed our operations, acquisitions, debt service, and capital
requirements through cash flows generated from operations, debt financing, and
issuance of securities. Our working capital deficit at June 30, 2006 was
$1,631,951 and at December 31, 2005 it was $352,407. We had cash of $145,752 as
of June 30, 2006, while we had cash of $36,361 as of December 31, 2005. The
differences are primarily due to funding the losses of the operations offset by
the funding from the first and second tranch.
16
We used $1,166,903 of net cash in operating activities for the six months ended
June 30, 2006 compared to using $1,326,563 in the six months ended June 30,
2005.
Net cash flows used for investing activities was $6,730 for the six months ended
June 30, 2006, compared to investments of $450 in the six months ended June 30,
2005. The investments were for the updating of some computers.
Net cash flows provided by financing activities were $1,359,488 for the six
months ended June 30, 2006, compared to net cash provided by financing
activities of $1,322,745 in the same period last year. The increase is primarily
from the funding from the first and second tranches.
On March 31, 2006, we entered into a Securities Purchase Agreement with certain
accredited investors pursuant to which they agreed to issue up to $2,000,000 of
principal amount of convertible promissory notes in three separate tranches and
warrants to purchase shares of the company's common stock (the "Securities
Purchase Agreement"). The tranches of notes are to be issued and sold as
follows: (i) $700,000 upon execution and delivery of the Securities Purchase
Agreement; (ii) $600,000 within 5 days of filing of a registration statement
with the Securities and Exchange Commission (the "SEC") registering the shares
of common stock issuable upon conversion of the notes and exercise of the
warrants issued pursuant to the Securities Purchase Agreement (the "Registration
Statement") and (iii) $700,000 within 5 days of the Registration Statement being
declared effective by the SEC. The convertible notes have a 3 year term and bear
interest at six percent (6%). At this time, we have received funding from the
first and second tranch. The notes are convertible into the company's common
stock pursuant to a "variable conversion price" equal to the "Applicable
Percentage" multiplied by the "Market Price.' "Applicable Percentage" is 55% and
further increased to 60% if the Registration Statement is declared effective by
the SEC on or before July 29, 2006. The Registration Statement was filed on time
and the "Applicable Percentage" used is 55% in valuing the convertible
promissory notes. "Market Price" means the average of the lowest three trading
prices (as defined) for the company's common stock during the 20 trading day
period prior to conversion. Upon an event of default (as defined), the notes are
immediately due and payable at an amount equal to the greater of (i) 140% of the
then outstanding principal amount of notes plus interest and (ii) the "parity
value" defined as (a) the highest number of shares of common stock issuable upon
conversion of the notes multiplied by (b) the highest closing price for the
company's common stock during the period beginning on the date of the occurrence
of the event of default and ending one day prior to the demand for prepayment
due to the event of default. The notes are secured by a first lien on all of the
company's assets, including all of its intellectual property.
Subject to certain terms and conditions set forth therein, the notes are
redeemable by the company at a rate from 120% to 140% of the outstanding
principal amount of the notes plus interest. In addition, so long as the average
daily price of the company's common stock is below the "initial market price"
(as defined) the company may prepay a such monthly portion due on the
outstanding notes and the investors agree that no conversions will take place
during such month where this option is exercised by us.
17
The notes were issued with warrants to purchase up to 50,000,000 shares of our
common stock at an exercise price of $0.07 per share, subject to adjustment.
We agreed to register the secondary offering and resale of the shares issuable
upon conversion of the notes, the shares issuable upon exercise of the warrants
within 30 days of the execution of the Securities Purchase Agreement.
We relied on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, for the offer and sale of the notes and the
warrants.
In connection with the offer and sale of the notes and the warrants, the company
engaged Envision Capital LLC, as a finder for the transaction. Envision will
receive a ten percent (10%) cash commission on the sale of the notes and
warrants to purchase up to 5,000,000 shares of the company's common stock on the
same terms and conditions as the warrants issued to purchasers under the
Securities Purchase Agreement.
To date, the first two tranches of convertible notes have been issued and sold,
resulting in gross proceeds of $1.3 million to us.
Capital Requirements
We had a working capital deficit of $1,631,951 as of June 30, 2006. We have
closed the first two tranches of the March 2006 Private Offering discussed
above, which resulted in gross proceeds to us of $1,300,000 and we expect to
close the final tranche of this private placement which will generate gross
proceeds of $700,000 in the next 90 days.
In the event we seek to expand our operations or launch new products for sale
into the marketplace, or in the event the company seeks to acquire a company or
business or business opportunity, or in the event that our cash flows from
operations are insufficient to fund our operations, working capital
requirements, and debt service requirements, the company would need to finance
its operations through additional debt or equity financing, in the form of a
private placement or a public offering, a strategic alliance, or a joint
venture. Such additional financing, alliances, or joint venture opportunities
might not be available to the company, when and if needed, on acceptable terms
or at all. If we are unable to obtain additional financing in sufficient amounts
or on acceptable terms under such circumstances, our operating results and
prospects could be adversely affected. In addition, any debt financings or
significant capital expenditures require the written consent of the company's
lender under the March private placement.
Off-Balance Sheet Arrangements
None.
18
ITEM 3. CONTROLS AND PROCEDURES.
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in its Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure
based closely on the definition of "disclosure controls and procedures" in Rule
13a-15(e). In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
At the end of the period covered by this Quarterly Report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that, as of June 30, 2006, the disclosure controls
and procedures of the Company were not effective to ensure that the information
required to be disclosed in the Company's Exchange Act reports was recorded,
processed, summarized and reported on a timely basis.
Our independent auditor, Malone & Bailey PC, identified deficiencies our
internal controls related to depreciation, amortization and the recapitalization
for the fiscal period ended December 31, 2005. In addition, management
identified deficiencies in their accounting for business combinations. To
address these issues, we hired an accountant to assist in our preparation and
review process. Our Chief Executive Officer and Chief Financial Officer feel
this step now ensures that effective controls are now in place and will insure
proper reporting of business combinations, depreciation, amortization and
recapitalizations.
19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
See our Current Report on Form 8-K dated May 5, 2006.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
Exhibit No. Description
----------- ------------------------------------------------------------------
3.1* Articles of Incorporation filed May 8, 2001 (incorporated by
reference to Exhibit A filed with Form SB-2October 4, 2001).
3.2* Articles of Amendment to the Articles of Incorporation, filed
effective August 3, 2004.
3.3* Certificate of Designation for the Series A Preferred Stock, filed
effective October 18, 2004.
3.4* Certificate of Designation for the Series B Preferred Stock, filed
effective December 1, 2005.
3.5* Articles of Amendment to the Articles of Incorporation, filed
effective November 22, 2004.
3.6* Articles of Amendment to the Articles of Incorporation, filed
effective January 31, 2005
3.7* Bylaws (incorporated by reference to Exhibit 3(ii) filed with Form
SB-2 October 4, 2001).
3.8* Amended and Restated Bylaws.
3.9** Articles of Amendment to the Articles of Incorporation, filed
effective May 5, 2006.
10.1* Consulting Services Agreement dated August 1, 2003.
10.2* Technology License Agreement
10.3* Stock Purchase Agreement dated as of August 31, 2005 by and among
The Jackson Rivers Company, Dennis Lauzon and Jeffrey Flannery.
10.4* Agreement and Plan of Merger dated December 1, 2005 by and among
the Jackson Rivers Company, JKRC Sub, Inc., Diverse Networks, Inc.
and the shareholders of Diverse Networks, Inc.
10.5* Stock Purchase Agreement dated as of December 1, 2005 by and
between Jeffrey W. Flannery, James E. Nelson and The Jackson
Rivers Company.
10.6*. Employment Agreement dated as of December 1, 2005 between James E.
Nelson and The Jackson Rivers Company
10.7* Securities Purchase Agreement dated as of March 31, 2006 by and
among The Jackson Rivers Company and the Purchaser set forth
therein.
10.8* Form of Callable Secured Promissory Note dated March 31, 2006.
10.9* Security Agreement dated as of March 31, 2006.
10.10* Registration Rights Agreement dated as of March 31, 2006.
10.11* Intellectual Property Security Agreement dated as of March 31,
2006.
10.12* Form of Stock Purchase Warrant dated March 31, 2006.
20
10.13* Convertible Promissory Note dated as of January 2, 2006.
10.14* Convertible Promissory Note dated as of March 12, 2006.
10.15* Agreement and Plan of Merger, dated May 5, 2006 by and among The
Jackson Rivers Company, JKRI Acquisition Corp., and UTSI
International Corporation.
31.1** Certification of Jeffrey W. Flannery, Chief Executive Officer,
Chief Financial Officer and Director of The Jackson Rivers
Company, pursuant to 18 U.S.C. Sec.1350, as adopted pursuant to
Sec.302 of the Sarbanes-Oxley Act of 2002.
32.1** Certification of Jeffrey W. Flannery, Chief Executive Officer,
Chief Financial Officer and Director of The Jackson Rivers
Company, pursuant to 18 U.S.C. Sec.1350, as adopted pursuant to
Sec.906 of the Sarbanes-Oxley Act of 2002.
----------
* Previously Filed
** Filed Herewith
21
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
The Jackson Rivers Company
Dated: September 12, 2006 By /s/ Jeffrey W. Flannery
-------------------------------------
Jeffrey W. Flannery,
Chief Executive Officer,
Chief Financial Officer and Director
22