U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 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 November 10, 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 SHEETS
Assets
(Unaudited)
September 30, 2006 December 31, 2005
------------------ -----------------
Current assets
Cash and cash equivalents $ 187,889 $ 36,361
Accounts receivable, net 509,809 272,330
Inventory -- 19,633
Prepaid and other assets 188,916 32,681
----------- -----------
Total current assets 886,614 361,005
Property and equipment 1,416,114 1,106,234
Accumulated depreciation (1,223,433) (854,839)
----------- -----------
192,681 251,395
Customer list, net of amortization 674,147 --
Goodwill 1,868,986 --
Other long term assets 28,206 --
----------- -----------
Total assets $ 3,650,634 $ 612,400
=========== ===========
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable and accrued expenses 943,022 $ 703,125
Curent derivative liability 473,452 --
Note payable - short term 768,133 --
Line of credit 473,000 --
Capital lease - current portion 6,208 10,287
Other current liabilities 27,542 --
----------- -----------
Total current liabilities 2,691,357 713,412
Derivative liability 1,605,464 --
Note payable - related parties 301,540 302,644
Note payable - long term -- 917,000
Capital lease - net of current portion -- 4,765
----------- -----------
Total Liabilities 4,598,361 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 September 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 September 30, 2006
1,000 1,000
Series C preferred stock, par value $1.00 2,200,000 shares authorized,
issued and outstanding as of September 30, 2006
2,200,000 --
Common stock, par value $.00001 per share, 990,000,000 shares authorized,
151,158,574 issued and outstanding at September 30, 2006
1,512 495
Additional paid-in capital 1,038,696 507,755
Stock subscription receivable -- (92,400)
Accumulated deficit (4,200,328) (1,742,281)
Comprehensive Income - translation of non-dollar currency financials of
Branch 11,383 --
----------- -----------
Total stockholders' deficit (947,727) (1,325,421)
----------- -----------
Total liabilities and stockholders' deficit $ 3,650,634 $ 612,400
=========== ===========
See accompanying notes to consolidated financial statements
2
THE JACKSON RIVERS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months For the nine months
ended September 30, ended September 30,
------------------------- -------------------------
2006 2005 2006 2005
------------ ---------- ----------- -----------
Revenues $ 938,706 $ 33,149 $ 2,165,256 $ 74,359
Cost of goods sold 648,103 8,625 1,394,611 20,547
------------ ---------- ----------- -----------
Gross profit 290,603 24,524 770,645 53,812
Research & development 84,709 -- 84,709 --
Selling, general & administrative 598,573 201,621 2,292,314 1,717,287
Depreciation and amortization 57,363 382 165,039 1,538
------------ ---------- ----------- -----------
Total operating expenses 655,936 202,003 2,457,353 1,718,825
------------ ---------- ----------- -----------
Loss from operations (450,042) (177,479) (1,771,417) (1,665,013)
------------ ---------- ----------- -----------
Other income (expense)
Interest expense, net (101,273) 1 (301,528) 11
Gain/(loss) on derivative liability (283,645) -- (283,645) --
Debt forgiveness -- 225,700 -- 225,700
Other income (expense) 75,549 -- (20,004) --
------------ ---------- ----------- -----------
Total other income (expense) (309,369) 225,701 (605,177) 225,711
------------ ---------- ----------- -----------
Net income (loss) from continued operations (759,411) 48,222 (2,376,594) (1,439,302)
============ ========== =========== ===========
Loss from discontinued operations -- -- (81,454) (9,981)
Net income (loss) attributable to common shareholders $ (759,411) $ 48,222 $(2,458,048) $(1,449,283)
------------ ---------- ----------- -----------
Basic and diluted net income/(loss) from continuing operations (0.01) 0.01 (0.03) (0.36)
Basic and diluted net income/(loss) from discontinued operations 0.00 0.00 (0.00) (0.00)
Income (loss) per share, basic and diluted $ (0.01) $ 0.01 $ (0.03) $ (0.36)
Weighted average number of shares outstanding basic and diluted 151,158,574 8,845,756 94,898,121 3,944,814
See accompanying notes to consolidated financial statements
3
THE JACKSON RIVERS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months
ended September 30,
-------------------------
2006 2005
----------- -----------
Cash flows from operating activities
Loss from continued operations $(2,376,594) $ --
Loss for discontinued operations (81,456) --
----------- -----------
Net loss (2,376,594) (1,439,302)
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 165,039 1,538
Debt forgiveness -- (225,700)
Common stock issued for consulting services rendered 307,351 278,683
Common stock issued in exchange for employee services rendered 211,200 892,019
Common stock issued from stock subscription receivable 92,400 --
Accretion of discount on note payable 138,425 --
Changes in assets and liabilities (Increase) decrease:
Accounts receivable (42,824) 34,884
Inventories 19,633 (33,060)
Other assets (156,235) (2,588)
Cash disbursed in excess of available funds -- (11,073)
Increase (decrease):
Accounts payable and accrued liabilities (150,145) 192,258
Other liabilities (6,957) --
----------- -----------
Net cash used in operating activities (1,880,161) (312,341)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (21,409) (450)
Cash flows from financing activities
Proceeds from sale of stock, net of costs and fees 13,407 200,736
Proceeds from notes payable, net of repayments 1,421,172 20,000
Proceeds from notes payable - related parties, net of repayments 420,751 89,300
Payment for Capital Leases (8,844) --
Acquisition of UTSI 195,229 --
----------- -----------
Net cash provided by financing activities 2,041,715 310,036
----------- -----------
Net increase (decrease) in cash and cash equivalents 140,145 (2,755)
----------- -----------
Effect of exchange rate on cash and cash equivalents 11,383 --
Cash and cash equivalents - beginning of period 36,361 5,272
----------- -----------
Cash and cash equivalents - end of period $ 187,889 $ 2,517
=========== ===========
Supplemental disclosures of cash flow information
Cash paid for income taxes $ -- $ --
=========== ===========
Cash paid for interest $ 60,532 $ --
=========== ===========
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 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 nine months ended September 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 Jackson Rivers' Annual Report on Form 10-KSB for the year
ended December 31, 2005, should be read in conjunction with these consolidated
financial statements.
2. ACQUISITION OF UTSI INTERNATIONAL CORPORATION
On May 5, 2006, Jackson Rivers 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 Jackson Rivers, 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 Jackson Rivers 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 Jackson Rivers).
Each share of Series C Preferred Stock will initially be convertible, starting
after May 5, 2008, into that number of shares of Jackson Rivers 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
Jackson Rivers 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 nine months ending September 30, 2006 and 2005 and the Statement
of Cash Flows for the nine months ending September 30, 2006 and 2005 are
presented to include the results of UTSI during those periods.
5
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.
6
The following Unaudited pro forma consolidated 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 STATEMENTS OF OPERATIONS
(Unaudited)
For the three months For the nine months
ended September 30, ended September 30,
-------------------- -------------------------
2005 2006 2005
-------------------- ----------- -----------
Revenues $ 665,077 $ 2,602,825 $ 3,401,992
Cost of goods sold 1,027,095 1,592,528 2,106,901
---------- ----------- -----------
Gross profit (362,018) 1,010,297 1,295,091
Research & development -- 84,709 --
Selling, general & administrative (58,066) 2,777,989 3,177,976
Depreciation and amortization (95,792) 170,215 67,199
---------- ----------- -----------
Total operating expenses (153,858) 2,948,204 3,245,175
---------- ----------- -----------
Loss from operations (208,160) (2,022,616) (1,950,084)
---------- ----------- -----------
Other income (expense)
Interest expense, net (5,770) (287,940) (34,516)
Gain/(loss) on derivative liability -- (283,645) --
Gain on sale of fixed asset -- 10,067 --
Debt forgiveness 155,000 -- 155,000
Other income (expense) 21,310 (77,027) 21,934
---------- ----------- -----------
Total other income (expense) 170,540 (638,545) 142,418
---------- ----------- -----------
Loss before income taxes (37,620) (2,661,161) (1,807,666)
---------- ----------- -----------
Income tax expense (benefit) 27,940 -- (64,409)
---------- ----------- -----------
Net loss from continuing operations $ (65,560) $(2,661,161) $(1,743,257)
========== =========== ===========
Loss per share, basic and diluted $ (0.01) $ (0.03) $ (0.44)
Weighted average number of shares outstanding
basic and diluted 8,845,756 94,898,121 3,944,814
See accompanying notes to financial statements
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 September 30, 2006, Jackson Rivers has an accumulated
deficit of $4,200,328. In addition, Jackson Rivers' current liabilities exceeded
its current assets by $1,804,743 as of September 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. Jackson Rivers' 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 Jackson
Rivers. 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 Jackson Rivers 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 borrowed $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 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%). As of September 30, 2006, we had received funding from the
first and second tranch, and the funding for the third tranch was received on
October 11, 2006, after the SEC declared effective the Registration Statement.
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.
9
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
September 30, 2006; expected volatility of 68%; risk free interest rate of
approximately 4.90%; and a term of one year.
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
September 30, 2006; expected volatility of 72%; risk free interest rate of
approximately 4.62%; and a term of three years.
From August 10 - 14, 2006, we obtained $97,500 in 30-day bridge loans from 7
individuals. The terms of the loan were for 30 days with interest at 10% per
annum. At the time of the funding of the third tranch, Jackson Rivers will pay
the notes in full plus interest and issue common stock equal to 50% of the value
of the principal, based on the average of the lowest three closing bid prices in
the 20 days immediately preceding the Repayment Date. The fair value of stock
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 September 30, 2006; expected volatility of 27%;
risk free interest rate of approximately 5.21%; and a term of thirty days. As of
September 30, 2006, $17,500 of the bridge loans had been paid in full.
5. CAPITAL STOCK
During the nine months ended September 30, 2006 Jackson Rivers issued 79,250,000
shares of common stock to consultants for services valued at $307,351. Valuation
was based on the fair value of the stock issued. Jackson Rivers issued
20,000,000 shares of common stock, valued at $211,200 to officers and employees
for stock options exercised.
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.
10
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, Jackson Rivers 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. As of December 31, 2005, all options were fully vested;
therefore, there are no expenses to Jackson Rivers related to the implementation
of SFAS No. 123R. Results for the prior periods have not been restated.
As part of the merger agreement with DNI, all of the options under the 1999 Plan
would be converted 1:1 to options for JKRI Series B Preferred Stock. The 2000
Plan options that were not forfeited or were "under water" were converted 1:1 to
JKRI 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.
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 non-vested stock options at any point during the year ended
December 31, 2005.
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.
11
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
Jackson Rivers 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
Jackson Rivers had applied the fair value recognition provisions of SFAS No. 123
to options granted in the three and nine months ended September 30, 2005.
Three months ended Nine months ended
September 30, 2005 September 30, 2005
------------------ ------------------
Net loss, as reported $ 48,222 $(1,439,302)
Deduct: Total stock-based employee/director compensation
expense under the fair value based method for all awards,
net of related tax effects (6,267) (18,802)
Pro forma net loss $ 41,955 $(1,458,104)
========== ===========
Loss per share, pro forma basic and diluted $ 0.00 $ (0.37)
========== ===========
Shares used in basic and diluted loss per share 8,845,756 3,944,814
---------- -----------
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.
12
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.
General
We are in the infrastructure management and technology business. We build and
operate large scale wireless networks and provide consulting and engineering
services to allow our customers to better manage their infrastructure, whether
that be an oil or gas pipeline, a remote asset device, a building or a network.
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 March 17, 2006, we sold 100% of equity interest in our wholly owned
subsidiary, JRC Global Inc. to our former President and controlling shareholder,
Dennis Lauzon for $1,100 in the form of a promissory note.
From August 10 - 14, 2006, we obtained $97,500 in 30-day bridge loans from 7
individuals. The terms of the loan were for 30 days with interest at 10% per
annum. At the time of the funding of the third tranch, the company will pay the
notes in full plus interest and issue common stock equal to 50% of the value of
the principal, based on the average of the lowest three closing bid prices in
the 20 days immediately preceding the Repayment Date. The fair value of stock
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 September 30, 2006; expected volatility of 27%;
risk free interest rate of approximately 5.21%; and a term of thirty days. As of
September 30, 2006, $17,500 of the bridge loans had been paid in full.
13
On October 11, 2006, we received the funding of $700,000 from the third tranch
after the SEC declared effective the Registration Statement.
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 discrete
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 September 30,
2006 and September 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.
14
The following table sets forth, for the periods indicated, certain selected
financial data from continuing operations:
For the three months For the nine months
ended September 30, ended September 30,
--------------------- -------------------------
2006 2005 2006 2005
--------- --------- ----------- -----------
Revenues $ 938,706 $ 33,149 $ 2,165,256 $ 74,359
Cost of goods sold 648,103 8,625 1,394,611 20,547
--------- --------- ----------- -----------
Gross profit 290,603 24,524 770,645 53,812
Research & development 84,709 -- 84,709 --
Selling, general & administrative 598,573 201,621 2,292,314 1,717,287
Depreciation and amortization 57,363 382 165,039 1,538
--------- --------- ----------- -----------
Total operating expenses 655,936 202,003 2,457,353 1,718,825
--------- --------- ----------- -----------
Loss from operations (450,042) (177,479) (1,771,417) (1,665,013)
--------- --------- ----------- -----------
Comparison of the Three Months and Nine months ended September 30, 2006 and
September 30, 2005
Net sales. Our net sales for operations increased to $938,706 and
$2,165,256 or an increase of approximately 2,732% and 2,812% for the three
months and nine months ended September 30, 2006, respectively. This
increase is primarily due to the acquisitions of Diverse Networks and
UTSI.
Cost of Sales. Cost of sales increased to $648,103 and $1,394,611 or
approximately 7,414% increase and 6,687% for the three months and nine
months ended September 30, 2006, respectively. As a percentage of net
sales, cost of sales increased to 69% and 64% of net sales for the three
and nine months ended September 30, 2006, respectively, versus
approximately 26% and 28% of sales for the three and nine months ended
September 30, 2005. This increase is primarily due to the inclusion of
costs from the acquisitions of Diverse Networks and UTSI. As a result, the
company generated a gross profit of $290,603 and $770,645 for the three
and nine months ended September 30, 2006 with a gross profit margin of
approximately 31% and 36% for the three and nine months ended September
30, 2006, respectively.
Research and Development. Research and Development expenses related to the
development of future products were $84,709 for both the three and nine
months ended September 30, 2006, as this cost started to be tracked during
this quarter, it previously had been included in Cost of Sales.
Selling, general and administrative. Selling, general and administrative
expenses increased to $598,573 and $2,292,314 for the first three and nine
months ending September 30, 2006, respectively. As a percentage of net
sales, selling, general and administrative expenses were approximately 64%
and 106% for the three and nine months ended September 30, 2006, as
compared to approximately 608% and 2,309% for the comparable period in
2005. Selling, general and administrative expenses were 196% and 33%
higher in the three months and nine months ending September 30, 2006,
respectively than the corresponding period last year, primarily due to the
inclusion of Diverse Networks and UTSI expenses.
15
Depreciation and Amortization. Depreciation and amortization expense
increased to $57,363 and $165,039 for the three and nine months ending
September 30, 2006, from $382 and $1,538 for the similar periods in 2005.
This increase was primarily due to the inclusion of depreciation and
amortization for Diverse Networks and UTSI.
Operating loss. We incurred an operating loss of $450,042 and $1,771,417
for the three and nine months ended September 30, 2006, compared to an
operating loss of $177,479 and $1,665,013 for similar periods in 2005. The
company had higher operating losses in the nine months ended September 30,
2006 compared to the prior year primarily due to losses in Diverse
Networks plus higher acquisition and financing costs slightly offset by
profits from UTSI since the acquisition.
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 September 30,
2006 was $1,804,743 and at December 31, 2005 it was $352,407. We had cash
of $187,889 as of September 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.
We used $1,880,161 of net cash in operating activities for the nine months
ended September 30, 2006 compared to using $312,341 in the nine months
ended September 30, 2005.
Net cash flows used for investing activities was $21,409 for the nine
months ended September 30, 2006, compared to investments of $450 in the
nine months ended September 30, 2005. The investments were for the
updating of some computers.
Net cash flows provided by financing activities were $2,041,715 for the
nine months ended September 30, 2006, compared to net cash provided by
financing activities of $310,036 in the same period last year. The
increase is primarily from the funding from the first and second tranches
and funding from related parties.
16
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%). As of September 30, 2006, we had received
funding from the first and second tranch. The payment for the third tranch
was received on October 11, 2006 after the SEC declared effective the
Registration Statement. 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.
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, and 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.
17
As of October 11, 2006, all three tranches of convertible notes have been
issued and sold, resulting in gross proceeds of $2.0 million to us.
Capital Requirements
We had a working capital deficit of $1,804,743 as of September 30, 2006.
As of that date, we had closed the first two tranches of the March 2006
Private Offering discussed above. On October 11, 2006, the third tranch
was closed and we received the final $700 thousand.
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.
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.
18
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
September 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 in
our internal controls related to depreciation, amortization and the
recapitalization for the fiscal period ended December 31, 2005. In
addition, management identified deficiencies in our 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-2 on October 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 on 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: November 14, 2006 By /s/ Jeffrey W. Flannery
---------------------------------
Jeffrey W. Flannery,
Chief Executive Officer,
Chief Financial Officer and Director
22