21-May-2010
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words "believes," "project," "expects," "anticipates," "estimates," "intends," "strategy," "plan," "may," "will," "would," "will be," "will continue," "will likely result," and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and future prospects on a consolidated basis include, but are not limited to:
changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.
Overview
We were incorporated as "NanoAsia Ltd." ("NanoAsia") on September 19, 2007, in the State of Nevada for the purpose of purchasing chemicals produced through the use of nano-technology by NanoDuck China, using those chemicals to treat finished garments for companies that manufacture and sell clothing, and selling those chemicals to fabric mills who wish to produce and sell fabrics with special performance features.
However, we recently determined that our current business model was inferior to the opportunity we discovered with Ad Systems. Accordingly, on February 11, 2010, we entered into the Merger Agreement with Ad Systems, whereby we acquired all of the assets, liabilities, and business operations of Ad Systems.
In consequence of entering into the Merger Agreement, we have determined to pursue the business plan of Ad Systems. We are currently engaged in the cable television advertising business.
Our Business
We are engaged in the business of developing, manufacturing, selling, and managing advertisement insertion hardware and software systems and services (our "Products" and "Services"). We have specifically targeted second and third tier cable TV operators that deploy national cable TV networks in the U.S. However, we do have plans to expand our operations to certain international markets.
Our Product enables local cable operators (our "Customers") to insert advertising in both conventional and nontraditional cable TV systems. Our Services to the operator consist of acquiring advertising spots from local, regional, and national advertisers; scheduling, running, and billing for playback time; installing and maintaining the associated hardware and software; providing ongoing support; and managing ad sales, all on a revenue share basis.
We are an independent provider of designated market area ("DMA") based cable TV advertising sales and commercial delivery in the U.S. We expect that our international expansion will initially focus on market opportunities in India and Latin America, followed by Canada. We intend to continue to focus the placement of our Products with independently-owned cable TV systems, franchised cable operators, colleges and university campuses, hotels, resorts, and other multi-dwelling-units ("MDUs").
We provide ad-insertion technology and services to Customers who were previously unable to benefit from this technology due to the prohibitively high cost of most ad-insertion systems. Our hardware is significantly less expensive to produce than traditional systems, and we maintain ownership of the system when we place it with a Customer. Thus, our Customer's experience no out-of-pocket expense; they simply split with us the additional revenue generated by our system.
Based on this model, we successfully completed a beta rollout to 12 sites in early 2008, and have since increased our customer base to 25 cable TV systems. This customer base is comprised of several Universities and small cable operators for an installed base of some 225,889 subscribers. We are ready to expand this customer base with 195 additional multi-year contracts that have already been signed, increasing our installed base to 824,400 in 2010, and 4,255,200 in 2011. Additionally, we have multiple five-year contracts pending, which, when concluded, will increase this installed base to 11,671,299 in 2012 and 22,135,200 in 2013. We anticipate monthly revenues on average of $4 to $6 per subscriber once fully deployed.
Our offices are located at 495 State Street Suite # 459, Salem, Oregon, 97301.
Product Development
We intend to continue the development and refinement of our Product over the coming months. We are currently in the process of developing the next generation of our Product to ensure that it will maintain compatibility with evolving TV technology and continue to function successfully on any platform and every type of video delivery.
During the last two years one person has been dedicated to research and development. This has produced the networked insertion software, and both the head end control and traffic and billing systems. During 2009 a second engineer was hired on a contract basis, and the preliminary design for the next generation product was completed. These activities have been externally funded and do not impact customer pricing for the current Product. The cost of this development will be absorbed by a reduction in cost of goods for the ensuing rollouts in year 3 and 4.
Our flagship product, Addige.NET, has been deployed and is in the commercial stage. A follow-up product that will reduce our costs and reliance on outside vendors is currently under development. However, we do not have the capital necessary to complete the development of this next generation of ad insertion hardware. We intend to resume development should sufficient capital become available through operating revenue, or debt or equity financing.
Our current Product is a standalone inserter, capable of controlling up to 8 networks and sharing up to 4 playback devices for commercial insertion. While this technology meets our needs and the current needs of our customers, we intend to upgrade the insertion technology in order to cater to all-digital cable head ends, including IP TV, which is becoming increasingly popular. A second generation is planned, which is intended for the following application environments:-
1. Analog Insertion
2. MPEG-2 stream splicing
3. Digital Overlay
4. Digital Signage
Analog insertion is still the technology of today, but it is rapidly being displaced as new digital head ends drive costs downward. The response to this pressure is to include digital-into-digital splicing (also known as MPEG-2 stream splicing), which we expect to develop and offer as development funds become available. Digital overlay and signage represent growth markets for us in the future, once the cable market has become saturated.
Significant Equipment
We intend to pay our contracted manufacturer to build between 75 to100 new systems and network support equipment for us to deploy during 2010. The capital cost for acquisition and deployment of this equipment is expected to be approximately $600,000.
Our operations are currently implemented on a small number of servers, which will have to be increased in order to accommodate growth. The development effort is minimal, but we expect the capital for new server hardware to be approximately $45,000.
Sales and Distribution Strategy
Our goal is for our ad-insertion technology to become a leading product in the cable advertising marketplace in the U.S. and certain international markets. In order to achieve our goal, we intend to increase awareness of our Product with potential customers, who we anticipate will be small cable operators. We also intend to sell advertising space to local and national advertisers.
We have already begun to sell our ad spots and are booking many national, regional, local, and political advertisers on our current operating systems. Some of the most active are Arby's, Chevrolet, Ford, KFC, Cold Stone Creamery, Coke, Buick, Suzuki, Great Clips, Red Lobster, Obama, and more.
We successfully completed a beta rollout to 12 sites in early 2008, and have since increased our customer base to 25 cable TV systems. This customer base is comprised of several Universities and small cable operators for an installed base of some 225,889 subscribers. We are ready to expand this customer base with 195 additional multi-year contracts that have already been signed, increasing our installed base to 824,400 in 2010, and 4,255,200 in 2011. Additionally, we have multiple five-year contracts pending, which, when concluded, will increase this installed base to 11,671,299 in 2012 and 22,135,200 in 2013. We anticipate monthly revenues on average of $4 to $6 per subscriber once fully deployed.
We feel that we can realize our revenue projections by completing the hundreds of contracts we already have. Additionally, we intend to increase this installed base by closing on some of thousands of potential future contracts.
Our sales representatives promote and sell our Products to cable system operators, and promote and sell advertising spots to local and national advertisers. These sales representatives are responsible for soliciting, selecting and securing accounts within a particular regional territory. We pay our sales representatives on a commission basis. In addition, we pay each sales representative a base salary. We provide service and support to our sales representatives, including advertising and sales materials. If we determine to expand our sales internationally, we will employ sales personnel in India, Latin America, and Canada.
Intellectual Property Protection
We intend to aggressively assert our rights under trade secret, unfair competition, trademark and copyright laws to protect our intellectual property, including product formulas, proprietary manufacturing processes and technologies, product research and concepts, and recognized trademarks. These rights are protected through the acquisition of patents and trademark registrations, the maintenance of trade secrets, the development of trade dress, and, where appropriate, litigation against those who are, in our opinion, infringing these rights.
We are currently consulting with law firms to protect our brand name and product design. While there can be no assurance that registered trademarks will protect our proprietary information, we intend to assert our intellectual property rights against any infringer. Although any assertion of our rights can result in a substantial cost to, and diversion of effort by, our Company, management believes that the protection of our intellectual property rights is a key component of our operating strategy.
Results of Operations for the Three Months Ended March 31, 2010 and 2009
Our revenues have increased in each fiscal period. We reported revenues of $91,981during the three months ended March 31, 2009, increasing to $121,972 in 2010.
General and administrative expenses are also increasing due to the cost of going public. General and administrative expenses increased to $195,965 during the three months March 31, 2010 from $72,894 in 2009.
We incurred a net loss of $139,150 for the three months ended March 31, 2010, compared with $7,855 for 2009.
Off Balance Sheet Transactions
We have had no off balance sheet transactions.
Critical Accounting Policies
Our significant accounting policies are described in Note 1 of the Financial Statements.
Liquidity and Capital Resources
As of March 31, 2010, we had total current assets of $368,647 and total assets of $384,533. Our total current liabilities as of March 31, 2010 were $761,406. Thus, we had a working capital deficit of $392,759 as of March 31, 2010.
Operating activities used $90,083 in cash for the three months ended March 31, 2010. Our net loss of $139,150 combined with an increase in refundable deposits of $25,000 and increase in accounts receivable of $14,862 offset by an amortization of a beneficial conversion feature of $24,247 and increase in accounts payable of $63,846 was the primary reason for our negative operating cash flow. Our cash used in investing activities was $16,722 during the three months ended March 31, 2010. Cash flows provided by financing activities during the three months ended March 31, 2010 was $250,000 represented by proceeds from convertible notes payable.
We anticipate requiring $2,000,000 in order to implement the plan discussed herein and service the contracts, which we have already signed. Based upon our current financial condition, we do not have sufficient cash to operate our business at the planned level for the next twelve months. We intend to fund operations through increased sales and debt and/or equity financing arrangements, which may be insufficient to fund expenditures or other cash requirements. We plan to seek additional financing in a private equity offering to secure funding for operations. There can be no assurance that we will be successful in raising additional funding. If we are not able to secure additional funding, the implementation of our business plan will be impaired. There can be no assurance that such additional financing will be available to us on acceptable terms or at all.
Going Concern
The Company's financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.
In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management's plan is to obtain such resources for the Company by obtaining capital from management and significant shareholders sufficient to meet its minimal operating expenses and seeking equity and/or debt financing. However management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
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