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 March 31, 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 May 12, 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
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
THE JACKSON RIVERS COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS March 31 2006 December 31, 2005
------------- -----------------
(restated)
Current assets:
Cash and cash equivalents $ 683,695 $ 36,361
Accounts receivable, net 360,313 272,330
Inventory 18,333 19,633
Prepaid expenses and other 31,352 32,681
----------- -----------
Total current assets 1,055,311 361,005
Software, net 19,700 25,910
Other assets 28,206 --
Property and equipment, net 192,531 225,485
----------- -----------
Total assets $ 1,334,131 $ 612,400
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 490,269 $ 703,125
Notes payable 1,146,957 917,000
Note payable - related party 309,544 302,644
Derivative liability 981,495 --
Capital lease - current portion 9,916 10,287
----------- -----------
Total current liabilities 2,938,181 1,933,056
Capital lease, net of current portion 2,232 4,765
Stockholders' deficit:
Preferred stock, par value $.00001 per share, 1,000,000,000 shares
authorized:
Series A preferred stock, par value $.001 per share,
10,000,000 shares authorized; 960,000 shares issued and
outstanding at March 31, 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 March 31, 2006 and December 31, 2005 1,000 1,000
Common stock, par value $.00001 per share,
990,000,000 shares authorized, 147,777,624 and
49,527,624 shares issued and outstanding at March
31, 2006 and December 31, 2005, respectively 1,387 495
Additional paid-in capital 880,710 507,755
Stock subscription receivable -- (92,400)
Accumulated deficit (2,489,389) (1,742,281)
----------- -----------
Total stockholders' deficit (1,606,282) (1,325,421)
----------- -----------
Total liabilities and stockholders' deficit $ 1,334,131 $ 612,400
=========== ===========
1
THE JACKSON RIVERS COMPANY
STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended March 31,
2006 2005
------------- -------------
Sales, net $ 468,714 $ 696,757
Cost of sales 213,088 544,751
------------- -------------
Gross profit 255,626 152,006
Operating expenses:
Selling, general, and administrative 821,349 979,800
Depreciation and amortization 36,132 73,691
------------- -------------
Total operating expenses 857,481 1,053,491
------------- -------------
Loss from operations (601,855) (901,485)
------------- -------------
Other income (expense):
Other 37,556 --
Forgiveness of debt -- (225,700)
Loss on derivative liability (130,794) --
Interest expense (52,016) (12,505)
------------- -------------
Total other expense (145,254) (238,205)
Net loss $ (747,109) $ (1,139,690)
============= =============
Loss per share, basic and diluted $ (0.01) N/A *
============= =============
Weighted average number of shares outstanding (basic and diluted) 118,499,847 N/A *
============= =============
* No common shares were issued to effectuate the reverse acquisition of Diverse
Networks, Inc. Only preferred shares were issued.
2
THE JACKSON RIVERS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three months ended March 31,
2006 2005
----------- -----------
Cash flow from operating activities:
Net loss from operations $ (747,109) $(1,139,690)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 29,922 73,691
Amortization 6,210 --
Common stock issued for
consulting services rendered 244,800 --
Common stock issued in exchange
for employee services rendered and
related transaction costs 157,200 --
Accretion of discount on note payable 51,142 --
Loss on derivative liability 130,794 --
(Increase) decrease in accounts receivable (87,982) (76,418)
Decrease (increase) in inventory 1,299 (10,662)
(Increase) in prepaid expenses and other (26,878) (25,290)
(Increase) decrease in federal income tax receivable 333 (160,050)
(Decrease) in accounts payable and accrued liabilities 60,611 (209,579)
----------- -----------
Net cash (used in) operating activities (179,658) (1,547,998)
Cash flows from investing activities:
Sale of fixed asset 4,420 --
Capital expenditures (1,388) (2,901)
----------- -----------
Net cash provided by (used in) investing activities 3,032 (2,901)
Cash flows from financing activities:
Payments on capital lease obligations (2,904) (2,368)
Proceeds from sale of common stock and common stock
subscribed, net of costs and fees 64,247 1,207,711
Payment on notes payable (22,383) --
Proceeds from notespayable 785,000 172,312
----------- -----------
Net cash provided by financing activities 823,960 1,377,475
Net increase (decrease) in cash and cash equivalents 647,334 (173,424)
Cash and cash equivalents at beginning of period 36,361 232,341
----------- -----------
Cash and cash equivalents at end of period $ 683,695 $ 58,917
=========== ===========
3
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 for interim financial information and with the instructions to Form
10-QSB for quarterly reports under Section 13 or 15 (d) 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 three months ended March 31, 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.
2. 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 March 31, 2006, Jackson Rivers has an accumulated
deficit of 2,489,389. In addition, Jackson Rivers' current liabilities exceeded
its current assets by $1,882,870 as of March 31, 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
3. RESTATEMENT
The balance sheet as of December 31, 2005 has been restated to reflect a
$250,000 finder's fee payable to a third party in connection with the reverse
merger of Diverse Networks, Inc. in December 2005. The fee was recorded to "loss
on recapitalization" in the statements of operations for the year ended December
31, 2005. We did not previously account for this fee. The fee had the impact of
increasing current liabilities by $250,000 and accumulated deficit by $250,000
as of December 31, 2005.
4. NOTES PAYABLE
On January 2, 2006, Jackson Rivers issued an unsecured convertible note
totalling $250,000 to purchase shares of our common stock (the "Convertible
Note"). The convertible note has a 1 year term and bear interest at six percent
(6%). The note is convertible into our common stock pursuant to a "variable
conversion price" equal 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%). 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. "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.
5
Subject to certain terms and conditions set forth therein, the notes are
redeemable by us at a rate of between 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 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.
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 market value of the
Company's common stock on the date of issuance, $0.0027; expected volatility of
111%; risk free interest rate of approximately 4.82%; 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 market value of the
Company's common stock on the date of issuance, $0.011; expected volatility of
111%; risk free interest rate of approximately 4.83%; and a term of three years.
6
5. CAPITAL STOCK
During the period ended March 31, 2006, the Company issued 75,250,000 shares of
common stock to consultants for services. 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 $157,200, to officers and employees for stock options
exercised. The Company received $62,247 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 seperately. 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.
7
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 ("SFAS No. 123R") using the modified-prospective transition
method. Under that method, compensation cost recognized in the first quarter 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.
As a result of adopting Statement 123(R) on January 1, 2006, the Company's net
loss for the quarter ended March 31, 2006 is $5,306 higher, than if it had
continued to account for share-based compensation under Opinion 25. Basic and
dilute earnings per share for the quarter ended March 31, 2006 would have been
(0.01) and (0.01), respectively, if the Company had not adopted Statement
123(R), compare to reported basic and diluted earnings per share of $(0.01) and
$(0.01), respectively. We recorded share based compensation costs of $5,306 for
the first quarter of 2006.
A summary of option activity under our stock plans as of March, 31, 2006 and the
changes during the first quarter of 2006 is presented below:
Number Weighted-Average
of Shares Exercise Price
--------- --------------
Outstanding at December 31 3,717,404 0.2976
Granted -- --
Exercised -- --
Canceled -- --
Outstanding at December 31 3,717,404 0.2976
=========
Exercisable at
March 31 3,490,696
=========
8
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%
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
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 first quarter of 2005.
Net loss, as reported $ (1,139,690)
Deduct: Total stock-based employee/director
compensation expense under the fair value
based method for all awards, net of related tax effects (7,520)
------------
Pro forma net loss $ (1,147,210)
============
Loss per share, pro forma basic N/A*
Loss per share, pro forma diluted N/A*
Shares used in basic and diluted loss per share N/A*
* No common shares were issued to effectuate the reverse acquisition of Diverse
Networks, Inc. Only preferred shares were issued.
9
7. SUBSEQUENT EVENT
On May 5, 2006, the Jackson Rivers Company announced its acquisition of UTSI
International Corporation whereby each share of UTSI common stock outstanding at
the effective time of the merger was converted into the right to receive
1.438029742 shares of the Company's Series C Preferred Stock or
2,200,000 shares of Series C Preferred.
Each share of Series C 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.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
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.
General
We build and operate large scale wireless networks and provides
consulting and engineering services to allow its 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 1, 2006. 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.
Significant Accounting Policies
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists,
services have been rendered, the sales price is fixed or determinable, and
collectibility is reasonably assured.
11
Results of Continuing Operations
Basis of Presentation
The results of operations set forth below for the periods ended March 31, 2006
and March 31, 2005 are those of the continuing operations of The Jackson Rivers
Company, which include Diverse Networks, Inc. on a consolidated basis
The following table sets forth, for the periods indicated, certain selected
financial data from continuing operations:
Three Months Ended
March 31,
-----------------------------
2006 2005
----------- -----------
Net sales $ 468,714 $ 696,757
Cost of sales 288,656 544,751
----------- -----------
Gross profit 180,058 152,006
Selling, general and administrative 821,349 979,800
Depreciation and Amortization 36,132 73,691
----------- -----------
Operating loss $ (601,855) $ (901,485)
=========== ===========
Comparison of the Three Months Ended March 31, 2006 and March 31, 2005
Net sales. Our net sales for operations decreased to $468,714, or a
decrease of approximately 33%, for the three months ended March 31, 2006, from
$696,757 for the three months ended March 31, 2005. This decrease was
attributable to the loss of a key sales and marketing person and the completion
of a major component of one of the major contracts.
Cost of Sales. Cost of sales for continued operations decreased to
$288,656, or approximately 47%, for the three months ended March 31, 2006, from
$544,751 for the three months ended March 31, 2005. As a percentage of net
sales, cost of sales decreased to 62% of net sales for the quarter ended March
31, 2006 versus approximately 78% of sales for the quarter ended March 31, 2005.
The decrease in cost of sales as a percentage of net sales resulted primarily
from a continuation of cost cutting measures and increased efficiencies. As a
result, the company generated a gross profit of $180,058 with a gross profit
margin of approximately 38% for the quarter ended March 31, 2006.
Selling, general and administrative. Selling, general and
administrative expenses decreased to $821,349, or a decrease of approximately
16%, for the three months ended March 31, 2006, from $979,800 for the three
months ended March 31, 2005. As a percentage of net sales, selling, general and
administrative expenses were approximately 175% for the quarter ended March 31,
2006, as compared to approximately 141% for the comparable period in 2005. The
decrease in selling, general and administrative expenses primarily results from
a reduction in our workforce.
Depreciation and Amortization. Depreciation and amortization expense
decreased to $36,132 for the three months ended March 31, 2006, from $73,691 for
the three months ended March 31, 2005. This decrease was primarily due to
control over new capital expenditures waiting for funding of the company.
12
Operating loss. We incurred an operating loss of $601,855 for the three
months ended March 31, 2006, compared to an operating loss of $487,627 for the
three months ended March 31, 2005. The company had higher operating losses in
the three months ended March 31, 2006 compared to the prior year primarily
because of additional accounting expenses related to public reporting and
additional rental expense.
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 March 31,
2006 was $1,882,820 and at December 31, 2005 it was $1,572,051. We had cash of
$683,695 as of March 31, 2006, while we cash of $36,361 as of December 31, 2005.
This difference results primarily from funding the first tranche of the
convertible debentures on March 31, 2006.
We used $179,658 of net cash used in operating activities for the three
months ended March 31, 2006 compared to using $1,547,998 in the three months
ended March 31, 2005.
Net cash flows provided by investing activities was $3,030 for the
three months ended March 31, 2006, compared to investments of $2,901 in the
three months ended March 31, 2005. The investment activity was due to disposal
of assets related to the JRC Global transaction.
Net cash flows provided by financing activities were $823,960 for the
three months ended March 31, 2006, compared to net cash provided by financing
activities of $1,354,919 in the three months ended March 31, 2005. The
difference results primarily from lower sale of common stock in the three months
ended March 31, 2006, offset by the sale of convertible debentures in the three
months ended in March 31, 2006.
March Private Offering
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%). 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. "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 between 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.
13
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 issue
and sold, resulting in gross proceeds of $1.3 million to us.
Insider and Affiliate Loans
In July 2005, the company borrowed $85,000 from an officer. This note
is payable with accrued interest on or before July 13, 2006.
Capital Requirements
We had a working capital deficit of $1,000,154 as of March 31, 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 its 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 its 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 recognized 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 was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
14
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 March 31, 2006, the disclosure
controls and procedures of the Company were not as 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.
In connection with the completion of its review of the financial
statements of the Company for the three month period ended March 31, 2006,
Malone & Bailey, PC identified deficiencies in our internal controls related to
accrued liabilities and derivative liabilities.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
1. See our Current Report on Form 8-K dated March 31, 2006 filed on April
6, 2006.
2. In March 2006, we issued an 8% Convertible Note in the aggregate
principal amount of $60,000 to a single accredited investor. Upon consummation
of a funding in the aggregate amount of $300,000, the holder entitled to full
payment of all outstanding principal and interest. In addition, the holder is
entitled receive Common Stock equal to the value of the Principal and interest
at a conversion price equal to the average of the lowest 3 closing bid prices in
the 20 trading days immediately preceding the repayment date. No conversions can
be made which would result in holder owning more than 4.99% of our common stock
after conversion. The issuance of this note was exempt under Section 4(2) of the
Securities Act of 1933, as amended.
3. In January 2006, we issued an 8% Convertible Note in the aggregate
principal amount of $250,000 to a single accredited investor in consideration
for services rendered under a fee agreement dated November 2005. This note is
due and payable on or before January 1, 2007. This note is convertible into
shares of that number of shares of our common stock as would be determined by
dividing (i) the unpaid principal balance plus accrued interest by (ii) 80% of
the average of the three lowest closing bid prices for the twenty trading days
immediately prior to conversion. No conversions can be made which would result
in holder owning more than 4.99% of our common stock after conversion. The
issuance of the note was exempt under Section 4(2) of the Securities Act of
1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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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.
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 an 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
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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: May 22, 2006 By /s/ Jeffrey W. Flannery
----------------------------------
Jeffrey W. Flannery,
Chief Executive Officer,
Chief Financial Officer and Director
17