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"Form 10KSB for UNIVERSAL COMMUNICATION SYSTEMS INC
13-Jan-2006
Annual Report
MANAGEMENT`S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following should be read in conjunction with the "Risk Factors" and the "Financial Statements" and the Notes thereto.
Plan of Operations
For the past three fiscal years we have had minimal revenues. We have a history of losses, and an accumulated shareholder deficit of $39,216,245. Because of our recurring losses, our independent auditors have expressed doubt as to our ability to continue as a going concern.
We will require additional capital in the short term to remain a going concern.
We will require substantial short term outside investment on a continuing basis to finance our current operations and any limited capital expenditures identified to protect existing investments. Our revenues for the foreseeable future may not be sufficient to attain profitability. Since inception, we have generated little revenue and have incurred substantial expenditures. We expect to continue to experience losses from operations while we develop the Air - Water and photo voltaic businesses. In view of this fact, our auditors have stated in their report for the period ended September 30, 2005 that our ability to meet our future financing requirements, and the success of our future operations, cannot be determined at this time. In order to finance our working capital requirements we are negotiating equity investments, but there can be no assurance that we will obtain the required capital or that it will be obtained on terms favorable to us. If we do not obtain short term financing we may not be able to continue as a viable concern. Although one of our subsidiaries has a bank account overdraft facility, we do not have a bank line of credit and there can be no assurance that any required or desired financing will be available through bank borrowings, debt, or equity offerings, or otherwise, on acceptable terms, if at all. If future financing requirements are satisfied through the issuance of equity securities, investors may experience significant dilution in the net book value per share of common stock.
We are currently focusing our operations on the design, manufacture and sale of water production and generation systems along with solar power systems. There are no assurances that this business activity will be successful, that we will be able to identify and sell to the market and that the market will respond to our product line.
PLAN OF OPERATION FOR THE NEXT 12 MONTHS
Our cash position at September 30, 2005 is $313,992. This is only sufficient to provide coverage for two months of operating cash needs, based on the current reporting period`s negative cash flow from operations. However, our Chairman, in connection with Port Universal Ltd., a company in which he owns a one third interest, has agreed to provide funding as needed until our sales activities are sufficient to cover our cash flow needs. This agreement by our Chairman and Port Universal is not a binding obligation; we have no assurances that this funding will continue beyond the short term. Further, we anticipate that by December 31, 2006, our subsidiaries will have sufficient revenues that we will not require funding from equity sales.
With our focus on the airwater and photo voltaic businesses, we have been able to obtain private placement funding to finance our activities in these fields. We anticipate continuing to receive operating funds from private placement sales of our common stock, until such time as product sales are sufficient to support the organization, however no assurances can be made that we will be able to find willing investors.
We do not have any major expenditures planned, nor do we anticipate the purchase or sale of plant and/or significant equipment. Our plan calls for the use of third party contract manufacturers, thus avoiding the allocation of our
resources into manufacturing operations. We anticipate funding any sizeable orders for either AirWater equipment or Photovoltaic installations, through deposits and advances from customers.
We do not anticipate any substantial change in the number of employees in the near term for our existing operations.
We have several potential sizeable contracts in the sales process. Should these contracts be awarded, we will need to raise additional equity or arrange for financing vehicles to fund those contracts. Any equity raised could result in dilution of existing shareholders. Additionally, we are uncertain as to the availability of sufficient financing on acceptable terms.
Results of Operations
Revenues and cost of sales for the fiscal year ended September 30, 2005 were earned primarily by our subsidiaries, AirWater and Millennium. Our Peruvian subsidiary had revenues which are not reported as a result of a lack of cooperation from our subsidiary`s management.
General and administrative expenses totaled $3,189,696 in the fiscal year ended September 30, 2005 and $2,832,670 in the fiscal year ended September 30, 2004. The increase in expenses resulted from activities associated with the entrance into the air-water technology industry.
General and administrative expenses for the fiscal years ended September 30, 2005 and 2004 were comprised of the following items:
2005 2004
Consultants and outside services $ 965,657 $ 1,114,528
Depreciation 16,069 13,079
Disposition of Demonstration Equipment 392,751 -
Financing costs and fund raising expense 169,479 187,597
Legal expense 585,986 322,482
Miscellaneous and other expenses 452,090 238,456
Professional fees 140,971 245,893
Rent 108,882 78,432
Salaries 170,405 313,458
Travel 187,406 318,745
$ 3,189,696 $ 2,832,670
Liquidity and Capital Resources
As of September 30, 2005 our total working capital was deficient in the amount of $1,480,078. This represents a $130,103 decrease over our September 30, 2004 deficiency of $1,610,181. Until revenues from the sale of our products provide needed funds, we will need to obtain funding from external sources to finance our current operations.
Since we began operations, revenues have not been significant and we have incurred substantial expenditures and operating losses. In view of this fact, our auditors have stated in their report for the fiscal years ended September 30, 2005 and 2004 that there is substantial doubt about our ability to continue as a going concern, dependent upon our ability to meet our future financing requirements, and the success of our future operations, the outcome of which cannot be determined at this time. In order to finance our working capital requirements, we have and continue with negotiating equity investments with several sophisticated investors, but there can be no assurance that we will obtain this capital in the future, or that it will be obtained on terms favorable to us. If we do not obtain short term financing we may not be able to continue as a viable concern. We do not have a bank line of credit and there can be no assurance that any required or desired financing will be available through bank borrowings, debt, or equity offerings, or otherwise, on acceptable terms. If future financing requirements are satisfied through the issuance of equity securities, investors may experience significant dilution in the net book value per share of common stock.
On June 6, 2003, we defaulted on the January 6, 2003 12% notes in the amount of $60,000, which came due on that date. The holders of the Notes, who also hold a portion of the convertible debentures, did not take action to foreclose on the Notes.
During the fiscal years ended September 30, 2005 and 2004, we received equity investments and advances of $1,504,885 and $2,593,452 respectively. These investments and advances were in the form of issuance of our common stock in various private placements and the issuance of preferred convertible Series B, C and D stock.
Risk Factors
We will require additional capital in the short term to remain a going concern
We will require short term outside investment on a continuing basis to finance our current operations and any expansion of activities. Since we began operations, we have generated virtually no revenues and have incurred substantial expenditures. We expect to continue to experience losses from operations while we develop our new revenue source, consummate acquisitions and develop other technologies. In view of this fact, our auditors have stated in their report for the period ended September 30, 2005 that our ability to meet our future financing requirements, and the success of our future operations, cannot be determined at this time. In order to finance our working capital requirements we are negotiating existing equity investments and new investments, but there can be no assurance that we will obtain this capital or that it will be obtained on terms favorable to us. If we do not obtain short term financing we may not be able to continue as a viable concern. We do not have a bank line of credit and there can be no assurance that any required or desired financing will be available through bank borrowings, debt, or equity offerings, or otherwise, on acceptable terms. If future financing requirements are satisfied through the issuance of equity securities, investors may experience significant dilution in the net book value per share of common stock.
We are dependent on the services of key individuals and the loss of any of these individuals could significantly affect our ability to operate our business
We may be unable to protect our intellectual property rights
Our success depends in part on our ability to protect our proprietary technologies. We rely on a combination of patent, copyright and trademark laws, trade secrets and confidentiality and other contractual provisions to establish and protect our proprietary rights. We hold one patent from the United States Patent and Trademark Office pertaining to the distributed wireless call processing system and several patents with respect to the air-water process. However, our patents may not be of sufficient scope or strength, others may independently develop similar technologies or products, duplicate any of our products or design around our patents, and the patents may not provide us competitive advantages. Litigation, which could result in substantial costs and diversion of effort by us, may also be necessary to enforce any patents issued or licensed to us or to determine the scope and validity of third-party proprietary rights. Any such litigation, regardless of outcome, could be expensive and time consuming, and adverse determinations in any such litigation could seriously harm our business.
We may not be able to successfully market and develop the air from water systems required by the market we are focusing our sales efforts on. Governments and humanitarian organizations are subject to political influences which can change without notice. Needs, as defined by these groups, may also change. If we cannot design, build and modify the systems to meet with these changes, our marketing efforts may not be productive.
Other risk issues
We have pursued, are currently pursuing and, in the future may pursue, new technologies and businesses internally and through acquisitions and combinations which involve significant risks. Any such acquisition or combination may involve, among other things, the issuance of equity securities, the payment of cash, the incurrence of contingent liabilities and the amortization of expenses related to goodwill and other intangible assets, and transaction costs, which have adversely affected, or may adversely affect, our business` results of operations and financial condition. Our ability to integrate and organize any new businesses and/or products, whether internally developed or obtained by acquisition or combination, will likely require significant expansion of our operations. There is no assurance that we will have or be able to obtain the necessary resources to satisfactorily effect such expansion, and the failure to do so could have a material adverse effect on our business, financial condition and results of operations. In addition future acquisitions and or combinations by the Company involve risks of, among other things, entering markets or segments in which we have no or limited prior experience, the potential loss of key employees of the acquired company and/or difficulty, delay or failure in the integration of the operations, management, personnel and business of any such new business with our business and operating and financial difficulties of any new or newly combined operations, any of which could have a materially adverse effect on our business, financial condition and results of operations. Moreover, there can be no assurance that the anticipated benefits of any specific acquisition or of any internally developed new business segment or business combination will be realized. "
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