"""16-May-2006
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Safe Harbor for Forward-Looking Statements
We have made forward-looking statements in this Form 10-Q under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the "Notes to Consolidated Financial Statements." In addition, our representatives or management may make other written or oral statements that constitute forward-looking statements. Forward-looking statements are based on management's beliefs and assumptions and on information currently available to them. These statements often contain words like believe, expect, anticipate, intend, contemplate, seek, plan, estimate or similar expressions. We make these statements under the protection afforded them by
Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements involve risks, uncertainties and assumptions, including those discussed in this report. We operate in a continually changing business environment, and new risk factors emerge from time to time. We cannot predict those risk factors, nor can we assess the impact, if any, of those risk factors on our business or the extent to which any factors may cause actual results to differ materially from those projected in any forward-looking statements. Forward-looking statements do not guarantee future performance, and you should not put undue reliance on them.
Forward-looking statements can generally be identified by the use of forward-looking terminology, such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates," or "anticipates" or the negative of these terms or other comparable terminology, or by discussions of strategy, plans or intentions. Statements contained in this report that are not historical facts are forward-looking statements. Without limiting the generality of the preceding statement, all statements in this report concerning or relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments. These forward-looking statements are necessarily estimates reflecting our best judgment based upon current information and involve a number of risks and uncertainties. Other factors may affect the accuracy of these forward-looking statements, and our actual results may differ materially from the results anticipated in these forward-looking statements. While it is impossible to identify all relevant factors, factors that could cause actual results to differ materially from those estimated by us include, but are not limited to, those factors or conditions described in "Management Discussion and Analysis or Plan of Operation" as well as changes in the regulation of the IP telephony industry at either or both of the federal and state levels, competitive pressures in the IP telephony industry and our response to these factors, and general conditions in the economy and capital markets. For a more complete discussion of these and other risks, uncertainties and assumptions that may affect us, see the company's annual report on Form 10- KSB for the fiscal year ended December 31, 2005. Critical accounting policies The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, bad debts, inventories, warranty obligations, contingencies and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A discussion of our critical accounting policies and the related judgments and estimates affecting the preparation of our consolidated financial statements is included in the Annual Report on our Form 10-KSB fiscal year 2005 There have been no material changes to our critical accounting policies as of March 31, 2006.
Overview
NewMarket Technology is engaged in the business of developing market entry technology products and services into early and mainstream technology products and services. NewMarket has introduced a unique business model to this end with two substantial differentiating features.
1) we believe the NewMarket business model overcomes the profit margin pressure facing the technology service sector resulting from the globalization of the technology labor force and,
2) we believe the business model enhances the return on investment opportunity for shareholders through regularly generating the issue of equity dividends.
In general, the component functions of the NewMarket business model are to:
1) find and acquire timely early stage technology companies;
2) incrementally invest in order toto market refine the acquired technology offering for the marketplace;
3) concentrate initial sales efforts on focused pilot opportunities;
4) expand pilot opportunities to a level that prove market viability;
5) spin the technology company out into a next stage, stand alone company to support expanded capital formation;
6) create efficiencies and economiesy of scale by retaining support service contract functions at NewMarket Technology; and
7) build service and sales capacity in developing economies oversees to take advantage of reduced labor expense and to sell into fast growing economic regions with less brand name competition than in North America.
Technology sector businesses face two substantial market wide systemic issues. The first is the growing global technical labor force that is creating significant profit margin pressure. Tas technology companies continue to ratchet down expenses and sell at prices below their competition by employing the ever growing technology labor force from developing economic countries around the world. Thise global technology labor force is growing and technology companies will continue to chase each other's downward spiraling labor expense, in turn, continuing to squeeze technology company profit margins for the foreseeable future. Secondly, since the collapse of the dotcom investment market, the
technology sector has not been able to re-establish consistent investment community interest in technology innovation. Profit margin pressure deters investment community interest at the same time making internal research and development investment an unlikely alternative. Technology innovation is critical to the technology sector. Updated technology products with enhanced features and performance that replace last generation products are a significant and critical portion of the overall technology market.
We believe NewMarket improves technology product and service profit margins by combining traditional product and service revenues with income monetized from the overall business value of a technology offering. The equity value is usually a factor of the future earnings potential of a new technology. Earnings potential is generally derived by projecting the currently realized revenue and earnings of a product or service offering, within its market entry customer scope, across the entire market of potential customers that are likely future candidates for the new product or service offering. NewMarket contains each technology product and service offering within a subsidiary company. As the product and service offering matures, NewMarket plans to monetize the overall value of the technology offering through an incremental liquidation of stock in the subsidiary company housing the now mature product or service offering. The revenue and profits of the now mature product or service offering combined with the income from the incremental sale of stock in the associated subsidiary will provide NewMarket with a profit margin advantage.
The NewMarket corporate structure that enables the incremental sale of subsidiary stock in order to boost product and service revenues and profits is also the aspect of the NewMarket business model that attracts investment in technology product and service innovation. In addition to selling stock in subsidiary companies to combine equity income with traditional product and service revenue and profits, the subsidiary structure provides an attractive long term and incremental return on investment opportunity for both institutional and retail common shareholders. When a subsidiary company is positioned for incremental liquidation through an independent public listing or the sale of subsidiary stock to a third-party company, NewMarket will issue subsidiary stock to common shareholders through a dividend declaration. By issuing stock in subsidiary companies to NewMarket common shareholders, NewMarket believes it will enhance long-term return opportunity for common shareholders by adding dividend returns to NewMarket stock appreciation, if any. The ability of NewMarket common shareholders to liquidate subsidiary stock issued in a NewMarket dividend creates incremental return opportunities that can be immediately realized without liquidating NewMarket stock.
We believe the NewMarket Technology business opportunity is perpetuated by the ongoing demand for technology innovation. New technologies likewise require ongoing investment. However, since the 2001 collapse of the high tech IPO market, new technologies have struggled to find investment and investors have not found an attractive start-up investment model.
NewMarket Technology has set out to replace the high tech IPO market with the micro-cap public market. The technology start- ups are appropriately much smaller organizations with more reasonable start-up goals. The required capital investments are correspondingly smaller.
In order to create a meaningful organization through smaller investments, the counter strategy to smaller investments is more investments. NewMarket is concentrating on Internet Protocol (IP) Communication Technologies. The Company currently has three market sector concentrations each leveraging a core expertise in IP Technology - Telecommunications, Healthcare and Homeland Security. NewMarket creates multiple investment and return opportunities around a single technology concentration. NewMarket plans to add Financial Services as a new market sector concentration in 2006.
The combination of multiple companies creates an inherent economy of scale opportunity. While the company is currently concentrating on three market sectors, it is building only one support service organization. Installation, integration, ongoing development, maintenance and customer service support are all folding under one organization to support all three markets. NewMarket plans to substantially reorganize its current support service operations in 2006 to optimize the inherent economy of scale opportunity.
Part of the Company's growth strategy includes expansion into high-growth developing economic regions. These developing economic regions provide both an environment for accelerated growth as well as a parallel platform for acquiring early stage subsidiary technology companies and developing them into mainstream technology service and product companies. NewMarket has entered into a joint venture with GaozhiSoft in Shanghai, China. The two companies have already combined resources to win initial sales contracts.
Recent Developments
In February , 2006, the Board of Directors of the Company appointed Philip J. Rauch as Chief Financial Officer. As a result, Philip Verges, the Chief Executive Officer of the Company, resigned as Chief Financial Officer of the Company in connection with Mr. Rauch's appointment.
In February, 2006, the Company entered into a Quota Purchase and Sale Purchase Agreement with Flavio Firmino Da Silva, Marcio Archimedes Pissardo, Celso Souza Isberner, Alexanre Dias Couto and Mind Information Services Ltda., a Brazilian corporation (collectively, the "Sellers"),the principals of UniOne Consulting, Ltda., a Brazilian limited liability company ("UniOne") to purchase the principal's 100% interest in UniOne. . The purchase price to be paid by the Company is $6,460,320, which may be increased to $8,539,680 based on various criteria. The purchase price is payable in several tranches as follows:
o $1,000,000 was is paidyable on the closing of the acquisition;
o $1,084,000 is payable on August 22, 2006;
o $1,084,000 is payable on February 22, 2007;
o on August 22, 2007, $823,840 is payable and a maximum of $520,320 is payable in the event that UniOne's after tax net profit exceeds $912,000 for the fiscal year 2006;
o on February 22, 2008, $823,840 is payable and a maximum of $520,320 is payable in the event that UniOne's after tax net profit exceeds $912,000 for the fiscal year 2006;
o on August 22, 2008, $823,840 is payable and a maximum of $520,320 is payable in the event that UniOne's after tax net profit exceeds $912,000 for the fiscal year 2007; and
o on December 22, 2008, $820,800 is payable and a maximum of $518,400 is payable in the event that UniOne's after tax net profit exceeds $912,00 for the fiscal year 2007.
UniOne is a systems integrator, developer and business practice implementation company, providing support for the integration and maintenance of enterprise software applications. UniOne is located in Sao Paulo with regional offices inand Rio de Janeiro, Brazil, and office Santiago de Chile, Chile.
In March 2, 2006, the Board of Directors of the Company voted to appoint Kenneth A. Blow and Hugh G. Robinson as independent directors of the Company. There are no understandings or arrangements between Messrs. Blow and Robinson and any other person pursuant to which either director was selected as a director. Messrs. Blow and Robinson may be appointed to serve as a member of a committee although there are no current plans to appoint either director to a committee as of the date hereof. Neither Messrs. Blow nor Robinson have any family relationship with any director, executive officer or person nominated or chosen by the Company to become a director or executive officer. Additionally, Messrs. Blow and Robinson have never entered into a transaction, nor is there any proposed transaction, between Messrs. Blow and Robinson and the Company.Additionally, Mr. Blow and Mr. Robinson, along with Bruce Noller, the Company's other independent director, were appointed to the Audit Committee of the Board of Directors.
On March 31, 2006, the Company and Sensitron Inc., a Delaware corporation, agreed to convert NewMarket's previous equity investment of $411,400 in Sensitron Inc. into a two -year Promissory Note with a rate of 6% per annum. Additionally, the Company received 20,000 warrants to purchase common stock of Sensitron. The pParties previously entered into a Common Stock Subscription Agreement dated August 17, 2004 and pursuant to the terms of that Subscription Agreement, NewMarket hads investedadvanced the sum of $411,400 into Sensitron.
Future plans call for acquiring companies that augment and complement current products and customers. Such plans involve various risks to future business operations and financial condition. If the Company fails to perform adequate due diligence, NewMarket may acquire a company or technology that:
(a) is not complementary to the business;
(b) is difficult to assimilate into the business;
(c) subjects the Company to possible liability for technology or product defects; or
(d) involves substantial additional costs exceeding estimated costs.
In addition, the Company also faces the following risks in connection with its acquisitions:
(a) the Company may spend significant funds conducting negotiations and due diligence regarding a potential acquisition that may not result in a successfully completed transaction;
(b) the Company may be unable to negotiate acceptable terms of an acquisition;
(c) if financing is required to complete the acquisition, the Company may be unable to obtain such financing on reasonable terms, if at all; and
(d) negotiating and completing an acquisition, as well as integrating the acquisition into our operations, will divert management time and resources away from our current operations and increase our costs.
Results of Operations
Net sales increased 70% from $10,187,082 for the quarter ended March 31, 2005 to $17,330,160 for the quarter ended March 31, 2006. This increase was primarily due to the implementation of the previously herein described new business model implemented in June 2002 and the corresponding herein described acquisitions starting with VTI in June 2002, in addition to the operations and growth from the acquired assets.
Cost of sales increased 123% from $5,450,805 for the quarter ended March 31, 2005 to $12,203,215 for the quarter ended March 31, 2006. This increase was primarily due to the corresponding increase in overall sales. Our cost of sales, as a percentage of sales was 54% and 70% for the quarters ended March 31, 2005 and 2006, respectively. Management plans to continue to pursue strategies to reduce the overall cost of sales as a percentage of sales as the company grows. Management intends to leverage increased purchasing volume to improve purchasing contracts and reduce the overall cost of sales. Management also intends to implement resource utilization strategies that can demonstrate notable savings when applied over higher volumes of production.
Compensation expense decreased 24% from $1,996,484 for the quarter ended March 31, 2005 to $2,612,743 for the quarter ended March 31, 2006. Management is working to keep compensation expense in reasonable proportion to overall Company sales and expenses. Management has significantly decreased its stock-based compensation to outside consultants, officers and related party consultants and plans to continue to limit such compensation. No performance incentive compensation program has been put in place since the implementation of the Company's new business model in June 2002, but management has plans to construct and implement such a plan in the future.
General and administrative expenses increased 17% to $1,908,587 for the quarter ended March 31, 2006 from $1,628,772 for the quarter ended March 31, 2005. The increase in general and administrative expenses was primarily due to the overall increase in sales and operational expenses. Management plans to reduce general and administrative expenses as a percentage of overall sales through the consolidation of redundant processes and resources inherited through acquisition activity.
Depreciation and amortization expense decreased 11% from $172,806 for the quarter ended March 31, 2005 to $153,899 for the quarter ended March 31, 2006. The deincrease is primarily due to a decrease in fixed assets. Depreciation on fixed assets is calculated on the straight-line method over the estimated useful lives of the assets.
Net income increased 326% from $102,013 for the quarter ended March 31, 2005 to $434,298 for the quarter ended March 31, 2006. Net income represented 2.5% and 1.0% of net sales for the quarters ended March 31, 2006 and 2005, respectively. Comprehensive net income, which is adjusted to compensate for the risk associated with foreign profits and the potential conversion of foreign currency, increased 466% from $102,045 for the quarter ended March 31, 2005 to $577,387 for the quarter ended March 31, 2006. Comprehensive net income represented 3.3% and 1.0% of net sales for the quarters ended March 31, 2006 and 2005, respectively. The increase in net income and increase in the percentage of net sales was primarily due to the implementation of the previously herein described new business model implemented in June 2002 and the corresponding herein described acquisitions starting with VTI in June 2002, in addition to the operations and growth from the acquired assets and the investment in operations made to effect such growth.
Liquidity and Capital Resources
The Company's cash balance at March 31, 2006 decreased $138,866 from $3,106,521 as of December 31, 2005, to $2,967,655. The decrease was the result of a combination of loan proceeds totaling $52,198, proceeds from asset sales totaling $70,872 and cash flows from operations totaling $332,571, offset by cash used for repayment of loans totaling $72,196, and investing activities totaling $522,311. Operating activities for the quarter ended March 31, 2006 exclusive of changes in operating assets and liabilities provided $879,902 as well as an increase in receivables and other current assets of $3,448,739 offset by and a decrease in accounts payable and accrued and other current liabilities of $3,996,070.
Since inception, the Company has financed operations primarily through equity security sales. The start-up nature of the Company may require further need to raise cash through equity sales at some point in the future in order to sustain operations. Accordingly, if revenues are insufficient to meet needs, we will attempt to secure additional financing through traditional bank financing or a debt or equity offering; however, because the start-up nature of the Company and the potential of a future poor financial condition, we may be unsuccessful in obtaining such financing or the amount of the financing may be minimal and therefore inadequate to implement our continuing plan of operations. There can be no assurance that we will be able to obtain financing on satisfactory terms or at all, or raise funds through a debt or equity offering. In addition, if we only have nominal funds by which to conduct our operations, it will negatively impact our potential revenues.
Cautionary Statements
We have incurred operating losses from time to time in each of the last three years.
We cannot be certain that we can sustain or increase profitability on a quarterly or annual basis in the future. If we are unable to remain profitable, our liquidity could be materially harmed.
We cannot predict our future results because our business has a limited operating history, particularly in its current form.
Given our limited operating history, it will be difficult to predict our future results. You should consider the uncertainties that we may encounter as an early stage company in a new and rapidly evolving market. These uncertainties include:
o ......market acceptance of our products or services
o ......consumer demand for, and acceptance of, our products, services and follow-on products
o ......our ability to create user-friendly applications
o ......our unproven and evolving business model
o ......potential political uncertainty in foreign markets which we operate in.
We have only recently begun to generate significant revenues and we still incurred losses in fiscal years 2001 and 2002.
We have a limited operating history and incurred losses for 2001 and 2002. We will need to achieve greater revenues to maintain profitability. There can be no assurance that we will be successful in increasing revenues, or generating acceptable margins, or, if we do, that operation of our business will be a profitable business enterprise. We may have to seek additional outside sources of capital for our business. There can be no assurance that we will be able to obtain such capital on favorable terms and conditions or at all. If this occurs the market price of our common stock could suffer.
Our quarterly and annual sales and financial results have varied significantly in the past, and we expect to experience fluctuations in the future, which mean that period-to-period comparisons are not necessarily meaningful or indicative of future performance.
Our sales and operating results have varied, and may continue to vary, significantly from year to year and from quarter to quarter as a result of a variety of factors, including the introduction of new products by competitors, pricing pressures, the timing of the completion or the cancellation of projects, the evolving and unpredictable nature of the markets in which our products and services are sold and economic conditions generally or in certain geographic areas in which our customers do business. Furthermore, we may be unable to control spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, we cannot assure you that sales and net income, if any, in any particular quarter will not be lower than sales and net income, if any, in a preceding or comparable quarter or quarters. In addition, sales and net income, if any, in any particular quarter are not likely to be indicative of the results of operations for any other quarter or for the full year. The trading prices of our securities may fluctuate significantly in response to variations in our quarterly or annual results of operations.
We may not be able to sustain or accelerate growth, or sustain or accelerate recurring revenue from our business.
There can be no assurance that demand for our services and products will increase or be sustained, or that our current or future products will have market acceptance in that product category. Our acquisition costs per customer are high due to the significant costs associated with sales, research and development and marketing. To the extent we do not achieve growth and this cost per customer is not reduced, it will be difficult for us to generate meaningful revenue at acceptable margins or achieve profitability. To the extent that our business model is not successful, because market acceptance does not develop as expected, or other competing technologies evolve in connection with the changing market or for any other reason, we might have future unexpected declines in revenue.
Rapid technological change could render our products and services obsolete.
The IP Telephony industry is characterized by rapid technological innovation, sudden changes in user and customer requirements and preferences, frequent new product and service introductions and the emergence of new industry standards and practices. Each of these characteristics could render our services, products, intellectual property and systems obsolete. The rapid evolution of our market requires that we improve continually the performance, features and reliability of our products and services, particularly in response to competitive offerings. Our success also will depend, in part, on our ability:
o to develop or license new products, services and technology that address the varied needs of our customers and prospective customers, and
o to respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.
If we are unable, for technical, financial, legal or other reasons, to adapt in a timely manner to changing market conditions or user preferences, we . . .
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