UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.  20549




FORM 10-Q


(Mark One)




x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the quarterly period ended December 31, 2010




or




 ̈   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934




For the transition period from _____________ to ________________




Commission File Number:  000-09751




STATMON TECHNOLOGIES CORP.




(Exact name of registrant as specified in its charter)




Nevada
83-0242652(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)3000 Lakeside Drive, Suite 300 South, Bannockburn, IL 60015(Address of principal executive offices) (Zip Code)(847) 604-5366(Registrant’s telephone number, including area code)Former name, former address and former fiscal year, if changed since last report:




Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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  ̈




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes  x    No  ̈




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.




Large accelerated filer  ̈

Accelerated filer  ̈Non-accelerated filer    ̈
(Do not check if a smaller reporting company)
Smaller reporting company x




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)   Yes   ̈  No x




Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.




Class

Outstanding at February 15, 2011Common Stock, $.01 par value

30,122,176





FORM 10-Q


STATMON TECHNOLOGIES CORP. AND SUBSIDIARIES


December 31, 2010




TABLE OF CONTENTS




Page(s)PART 1 – FINANCIAL INFORMATIONItem 1.  Financial Statements.Condensed Consolidated Balance Sheets at December 31, 2010 (unaudited) and March 31, 2010
3Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2010 and 2009 (unaudited)
4Condensed Consolidated Statements of Income/(Operations) for the Nine Months Ended December 31, 2010 and 2009 (unaudited)
5Condensed Consolidated Statements of Stockholder’s Deficiency for the Nine Months Ended December 31, 2010 (unaudited)
6Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2010 and 2009 (unaudited)
7Notes to Condensed Consolidated Financial Statements (unaudited)
9Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
22Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
28Item 4.  Controls and Procedures.
28PART II – OTHER INFORMATIONItem 1.  Legal Proceedings.
29Item 1A. Risk Factors
29Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.
29Item 3.  Defaults Upon Senior Securities.
29Item 4.  (Removed and Reserved)
29Item 5.  Other Information.
29Item 6.  Exhibits.
30SIGNATURES
31Exhibits
32Certifications




2




Item 1.  Financial Statements.




STATMON TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS




December 31,


March 31,2010


2010(unaudited)ASSETSCurrent Assets:Accounts receivable, net of allowance of $13,813

$
146,542


$
436,013Inventories


44,427



39,485Prepaid expense and other current assets


197,769



77,154Total Current Assets


388,738



552,652Property and equipment, net of accumulated depreciation of $258,361 and $211,003, repectively


110,085



157,443Deferred financing costs, net of accumulated amortization of $0 and $54,157, respectively


-



8,871Security deposits and other assets


44,793



50,959Total Assets

$
543,616


$
769,925LIABILITIES AND STOCKHOLDERS' DEFICIENCYCurrent Liabilities:Notes payable (including $450,000 due to a related party), net of debt discount of $0 and $8,034, respectively

$
1,101,250


$
1,093,216Convertible notes payable, net of debt discount of $69,148 and $150,345, respectively


1,921,352



2,012,655Accounts payable


1,467,057



1,275,245Accrued expenses


153,353



584,230Accrued compensation and payroll taxes


2,244,901



1,924,210Interest payable (including $89,329 and $53,713 due to related party, respectively)


507,272



303,749Deferred revenue


329,714



453,326Derivative liability


1,376,000



3,885,000Total Current Liabilities


9,100,899



11,531,631Long-term Liabilities:Convertible notes payable, net of debt discount of $918,320 and $609,316, respectively


390,160



192,404Total Liabilities


9,491,059



11,724,035Commitments and ContingenciesStockholders' Deficiency:Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued and outstanding


-



-Common stock, $.01 par value, 100,000,000 shares authorized, 30,122,176 and 25,745,447 issued and outstanding, respectively


301,222



257,454Additional paid-in capital


18,057,893



17,068,256Accumulated deficit


(27,306,558
)


(28,279,820
)Total Stockholders' Deficiency


(8,947,443
)


(10,954,110
)Total Liabilities and Stockholders' Deficiency

$
543,616


$
769,925





See accompanying notes to condensed consolidated financial statements (unaudited).




3





STATMON TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)




For the Three Months Ended December 31,2010


2009Revenue

$
358,615


$
791,646Cost of Sales


10,828



61,863Gross Profit


347,787



729,783Selling, General and Administrative Expenses (including stock-based compensation of $121,500 and $0, repectively)


815,824



871,963Operating Loss


(468,037
)


(142,180
)Other (Income)/Expense:Interest (including $16,875 and $13,750 to related parties for  2010 and 2009 periods, respectively)


181,527



64,191Interest expense related to warrants and conversion features issued in association with debt


24,745



2,925Amortization of debt discount


212,650



384,411Amortization of deferred financing costs


-



40,331Gain on change in fair value of derivatives


(226,000
)


(281,000
)Total Other (Income)/Expense


192,922



210,858NET LOSS

$
(660,959
)

$
(353,038
)NET LOSS PER SHARE - Basic and Diluted

$
(0.02
)

$
(0.01
)Weighted Average Number of Common Shares Outstanding -Basic and Diluted


30,594,366



24,646,892





See accompanying notes to condensed consolidated financial statements (unaudited)




4





STATMON TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF INCOME/(OPERATIONS)


(Unaudited)




For the Nine Months Ended December 31,2010


2009Revenue

$
1,926,819


$
1,963,370Cost of Sales


114,739



184,054Gross Profit


1,812,080



1,779,316Selling, General and Administrative Expenses (including stock-based compensation of $344,250 and $34,000, repectively)


2,752,252



2,983,678Operating Loss


(940,172
)


(1,204,362
)Other (Income)/Expense:Interest (including $48,356 and $41,250 to related parties for 2010 and 2009 periods, respectively)


469,761



161,495Interest expense related to warrants and conversion features issued in association with debt


685,947



863,300Interest expense related to change in fair value of warrants and conversion features granted for ratchet provisions


-



5,936,000Amortization of debt discount


676,987



1,121,629Amortization of deferred financing costs


8,871



166,305Gain on change in fair value of derivatives


(3,755,000
)


(5,588,000
)Total Other (Income)/Expense


(1,913,434
)


2,660,729NET INCOME/(LOSS)

$
973,262


$
(3,865,091
)NET INCOME/(LOSS) PER SHARE - Basic

$
0.03


$
(0.16
)NET INCOME/(LOSS) PER SHARE - Diluted

$
0.00


$
(0.16
)Weighted Average Number of Common Shares Outstanding - Basic


29,747,576



24,321,988Weighted Average Number of Common Shares Outstanding - Diluted


42,943,496



24,321,988





See accompanying notes to condensed consolidated financial statements (unaudited)




5





STATMON TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY


FOR THE NINE MONTHS ENDED DECEMBER 31, 2010


(UNAUDITED)




Additional





TotalCommon Stock


paid-in


Accumulated


Stockholders'Shares


Amount


capital


deficit


DeficiencyBalance, April 1, 2010


25,745,447


$
257,454


$
17,068,256


$
(28,279,820
)

$
(10,954,110
)Issuance of common stock for investment advisory services


1,800,000



18,000



468,000



-



486,000Issuance of common stock for extension agreement


2,552,729



25,528



509,162



-



534,690Warrant exercise


24,000



240



-



-



240Issuance of debt related penalty warrants


-



-



8,475



-



8,475Reclassification of warrants from liabilities


-



-



4,000



-



4,000Net Income


-



-



-



973,262



973,262Balance, December 31, 2010


30,122,176


$
301,222


$
18,057,893


$
(27,306,558
)

$
(8,947,443
)





See accompanying notes to condensed consolidated financial statements (unaudited)




6




STATMON TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)




For the Nine Months Ended December 31,2010


2009CASH FLOWS FROM OPERATING ACTIVITIES:Net income/(loss)

$
973,262


$
(3,865,091
)Adjustments to reconcile net income/(loss) to net cash used in operating activities:Depreciation


47,358



44,708Interest expense related to warrants and conversion features issued in association with debt and ratchet provisions


685,947



6,799,300Common stock issued for investment advisory services


344,250



-Common stock issued for interest


-



33,493Provision for doubtful accounts


-



10,000Gain on change in fair value of derivatives


(3,755,000
)


(5,588,000
)Amortization of debt discount


676,987



1,121,629Amortization of deferred financing costs


8,871



166,305Deferred rent expense


(42,566
)


(59,849
)Stock based compensation


-



34,000Changes in operating assets and liabilities:Accounts receivable


289,471



(91
)Inventories


(4,942
)


104,267Prepaid expense and other current assets


21,135



(27,567
)Security deposits and other assets


6,166



-Accounts payable


191,812



233,624Accrued expenses


92,713



10,000Accrued compensation and payroll taxes


320,691



572,735Interest payable


82,417



52,085Deferred revenue


(123,612
)


26,753NET CASH USED IN OPERATING ACTIVITIES


(185,040
)


(331,699
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from convertible notes payable


747,300



355,000Proceeds from exercise of warrants


240



1,600Payments of convertible notes payable


(562,500
)


-Deferred financing costs


-



(24,000
)NET CASH PROVIDED BY FINANCING ACTIVITIES


185,040



332,600NET INCREASE  IN CASH


-



901CASH, BEGINNING OF PERIOD


-



1,000CASH, END OF PERIOD

$
-


$
1,901SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for:Interest

$
42,177


$
49,297





See accompanying notes to condensed consolidated financial statements (unaudited)




7





STATMON TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)


(Unaudited)




For the Nine Months Ended December 31,2010


2009NON-CASH INVESTING AND FINANCING ACTIVITIES:Issuance of common stock to investment advisors

$
486,000


$
-Issuance of common stock for extension agreement

$
534,690


$
-Reclassification of derivative liability to equity

$
4,000


$
15,000Reclassification of warrants to derivative liability

$
-


$
(107,000
)Cumulative effect of change in accounting principalon accumulated deficit

$
-


$
491,006Cumulative effect of change in accounting principalon paid in capital

$
-


$
(2,600,261
)Issuance of common stock for conversion of convertibledebentures

$
-


$
25,000





See accompanying notes to condensed consolidated financial statements (unaudited)




8





STATMON TECHNOLOGIES CORP. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009


(Unaudited)





1.
BUSINESS DESCRIPTION, GOING CONCERN AND ACCOUNTING POLICIES




Company Overview




Statmon Technologies Corp. (the “Company”) is a wireless and fiber infrastructure network management solution provider. “Axess”, our proprietary flagship software application, and our supporting integration products are deployed in telecommunications, media broadcast and navigation aid transmission networks to optimize operations and keep them fully functional 24 hours a day, 7 days a week, 52 weeks a year. A typical infrastructure network comprises a network operations center (“NOC” or “Master Control”) plus a network of remote transmission sites incorporating a wide range of devices, facilities management and environmental control systems.




The Statmon Platform is designed to self heal or preempt transmission failure by automating the integration of all the different devices and disparate technologies under a single control system, or permit corrective action at the NOC. A tiered severity level alarm system at every site, down to the device level, reports back to the NOC permitting manual adjustment or corrective action without having to visit the site. An authorized operator can drill down and make manual adjustments to an individual device at a remote site from any connected location including a wireless device such as a laptop or Blackberry.




Architecturally designed as a universal “Manager of Technologies” (“MOT”) application or platform, wide scale network operations, regardless of disparate equipment brands or incompatible technologies deployed at a NOC or remote site, can automatically interact with each other while being managed from a single point of control or “dashboard” style computer screen. In real time, a proactive alarm system reports to a NOC or designated wireless device for appropriate attention or action. Adjusting the HVAC, the health of the uninterrupted power supply (“UPS”) and diesel generator and the level of the fuel tank, as well as disaster recovery, emergency power management,
and redundancy are all proactive management capabilities of the Statmon Platform. The Statmon Platform will keep remote sites operating even when part or all of the entire network are down, automatically bringing the remote back on line when network operations are restored.




The marketing and distribution of our products are primarily facilitated by value-added resellers (“VAR’s”), sales channel strategic partners and original equipment manufacturer (“OEM”) collaborations. Sales channel partners are developed and managed by an internal business development team and supported by a direct sales force. The Company is seeking additional partners with appropriate credentials for large scale implementations.




Basis of Presentation




The unaudited condensed consolidated interim financial statements include the accounts of the Company's wholly-owned subsidiaries, Statmon-eBI Solutions, LLC and STC Software Corp. All inter-company accounts and transactions have been eliminated in consolidation.




These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") for interim financial information and the rules and regulations of the Securities and Exchange Commission for interim financial statements. These financial statements reflect all adjustments and accruals of a normal recurring nature that, in the opinion of management, are necessary in order to make the financial statements not misleading. The results for the interim periods presented are not necessarily indicative of results to be expected for any future period.


9




1.
BUSINESS DESCRIPTION, GOING CONCERN AND ACCOUNTING POLICIES, continued




These financial statements should be read in conjunction with the audited financial statements and the notes thereto of all the entities included in the Company’s 2010 Annual Report on Form 10-K filed with the Securities Exchange Commission.




Going Concern




The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the Unites States of America. The Company has incurred net losses of approximately $27.3 million since inception. Additionally, the Company had a net working capital deficiency of approximately $8.7 million at December 31, 2010.




As of December 31, 2010, the Company has $1,990,500 of Convertible Debentures due before December 31, 2011 of which $1,600,500 is past due. The Company is currently looking for alternatives to extend the due date or to obtain additional financing to settle the outstanding debentures. The Company also has $1,101,250 in unsecured notes payable that are in default and has accrued compensation and payroll tax obligations of $2,244,901 including penalties and interest.




On October 15, 2010, the Company received a notice of intent to levy from the Internal Revenue Service against the Company’s assets for approximately $803,000 in connection with delinquent payroll taxes, interest and penalties. The Company has the right to and has requested a hearing with the Internal Revenue Service which has not yet been scheduled. The Company plans to settle or enter into a payment plan to settle the outstanding obligations. The Company is currently seeking additional financing to settle the outstanding payroll taxes, interest and penalties. If the Company is unable to obtain additional financing or cannot structure a payment plan that it can adhere to, it may be forced to curtail
business operations or enter into Chapter reorganization proceedings.





These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying unaudited condensed consolidated interim financial statements do not include any adjustments that might result from the outcome of this uncertainty.




As more fully described in the Notes below, the Company funded its operations during the nine months ended December 31, 2010 by raising an additional $747,300 of proceeds through the sale of Senior Secured Convertible Debentures. However, $562,500 was raised for the explicit purpose of paying down debentures that came due.




Management Plans




Management’s plans with regard to the above matters encompass the following actions: 1) obtain funding from new investors to alleviate the Company’s working capital deficiency, 2) implement a plan to increase sales. The Company and its sales channel partners have developed a pipeline of qualified sales opportunities. The revenues from such prospective sales pipelines are expected to grow as the existing and new sales channel partner relationships develop and 3) Restructuring some of its debt. To help with its plan the Company has hired a financial advisor to help raise capital. The Company’s continued existence is dependent upon its ability to resolve its liquidity problems and increase
profitability in its current business operations.




10


1.
BUSINESS DESCRIPTION, GOING CONCERN AND ACCOUNTING POLICIES, continued


There can be no assurances that the Company will be successful in obtaining the aforementioned operating results, financing or refinancing, converting and/or extending its notes payable. If not successful, the Company would seek to negotiate other terms for the issuance of debt, and/or pursue bridge financing, negotiate with suppliers for a reduction of debt through issuance of stock, and seek to raise equity through the sale of its common and preferred stock. At this time, management cannot assess the likelihood of achieving these objectives. If the Company is unable to achieve these objectives or amounts due for debentures and payroll taxes are unable to be paid, it may be forced to cease business
operations.




Revenue Recognition




Product revenues from the sale of software licenses are recognized when evidence of a license agreement exists, the fees are fixed and determinable, collectability is probable and vendor specific objective evidence exists to allocate the total fee to elements of the arrangements. The Company's software license agreement entitles licensees limited rights for upgrades and enhancements for the version they have licensed.





The Company requires its software product sales to be supported by a written contract or other evidence of a sale transaction, which generally consists of a customer purchase order or on-line authorization. These forms of evidence clearly indicate the selling price to the customer, shipping terms, payment terms (generally 30 days) and refund policy, if any. The selling prices of these products are fixed at the time the sale is consummated.





Deferred revenue represents revenue billed or collected for services not yet rendered.




Derivative Liability




The Company has estimated the fair value of all outstanding warrants and conversion features which include an implied down-side protection feature. The derivative liabilities are adjusted to fair value at the end of each reporting period. Such fair values were estimated using the Black-Scholes valuation model. Although the Company determined the common stock warrants include an implied down-side protection feature, the Company performed a Monte-Carlo simulation and concluded that the value of the feature is de minimis and the use of the Black-Scholes valuation model is considered to be a reasonable method to value the warrants. The Company will continue to adjust the warrant liability for changes in fair value
until the earlier of the exercise, at which time the liability will be reclassified to stockholders’ equity (deficit) or expiration of the warrants.





New Accounting Pronouncements




In October 2009, the Financial Accounting Standards Board (“FASB”) updated topic 605 on Revenue Recognition authoritative guidance on revenue recognition that became effective for us beginning April 1, 2010, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software- enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables
that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The guidance includes additional disclosure requirements about how the application of the relative selling price method affects the timing and amount of revenue recognition. The adoption of this new guidance did not have a material impact on our financial statements.




11


1.
BUSINESS DESCRIPTION, GOING CONCERN AND ACCOUNTING POLICIES, continued


In June 2009, the FASB issued Accounting Standards Update (ASU) 2009-16, Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets. ASU 2009-16 will require more information about transfers of financial assets, including securitization transactions, eliminates the concept of a qualifying special-purpose entity and changes the requirements for derecognizing financial assets. ASU 2009-16 is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. The adoption of this new guidance did not have a material impact on our financial statements.




In February 2010, the FASB issued Accounting Standards Update 2010-10 (ASU 2010-10), “Consolidation (Topic 810).” The amendments to the consolidation requirements of Topic 810 resulting from the issuance of Statement 167 are deferred for a reporting entity’s interest in an entity (1) that has all the attributes of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. An entity that qualifies for the deferral will continue to be assessed under the overall guidance on the consolidation of variable interest entities in Subtopic 810-10 (before the Statement 167
amendments) or other applicable consolidation guidance, such as the guidance for the consolidation of partnerships in Subtopic 810- 20. The deferral is effective as of the beginning of a reporting entity’s first annual period that begins after November 15, 2009, and for interim periods within that first annual reporting period, which coincides with the effective date of Statement 167. Early application is not permitted. The adoption of this new guidance did not have a material impact on our financial statements.




In January 2010, the FASB issued a standard pertaining to fair value disclosures (ASU No. 2010-6) that requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2, to describe the reasons for the transfers, and to disclose separately certain additional information about purchases, sales, issuances, and settlements of Level 3 items. This standard also requires an entity to provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 items. The standard is effective for interim and annual reporting periods
beginning after December 15, 2009, except for the Level 3 disclosure of activity, which is effective for fiscal years beginning after December 15, 2010. We adopted the effective portions of this standard as of April 1, 2010. The adoption of the effective portions of this standard did not have a material impact on our consolidated financial statements and management is currently evaluating the effect of the impact of the separate disclosure requirements of Level 3 items.




In February 2010, the FASB issued a standard that removed the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements (ASU No. 2010-09). Generally, this standard was effective immediately upon issuance. The adoption of this standard did not have a material impact on our consolidated financial statements.




Reclassification




Certain prior amounts have been reclassified to conform to current year presentation. These reclassifications had no impact on operating income (loss) for any of the periods presented.




12


2.
SENIOR SECURED ORIGINAL ISSUE DISCOUNT CONVERTIBLE DEBENTURE AND DERIVATIVE LIABILITIES




On March 5, 2008, the Company issued and sold debentures in a total principal amount of $1,500,000, due March 5, 2010 (the “Debentures”) to accredited investors in a private placement pursuant to a securities purchase agreement (the “Purchase Agreement”). The Debentures are the first tranche of up to an aggregate of $4,038,000 of Original Issue Discount Senior Secured Convertible Debentures (for an aggregate cash subscription amount of up to $3,365,000). The Debentures have an effective interest rate of approximately 10% per annum. After deducting the expenses of the private placement, including prepaid interest, the Company received net proceeds of approximately $1,190,000 related to
Tranche I.




During the six months ended September 30, 2008, the Company issued and sold the second tranche (“Tranche II”) of debentures in total principal amount of $1,038,000, due two years from the issuance of the securities, under the same debenture facility. The terms are substantially the same and the Company received net proceeds after deducting the expenses of the private placement of approximately $865,000 related to Tranche II.




In connection with the private placement, the investors also initially received warrants (the “Warrants”) to purchase up to 2,583,474 shares of the Company’s common stock, which terminate five years from the closing date (the “Termination Date”) and initially had an exercise price of $1.20 per share. Based on the terms of the agreement, the Warrants may also be exercised by means of a cashless exercise. On the Termination Date, the Warrant shall be automatically exercised via cashless exercise. Based on the reduced exercise price of the warrants issued in conjunction with Tranche III (See below), the exercise price of the Warrants was reduced to $0.50 and the investors were issued an
additional 3,616,864 warrants based on the terms of the original Tranche I and II agreements.




From April 1, 2009 through December 31, 2010 , the Company issued and sold a portion of the third tranche (“Tranche III”)of debentures in total principal amount of $1,734,480, due two years from the issuance of the securities, under the same debenture facility.  In connection with the private placement, the investors also received warrants to purchase up to 6,937,920 shares of the Company’s common stock, which terminate in five years and have an exercise price of $0.50 per share. Based on the terms of the agreement, the Warrants may also be exercised by means of a cashless exercise.




The initial conversion price (“Initial Conversion Price”) of both Tranche I and Tranche II of Debentures was $0.9824 per share. The conversion price of Tranche III was $0.25. Based on the reduced conversion price of the Debentures issued in conjunction with Tranche III, the conversion prices of the Debentures from Tranches I and II were reduced to $0.25 based on the terms of the original agreement governing their issuance. To record the change in the fair value of the conversion price reduction and the warrant exercise price reduction, the Company recorded a $5,936,000 interest charge which is recorded in “Interest expense related to change in fair value of warrants and conversion features
issued in association with debt” on the condensed consolidated statement of operations for the nine months ended December 31, 2009.




The Company adopted the provisions of an update on ASC Topic 815 Derivatives and Hedging on April 1, 2009 and the warrants and convertible features on the debentures, which were previously classified as equity, are now classified as liabilities and are recorded at fair value. The Company used a Black-Scholes pricing model to determine the value of the warrants and conversion features. The model uses sourced inputs such as interest rates, stock price and volatility, the selection of which requires management judgment and requires that the fair value of these liabilities be remeasured at the end of every reporting period with the change in fair value reported in the statement of operations.




13


2.
SENIOR SECURED ORIGINAL ISSUE DISCOUNT CONVERTIBLE DEBENTURE AND DERIVATIVE LIABILITIES, continued





On Tranche I and II, the gross redemption value of $2,538,000 was recorded net of a discount of $2,526,000.  The debt discount consisted of $423,000 related to the original issue discount, $1,815,000 related to the allocated fair value of the warrants, $1,323,000 relates to the beneficial conversion feature of the note reduced by deemed interest of $1,035,000 due to the fact that the proceeds in some of the issuances were less than the fair value issued in the transaction.  The debt discount is charged to interest expense ratably over the life of the loan. During the nine months ended December 31, 2010 and 2009, the Company amortized $150,345 and $951,575 respectively of debt discount related to
Tranches I and II.




The gross proceeds of $1,734,480 related to Tranche III were recorded net of a discount of $1,734,480. The debt discount consisted of $289,080 related to the original issue discount, $2,174,000 related to the fair value of the warrants and $1,010,000 related to the fair value of the conversion feature of the note reduced by $1,738,600 of deemed interest that was expensed immediately. During the nine months ended December 31, 2010 and 2009, the Company amortized $518,608 and $135,531 respectively of debt discount related to Tranche III.




The derivative liabilities were valued using the Black-Scholes model with the following assumptions.




December 31,


Tranche III


March 31,


Tranche I & II2010


Inception


2010


InceptionConversion Feature:Risk-free interest rate


0.29
%


0.88%-1.26
%


0.43
%


2.0% -4.25
%Expected volatility


201.70
%


154.9%-192.4
%


176.79
%


106.7%-112.0
%Expected life (in years)


0.25-1.75



2.00



0.02-2.00



2.00Expected dividend yield


-



-



-



-Warrants:Risk-free interest rate


1.02%-2.01
%


1.74%-2.75
%


1.65%-2.60
%


0.50%-2.50
%Expected volatility


201.70
%


154.9%-192.4
%


176.79
%


105.1%-155.1
%Expected life (in years)


2.18-4.75



5.00



2.93-5.0



5.00Expected dividend yield


-



-



-



-




Under additional provisions of the securities purchase agreements related to such Debentures, the Company was required to meet certain revenue minimums in fiscal year 2009 which were not met. Based on not meeting the revenue minimums, the Company was required to issue to each investor, on a pro-rata basis, additional warrants (the “Additional Warrants”) to purchase up to, in the aggregate, 676,800 shares of the Company’s common stock related to Tranches I and II. The Additional Warrants are in the same form as the Warrants described above, have a term of exercise equal to five (5) years following their issuance, and shall have an exercise price of $0.01 per share. During the year ended March 31,
2010, The Company has issued 400,000 and 276,800 penalty warrants to the debenture holders in Tranche I and Tranche II, respectively related to this penalty. The fair value of these warrants is $124,743 based on a Black Scholes model and The Company recorded this penalty during the year ended March 31, 2009 as that is the period when the revenue shortfall occurred. The Company also failed to meet revenue minimums in Fiscal 2010 and 2011 and is required to issue to certain Tranche III investors 399,072 penalty warrants valued at $64,000, respectively based on a Black Scholes model. The Company recorded $38,000 of this penalty during the year ended March 31, 2010 and $26,000 during the nine months ended December 31, 2010 as that is the period when the revenue shortfalls occurred. Additional Tranche III holders have similar provisions to receive up to 280,320 similar warrants if the
Company fails to meet revenue minimums twelve month periods through June 30, 2011.




14


2.
SENIOR SECURED ORIGINAL ISSUE DISCOUNT CONVERTIBLE DEBENTURE AND DERIVATIVE LIABILITIES, continued





On March 5, 2010, $1,125,000 of Tranche I debentures became due. We entered negotiations with the Tranche I holders and obtained an extension to May 31, 2010 by issuing 1,341,665 shares of our common stock as an extension fee. The common stock was valued at $0.29 and we recorded $389,082 related to this issuance as interest expense in the year ended March 31, 2010. On July 30, 2010, $562,500 was paid to the holders of the debentures that became due on May 31, 2010. On November 16, 2010, we received a demand for repayment notice from the holders of the Tranche I debentures for their outstanding balance of $612,266 which includes principal and interest as of November 16, 2010. The Company is in the process of raising
additional capital through the issuance of additional debentures to settle the remaining balance.




During the six months ended September 30, 2010, $1,038,000 of Tranche II debentures became due. We have an obligation to issue to the Tranche II holders extension shares as an extension fee on the same terms as Tranche I. We have issued 1,211,064 shares of common stock to the Tranche II holders. We have valued the shares at $145,608 based on the market value of the shares on their effective date and have recorded the charge in interest expense during the nine months ended December 31, 2010. We have not yet settled these debentures and the Company is in the process of raising additional capital through the issuance of additional debentures to settle the remaining balance.




The gross amount of maturities under the Secured Senior Secured Original Issue Discount Convertible Debentures (not netted to include the debt discount and assuming that the debenture is not converted into common stock) is $1,990,500 and $1,308,480 for the twelve months ended December 31, 2011 and 2012, respectively.




3.
NOTES PAYABLE




Notes payable at December 31, 2010 and March 31, 2010 consist of the following:




As ofDecember 31, 2010


March 31, 2010Notes Payable - Delis - related party
[a]

$
200,000


$
200,000Notes Payable - various
[b]


401,250



401,250Senior Subordinated Notes Payable - Thieme Consulting, Inc. - related party
[c]


250,000



250,000Senior Subordinated Notes Payable, net of debt discount of $0 and $8,034, respectively
[d]


250,000



241,966Short-Term Notes Payable


$
1,101,250


$
1,093,216




[a]
On April 27, 2007, the Company sold a unit consisting of (i) a $200,000 principal amount secured promissory note bearing interest at 10% per annum and due 180 days from the date of issuance, (ii) 150,000 shares of common stock and (iii) warrants to purchase 150,000 shares of common stock exercisable at a price of $1.00 per share for a term of five years. This note matured on October 24, 2007. Since the Company did not repay the note by the maturity date, per the default terms of the note, the Company issued an additional 100,000 shares of common stock and warrants to purchase 100,000 shares of its common stock at an exercise price of $1.00 per share with a term of five years as consideration for an extension of the due date of the note to October 24, 2008.




15




3.
NOTES PAYABLE, continued





The Company is negotiating an extension or conversion to shares of common stock that would supersede such extension agreement subject to approval from the majority of the secured debenture holders. There can be no assurance that it will be able to obtain such an extension or approval from the majority of the debenture holders.  This note is secured by a second lien on all of the assets of the Company.During the nine months ended December 31, 2010, the Company has incurred $22,500 of interest expense related to this note.




[b]
These Units generally consisted of (i) a promissory note bearing interest generally at 10% per annum, (ii) a share of the Company’s common stock and (iii) three or five-year warrant to purchase shares of common stock at an exercise price between $1.00 and $2.00 per share. The total amount of these notes is $401,250 and represents eight notes with initial maturity dates between November 19, 2002 and October 21, 2008.




At December 31, 2010, all these notes are in default, plus interest of $280,323. Upon default, most notes accrue interest at 15% per annum and provide for the issuance of monthly warrants, exercisable at the same price as the original warrants granted with the unit, as a penalty until the repayment of the notes in full. The Company accrued $43,913 of interest and granted 67,500 penalty warrants, valued at $8,475 related to such notes during the nine months ended December 31, 2010. The Company will continue to grant 7,500 penalty warrants per month related to such notes in default until the notes are repaid.




[c]
An existing note in the amount of $250,000 matured and on March 5, 2008, the Company entered into a new promissory note with Thieme Consulting, Inc. for $250,000. This new note is subordinated to the Debentures described in Note 2 above. In consideration for entering into the new note and subordinating its first security position, the Company repaid all of the accrued interest due on the October 2001 notes of $243,896. The new note had a maturity date of June 4, 2010 and accrued interest of 10% during the life of the loan and now bears interest at 15% per annum after the due date of the note. The Company is presently in discussions to extend the due date of the note. During the nine months ended December 31, 2010, the Company has incurred $25,856 of interest expense related to this note and at
December 31, 2010, the Company has accrued $77,980 of interest due on this note.




[d]
An existing note in the amount of $250,000 matured and on March 5, 2008, the Company entered into a new promissory note with a secured promissory note holder. This new note is subordinated to the notes in Note 2 above. In consideration for entering into the new note, the Company converted all of the accrued interest due on the August 2004 note of $125,445 into shares of restricted common stock at $1.00 per share, issued 703,871 shares of restricted common stock in exchange for 1,759,676 warrants and issued a new warrant to purchase 250,000 shares of common stock exercisable for a five-year term at $1.20 per share which expires on March 5, 2013.  The new note had a maturity date of June 4, 2010 and accrued interest at 10% during the life of the note and now bears interest at 15% per annum
after the due date of the note. The Company is presently in discussions to extend the due date of the note. During the nine months ended December 31, 2010, the Company has incurred $21,396 of interest expense related to this note and at December 31, 2010, the Company has accrued $21,396 of interest due on this note.




16


4.
STOCKHOLDERS’ EQUITY


During the nine months ended December 31, 2010, the Company issued 1,800,000 shares of common stock valued at $0.27 for financial advisory services. The term of the agreement is for one year beginning April 15, 2010 and the Company recorded the fair value of the common stock issued for future consulting services as a prepaid expense and is charging as expense over the life of the contract. The expense related to this agreement is $121,500 and $344,250 for the three and nine months ended December 31, 2010, respectively. The Company also issued 1,341,665 shares of common stock valued at $0.29 as an extension fee to Tranche I holders to extend the due date of their debentures from March 5, 2010 to May 31, 2010. We
recorded this expense as interest expense during the three months ended March 31, 2010. The Company also issued 1,211,064 shares of common stock valued between $0.06 and $0.15 as an extension fee to the Tranche II holders to extend the due date of their debentures. We recorded $145,607 as interest expense during the nine months ended December 31, 2010. The Company also issued 24,000 shares of common stock to a Tranche II debenture holders upon the exercise of $0.01 penalty warrants.




5.
COMMITMENTS AND CONTINGENCIES




[a] Accrued Compensation and Payroll Taxes - During the years 2001 through 2008, The Company considered its Chief Executive Officer and its Chief Technology Officer to be consultants of the Company rather than employees, as a result of the Company’s non-compliance with the terms of their original employment agreements. If the Chief Executive Officer and the Chief Technology Officer were classified as employees during the above period, the Company would have been required to withhold and remit payroll taxes to the respective taxing authorities.




This position may be subject to audit by the Internal Revenue Service and other state and local taxing authorities, which, upon review, could result in an unfavorable outcome if it is determined that such individuals’ compensation should have been reported on the basis of an employee rather than a consultant.




The Company has recorded charges of approximately $1,073,000 for additional compensation (including penalties and interest) on behalf of the Chief Executive Officer and the Chief Technology Officer should the Company be challenged by the taxing authorities and it is determined their position is without merit.




In addition, the Company was delinquent in filing certain of its payroll returns (including the remittance of taxes) totaling approximately $1,172,000 which includes payroll taxes, related penalties and interest computed through December 31, 2010. The Company filed all delinquent tax returns on July 7, 2010 and is current with its payroll tax filings to date but is not current in remitting payroll taxes due and consequently may be subject to additional interest and penalties.




On October 15, 2010, we received a notice of an intent to levy and the right to a hearing from the Internal Revenue Service against the Company’s assets for approximately $803,000. We exercised our right to a hearing which has not yet been scheduled. At that hearing, we intend to settle or enter into a payment plan to settle our outstanding obligations.




[b]Product Liability Insurance - The manufacture and sale of the Company’s products involve the risk of product liability claims. The Company does not carry product liability insurance. Pursuant to its software licensing agreements and contracts, the Company makes every effort to limit any product liability to the dollar value of the transaction, however, a successful claim brought against the Company could require it to pay substantial damages and result in harm to the Company’s business reputation, remove its products from the market or otherwise adversely affect its business and operations.




17




6.
FAIR VALUE MEASUREMENTS




On April 1, 2008, the Company implemented ASC 850 Fair Value Measurements and Disclosures which provides a single definition of fair value, a framework for measuring fair value, and expanded disclosures concerning fair value and clarifies that the exchange price is the price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date and emphasizes that fair value is a market-based measurement and not an entity-specific measurement.




It also established the following hierarchy used in fair value measurements and expanded the required disclosures of assets and liabilities measured at fair value:





•
Level 1 – Inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.


•
Level 2 – Inputs use other inputs that are observable, either directly or indirectly. These inputs include quoted prices for similar assets and liabilities in active markets as well as other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.


•
Level 3 – Inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.




In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair measurements requires judgment and considers factors specific to each asset or liability.





Liabilities measured at fair value on a recurring basis at December 31, 2010 are as follows:





Quoted Prices in

Active Markets for

Identical Liabilities

(Level 1)


Significant

Other

Observable

Inputs

(Level 2)


Significant

Unobservable

Inputs

(Level 3)


Balance at

December 31, 2010Conversion Features

$
-


$
-


$
315,000


$
315,000Warrant liability

$
-


$
-


$
1,061,000


$
1,061,000$
-


$
-


$
1,376,000


$
1,376,000





Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Our Level 3 liabilities consist of derivative liabilities associated with the debentures and warrants that contain exercise price reset provisions.




The following table provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets measured at fair value on a recurring basis using significant unobservable inputs during the nine months ended December 31, 2010.




18


6.
FAIR VALUE MEASUREMENTS, continued


Conversion


WarrantFeature


Liability


TotalBalance April, 1, 2010

$
1,445,000


$
2,440,000


$
3,885,000Total realized/unrealized (gains) or lossesIncluded in other income (expense)


(1,688,000
)


(2,067,000
)


(3,755,000
)Purchases, issuances or settlements


558,000



688,000



1,246,000Transfers in and /or out of Level 3


-



-



-Balance December 31, 2010

$
315,000


$
1,061,000


$
1,376,000




The Company does not enter into derivative contracts for purposes of risk management nor speculation. However, the Company has entered into agreements whose terms require that we classify certain freestanding warrants and embedded conversion features as liabilities for accounting purposes. Our derivatives are classified as derivative liabilities in short-term liabilities on the balance sheet and the change in their fair value is recorded in other (income) expense on the statement of operations.




7.
NET INCOME/LOSS PER SHARE




Basic net income/loss per share is computed by dividing the net income/loss applicable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net income/loss per share reflects potential dilution of securities by adding other potential common shares, including stock warrants and shares issuable upon the conversion of convertible notes payable, to the weighted-average number of common shares outstanding for a period, if dilutive.





The Company’s computation of weighted average per share includes 891,872 and 516,800 shares exercisable at $0.01 per share at December 31, 2010 and 2009, respectively.





There is no computation of diluted loss per share for the three months ended December 31, 2010 and 2009 because the computation would reduce net loss per share for those periods. The following tables set forth the components used in the computation of basic and diluted income per share for the nine months ended December 31, 2010 and 2009:


19


7.
NET INCOME/LOSS PER SHARE, continued


2010*



2009**Numerator:Net Income/(Loss)

$
973,262


$
(3,865,091
)Amortization of debt discount


676,987



-(Gain)/Loss in change in value of conversion features


(1,688,000
)Net Loss attributable to common stockholders

$
(37,751
)

$
(3,865,091
)Denominator:Weighted average common shares outstanding, basic


29,747,576



24,321,988Common shares issued upon conversion of debentures


13,195,920



-Weighted average common shares outstanding, diluted


42,943,496



24,321,988Net Income/(Loss) per share - Basic

$
0.03


$
(0.16
)Net Income/(Loss) per share - Diluted

$
0.00


$
(0.16
)





* Potential common shares of 16,296,456 were excluded from the computation of diluted earnings per share as their exercise prices were greater than the average market price of the common stock during the period.





** Potential common shares of 26,534,698 (outstanding warrants that can be exercised into 14,778,698 shares of common stock and outstanding convertible debentures that can converted into 11,756,000 shares of common stock) were excluded from the computation of diluted earnings per share as their inclusion would be anti-dilutive or would not effect on net income/(loss) per share.




8.
CUSTOMER CONCENTRATION




The Company sold a substantial portion of its product and services to four customers, News Corp, FLO TV, Turner Studios and the State of Maryland during the nine months ended December 31, 2010 and 2009. Sales to these customers were approximately 45%, 25%, 2% and 1% of total sales, respectively for the nine months ended December 31, 2010 and 0%, 54%, 14% and 12% of total sales, respectively for the nine months ended December 31, 2009. Sales to these customers were approximately 0%, 43%, 10% and 0% of total sales, respectively for the three months ended December 31, 2010 and 0%, 40%, 34% and 0% of total sales, respectively for the three months ended December 31, 2009.




Accounts receivable balance for these customers was approximately $18,000, $0, $0 and $0, respectively at December 31, 2010 and $0, $112,000, $0 and $0, respectively at December 31, 2009.




On October 5, 2010, Qualcomm announced they were discontinuing the selling of their FLO TV mobile TV direct-to-the-consumer devices and expected to end the transmission to AT&T and Verizon subscribers in March 2011. On October 6, 2010, we received a 90 day notice terminating our FLO TV software maintenance and services agreement. On December 20, 2010, Qualcomm announced that AT&T has agreed to purchase the FLO spectrum to provide an advanced broadband experience to AT&T customers. In this transition period we expect that sales supporting the spectrum will be minimal if any.




20




9.
RESEARCH AND DEVELOPMENT




Research and development expenditures are charged to operations as incurred. Research and development expenditures were approximately $913,000 and $953,000 for the nine months ended December 31, 2010 and 2009, respectively. Research and development expenditures were approximately $276,000 and $287,000 for the three months ended December 31, 2010 and 2009, respectively.




10.
SUBSEQUENT EVENTS




The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon that evaluation, the Company didn’t identify any subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements.




21




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.




Recent Developments for the Company




Statmon Technologies Corp. is a facilities and network infrastructure solution provider. “Axess”, our proprietary flagship software application, and our supporting integration products are widely deployed in mainstream media broadcast, telecommunications, building and facilities management as well as aviation navigation aid transmission networks. The Statmon solution is deployed to optimize operations across the infrastructure and remote site network and ensure operations remain healthy and fully functional at all times.




A typical infrastructure network comprises a network operations center (“NOC”) or master control (“MC”), plus, a wide area network of remote transmission sites (the “Network”). The remote sites typically involve a wide range of incompatible electronic equipment manufacturers and digital communication devices, building and facilities management control devices, as well as environmental monitoring systems including security alarms, surveillance cameras, digital entry pads, thermostats and interfaces for ventilation duct controllers, the HVAC system and emergency power generators.




The Statmon solution is designed to preempt transmission or operational failure with a self healing matrix automating the continuous integration of all the disparate devices and technologies under a single “umbrella” control system. The Statmon solution also permits manual corrective action at the NOC or from a wireless connected device such as a laptop, iPhone/iPad, Droid or Blackberry smart phone from any location. There is a tiered severity level alarm system activated at every site, interfaced down to the individual devices, and reporting back up northbound to a NOC, including logging any automated adjustments or permitting manual adjustment or corrective action without a field technician having to
physically travel to the NOC facility or to the remote site. Authorized operators can drill down through the Axess software screens in real time and observe what is taking place with any individual device or system and make management and control adjustments as required at the site.




An important “value add” of the Statmon solution is the preemption of failure at remote sites while simultaneously optimizing the performance of the entire network economically. Any Network downtime typically has a mission critical or direct financial impact on the customers’ top line revenue generation, operating profit and the all important customer experience or satisfaction. The ROI and investment payback periods relative to the purchase cost of the Statmon solution compared to the operators loss of revenue or the real costs of being “off the air” typically are highly attractive. Advertisers do not pay for commercials that do not go to air or demand expensive make good air time.
Mobile device and cell phone users are expecting higher levels of customer experience and are quick to switch service providers if the cell sites in their area are constantly down or dropping connections. Geographically, the Statmon Platform streamlines the network engineering work flow and remote site field trips and maintenance process, reducing operating and outsourcing costs and facilitating the reallocation of resources with economics. The Statmon solution can dramatically facilitate the green policies being implemented by all levels of corporate and government entities.  Architecturally designed as a universal “Manager of Technologies” application or platform, wide scale network operations, regardless of disparate equipment brands or incompatible technologies deployed at a NOC or remote site, can automatically interact with each other while being managed from a
single point of control or “dashboard” style computer or smart phone screen. In real time, proactive alarm systems report up northbound to a NOC or designated wireless device for appropriate attention or action. Adjusting the HVAC, monitoring the health of the uninterrupted power supply and diesel generator including the level of fuel in the diesel tank, as well as proactive disaster recovery actions, emergency power management, and redundancy are all proactive management capabilities of the Statmon Platform. The Statmon solution will keep remote sites operating independently even when part or the entire entire network are down, automatically bringing the remote site back on line when network operations are restored.




22




Telecommunications infrastructure and high speed networks in both developed and developing countries around the world are being aggressively upgraded to meet the growing subscriber demand for communication services and new applications/features. In developing countries, wireless networks provide an affordable alternative to the more expensive hardwire or landline infrastructure. Notable are the third generation, or 3G, wireless and infrastructure transmission networks which are being upgraded to handle the rapid call traffic increases, wireless high speed broadband and convergence of digital media delivery and additional data services for the wireless and IPTV fiber markets. Cable systems are offering
telecommunication and high speed broadband services to their customers and upgrading their networks including deploying Statmon’s proprietary “Accurate” Local People Meter monitoring platform which interfaces with directly with Nielsen for market research purposes. Statmon’s unique RF (radio frequency) background and knowhow in the mainstream media broadcast industry places us in a strategic position to provide high end solutions for the enhanced telecommunications networks offering video and enriched multimedia content.




The marketing and distribution of our products is primarily facilitated by third party sales channel partners, value added resellers, black label and original equipment manufacturer collaborations (“Channel Partners” or “Strategic Partners”). Channel Partners are developed and managed by an internal business development team and supported by a direct sales and engineering support force. We have a history as an innovative technology leader for remote site facilities management, transmission remote control and monitoring in the traditional television, radio, satellite and cable broadcast industries. The traditional network television market is undergoing a resurgence of activity and reformatting
as the digital and high definition (“HD”) television, cable and satellite delivery systems realign their operating and business models post the analog switchover including offering additional digital channels that individually focus on HD programming, continuous news coverage and weather reporting, sports and special interest coverage. Now that analog broadcasting has officially been turned off the digital HD network broadcast operations are being streamlined or rationalized with central casting, regional hubs and unmanned remote site transmission operations. The traditional radio markets are retrofitting to multi band digital transmission in order to remain competitive with satellite radio, mobile TV, multimedia and music content direct to cell phone or mobile device offerings for automobiles, trucks, public transport and the military.




Between 2006 and 2010 wireless telecommunications technology leader Qualcomm, Incorporated, through its wholly owned subsidiaries MediaFLO Technologies Inc., and FLO TV Inc., constructed from scratch, a national high speed broadcast transmission network on relocated spectrum acquired from the Federal government for a approximately $900 million. Statmon’s Axess and related products were installed to control and monitor 527 transmission sites from the San Diego based NOC. The FLO TV transmission network was designed to provide up to 25 channels of live television and video content directly to the AT&T and Verizon cell phone subscriber base as well as the automotive mobile TV subscriber markets through Ford
Motor Co., Chrysler and General Motors Corp OEM agreements.




On October 5, 2010, Qualcomm announced they were discontinuing the selling of their FLO TV mobile TV direct-to-the-consumer devices and expected to end the transmission to AT&T and Verizon subscribers in March 2011.  On December 20, 2010, Qualcomm announced that AT&T has agreed to purchase the FLO spectrum to provide an advanced broadband experience to AT&T customers to meet the growing imbalance between mobile data supply and the demand for high quality video and print content for richer video user experience.




23




Statmon received a 90 day notice of termination of its FLO TV software maintenance services contracts on October 6, 2010. In the three- and nine-months ended December 31, 2010 25% and 43% of our revenues have come from FLO TV.  We expect other existing and new customers in our sales pipelines to mitigate the loss on the FLO TV business which since inception had generated approximately $7,800,000 in sales.




In addition to our core broadcast business we have commenced penetrating and with adequate operating capital are poised to pursue rapid expansion into additional vertical markets, including the wireless telecommunications (cell phone), mobile TV, IPTV over fiber networks, microwave telecommunications, multimedia, gaming, power grid and emergency power management, government infrastructure management, homeland security, military communications, surveillance and other markets where centrally controlled network management, embedded industrial systems and wide scale remote monitoring and control solutions are being implemented.




We believe our products have broad application in the wireless, landline and fiber segments of the telecommunications industries providing network management, alarm monitoring and remote site control, transmission, buildings and facilities management solutions for many of the new planned networks, as well as the upgrades and wide scale infrastructure enhancements. In developing countries, wireless infrastructure networks are being developed as viable alternatives to wired networks. Economic remote site management is vital for viable carrier operations.




We expect the wireless and infrastructure markets to experience sustained growth over the next ten to twenty years as the carriers and infrastructure service providers compete to provide superior and additional wide-ranging services, including enriched video and high quality content to mobile devices, wireless broadband and other related mobile data delivery services customers expect. We believe that our background in the mainstream broadcast transmission industry at the highest TV and radio network levels plus our three year involvement with wireless technology leader Qualcomm places us in a credible position to satisfy the operational needs of the mainstream telecommunications, wireless and infrastructure providers
for RF and content delivery, as well as overall communications network, building and remote site management and control.




Our significant clients in the present and in the past include News Corporation – Fox Television, General Electric – NBC Universal & Telemundo Television Networks (in the process of being acquired by Comcast), Time Warner - Turner Broadcast Systems, CNN, Cox Communications; Belo Corp. Television, Qualcomm - FLO TV; CBS Corporation Television and Radio Networks; The Walt Disney Company - ABC Television and Radio Networks; Univision Communications Television and Radio Network,; Australian Government owned Air Services of Australia (the Australian equivalent to the FAA); Tribune Company Television; and Statmon’s current sales channel and integration partners include National TeleConsultants
(“NTC”), Comprehensive Technical Group (“CTG”), Sealevel Systems, Cascadiant - InfraCell, Trilithic, Harris Broadcast, Pixelmetrix, Nautel Navigation, BTS Ireland and Sound Broadcast Services, Ltd.




Off-Balance Sheet Arrangements




We do not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have material current or future effect on financial conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses.




24




For the Three Months Ended December 31, 2010 and 2009




Results From Operations


Revenues- Revenues were $358,615 and $791,646 for the three months ended December 31, 2010 and 2009, respectively. The decrease in revenues of approximately $433,000 is due to a reduction in revenues associated with FLO TV and Turner Studios. The reduction is the FLO TV revenue is due to their decision to sell their spectrum and exit the mobile TV business. The reduction in sales to Turner Studios was due to the timing of their internal projects. Revenues to FLO TV were 43% and 40% for the three months ended December 31, 2010 and 2009, respectively and revenues to Turner Studios were 10% and 43% for the three months ended December 31,
2010 and 2009, respectively.




Cost of Sales - Cost of sales were $10,828 and $61,863 for the three months ended December 31, 2010 and 2009, respectively. Overall gross profit percentage increased to 97% in the three months ended December 31, 2010 compared to 92% in the three months ended December 31, 2009 due to an increase, as a percentage of sales, in software sales and support services during the period.




Selling, General and Administrative Expenses - Selling, general and administrative expenses were $815,824 and $871,963 for the three months ended December 31, 2010 and 2009, respectively, a decrease of approximately $56,000.  The decrease in selling, general and administrative expenses is attributed to a decrease in payroll and product consulting costs of approximately $130,000 which is primarily based on headcount reductions and travel costs of approximately $20,000 mitigated by an increase of $121,500 in non-cash stock based compensation for investment advisory services.




Other Income/(Expense )- Other Income/(Expense) was $192,922 of other expense compared to $210,858 of other expense for the three months ended December 31, 2010 and 2009, respectively. The approximately $18,000 decrease can be attributed to decrease in the amortization of debt discount of approximately $172,000 due to the debt discount related to the Tranche I and II financing being fully amortized in during the three months ended December 31, 2010 and the Tranche I and II amortization amounted to $318,000 during the three months ended December 31, 2009. This decrease is mitigated by a decrease in the gain on a change in the fair value of
derivatives of $226,000 and $281,000 for the three months ended December 31, 2010 and 2009, respectively. The decrease in the gain is primarily due to the fact that our stock price decreased at a lower percentage during the three months ended December 31, 2010 compared to the three months ended December 31, 2009 which made our outstanding warrants and conversion features less valuable.




Net Income/(Loss) - As a result of the above, for the three months ended December 31, 2010, the Company recorded a net loss of $660,959 compared to a net loss of $353,038 for the same period the previous year.




For the Nine Months Ended December 31, 2010 and 2009




Results From Operations




Revenues- Revenues were $1,926,819 and $1,963,370 for the nine months ended December 31, 2010 and 2009, respectively. The decrease in revenues of approximately $37,000 is due to an approximately $875,000 national monitoring solution that was sold in 2010 mitigated by a decrease in revenues of approximately $571,000 associated with FLO TV due to their decision to sell their spectrum and exit the mobile TV business as well as decreases in revenues of $235,000 and $204,000 associated with Turner Studios and the State of Maryland due to the timing of their internal projects .




Cost of Sales - Cost of sales were $114,739 and $184,054 for the nine months ended December 31, 2010 and 2009, respectively. Overall gross profit percentage increased to 94% in the nine months ended December 31, 2010 compared to 91% in the nine months ended December 31, 2009 due to an increase, as a percentage of sales, in software sales and support services during the period.




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Selling, General and Administrative Expenses - Selling, general and administrative expenses were $2,752,252 and $2,983,678 for the nine months ended December 31, 2010 and 2009, respectively, a decrease of approximately $231,000.  The decrease in selling, general and administrative expenses is attributed to a decrease in payroll costs of approximately $490,000 which is primarily based on headcount reductions mitigated by an increase of $344,250 in non-cash stock based compensation for investment advisory services.




Other Income/(Expense )- Other Income/(Expense) was $1,913,433 of other income compared to $2,660,729 of other expense for the nine months ended December 31, 2010 and 2009, respectively. The approximately $4,574,000 increase in other income can be attributed to the reduction in interest expense related to a change in fair value of warrants and conversion features granted for ratchet provisions of $5,936,000 which was due to the expense that we incurred in the nine months ended December 31, 2009 related to additional warrants and conversion features that we were required to issue due to repricing provisions in our debenture
agreements.




We recorded a gain on a change in the fair value of derivatives of $3,755,000 and $5,588,000 for the nine months ended December 31, 2010 and 2009, respectively. This decrease in the gain is primarily due to the fact that our stock price decreased at a lower percentage during the nine months ended December 31, 2010 compared to the nine months ended December 31, 2009 which made our outstanding warrants and conversion features less valuable.




Net Income/(Loss) - As a result of the above, for the nine months ended December 31, 2010, the Company recorded net income of $973,262 compared to a net loss of $3,865,091 for the same period the previous year.




Liquidity and Capital Resources




The cash balance was $0 and $1,901 as of December 31, 2010 and 2009.





Net cash used in operating activities was $185,040 and $331,699 for the nine months ended December 31, 2010 and 2009, respectively. The use of cash in 2010 and 2009 is primarily the result of funding the net operating loss of $940,172 (which included non-cash expenses of $349,042) and $1,204,362 (which included non-cash expenses of $18,859) for the nine months ended December 31, 2010 and 2009, respectively.





Net cash provided by financing activities was $185,040 and $332,600 for the nine months ended December 31, 2010 and 2009, respectively.  Net cash provided by financing activities was primarily the result of funding related to Tranche III of the Company’s private placement of such debentures less payments related to Tranche I of the debentures.




As of December 31, 2010, the Company had a working capital deficiency of approximately $8.7 Million including short-term notes payable, convertible notes payable and accrued interest of approximately $3,529,000, net of applicable debt discount of approximately $69,000. We also have long-term convertible debentures of approximately $390,000, net of an applicable debt discount of approximately $918,000. In addition, the Company is delinquent in remitting accrued compensation and payroll taxes totaling approximately $2,245,000.





On October 15, 2010, the Company received a notice of intent to levy from the Internal Revenue Service against the Company’s assets for approximately $803,000 in connection with delinquent payroll taxes, interest and penalties. The Company has the right to and has requested a hearing with the Internal Revenue Service which has not yet been scheduled. The Company plans to settle or enter into a payment plan to settle the outstanding obligations. The Company is currently seeking additional financing to settle the outstanding payroll taxes, interest and penalties.


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In order to continue its operations through and beyond December 2011, the Company will need to increase revenue, repay or obtain extensions on its existing short-term debt, pay or settle payroll tax obligations and raise additional working capital through the sale of debt or equity securities in addition to the completion of its placement of debentures.





There can be no assurance that the Company will be able to raise the capital it requires in this time frame or at all or that it will be able to raise the capital on terms acceptable to it. In addition, there can be no assurances that the Company will be successful in obtaining extensions of its notes, if required or be able to pay amounts due on payroll tax returns. If it is not successful, the Company would seek to negotiate other terms for the issuance of debt, pursue bridge financing, negotiate with suppliers for a reduction of debt through issuance of stock, and/or seek to raise equity through the sale of its common stock. At this time management cannot assess the likelihood of achieving these objectives. If the
Company is unable to achieve these objectives, the Company may be forced to cease its business operations, sell its assets and/or enter into Chapter reorganization proceedings.





Except as provided above, the Company has no present commitment that is likely to result in its liquidity increasing or decreasing in any material way. In addition, except as noted above, the Company knows of no trend, additional demand, event or uncertainty that will result in, or that is reasonably likely to result in, the Company’s liquidity increasing or decreasing in any material way. The Company has no material commitments for capital expenditures. The Company knows of no material trends, favorable or unfavorable, in its capital resources.





The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and assume that the Company will continue as a going concern.




Going Concern




The Company has incurred net losses of approximately $27.3 million since inception. Additionally, the Company had a net working capital deficiency of approximately $8.7 million at December 31, 2010. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. Primarily as a result of its recurring losses and its lack of liquidity, the Company has received a report from its independent registered public accountants, included with its annual report on Form 10-K for the year ended March 31, 2010, that included an explanatory paragraph describing the
conditions that raise substantial doubt about the Company’s ability to continue as a going concern.




Inflation and Seasonality




Inflation has not materially affected the Company during the past fiscal year. The Company’s business is not seasonal in nature.




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Item 3 – Quantitative and Qualitative Disclosures About Market Risk.




(Not Applicable)




Item 4.  Controls and Procedures.




Evaluation and Disclosure Controls and Procedures




The Company, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company's "disclosure controls and procedures," as such term is defined in Rules 13a-15e promulgated under the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were not effective as of the end of the period covered by this report due to a material weakness identified by management relating to the lack of sufficient accounting resources.




Based upon its evaluation, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has concluded there are material weaknesses with respect to its internal control over financial reporting as defined in Rule 13a-15(e).




The material weaknesses identified by management relates to the lack of sufficient accounting resources and the lack of documentation of the performance of key controls and document retention. We have engaged outside consultants to perform financial reporting functions and perform routine record keeping. Consequently, our financial reporting function is limited which makes it difficult to report our financial information with the SEC timely and our control environment does not provide an appropriate segregation of duties or documentation of the performance of key controls.




In order to correct this material weakness, the Company has hired outside consultants to assist with financial statement preparation and reporting needs and plans to hire internal full-time accounting personnel during fiscal 2011. We also intend to augment internal accounting personnel with consultants as needed to ensure that management will have adequate resources in order to attain complete reporting of financial information in a timely manner and provide a further level of segregation of financial responsibilities.




A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Such limitations include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures, such as simple errors or mistakes or intentional circumvention of the established process.




Changes in Internal Controls Over Financial Reporting




There were no changes to the internal controls during the quarter ended December 31, 2010 that have materially affected or that are reasonably likely to materially affect the internal controls over financial reporting.




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PART II - OTHER INFORMATION




Item 1.
Legal Proceedings




Not Applicable




Item 1A. Risk Factors




Not Applicable




Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds





Between April 1 and December 31, 2010, the Company sold Debentures to investors as follows:


•
The Company issued an additional $896,760 principal amount of the Debentures and received net proceeds of $747,300 related to Tranche III of the private placement of such Debentures. In connection with the Debentures, the Company issued five-year warrants to purchase 3,587,040 shares of common stock at $0.50 per share. The Debentures are convertible into common stock at $0.25 per share.





Item 3.
Defaults Upon Senior Securities.





None.




Item 4.
(Removed and Reserved)




Item 5.
Other Information.




Not Applicable




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Item 6.
Exhibits





(a)
Exhibits


31.1
Certificate of Geoffrey P. Talbot, Chief Executive Officer and Chief Financial Officer, pursuant to Section 302 of the Sarbanes Oxley Act of 2002.32.1
Certificate of Geoffrey P. Talbot, Chief Executive Officer and Chief Financial Officer, pursuant to Section 906 of the Sarbanes Oxley Act of 2002.


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SIGNATURES




Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




Date: February 22, 2011
/s/Geoffrey P. Talbot/s/Name:
Geoffrey P. TalbotTitle:
Chief Executive Officer and Chief Financial Officer




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EXHIBIT INDEX





Exhibit

Description31.1

Certificate of Geoffrey P. Talbot, Chief Executive Officer and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certificate of Geoffrey P. Talbot, Chief Executive Officer and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.




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