Unassociated Document


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 AND EXCHANGE ACT OF 1934
FOR THE PERIOD ENDING JUNE 30, 2009
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM ________ TO ________             
COMMISSION FILE NUMBER 0 – 1325
___________
 
MULTIBAND CORPORATION
 
(Exact name of registrant as specified in its charter)

MINNESOTA

(State or other jurisdiction of incorporation or organization)

41 - 1255001

(IRS Employer Identification No.)

9449 Science Center Drive, New Hope, Minnesota 55428

(Address of principal executive offices)

Telephone (763) 504-3000    Fax (763) 504-3060

Internet:   www.multibandusa.com

(Registrant's telephone number, facsimile number, and Internet address)

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 and 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 o

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. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o      No x

On, August 5, 2009 there were 9,659,797 shares outstanding of the registrant's common stock, no par value, and 291,018 outstanding shares of the registrant's convertible preferred stock.
 



 
PART I.  FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

MULTIBAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2009 (unaudited)
   
June 30, 2008 (unaudited)
   
June 30, 2009 (unaudited)
   
June 30, 2008 (unaudited)
 
                         
REVENUES
  $ 67,396     $ 10,806     $ 129,554     $ 16,520  
                                 
COSTS AND EXPENSES
                               
Cost of products and services (exclusive of depreciation and amortization shown separately below)
    56,894       6,394       104,210       10,214  
Selling, general and administrative
    15,509       2,561       29,249       4,416  
Depreciation and amortization
    2,703       879       5,988       1,617  
Impairment of assets
    -       7       -       65  
                                 
Total costs and expenses
    75,106       9,841       139,447       16,312  
                                 
INCOME (LOSS) FROM OPERATIONS
    (7,710 )     965       (9,893 )     208  
                                 
OTHER EXPENSE
                               
Interest expense
    (890 )     (113 )     (1,745 )     (214 )
Interest income
    3       -       10       -  
Other income
    98       32       348       73  
                                 
Total other expense
    (789 )     (81 )     (1,387 )     (141 )
                                 
NET INCOME (LOSS) BEFORE INCOME TAXES AND NONCONTROLLING INTEREST IN SUBSIDIARIES
    (8,499 )     884       (11,280 )     67  
                                 
PROVISION FOR INCOME TAXES
    102       434       202       463  
                                 
NET INCOME (LOSS)
    (8,601 )     450       (11,482 )     (396 )
                                 
LESS: NET INCOME (LOSS) ATTRIBUTABLE TO THE NONCONTROLLING INTEREST IN SUBSIDIARIES
    (1,482 )     394       (1,778 )     412  
                                 
NET INCOME (LOSS) ATTRIBUTABLE TO MULTIBAND CORPORATION AND SUBSIDIARIES
    (7,119 )     56       (9,704 )     (808 )
Preferred stock dividends
    71       103       144       3,985  
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
  $ (7,190 )   $ (47 )   $ (9,848 )   $ (4,793 )
                                 
LOSS PER COMMON SHARE – BASIC AND DILUTED:
                               
    LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
  $ (0.75 )   $ (0.00 )   $ (1.02 )   $ (0.53 )
                                 
Weighted average common shares outstanding – basic and diluted
    9,651       9,499       9,650       8,999  

See accompanying notes to the unaudited condensed consolidated financial statements
 
Page 2

 
MULTIBAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2009 (unaudited)
   
June 30, 2008 (unaudited)
   
June 30, 2009 (unaudited)
   
June 30, 2008 (unaudited)
 
                         
NET INCOME (LOSS)
  $ (7,119 )   $ 56     $ (9,704 )   $ (808 )
                                 
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
                               
Unrealized gains (losses) on securities:
                               
Unrealized holding gains (losses) arising during period
    (38 )     (57 )     (8 )     152  
                                 
COMPREHENSIVE LOSS
  $ (7,157 )   $ (1 )   $ (9,712 )   $ (656 )

See accompanying notes to the unaudited condensed consolidated financial statements
 
Page 3

 
MULTIBAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
ASSETS
(in thousands)

   
June 30, 2009 (unaudited)
   
December 31, 2008 (audited)
 
CURRENT ASSETS
           
Cash and cash equivalents
 
$
5,584
   
$
4,346
 
Securities available for sale
   
38
     
46
 
Accounts receivable, net
   
16,990
     
3,437
 
Other receivable – related party
   
518
     
7,666
 
Inventories
   
14,873
     
1,903
 
Prepaid expenses and other
   
2,585
     
1,273
 
Current portion of notes receivable
   
61
     
61
 
Total Current Assets
   
40,649
     
18,732
 
PROPERTY AND EQUIPMENT, NET
   
8,569
     
2,033
 
OTHER ASSETS
               
Goodwill
   
34,744
     
1,095
 
Intangible assets, net
   
26,694
     
3,668
 
Other receivable – related party – long term
   
2,230
     
-
 
Notes receivable – long-term, net of current portion
   
34
     
39
 
Other assets
   
2,245
     
476
 
Total Other Assets
   
65,947
     
5,278
 
                 
TOTAL ASSETS
 
$
115,165
   
$
26,043
 

See accompanying notes to the unaudited condensed consolidated financial statements
 
Page 4

 
MULTIBAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY
(in thousands, except share and liquidation preference amounts)

   
June 30, 2009 (unaudited)
   
December 31, 2008 (audited)
 
CURRENT LIABILITIES
           
Mandatory redeemable preferred stock, 0 and 15,000 Class F preferred shares
  $ -     $ 150  
Line of credit
    49       -  
Short term debt
    731       -  
Current portion of long-term debt
    236       1,609  
Current portion of capital lease obligations
    580       311  
Accounts payable
    43,994       8,274  
Accrued liabilities
    22,692       4,435  
Deferred service obligations and revenue
    3,557       1,488  
Total Current Liabilities
    71,839       16,267  
LONG-TERM LIABILITIES
               
Long-term debt – related party
    1,500       -  
Long-term debt, net of current portion and original issue discount
    38,465       346  
Capital lease obligations, net of current portion
    610       317  
Total Liabilities
    112,414       16,930  
COMMITMENTS AND CONTINGENCIES
               
STOCKHOLDERS' EQUITY
               
Cumulative convertible preferred stock, no par value:
               
8% Class A (14,171 shares issued and outstanding, $148,796 liquidation preference)
    213       213  
10% Class B (1,970 and 2,570 shares issued and outstanding, $20,685 and $26,985 liquidation preference)
    20       26  
10% Class C (113,480 and 114,080 shares issued and outstanding, $1,134,800 and $1,140,800 liquidation preference)
    1,474       1,482  
10% Class F (150,000 shares issued and outstanding, $1,500,000 liquidation preference)
    1,500       1,500  
8% Class G (11,595 shares issued and outstanding, $115,950 liquidation preference)
    48       48  
6% Class H (2.0 shares issued and outstanding, $200,000 liquidation preference)
    -       -  
Common stock, no par value (9,652,297 and 9,642,374 shares issued and outstanding)
    37,781       37,687  
Stock subscriptions receivable
    (55 )     (84 )
Options and warrants
    46,555       46,038  
Accumulated other comprehensive income – unrealized gain on securities available for sale
    38       46  
Accumulated deficit
    (90,768 )     (81,314 )
Total Stockholders' Equity
    (3,194 )     5,642  
Noncontrolling interest in subsidiaries
    5,945       3,471  
Total Equity
    2,751       9,113  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 115,165     $ 26,043  

See accompanying notes to the unaudited condensed consolidated financial statements
 
Page 5

 
MULTIBAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
   
SIX MONTHS ENDED JUNE 30,
 
   
2009
   
2008
 
   
(unaudited)
   
(unaudited)
 
OPERATING ACTIVITIES
           
Net loss
 
$
(11,482
)
 
$
(396
)
Adjustments to reconcile net loss attributable to Multiband Corporation and subsidiaries to net cash provided from operating activities:
               
Depreciation and amortization
   
5,988
     
1,617
 
Amortization of imputed interest discount
   
35
     
24
 
Amortization of original issue discount related to warrants issued with long term debt
   
9
     
-
 
Amortization of deferred financing costs
   
5
     
 -
 
Loss on sale of property and equipment and intangible assets
   
-
     
59
 
Gain on debt extinguishment
   
-
     
(30
)
Impairment of goodwill, intangibles and property and equipment
   
-
     
65
 
Change in allowance for doubtful accounts on accounts receivable
   
(127
)
   
(15
)
Change in reserve for stock subscriptions and interest receivable
   
29
     
(6
)
Expense related to repricing of warrants
   
30
     
-
 
Stock based compensation expense
   
114
     
362
 
Compensation expense of restricted stock award
   
-
     
24
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(8,727
)
   
(66
Inventories
   
1,160
     
917
 
Prepaid expenses and other
   
344
     
(592
)
Other assets
   
(31
)
   
(4
)
Accounts payable and accrued liabilities
   
9,333
     
(1,766
)
Deferred service obligations and revenue
   
1,981
     
736
 
Net cash flows from (used by) operating activities
   
(1,339
)
   
929
 
INVESTING ACTIVITIES
               
Purchases of property and equipment
   
(1,426
)
   
(66
)
Checks issued in excess of bank balance with the purchase of 80% of outstanding stock of DirecTECH operating entities
   
(369
)
   
-
 
Cash acquired via purchase of NC (formerly Michigan Microtech, Inc. (MMT))
   
-
     
4,044
 
Cash collected on other receivables – related party acquired with the purchase of NC (formerly Michigan Microtech, Inc. (MMT))
   
-
     
2,815
 
Purchase of US Install
   
-
     
(101
Purchases of intangible assets
   
(102
)
   
-
 
Proceeds from sale of property and equipment and intangible assets
   
-
     
6
 
Collections on notes receivable
   
35
     
1
 
Net cash flows from (used in) investing activities
   
(1,862
)
   
6,699
 
FINANCING ACTIVITIES
               
Payments on short-term debt
   
(25
)
   
-
 
Payments on long-term debt
   
(2,580
)
   
(34
)
Payments on capital lease obligations
   
(210
)
   
(112
)
Payments on note payable – related party
   
(1,400
)
   
-
 
Payments for debt issuance costs
   
(144
)
   
-
 
Net advances on line of credit
   
4
     
-
 
Payment on mandatory redeemable preferred stock
   
(150
)
   
(38
)
Payments for stock issuance costs
   
-
     
(25
)
Payments received on stock subscriptions receivable
   
-
     
1
 
Proceeds from note payable – related party
   
2,900
     
-
 
Proceeds from issuance of long-term debt
   
6,100
     
100
 
Redemption of preferred stock
   
(12
)
   
(51
)
Preferred stock dividends
   
(44
)
   
(62
)
Net cash flows from (used in) financing activities
   
4,439
     
(221
)
INCREASE IN CASH AND CASH EQUIVALENTS
   
1,238
     
7,407
 
CASH AND CASH EQUIVALENTS - Beginning of Period
   
4,346
     
944
 
CASH AND CASH EQUIVALENTS - END OF PERIOD
 
$
5,584
   
$
8,351
 

See accompanying notes to the unaudited condensed consolidated financial statements
 
Page 6

 
MULTIBAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
             
   
SIX MONTHS ENDED JUNE 30,
 
   
2009
   
2008
 
   
(unaudited)
   
(unaudited)
 
Cash paid for interest, net of amortization of original issue discount and interest discount
  $ 989     $ 136  
Cash paid for federal and state income taxes
    598       120  
                 
Non-cash investing and financing transactions:
               
Conversion of Class I preferred stock to common stock
    -       3,745  
Conversion of Class G preferred stock to common stock
    -       150  
Conversion of accrued interest into common stock
    2       2  
Conversion of accrued dividends into common stock
    91       175  
Intrinsic value of preferred dividends
    2       70  
Purchase of property and equipment via increase of capital lease obligations
    565       34  
Warrants issued for long-term notes payable
    372       -  
Reduction in notes payable via reduction in other receivables
    76       -  
Purchase of US Installs via increase in accrued expenses
    -       103  
Acquisition of securities available for sale upon expiration of contingent rights
    -       209  
Reduction of stock subscription receivable via cancellation of common stock
    -       61  
Debt and accrued interest paid with issuance of common stock
    -       20  
Purchase of 51% of MMT via issuance of notes payable and common stock, net of discount for imputed interest
    -       5,783  
Increase in short-term debt via offset to accounts payable
    159       -  
Purchase of 80% of outstanding stock of DirecTECH operating entities via issuance of short and long-term notes payable
    38,240       -  
Reduction of notes payable via reduction of related party receivable in connection with the purchase of 80% of outstanding stock of DirecTECH operating entities
    5,844       -  
Reduction of notes payable with issuance notes payable in connection with acquisition
    300       -  
Purchase of 29% of outstanding stock of NC (formerly MMT) via issuance of short and long-term notes payable
    1,660       -  
Purchase of 80% of outstanding stock of DirecTECH operating entities via payment to escrow in 2008
    500       -  

See accompanying notes to the unaudited condensed consolidated financial statements
 
Page 7

 
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(in thousands, except for share amounts)
 
NOTE 1 - Unaudited Consolidated Financial Statements

The information furnished in this report is unaudited and reflects all adjustments which are normal recurring adjustments and, which in the opinion of management, are necessary to fairly present the operating results for the interim periods. The operating results for the interim periods presented are not necessarily indicative of the operating results to be expected for the full fiscal year.  The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, previously filed with the Securities and Exchange Commission.

NOTE 2 - Summary of Significant Accounting Policies

Nature of Business

Multiband Corporation and subsidiaries (the Company) was incorporated in Minnesota in September 1975.  The Company provides voice, data and video services to multi-dwelling unit and single family home customers.  The Company's products and services are sold to customers located throughout the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern that contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  For the six months ended June 30, 2009 and 2008, the Company incurred net losses attributable to Multiband Corporation and subsidiaries of $9,704 and $808, respectively.  At June 30, 2009, the Company had an accumulated deficit of $90,768.  The Company's ability to continue as a going concern is dependent on it maintaining profitability and/or raising additional capital.  Management may sell, if prudent, certain assets on a strategic basis for prices agreeable to the Company and/or obtain additional debt or equity capital to meet all of its existing cash obligations and fund commitments on planned Multiband projects; however, there can be no assurance that the sources will be available or available on terms favorable to the Company.  Management anticipates that the impact of the actions listed below will generate sufficient cash flows to pay current liabilities, long-term debt and capital and operating lease obligations and fund the Company's operations through 2009:

1.
Initiate and grow its Home Service Provider (HSP) business by eliminating competitive HSP providers from certain of its core markets.
2.
Improve gross margin percentages by cycling technicians from training and placing them in a revenue generating role and by mitigating work order breakage expense.
3.
Reduce operating expenses by reducing training costs through the lowering of technician turnover, managing professional fees and other general and administrative expenses.
4.
Evaluate and reduce of excess inventory including such factors as anticipated usage, inventory turnover, inventory levels and product demand levels.
5.
Obtain additional debt financing.
6.
Expansion of call center support with sales of call center services to both existing and future system operators and to buyers of the Company’s video subscribers.
7.
Solicit additional equity investment in the Company by either issuing preferred or common stock.

Principles of Consolidation

The 2008 consolidated financial statements include the accounts of Multiband Corporation (MBCorp) and its wholly owned subsidiaries, Minnesota Digital Universe, Inc. (MDU), Multiband Subscriber Services, Inc. (MBSS), and Multiband USA, Inc. (MBUSA).  In addition, effective March 1, 2008, the Company acquired a 51% interest in Multiband NC, Inc. (NC) (formerly Michigan Microtech, Inc. (MMT)) and have also included NC’s results of operations and cash flow for the four months ended June 30, 2008 in the consolidated financial statements for that period.

In addition, effective January 2, 2009, the Company purchased 80% of the issued and outstanding shares of common stock of all of the DirecTECH Holding Co. (DTHC) operating subsidiaries (DirecTECH) (an additional 29% of Multiband NC, Inc. (NC) (formerly Michigan Microtech, Inc. (MMT)), 51% of which was previously purchased effective March 1, 2008 (see Note 3) and 80% of Multiband NE, Inc. (NE), Multiband SW, Inc. (SW), Multiband EC, Inc. (EC), Multiband MDU, Inc. (MBMDU), Multiband DC, Inc. (DC) and Multiband Security, Inc. (Security) (see Note 3)).  The noncontrolling interest in subsidiaries on the unaudited condensed consolidated balance sheet (formerly Minority Interest) and unaudited condensed consolidated statement of operations represents DTHC’s 20% ownership of Multiband NE, Inc. (NE), Multiband SW, Inc. (SW), Multiband EC, Inc. (EC), Multiband NC, Inc. (NC), Multiband MDU, Inc. (MBMDU), Multiband DC, Inc. (DC) and Multiband Security, Inc. (Security).  The 2009 consolidated financial statements include the accounts of all wholly-owned subsidiaries and the newly acquired companies (DirecTECH).  All significant intercompany transactions and balances have been eliminated in consolidation.
 
Page 8


MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(in thousands, except for share amounts)
 
Revenue Recognition

The Company recognizes revenue in accordance with the Securities Exchange Commission’s Staff Accounting Bulletin No. 104 “Revenue Recognition” (“SAB 104”), which requires that four basic criteria be met before revenue can be recognized: (i) persuasive evidence of a customer arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) product delivery has occurred or services have been rendered.  The Company recognizes revenue as services are performed and completed.

The Company earns HSP segment revenue as follows:

·    
installation and service of DirecTV video programming for residents of single family homes
·    
installation of home security systems and internet services

The Company has a home services provider (HSP) agreement with DirecTV which allows the Company to install and activate DirecTV video programming services for residents of single family homes.  As a DirecTV HSP, the Company earns revenue for installing and servicing DirecTV video customers pursuant to predetermined rates set by DirecTV which may vary from time to time.  Revenue is recognized upon completion of the delivery and installation of equipment.  DirecTV reimburses the Company for substantially all DirecTV equipment used for customer installation related to the HSP segment.

HSP segment installation and services revenues are recognized in the period the related services are provided in accordance with SAB 104.  MDU segment user charges are recognized as revenues in the period the related services are provided in accordance with SAB 104.  Any amounts billed prior to services being provided are reported as deferred service obligations and revenues.

The Company earns MDU segment revenue as follows:

1.    
from voice, video and data communications products which are sold and installed
2.    
direct billing to user charges to multiple dwelling units, through the activation of, enhancement of, and residual fees on video programming services provided to residents of multiple dwelling units

Revenue generated from activation of video programming services is earned in the month of activation.  According to Multiband's Master System Operator agreement with DirecTV, in the event that a customer cancels within the first 12 months of service, DirecTV has the right to chargeback the Company for a portion of the activation fees received.  In accordance with Securities Exchange Commission SAB 104, the Company has estimated the potential charge back of commissions received on activation fees during the past 12 months based on historical percentages of customer cancellations and has included that amount as a reduction of revenue.  Residual income is earned as services are provided by DirecTV through its system operators.  As a master system operator for DirecTV, the Company earns a fixed percentage based on net cash received by DirecTV for recurring monthly services, a variable amount depending on the number of activations in a given month, and a variable amount for coordinating improvements of systems used to deliver enhanced programming services.  The Company’s master system operator contract with DirecTV also permits the Company to earn revenues through its control of other system operators who are unable to provide DirecTV video programming services without the Company’s performance.

The Company reports the aforementioned MDU voice, data, and video revenues on a gross basis based on the following factors: the Company has the primary obligation in the arrangement with its customers; the Company controls the pricing of its services; the Company performs customer service for the agreements; the Company approves customers; and the Company assumes the risk of payment for services provided.
We offer some products and services that are provided by third party vendors.  We review the relationship between us, the vendor and the end customer on an individual basis to assess whether revenue should be reported on a gross or net basis.  As an example, our resold satellite digital television revenue is reported on a net basis.
 
Page 9

 
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(in thousands, except for share amounts)
 
The Company has determined that the accounting policies for revenue recognition described above are in accordance with the Financial Accounting Standards Board Emerging Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”.  EITF No. 99-19 employs multi-factor tests to determine whether amounts charged to customers in respect of certain expenses incurred should be included in revenues or netted against such expenses.

MDU segment revenue generated by the support center to service third party subscribers by providing billing and call center support services is recognized in the period the related services are provided.

Customers contract for both the purchase and installation of voice and data networking technology products and certain video technologies products.  Revenue is recognized when the products are delivered and installed and the customer has accepted and has the ability to fulfill the terms of the contract.

The Company applies Emerging Issues Task Force Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF 06-3”).  EITF 06-3 concluded that the presentation of taxes imposed on revenue-producing transactions (sales, use, value added and excise taxes) on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an accounting policy that should be disclosed.  The Company’s policy is to present taxes imposed on revenue-producing transactions on a net basis.

Deferred Revenue

The Company invoices for certain installation upgrade projects upon order of project equipment.  Revenue is deferred on these projects until the equipment is installed.

Goodwill and Other Intangible Assets

We periodically evaluate goodwill and other intangible and long-lived assets for potential impairment indicators.  Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our business segments.  Future events could cause us to conclude that impairment indicators exist and that goodwill and other intangible and long-lived assets are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.  Goodwill was $34,744 and $1,095 at June 30, 2009 and December 31, 2008, respectively, and is recorded as part of our MDU and HSP segments.  The increase in goodwill during 2009 is due to the purchase of DirecTECH (see Note 3).

Goodwill by business segment consists of the following:
 
   
MBCorp.
 
 
MDU
 
 
HSP
    Total  
Balance, December 31, 2008
  $ -     $ 50     $ 1,045     $ 1,095  
Acquisitions
    -       312       33,337       33,649  
Balance, June 30, 2009
  $ -     $ 362     $ 34,382     $ 34,744  
 
Page 10

 
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(in thousands, except for share amounts)
 
Components of intangible assets are as follows:
   
June 30, 2009
   
December 31, 2008
 
   
Gross 
Carrying
   
Accumulated
   
Gross 
Carrying
   
Accumulated
 
   
Amount
   
Amortization
   
Amount
   
Amortization
 
Intangible assets subject to amortization
                       
Right of entry contracts
  $ 3,137     $ 953     $ 801     $ 526  
Contracts with DirecTV
    36,902       12,392       11,502       8,060  
Customer contracts
    102       102       102       86  
Total
    40,141       13,447       12,405       8,672  
                                 
Impairment of intangibles
    -       -       -       65  
                                 
Total including impairment
  $ 40,141     $ 13,447     $ 12,405     $ 8,737  

Amortization of intangible assets was $2,056 and $666 for the three months ended June 30, 2009 and 2008, respectively.  For the six months ended June 30, 2009 and 2008, amortization of intangible assets was $4,710 and $1,183, respectively.  Estimated amortization expense of intangible assets for the remainder of the year ending December 31, 2009 and for the years ending December 31, 2010, 2011, 2012, 2013, 2014 and thereafter is $3,515, $5,768, $5,147, $5,101, $5,004, $1,756 and $279, respectively.  Right of entry contracts contain $124 of contracts that have not been placed in service, therefore no amortization expense has been recorded.  The weighted average remaining life of the intangibles is 4.69 years with right of entry contracts average life of 5.50 years, contracts with DirecTV of 4.62 years as of June 30, 2009.

Debt Issuance Costs

The Company has incurred $145 of debt issuance costs during the three months ended June 30, 2009.  The Company amortizes the debt issuance costs over 26 to 43 months and includes these costs with other assets on the unaudited condensed consolidated balance sheet.  Amortization of debt issuance costs of $5 and $0 for the three and six months ended June 30, 2009 and 2008, respectively, is included in interest expense. 

Stock-Based Compensation

The Company applies Financial Accounting Standards (SFAS) No. 123R “Share-Based Payment” (“SFAS 123R”), which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. SFAS 123R is being applied on the modified prospective transition method and therefore the Company has not restated results for prior periods. The financial statements for the six months ended June 30, 2009 and 2008 recognize compensation cost for the portion of outstanding awards which have vested during the year.  The Company recognizes stock-based compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. For the three months ended June 30, 2009 and 2008 total share-based compensation expense of $24 ($.00 per share) and $151 ($.02 per share), respectively, was included in selling, general and administrative expenses.  For the six months ended June 30, 2009 and 2008, total share-based compensation expense of $114 ($.01 per share) and $362 ($.04 per share) was included in selling, general and administrative expenses, respectively.  As of June 30, 2009, there was $203 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan.  That cost is expected to be recognized over a weighted-average period of 3.17 years.  This is an estimate based on options currently outstanding and therefore this projected expense could be more in the future.

In determining the compensation cost of the options granted during the three and six months ended June 30, 2009 and 2008, the Company applies the SFAS 123R, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model and the weighted average assumptions used in these calculations are summarized as follows:
 
Three months ended
 
Six months ended
 
June 30, 2009
 
June 30, 2008
 
June 30, 2009
 
June 30, 2008
Risk-free interest rate
1.43%
 
3.27%
 
1.43%
 
3.15%
Expected life of options granted
5.0 Years
 
6.5 Years
 
5.0 Years
 
6.5 Years
Expected volatility range
95%
 
92.9%
 
95%
 
93.3%
Expected dividend yield
0%
 
0%
 
0%
 
0%
 
Page 11

 
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(in thousands, except for share amounts)
 
The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of variables.  These variables include, but are not limited to the Company’s expected stock price volatility, and actual and projected stock option exercise behaviors and forfeitures.  An option's expected term is the estimated period between the grant date and the exercise date of the option.  As the expected-term period increases, the fair value of the option and the compensation cost will also increase.  The expected-term assumption is generally calculated using historical stock option exercise data.  The Company does not have historical exercise data to develop such an assumption.  In cases where companies do not have historical data and where the options meet certain criteria, SEC Staff Accounting Bulletin 107 ("SAB 107") provides the use of a simplified expected-term calculation.  Accordingly, the Company calculated the expected terms using the SAB 107 simplified method.

In January 2009, the Company issued 80 shares of stock options with a Black Scholes valuation of $72 to four directors of the Company.  These seven year stock options were immediately vested and were issued as long-term incentive compensation pursuant to the Company’s 2000 Non-employee Directors Stock Compensation Plan.

In January 2009, the Company issued 214 shares of stock options with a Black Scholes valuation of $193 to two officers of the Company.  These seven year stock options vest over four years and were issued as long-term incentive compensation pursuant to the Company’s 1999 Stock Compensation Plan.

Net Loss per Common Share

Basic net loss per common share is computed by dividing the loss attributable to common stockholders by the weighted average number of common shares outstanding for the reporting period.  Diluted loss per common share is computed by dividing loss attributable to common stockholders by the sum of the weighted average number of common shares outstanding plus all additional common stock that would have been outstanding if potentially dilutive common shares related to common share equivalents (stock options, stock warrants, convertible preferred shares, and issued but not outstanding restricted stock) had been issued.  All options, warrants, convertible preferred shares, and restricted stock outstanding during the three and six months ended June 30, 2009 and 2008 were excluded from the calculation of diluted loss per share as their effects were anti-dilutive due to the Company’s net losses for the periods.

Segment Reporting

A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. Management believes that the Company has  two operating segments, HSP (Home Service Provider), where the Company receives net cash payments for the installation and service of DirecTV video programming for residents of single family homes; and  MDU, where the Company acts as a master service operator for DirecTV, receives net cash payments for managing video subscribers through its network of system operators who are billed by DirecTV and also directly bills voice, data and video subscribers as a principal.  The previously filed Form 10-K business segments disclosed the MCS segment which is now reported within the MDU segment.

Recent Accounting Pronouncements

During May 2009, the FASB issued SFAS No. 165 “Subsequent Events” (“SFAS 165”).  SFAS 165 requires all public entities to evaluate subsequent events through the date that the financial statements are available to be issued and disclose in the notes the date through which the Company has evaluated subsequent events and whether the financial statements were issued or were available to be issued on the disclosed date.  SFAS 165 defines two types of subsequent events, as follows: the first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet and the second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.  SFAS 165 is effective for interim and annual periods ending after June 15, 2009 and must be applied prospectively.  The disclosure of the subsequent events did not have a material effect on the consolidated financial statements.
 
Page 12

 
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(in thousands, except for share amounts)
 
Income Taxes

We account for income taxes under the liability method in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”).  Deferred tax liabilities are recognized for temporary differences that will result in taxable amounts in future years.  Deferred tax assets are recognized for deductible temporary differences and tax operating loss and tax credit carryforwards.  Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled.  We assess the likelihood that our deferred tax assets will be recovered from future taxable income and record a valuation allowance to reduce our deferred tax assets to the amounts we believe to be realizable.  We concluded that a full valuation allowance against our U.S. deferred tax assets was appropriate as of June 30, 2009 and December 31, 2008.

Reclassifications

Certain accounts in the prior quarter’s unaudited condensed consolidated financial statements have been reclassified for comparative purposes to conform to the presentation in the current quarter’s unaudited condensed consolidated financial statements.  The reclass was a change in presentation of minority interest to noncontrolling interest in stockholders’ equity (see Note 4).  These reclassifications had no effect on net loss.

NOTE 3 – Business Acquisitions

Effective January 2, 2009, the Company purchased 80% of the issued and outstanding shares of common stock of all of the DTHC operating subsidiaries (DirecTECH) (an additional 29% of NC (formerly MMT), 51% of which was previously purchased effective March 1, 2008 and 80% of NE, SW, EC, MBMDU, DC and Security.  DTHC, a fulfillment agent for a national satellite television company, DirecTV, specializes in the providing of satellite TV to single family homes.  The purpose of this acquisition was to increase the Company’s business of installing video services in single family homes (HSP segment).  The purchase price totaled $40,400 plus other consideration valued at $1,608 as of the acquisition date.  The $40,400 consists of three parts; 1) $500 in cash which was paid at the initial closing date of January 2, 2009 and in escrow as a deposit at December 31, 2008, 2) a non-interest bearing note of $500 payable without interest as follows: $250 on demand on or after April 1, 2009 and $250 after the Company’s retention of senior financing, as defined, no later than August 31, 2009 and 3) a promissory note in the amount of $39,400, due January 1, 2013, bearing interest at an annual rate of 8.25% (subject to adjustment in the event of a default), plus the remaining $800 note payable from the purchase of 51% of NC.  Subsequent to the closing, the Company and DTHC mutually agreed to offset the $40,200 promissory note by the amount of $5,844, for an offsetting receivable on Multiband’s books as of December 31, 2008.  This reduced the amount of this promissory note to $34,356.  As part of the agreement, Multiband has until December 31, 2009 to purchase the remaining 20% of the issued and outstanding shares of common stock of all DirecTECH.  The consideration for the 20% purchase will be $10,000 of Multiband Series J Preferred Stock, whose issuance will require Multiband shareholder approval. The closing on the remaining 20% stock transaction is anticipated to occur on or before December 31, 2009.

The Company applied SFAS No. 141(R) “Business Combinations” (“SFAS 141(R)”) to evaluate the purchase price allocation based on the fair value of the assets acquired and liabilities assumed.  The Company also applied Staff Position No. FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP FAS 141 (R)-1”) which amends the accounting in FAS 141(R) for assets and liabilities arising from contingencies in a business combination.  FSP FAS 141(R)-1 requires that pre-acquisition contingencies be recognized at fair value, if fair value can be reasonably determined.  If fair value cannot be reasonably determined, FSP FAS 141(R)-1 requires measurement based on the best estimate in accordance with SFAS No. 5, “Accounting for Contingencies.” (“SFAS 5”) FSP FAS 141(R)-1 is effective as of January 1, 2009 in connection with the adoption of FAS 141(R).

The Company applied SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”) for the presentation and accounting for the noncontrolling 20% interest at June 30, 2009.  Multiband had previously gained control of NC with its purchase of 51% of NC in March 2008, SFAS 160 required Multiband to recognize the acquisition of additional 29% ownership interest in NC on January 2, 2009 as an equity transaction.  The purchase price of $1,660 increased the accumulated deficit and the transfer of $2,054 of noncontrolling interest to controlling interest decreased the accumulated deficit.  No increase to goodwill or intangibles was recorded as part of this acquisition.
 
Page 13

 
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(in thousands, except for share amounts)
 
As it relates to the purchase of the remainder of the DTHC operating subsidiaries, SFAS 141(R) required the Company to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with certain exceptions.  It also required the Company to recognize goodwill as of the acquisition date, measured using an income, market or cost approach, which in most types of business combinations will result in measuring goodwill as the excess of the fair value of consideration transferred plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair value of the identifiable net assets acquired or assumed.  A qualitative and quantitative analysis of factors that make up recognized goodwill, such as DirecTECH’s assets, liabilities and other contingent considerations, such as leases and other off-balance sheet commitments, follows.  This analysis is preliminary while the Company is still in its one year measurement period.

A summary of the transaction is as follows:
Cash paid
  $  500  
Short-term debt
    500  
Promissory note
    39,400  
Total consideration
    40,400  
     Less consideration for 29% of NC (recorded separately as an equity transaction)
    (1,660 )
Consideration for 80% of outstanding stock of EC, NE, SW, MBMDU, DC, and Security
  $ 38,740  
         
Assets
  $ 30,802  
Intangible assets
    27,634  
Goodwill
    33,649  
Liabilities
    (47,039 )
Noncontrolling interest
    (6,306 )
    $ 38,740  

The fair value of the intangible assets of $27,634 and noncontrolling interest of $6,306 was obtained by management, using significant level 3 unobservable inputs, as defined in SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) including discount rates of 15%, a terminal value of $28,200, as well as a noncontrolling discount of 30%.

The contingent consideration recorded on the acquisition is related to the acquisition agreement which requires a 20% cash payout on all earnings in 2009 until the remaining 20% of the Company is acquired.  The Company estimated this consideration based on significant level 3 inputs as defined in SFAS 157 and the probability adjusted cash flow.

As part of the acquisition, the Company preliminarily assessed a $5,040 contingent legal accrual related to an existing litigation.  In connection with the purchase of the operating subsidiaries of DTHC, the Company has the right to offset 50% of certain claims against the note to DTHC once those claims are settled and paid. The Company has recorded a receivable of $2,290 which represents an estimate of the amount that can be recovered from DTHC based on the current legal estimate. The receivable is classified as long-term since management intends to offset the receivable with any balance remaining on the note payable to DTHC.  At present, the litigation is proceeding through a discovery stage.  While the parties have made some preliminary attempts to settle the matter there is no guarantee that the matter can be settled out of court.  As a result there is no current timeline under which the amount of the aforementioned accrual can be finalized.  The Company intends to adjust the purchase price allocation should more information become available as to the fair value of the legal contingency during the measurement period.

The Company acquired $25,400 of intangible assets relating to contracts with DirecTV as well as right of entry contracts of $2,234.  At the time of the acquisition, the weighted average remaining life of the intangibles acquired was 2.57 years based on terms without renewals, with right of entry contracts average life of 5.44 years and contracts with DirecTV of 2.33 years.  The weighted average remaining life of the intangibles acquired was 3.49 years assuming one year term renewals, with right of entry contracts average life of 5.44 years and contracts with DirecTV of 3.33 years.  In May 2009, the Company signed a new contract with DirecTV (see Note 10).  The Company capitalizes material costs incurred to renew or extend terms of intangible assets.  No costs have been incurred to renew or extend the terms of intangible assets during the three and six months ended June 30, 2009.  Goodwill and intangible assets acquired are not expected to be deductible for tax purposes
 
Page 14

 
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(in thousands, except for share amounts)
 
The Company’s report on Form 10-K for the year ended December 31, 2008 contained a preliminary estimated fair value of all the aforementioned assets and liabilities related to the purchase.  At the time of the preliminary estimate DirecTech had not completed its audit for the year ended December 31, 2008.  Nor at this time had the Company completed its procedures to value and allocate the final purchase price to intangible and tangible assets acquired in the acquisition.  The Company’s subsequent receipt of final balance sheet information to the aforementioned Form 10-K filing, necessitated a revision of the DirecTech purchase price valuation.  This revision is reflected in this footnote.  The revision consists of reallocations of goodwill and other intangible assets related to the purchase.  More specifically, goodwill assets were increased by $14,400 and intangible assets were decreased by $9,066 from the original estimate, due to the additional purchase of 29% of NC being treated as an equity transaction under SFAS 160 and therefore no additional assets (including goodwill) or liabilities were allocated for NC in the purchase price (see Note 4).  At June 30, 2009, the Company revised the fair value of the contingent consideration from $1,608 to zero.  The Company determined that the significant level 3 inputs previously used to determine the contingent consideration were incomplete.  After further review, the Company determined that it was appropriate to define this change as a measurement period adjustment to the purchase price as a result of improved information regarding circumstances that existed as of the acquisition date.
 
Since the transaction was effective January 2, 2009, there is not a change in the June 30, 2009 balance sheet or income statement for the three and six months ended June 30, 2009.  The unaudited pro forma information for the three and six months ended June 30, 2008 does not purport to represent what the Company’s results of operations would actually have been if such transactions in fact had occurred at such date or to project the Company’s results of future operations.

   
2008
       
   
Consolidated
as reported
   
2008
Pro Forma
 
Three months ended June 30, 2008
           
Revenues
 
$
10,806
   
$
52,833
 
                 
Income from operations
   
965
     
2,576
 
                 
Net income attributable to Multiband Corp and subsidiaries
   
56
     
727
 
Preferred stock dividends
   
103
     
103
 
Income (loss) attributable to common shareholders
 
$
(47
)
 
$
624
 
                 
Income (loss) attributable to common shareholders per common share – basic and diluted
 
$
(0.00
)
 
$
0.07
 
                 
Weighted average shares outstanding – basic and diluted
   
9,499
     
9,499
 
             
             
Six months ended June 30, 2008
           
Revenues
 
$
16,520
   
$
111,741
 
                 
Income (loss) from operations
   
208
     
(4,869
)
                 
Net loss attributable to Multiband Corp and subsidiaries
   
(808
)
   
(6,293
)
Preferred stock dividends
   
3,985
     
3,985
 
Loss attributable to common shareholders
 
$
(4,793
)
 
$
(10,278
)
                 
Loss attributable to common shareholders per common share – basic and diluted
 
$
(0.53
)
 
$
(1.11
)
                 
Weighted average shares outstanding – basic and diluted
   
8,999
     
9,252
 
 
Page 15

 
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(in thousands, except for share amounts)
 
NOTE 4 – Noncontrolling Interest
 
   
June 30,
2009
   
December 31, 2008
 
Equity of noncontrolling interest (previously minority interest) in subsidiaries:
           
             
Noncontrolling interest in subsidiaries, beginning balance
  $ 3,471     $ -  
Purchase of 51% of NC
    -       2,819  
Purchase of 80% of NE, SC, EC, MBMDU, DC & Security
    6,306       -  
Purchase of NC from noncontrolling interest
    (2,054 )     -  
Net income(loss) attributable to the noncontrolling interest in subsidiaries
    (1,778 )     652  
Noncontrolling interest (previously minority interest) in subsidiaries, ending balance
  $ 5,945     $ 3,471  

NOTE 5 – Inventories
             
   
June 30,
2009
   
December 31, 2008
 
Inventories consisted of the following:
           
             
DirecTV – serialized
  $ 6,222     $ 813  
DirecTV – nonserialized
    5,930       670  
Other
    2,721       420  
Total
  $ 14,873     $ 1,903  

The Company’s inventories are segregated into three major categories.  Serialized DirecTV inventories consist primarily of satellite receivers and similar devices.  Non-serialized DirecTV inventories consist primarily of satellite dishes, poles and similar devices which are supplied by DirecTV.  Other inventory consists primarily of cable, switches and various small parts used in the installation of DirecTV satellite dishes.  The large increase in inventory is due to the purchase of DirecTECH (see Note 3).

NOTE 6 – Securities Available for Sale

As of December 31, 2007, Multiband had the voting rights for and was holding in trust 58,161 common shares of URON for various contingent rights holders whose rights were tied to potential future warrant exercises or preferred stock conversions.  Effective January 1, 2008, FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which provides a framework for measuring, reporting and disclosing fair value under generally accepted accounting principles.  SFAS 157 applies to all assets and liabilities that are measured, reported and/or disclosed on a fair value basis.

As defined in SFAS 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  In determining fair value, the Company values and records all investment securities transactions on a trade date basis.  Securities listed on a national or regional securities exchange are valued at their last reported sales price on the last business day of the period.  Securities which are not traded on a major exchange or for which no sale was reported on that date are valued at the average of their last quoted "bid" price and "asked" price.  Short positions are valued at the last quoted "asked" price.  Inputs used in the valuation methods can be either readily observable, market corroborated, or generally unobservable inputs.  Whenever possible the Company attempts to utilize valuation methods that maximize the use of observable inputs and minimizes the use of unobservable inputs.  The Company’s investments in available-for-sale securities was determined based on quoted market prices in active markets for identical assets and liabilities (level 1).  As of February 4, 2008, certain aforementioned contingent rights were not exercised by the various holders; therefore Multiband owns 37,994 shares of URON.  As a result, Multiband recorded the fair value of URON shares based on quoted market prices as an unrealized gain.  URON subsequently changed their name to Western Capital Resources, Inc.  At June 30, 2009 and December 31, 2008 the balance in securities available for sale was $38 and $46, respectively.
 
Page 16

 
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(in thousands, except for share amounts)
 
Securities available for sale consisted of the following:
   
June 30,
2009
   
December 31, 2008
 
Beginning balance
  $ 46     $ -  
Initial investment
    -       122  
Current period unrealized loss
    (8 )     (76 )
Ending balance
  $ 38     $ 46  


Fair value of securities available for sale is as follows:
 
   
Cost
   
Unrealized
Gain(Loss)
   
Fair Value at
Period End
 
June 30, 2009
  $ -     $ 38     $ 38  
December 31, 2008
  $ -     $ 46     $ 46  


NOTE 7 – Notes Payable

On May 26, 2009, the Company paid off its loan from Convergent Capital Partners I, L.P. in the amount of $1,400. On May 27, 2009, the Company entered into a loan agreement with Convergent Capital Partners, II, L.P. for five million dollars. This loan carries an interest rate of fourteen percent and requires monthly interest only payments until December 2012 when the principal is due and payable in full.  In connection with this loan, the Company paid a closing fee to the lender of $100.  The Company also issued the lender 212,574 fully vested five year warrants with an exercise price of $3.  The gross proceeds were allocated between the note and the warrants based on the relative fair value at the time of issuance.  The warrants were valued at $372 using the Black Scholes pricing model, recorded as original issue discount, and amortized as interest expense over the term of the note.  The Company expensed $9 during the three and six months ended June 30, 2009.  In the event the Company wishes to prepay the loan a prepayment penalty will be assessed.  The loan gives the lender a first security position in the Company’s assets.  The loan contains certain covenants with regards to the Company’s capital expenditures and quarterly earnings before interest, taxes, depreciation and amortization which will begin for the period ended September 30, 2009.

NOTE 8 – Accrued Liabilities

Accrued liabilities consisted of the following:
   
June 30,
2009
   
December 31, 2008
 
Payroll and related taxes
  $ 8,442     $ 1,354  
Accrued legal settlements and contingencies
    4,920       960  
Accrued preferred stock dividends
    633       622  
Accrued income taxes
    73       499  
Other
    8,624       1,000  
Total Accrued Liabilities
  $ 22,692     $ 4,435  
 
Page 17

 
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(in thousands, except for share amounts)
 
NOTE 9 - Business Segments

The Company has three reporting segments.  Multiband Corp. segment (MBCorp) includes corporate expenses (e.g. corporate administrative costs), interest income, interest expense, depreciation and amortization.  The MDU segment (MDU, MBSS, MBMDU and MBUSA) represents results as the master service operator for DirecTV and provides voice, data and video services to residential multi-dwelling units as the principal to subscribers.  The HSP segment (NE, SW, EC, NC, DC and Security) provides the installation and service of DirecTV video programming, internet and home security systems for residents of single family homes.  Segment disclosures by entity are provided to the extent practicable under the Company's accounting system.

Segment disclosures are as follows:
   
MBCorp
   
MDU
 
 
HSP
   
Total
 
Three months ended June 30, 2009:
                       
Revenues
  $ -     $ 6,705     $ 60,691     $ 67,396  
Loss from operations
    (1,044 )     (125 )     (6,541 )     (7,710 )
Identifiable assets
    3,837       16,748       94,580       115,165  
Depreciation and amortization
    95       994       1,614       2,703  
Capital expenditures
    65       468       20       553  
 
   
MBCorp
   
MDU
   
HSP
 
 
Total
 
Three months ended June 30, 2008:
                       
Revenues
  $ -     $ 4,201     $ 6,605     $ 10,806  
Income (loss) from operations
    (915 )     651       1,229       965  
Identifiable assets
    3,988       7,353       11,627       22,968  
Depreciation and amortization
    279       592       8       879  
Capital expenditures
    1       23       -       24  
                                 
 
 
   
MBCorp
   
MDU
   
HSP
   
Total
 
Six months ended June 30, 2009:
                       
Revenues
  $ -     $ 12,030     $ 117,524     $ 129,554  
Loss from operations
    (2,021 )     (382 )     (7,490 )     (9,893 )
Identifiable assets
    3,837       16,748       94,580       115,165  
Depreciation and amortization
    178       2,027       3,783       5,988  
Capital expenditures
    146       1,260       20       1,426  
 
   
MBCorp
   
MDU
   
HSP
   
Total
 
Six months ended June 30, 2008:
                       
Revenues
  $ -     $ 7,935     $ 8,585     $ 16,520  
Income (loss) from operations
    (1,743 )     662       1,289       208  
Identifiable assets
    3,988       7,353       11,627       22,968  
Depreciation and amortization
    416       1,190       11       1,617  
Capital expenditures
    22       44       -       66  
 
Page 18

 
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(in thousands, except for share amounts)
 
NOTE 10 – Commitments and Contingencies

Legal proceedings

The Company is subject to claims, regulatory processes and lawsuits that arise in the ordinary course of business.  The Company accrues for such matters when a loss is considered probable and the amount of such loss, or a range of loss, can be reasonably estimated.  The Company has recorded $4,920 of accrued liabilities as of June 30, 2009 for claims and potential settlements associated with existing litigation.  The majority of the accrual relates to claims for back overtime wages alleged in a number of cases filed between 2006 to 2008 entitled Lachiev v. JBM (S.D. Ohio); Davis v. JBM (S.D. Ohio); Gruchy v. DirecTech Northeast (D. Mass); Stephen v. Michigan Microtech (E.D. Mich); and In re DirecTECH Southwest, Inc. (E.D. La).  At present, the Company is vigorously defending those claims.

In connection with the purchase of the operating subsidiaries of DTHC, the Company has the right to offset 50% of certain claims, currently estimated at $4,675, against the note to DTHC once those claims are settled and paid.  The Company has recorded a receivable of $2,230 as of June 30, 2009 which represents an estimate of the amount that potentially be recovered from DTHC.  Defense costs are expensed as incurred.  Additionally, the Company is subject to pending claims, regulatory processes and lawsuits for which losses are not probable and amounts cannot be reasonably estimated.  Those losses could ultimately be material to the Company’s financial position, results of operations and cash flows.

Significant relationship

The Company is a master agent for DirecTV pursuant to a system operator agreement with DirecTV dated August 2005.  Under that agreement the Company is required to ensure that its system operators meet minimum technical DirecTV system standards so that the system operator subscribers may properly receive DirecTV programming services.  The initial term of the agreement is for three years and provides for two additional two-year renewals if the Company has a minimum number of paying video subscribers in its system operator network.  The Company has met the requirements and has entered into the first two year automatic renewal period.

The Company also has a separate home service provider agreement with DirecTV ending May 1, 2013.  The term of this agreement with DirecTV will automatically renew as of May 1, 2013 for additional one year periods unless either the Company or DirecTV gives written notice of termination at least 90 days in advance of expiration of the then current term.  Termination of the Company's DirecTV agreements would have a material adverse impact on the Company's on-going operations.  Revenues generated from DirecTV amounted to 99.2% and 99.2% of total revenue for the three and six months ended June 30, 2009, respectively.  Revenues generated from DirecTV for the three and six months ended June 30, 2008 were 92.2% and 89.8% of total revenue, respectively.  Accounts receivable from this customer was 89.4% and 52.6% of total accounts receivable as of June 30, 2009 and December 31, 2008, respectively.  The Company purchases a substantial portion of its inventory from DirecTV.  DirecTV is the only supplier of the major components (i.e., dishes and receivers) used in HSP segment installations.  The total accounts payable to DirecTV, related to inventory being supplied, was $24,929 and $3,034 at June 30, 2009 and December 31, 2008, respectively.

Gain on extinguishment of debt

In January 2008, the Company negotiated payment of the remaining balance of the note payable to Vern Swedin by issuing 7,500 shares of common stock at $2.60 per share in settlement of this debt resulting in a gain on extinguishment of debt of $30.  This modification was accounted for as a gain on extinguishment of debt in accordance with EITF 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments”.  This amount is included in other income on the consolidated statement of operations for the six months ended June 30, 2008.

Line of credit

The Company has a line of credit agreement with a bank that provides borrowings up to $50, due on demand.  Amounts outstanding under this line of credit carry an interest rate defined as the prime rate plus 3.0% (6.25% as of June 30, 2009). As of June 30, 2009 and December 31, 2008, the amount outstanding was $49 and $0, respectively. This line of credit is guaranteed by a shareholder of the Company.
 
Page 19

 
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(in thousands, except for share amounts)
 
Current portion of long-term debt

At December 31, 2008, the Company was in compliance with all debt covenants of its lender, Convergent Capital.  This loan was paid off May 26, 2009 (see Note 7).  The new loan has debt covenants beginning with the quarter ended September 30, 2009 (see Note 7).

Operating leases – vehicles

The Company leases substantially all of its fleet vehicles under operating leases from one lessor.  Each lease commences upon the in-service date of the vehicle and requires scheduled lease payments to be paid monthly for one year.  After one year, the Company has the option to renew the open ended lease for one year renewal periods or surrender the leased vehicle to the lessor to be sold.  If the net proceeds of such sale exceed the vehicle’s then depreciated value, the lessee receives the benefit of such excess. If there is a deficiency upon such sale, then lessee is required to pay the deficiency as additional rent to lessor.  The Company has entered this agreement jointly and severally with various of its subsidiaries.  For the three months ended June 30, 2009 the Company recognized a loss on the sale of vehicles of $69 and a gain of $7 for the three months ended June 30, 2008.  For the six months ended June 30, 2009 and the four months ended June 30, 2008 the Company recognized a loss on the sale of vehicles of $72 and $2, respectively.  For the three months ended June 30, 2009 and 2008 the Company’s operating lease expense under the lease totaled approximately $1,855 and $280, respectively.  For the six months ended June 30, 2009 and four months ended June 30, 2008, the Company’s operating lease expense under the lease totaled approximately $3,736 and $367, respectively.  In addition, the Company has a security deposit with the lessor in the amount of approximately $1,701 and $257 which is included in other assets in the accompanying balance sheet as of June 30, 2009 and December 31, 2008, respectively.

Guaranty

On March 1, 2006, Corporate Technologies, LLC (CTLLC), a subsidiary of North Central Equity, LLC, the purchaser of the MBS business segment, signed a lease with Lexstar Tower I Limited Partnership whereby CTLLC assumed the lease obligation for substantially all of the first floor space the Company is renting in Fargo, North Dakota for the period beginning March 1, 2006 to February 28, 2011. Pursuant to the aforementioned lease, the Company entered into a guaranty whereby the Company, in the event of a default or early termination of the lease by CTLLC, is obligated to perform CTLLC’s lease obligation during months 43-60 of the lease.  This guaranty has no effect on the Company’s consolidated financial statements for the six months ended June 30, 2009 and 2008. However, should Multiband eventually have to perform on the guaranty in the future, it could be liable for up to $349 in rent payments plus any associated charges such as property taxes and common area maintenance.  The Company has evaluated the accounting guidance of FIN 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees” and has determined that it does not apply to this guaranty.

NOTE 11 – Income Taxes

Due to the Company’s purchase of 80% of the issued and outstanding shares of common stock of all of the DTHC operating subsidiaries (DirecTECH) (an additional 29% of Multiband NC, Inc. (NC) (formerly Michigan Microtech, Inc. (MMT)), 51% of which was previously purchased effective March 1, 2008 and 80% of Multiband NE, Inc. (NE), Multiband SW, Inc. (SW), Multiband EC, Inc. (EC), Multiband MDU, Inc. (MBMDU), Multiband DC, Inc. (DC) and Multiband Security, Inc. (Security) effective January 2, 2009 the Company will file a 2009 consolidated tax return which includes all of the newly acquired subsidiaries.  Therefore, the Company may be able to utilize the tax loss carryforwards of Multiband Corporation if there is not a limitation of the use of the tax loss carryforwards and there is taxable income.  For the three months ended June 30, 2009 and 2008, the Company has recorded income tax expense of $102 and $434, respectively, related to state taxes.  For the six months ended June 30, 2009 and 2008, the Company recorded income tax expense related to state taxes of $202 and $463, respectively.
 
Page 20

 
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(in thousands, except for share amounts)
 
The Company applies FASB Interpretation 48 (FIN 48), “Accounting for Uncertainty in Income Taxes” to address the non-comparability in reporting tax assets and liabilities resulting from a lack of specific guidance in SFAS No. 109  “Accounting for Income Taxes” (“SFAS 109”), on the uncertainty in income taxes recognized in an enterprise’s financial statements.  Specifically, FIN 48 prescribes (a) a consistent recognition threshold and (b) a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides related guidance on derecognition, classification, interest and penalties, accounting interim periods, disclosure and transition.  To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income taxes, such amounts would be accrued and classified as a component of income tax expenses on the consolidated statement of operations.  There was no impact on the consolidated financial statements for the six months ended June 30, 2009 and 2008 related to FIN 48.  The Company’s federal and state tax returns are potentially open to examinations for years 2005-2007.  The Company has no significant unrecognized tax benefits as of June 30, 2009 that would reasonably be expected to affect our effective tax rate during the next twelve months.
 
NOTE 12 – Related Party Transactions

On April 15, 2009, the Company entered into an unsecured short term promissory note in the amount of $1,500 with director Frank Bennett. The note carries an interest rate of 6% with a 1% origination fee totaling $15, and was due May 15, 2009.  On May 4, 2009 the note was extended until June 15, 2009.  On June 15, 2009, the note was extended until June 14, 2011.  The terms of the loans were approved by the disinterested members of the Company’s audit committee.

On May 26, 2009, the Company entered into a separate short-term loan with Mr. Bennett in the amount of $1,400.  This loan was paid in full on May 28, 2009.  The term of the loan was approved by the disinterested members of the Company’s audit committee.

Proceeds for the acquisition of US Install Inc. by the Company completed in February, 2008 were obtained via an unsecured promissory note in the amount of $100 between Multiband and Bas Mattingly Master, LLC, a trust controlled by J. Bas Mattingly, chairman of DTHC, which is a 20% owner of DirecTECH. The note carries an interest rate of 7% per annum and is due August 20, 2009.

The Company has a line of credit agreement with a bank that provides borrowings up to $50 (see Note 9).  This line of credit is guaranteed by J. Bas Mattingly, chairman of DTHC.

NC leases warehouse space from two individuals that have ownership via related trusts in DTHC.  DTHC owns 20% of DirecTECH as a noncontrolling interest shareholder (see Note 3).  Lease payments amount to $9 per month plus expenses, expiring in December 2010.

Multiband and its subsidiaries lease principal offices located at 2000 44th Street SW, Fargo, ND 58013. The Fargo base rate is $14 per month. The Fargo property is owned in part by David Ekman, Chief Information Officer, of the Company.

As of June 30, 2009, Bernard Schafer is a director of both DTHC and Multiband.  DTHC is the minority shareholder of DirecTECH (see Note 3).

Jim Mandel, CEO of Multiband, loaned DTHC $100 in a short-term subordinated note paying simple interest monthly at 10% and is due December 2012.

In 2008, Multiband and DTHC performed certain management and information systems functions for one another pursuant to management consulting and employee leasing agreements.  These agreements terminated concurrent with Multiband’s purchase of the former DTHC operating entities (Note 3).  During the three and six months ended June 30, 2008, the Company has reduced selling, general and administrative expenses $330 and $630 as a reimbursement of direct expenses in relation to these management consulting agreements, respectively.
 
Page 21

 
MULTIBAND CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(in thousands, except for share amounts)
 
Prior to the purchase of DirecTECH on January 2, 2009, Multiband provided support center services to a then DirecTECH MDU (DTMDU), subsidiary of DTHC, currently Multiband MDU, Inc. (MBMDU).  The Company recorded MDU segment revenue of $82 and $139 from DTMDU for the three and six months ended June 30, 2008, respectively.  DTMDU was also one of the system operators in the MDU segment during 2008.  The Company has recorded MDU segment cost of products and services of $652 and $1,022 for the three and six months ended June 30, 2008 related to this system operator, respectively.  The Company had $771 in accounts receivable and $1,127 in accounts payable related to these agreements at December 31, 2008.

Multiband also had receivable balances with various DTHC entities at December 31, 2008 of $7,666.  Of this amount, $5,844 was subsequently offset in the first quarter of 2009 against the purchase price note used to acquire majority ownership of the operating subsidiaries of DTHC (Note 3).

The Company has a note receivable due from a non-affiliated entity that is 50% owned by a shareholder.  The stated value of this note receivable is $17 and $51 at June 30, 2009 and December 31, 2008, respectively.  The note is non-interest bearing and is paid monthly beginning October 31, 2007 through maturity on December 31, 2009.  The Company has discounted this note to its present value using the Company’s effective borrowing rate.  The carrying value of this note receivable was $0 and $34 at June 30, 2009 and December 31, 2008, respectively.  Interest income on this note is immaterial and has not been recognized.

NOTE 13Subsequent Events

In connection with preparation of the condensed consolidated financial statements and in accordance with the recently issued SFAS 165, the Company evaluated subsequent events after the balance sheet date of June 30, 2009 through August 13 , 2009, the date these unaudited consolidated financial statements were issued.

Page 22

 
FORWARD-LOOKING STATEMENTS

From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, product pricing, management for growth, integration of acquisitions, technological developments, new products, and similar matters.  Words such as “anticipates”, “may”, “will”, “should”, “believes”, “estimates”, “expects”, “intends”, “plans”, “predicts”, “will likely result”, “will continue”, or similar expressions identify forward-looking statements.  The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements including those made in this statement. In order to comply with the terms of the Private Securities Litigation Reform Act, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or Company's forward-looking statements.

The risks and uncertainties that may affect the operations, performance, developments and results of the Company's business include the following: national and regional economic conditions; pending and future legislation affecting IT and telecommunications industries; market acceptance of the Company's products and services; the Company's products and services; the Company's continued ability to provide integrated communication solutions for customers in a dynamic industry; the Company’s ability to successfully integrate and operate recently acquired operations, and other competitive factors.

Because these and other factors could affect the Company's operating results, past financial performance should not necessarily be considered as a reliable indicator of future performance and anticipated future period results.

 ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (in thousands)

OUR COMPANY

Multiband Corporation (the Company), is a Minnesota corporation formed in September 1975. The Company has two operating segments: 1) Multi-Dwelling Unit (MDU), which encompasses the subsidiary corporations Multiband Subscriber Services, Inc., Minnesota Digital Universe, Inc.; and Multiband MDU, Inc. (MBMDU), and 2) Home Service Provider (HSP), which encompasses the following subsidiaries of which Multiband owns an 80% interest in: Multiband NE, Inc. (NE), Multiband SW, Inc. (SW), Multiband EC, Inc. (EC), Multiband DC, Inc. (DC) and Multiband Security, Inc. (Security) (see Note 3).

The Company completed an initial public offering in June 1984.  In November 1992, the Company became a non-reporting company under the Securities Exchange Act of 1934.  In July 2000, the Company regained its reporting company status.  In December 2000, the Company stock began trading on the NASDAQ stock exchange under the symbol VICM.  In July 2004, the symbol was changed to MBND concurrent with the Company’s name change from Vicom, Incorporated to Multiband Corporation.

The Company’s website is located at: www.multibandusa.com.

From its inception until December 31, 1998, the Company operated as a telephone interconnect company only. Effective December 31, 1998, the Company acquired the assets of the Midwest region of Enstar Networking Corporation (ENC), a data cabling and networking company. In late 1999, in the context of a forward triangular merger, the Company, to expand its range of computer products and related services, purchased the stock of Ekman, Inc. d/b/a Corporate Technologies, and merged Ekman, Inc. into the newly formed surviving corporation, Corporate Technologies USA, Inc. (MBS).  MBS provided voice, data and video systems and services to business and government.  The MBS business segment was sold effective April 1, 2005.  The Company’s MCS segment (now known as MDU) began in February 2000.  MCS, the Company’s continuing operating division, provides voice, data and video services to multiple dwelling units (MDU), including apartment buildings, condominiums and time share resorts. During 2004, the Company purchased video subscribers in a number of separate transactions, the largest one being Rainbow Satellite Group, LLC. During 2004, the Company also purchased the stock of Minnesota Digital Universe, Inc.,  which made the Company the largest master service operator in MDU’s for DirecTV satellite television in the United States.  At July 31, 2009, the Company had approximately 133,000 owned and managed subscriptions with an additional 52,000 subscriptions supported by the call center.

During 2008, the Company became involved in the business of installing video services in single family homes by acquiring 51% of the outstanding stock of NC (formerly Michigan Microtech, Inc. (MMT a former subsidiary of DTHC)), a fulfillment agent for a national satellite television company, DirecTV, which specializes in the providing of satellite TV to single family homes. This acquisition was followed up by the acquisition of an 80% interest in a group of companies which were the former operating subsidiaries of DTHC, (Multiband NE, Inc. (NE), Multiband SW, Inc. (SW), Multiband EC, Inc. (EC), Multiband DC, Inc. (DC) and Multiband Security, Inc. (Security)).  The Company also purchased an additional 29% ownership interest in Multiband NC, of which it previously owned 51%, effective on January 2, 2009.
 
Page 23

 
The Company’s rationale for acquiring the aforementioned operating subsidiaries is as listed below.

1.  
The operating entities are potentially accretive to our business model as they have the:
a.  
Same line of business (DirecTV)
b.  
Ability to leverage systems and management
c.  
Ability to leverage core competencies in support center, software, and engineering
d.  
Ability to expand geographic presence with ample technician capacity
e.  
Size, scale, and scope of combined business enterprise more in line with growth necessary to support public entity
f.  
Potential for accretive positive cash flow and capacity for net income.
2.  
Also, new business opportunities may be integrated into an existing installation process which touches over 5,000 homes per day.  Multiband Enterprise Manager software application is capable of modification to support “bundled billing” attribute resulting from new sales opportunity.
3.  
Furthermore, the transaction produced a strong barrier to entry to other potential competitors which creates potential for longevity and exclusivity.
4.  
Other reasons for the acquisition included:
a.  
Strong financial performance by DirecTV which provides security and continued growth potential for Multiband.
b.  
Strong DirecTV balance sheet and liquidity which provides comfort for continued, successful operations.
c.  
Multiband’s public company reporting status provides an excellent platform to support and motivate new human resource asset.
d.  
Multiband’s management is, we believe, capable of “rightsizing” operating expense structure of DTHC operating entities to provide increased cash flow and earning potential over a short period of time; and