Attached files
file | filename |
---|---|
EX-10.31 - AMENDED CONVERTIBLE NOTE - AccessKey IP, Inc. | accesskey_10q-ex1031.htm |
EX-32.1 - CERTIFICATION - AccessKey IP, Inc. | accesskey_10q-ex3201.htm |
EX-10.32 - COMMON STOCK PURCHASE WARRANT - AccessKey IP, Inc. | accesskey_10q-ex1032.htm |
EX-31.1 - CERTIFICATION - AccessKey IP, Inc. | accesskey_10q-ex3101.htm |
EX-10.37 - FORBEARANCE AGREEMENT - AccessKey IP, Inc. | accesskey_10q-ex1037.htm |
EX-10.33 - FORBEARANCE AGREEMENT - AccessKey IP, Inc. | accesskey_10q-ex1033.htm |
EX-10.36 - SUPERSEDING NOTE - AccessKey IP, Inc. | accesskey_10q-ex1036.htm |
EX-31.2 - CERTIFICATION - AccessKey IP, Inc. | accesskey_10q-ex3102.htm |
EX-10.35 - SUPERSEDING SECURED NOTE BETWEEN MICRO PIPE FUND I, LLC AND ACCESSKEY IP, INC. - AccessKey IP, Inc. | accesskey_10q-ex1035.htm |
EX-10.34 - SUPERSEDING SECURED NOTE BETWEEN MICRO PIPE FUND I, LLC AND TEKNOCREATIONS, INC. - AccessKey IP, Inc. | accesskey_10q-ex1034.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
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: 0-053664
ACCESSKEY IP,
INC.
(Exact
name of registrant as specified in its charter)
Nevada | 41-1735422 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification Number) |
8100 M4 Wyoming Blvd. NE | 87113 |
(Address of principal executive offices) | (Zip Code) |
(310)
734-4254
(Registrant's
telephone number, including area code)
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. x Yes o 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 month (or for such shorter period that the registrant was
required to submit and post such files). o Yes o 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 o | Accelerated filer o |
Non-accelerated filer o (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). o Yes x No
At
November 9, 2009, 402,988,888 shares of the registrant's common stock (par value
$0.001 per share) were outstanding.
TABLE OF
CONTENTS
Page | ||
PART I – FINANCIAL INFORMATION | 3 | |
ITEM 1. | Financial Statements for the quarter and nine months ended September 30, 2009 | 3 |
ITEM 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 31 |
ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk | 41 |
ITEM 4. | Controls and Procedures | 41 |
ITEM 4T. | Controls and Procedures | 41 |
PART II – OTHER INFORMATION | 42 | |
ITEM 1. | Legal Proceedings | 42 |
ITEM 1A. | Risk Factors | 42 |
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 42 |
ITEM 3. | Defaults upon Senior Securities | 42 |
ITEM 4. | Submission of Matters to a Vote of Security Holders | 43 |
ITEM 5. | Other Information | 43 |
ITEM 6. | Exhibits | 44 |
2
ACCESSKEY
IP, INC. AND SUBSIDIARY
PART I. -
FINANCIAL INFORMATION
ITEM 1 -
FINANCIAL STATEMENTS FOR QUARTER AND NINE MONTHS ENDED SEPTEMBER 30,
2009
AccessKey
IP, Inc. and subsidiary
|
||||||||
Consolidated
balance sheets
|
||||||||
(unaudited)
|
||||||||
ASSETS
|
December
31,
|
September
30,
|
||||||
2008
|
2009
|
|||||||
Current
assets
|
||||||||
Cash
|
$ | 227,683 | $ | 41,685 | ||||
Accounts
receivable
|
1,010,173 | 161,464 | ||||||
Inventory
|
26,994 | 401,552 | ||||||
Notes
receivable (net of reserve of $32,000 and $42,000) (Note
15)
|
10,000 | - | ||||||
Interest
receivable (net of reserve of none and $6,942)
|
3,281 | - | ||||||
Prepaid
expenses
|
- | 5,000 | ||||||
Deposits
|
60,000 | - | ||||||
Total
current assets
|
1,338,131 | 609,701 | ||||||
Property
and equipment (net of accumulated depreciation of none)
|
- | 7,500 | ||||||
TOTAL
ASSETS
|
$ | 1,338,131 | $ | 617,201 | ||||
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
December
31,
|
September
30,
|
||||||
2008 | 2009 | |||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$ | 58,639 | $ | 76,552 | ||||
Accrued
liabilities (Note 4)
|
907,976 | 2,527,679 | ||||||
Accrued
liabilities to Officers (Note 4)
|
110,000 | 13,584 | ||||||
Notes
payable, net of unamortized discount of none and $210,411 (Note
11)
|
241,294 | 5,112,496 | ||||||
Note
payable to officer
|
- | 32,000 | ||||||
Prepaid
research and development (Note 12)
|
916,290 | - | ||||||
Total
current liabilities
|
2,234,199 | 7,762,311 | ||||||
Notes
payable (Note 11)
|
4,595,523 | - | ||||||
Derivative
liability
|
633,456 | 1,027,396 | ||||||
5,228,979 | 1,027,396 | |||||||
Total
liabilities
|
7,463,178 | 8,789,707 | ||||||
Stockholders'
deficit
|
||||||||
Preferred
stock, Series A, par value of $0.001 per share, preferred
liquidation value of $10.00 per share, 1,500,000 shares authorized and
1,231,341 shares outstanding as of December 31, 2008, and as of September
30, 2009 total liquidation preference of
$12,313,410
|
1,231 | 1,231 | ||||||
Preferred
stock, Series B, par value of $0.001 per share, no preferred
liquidation value, 1,200,000 authorized, no shares outstanding as of
December 31, 2008 and 1,200,000 shares outstanding as of September 30,
2009
|
- | 1,200 | ||||||
Common
stock, par value $0.001 per share, 1,500,000,000 shares authorized
and 366,776,388 shares issued and outstanding as of December 31, 2008 and
372,988,888 issued and outstanding as of September 30,
2009
|
366,776 | 372,989 | ||||||
Paid-in
capital
|
7,021,567 | 8,230,653 | ||||||
Accumulated
deficit
|
(13,514,621 | ) | (16,778,579 | ) | ||||
Total
stockholders' deficit
|
(6,125,047 | ) | (8,172,506 | ) | ||||
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$ | 1,338,131 | $ | 617,201 |
See notes
to interim unaudited consolidated financial statements
3
AccessKey
IP, Inc. and subsidiary
|
||||||||
Statements
of Operations
|
||||||||
(unaudited)
|
Quarter
ended
|
|||||||
September
30,
|
||||||||
2008
|
2009
|
|||||||
Service
revenue
|
$ | - | $ | - | ||||
Product
sales
|
174,790 | 151,488 | ||||||
Total
revenues
|
174,790 | 151,488 | ||||||
Cost
of sales
|
148,367 | 218,268 | ||||||
Gross
profit
|
26,423 | (66,780 | ) | |||||
Selling,
general and administrative
|
223,799 | 1,416,283 | ||||||
Research
& development costs
|
- | - | ||||||
Bad
debt expense
|
- | 1,257 | ||||||
Total
operating expenses
|
223,799 | 1,417,540 | ||||||
Operating
income (loss)
|
(197,376 | ) | (1,484,320 | ) | ||||
Interest
expense
|
(414,405 | ) | (1,025,771 | ) | ||||
Interest
income
|
- | 1,257 | ||||||
Debt
forgiveness income
|
93,076 | - | ||||||
Income
(loss) due to change in derivative liability
|
423,195 | 529,940 | ||||||
Net
income (loss) before income taxes
|
(95,510 | ) | (1,978,894 | ) | ||||
Provision
for income taxes
|
- | - | ||||||
Net
income (loss)
|
$ | (95,510 | ) | $ | (1,978,894 | ) | ||
Basic net income (loss) per share | nil | $ | (0.01 | ) | ||||
Fully
diluted net income per share
|
nil | $ | (0.01 | ) | ||||
Weighted
average number of common shares
|
361,109,721 | 365,590,555 | ||||||
Fully
diluted weighted average number of common shares
|
361,109,721 | 365,590,555 |
See notes
to interim unaudited consolidated financial statements
4
AccessKey
IP, Inc. and subsidiary
|
||||||||
Statements
of Operations
|
||||||||
(unaudited)
|
Nine
months ended
|
|||||||
September
30,
|
||||||||
2008
|
2009
|
|||||||
Service
revenue
|
$ | - | $ | 910,650 | ||||
Product
sales (net of returns of none and $433,933)
|
184,790 | 32,180 | ||||||
Total
revenues
|
184,790 | 942,830 | ||||||
Cost
of sales (net of returns of none and $271,876)
|
148,924 | 155,917 | ||||||
Gross
profit
|
35,866 | 786,913 | ||||||
Selling,
general and administrative
|
588,412 | 2,001,436 | ||||||
Research
& development costs
|
13,625 | 6,000 | ||||||
Bad
debt expense
|
- | 16,942 | ||||||
Total
operating expenses
|
602,037 | 2,024,428 | ||||||
Operating
income (loss)
|
(566,171 | ) | (1,237,515 | ) | ||||
Interest
expense
|
(1,209,978 | ) | (2,686,393 | ) | ||||
Interest
income
|
- | 3,858 | ||||||
Debt
forgiveness income
|
401,519 | - | ||||||
Income
due to change in derivative liability
|
973,759 | 656,092 | ||||||
Net
income (loss) before income taxes
|
(400,871 | ) | (3,263,958 | ) | ||||
Provision
for income taxes
|
- | (0 | ) | |||||
Net
income (loss)
|
$ | (400,871 | ) | $ | (3,263,958 | ) | ||
Basic
net income (loss) per share
|
nil | $ | (0.01 | ) | ||||
Fully
diluted net income per share
|
nil | $ | (0.01 | ) | ||||
Weighted
average number of common shares
|
354,191,872 | 364,242,222 | ||||||
Fully
diluted weighted average number of common shares
|
354,191,872 | 364,242,222 |
See notes
to interim unaudited consolidated financial statements
5
AccessKey
IP, Inc. and subsidiary
|
Statement
of Cash Flows
|
(unaudited)
|
For
the nine months ended
September
30,
|
||||||||
2008
|
2009
|
|||||||
Cash
flow from operating activities
|
||||||||
Net
income (loss)
|
$ | (400,871 | ) | $ | (3,263,958 | ) | ||
Expenses
paid with common stock
|
282,520 | 74,374 | ||||||
Expenses
paid with preferred stock
|
- | 1,100,000 | ||||||
Expenses
paid with options
|
- | 9,623 | ||||||
Change
in derivative liabilities
|
(973,759 | ) | (656,092 | ) | ||||
Non-cash
interest expense and financing costs
|
646,718 | 1,029,338 | ||||||
(Increase)
decrease in accounts receivable
|
(98,142 | ) | 848,708 | |||||
(Decrease)
increase in bad debt allowance
|
- | 10,000 | ||||||
(Decrease)
increase in interest receivable reserve allowance
|
- | 6,942 | ||||||
(Increase)
decrease in interest receivable
|
- | (3,661 | ) | |||||
(Increase)
decrease in prepaid expenses
|
(5,000 | ) | ||||||
(Increase)
decrease in deposits
|
- | 60,000 | ||||||
(Decrease)
increase in accounts payable
|
(515,494 | ) | 17,913 | |||||
(Decrease)
increase in accrued expenses
|
187,496 | 1,655,703 | ||||||
(Decrease)
increase in amounts accrued to related parties
|
- | (96,416 | ) | |||||
(Decrease)
increase in deferred revenue
|
876,340 | (916,290 | ) | |||||
(Increase)
decrease in inventory
|
(481,430 | ) | (374,558 | ) | ||||
Net
cash provided by (used in) operating activities
|
(476,622 | ) | (503,374 | ) | ||||
Cash
flow from investing activities
|
||||||||
Note
receivable from officer
|
- | (10,000 | ) | |||||
Note
receivable
|
(42,000 | ) | - | |||||
Payments
received on note receivable from officer
|
- | 10,000 | ||||||
Net
cash provided by (used in) investing activities
|
(42,000 | ) | - | |||||
Cash
flow from financing activities
|
||||||||
Repurchase
of common stock
|
- | (22,500 | ) | |||||
Loans
from officers
|
- | 56,000 | ||||||
Repayments
of officer loans
|
- | (24,000 | ) | |||||
Proceeds
from loans
|
1,317,567 | 840,000 | ||||||
Payments
on loans
|
(645,000 | ) | (532,124 | ) | ||||
Net
cash provided by financing activities
|
672,567 | 317,376 | ||||||
Net
cash increase (decrease)
|
153,945 | (185,998 | ) | |||||
Cash
at beginning of year
|
22,015 | 227,683 | ||||||
Cash
at end of period
|
$ | 175,960 | $ | 41,685 | ||||
Supplemental
information
|
||||||||
Cash
paid for taxes
|
$ | - | $ | - | ||||
Cash
paid for interest expense
|
$ | - | $ | 2,400 | ||||
Preferred stock issued for accrued bonuses to officers | $ | - | $ | 36,000 |
See notes
to interim unaudited consolidated financial statements
6
ACCESSKEY
IP, INC. AND SUBSIDIARY
NOTES TO INTERIM UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -
NATURE OF BUSINESS
AccessKey
IP, Inc., a Nevada corporation (the “Company” or “AccessKey”), is a public
company trading under the symbol “AKYI” on the Pink Sheets. AccessKey
is a technology company that has developed proprietary encryption technology
which has applications for the Internet Protocol Television (“IPTV”)
industry. Through its wholly-owned subsidiary, TeknoCreations, Inc.,
it has also developed inductive chargers for in-home play station gaming devices
and cases with built in lithium ion batteries for portable gaming
devices.
AccessKey
was incorporated under the name of Tollycraft Yacht Corporation in December of
1996. The Company changed its name to Childguard Corporation in
January of 2002 and then amended its articles of incorporation to change its
name to EWAN 1, Inc. on April 9, 2002. The Company changed its name
to Advanced Technetix, Inc. in September 2006 and began focusing its efforts on
its existing technology. In March 2007, the Company changed its name
to AccessKey IP, Inc., a name that more accurately reflects the Company’s
advanced security encryption technology.
Through
its wholly-owned subsidiary, TeknoCreations, Inc., the Company has developed the
InCharge inductive charger and the Tekcase. The InCharge system
enables users of Nintendo Wii, Sony PlayStation 3 or Microsoft Xbox 360 to
rapidly recharge their gaming handsets through the InCharge charging
base. The Company began sales of this product in July
2008. The Tekcase has currently been developed for use with the
Nintendo DS Lite and DSi. It is available in a plastic and leather
case to protect the product and has a built in lithium ion battery which offers
the user twice the playing time between charges.
NOTE 2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(GAAP).
Principles
of Consolidation and Presentation: The accompanying consolidated financial
statements include the accounts of AccessKey IP, Inc. and its subsidiary,
TeknoCreations, Inc. (“Tekno”), after elimination of all intercompany accounts
and transactions.
Use of
estimates: The preparation of the accompanying consolidated financial statements
in conformity with accounting principles generally accepted in the United States
requires management to make certain estimates and assumptions that directly
affect the results of reported assets, liabilities, revenue, and expenses.
Actual results may differ from these estimates.
Revenue
Recognition: The Company recognizes revenue when persuasive evidence
of an arrangement exists, delivery has occurred or services have been rendered,
the fee is fixed or determinable and collectability is probable. Our InCharge
and Tekcase units are sold FOB from our shipping point. We recognize
the revenues from these sales upon shipping them. They do not include
any maintenance or service contracts; therefore none of the revenues from these
sales are deferred. The contract with CSI Digital was recognized as
income under AICPA Statement of Position 97-2 (“SOP 97-2”), ASC Topic
985. Paragraph 12 of SOP 97-2 requires that revenue from the entire
arrangement be initially deferred and recognized upon product
delivery. The Company delivered the product under this
agreement in the quarter ended June 30, 2009 and included all previously
deferred revenues as income in the nine months ended September 30,
2009.
Tekno
sales have provisions for estimated product returns and allowances based on the
Company’s historical experience. This reserve allowance is currently at two
percent of gross sales. After we received a high volume of sales
returns in June 2009, we reviewed this reserve allowance for
adequacy. After this review, we determined that the returns in the
quarter ended June 30, 2009 were due to extraneous circumstances that should not
be indicative of future returns. Tekno sales are recorded upon the
shipment of product after the receipt of purchase orders. Customers
are billed at net 45 days of billing.
Cash
Equivalents: For purposes of the statements of cash flows, AccessKey considers
all highly liquid debt instruments with an original maturity of three months or
less to be cash equivalents.
Fair
Value of Financial Instruments: AccessKey’s financial instruments consist
principally of cash, accounts receivable, inventories, accounts payable and
borrowings. AccessKey believes the financial instruments' recorded values
approximate current values because of their nature and respective durations. The
fair value of embedded conversion options and stock warrants are based on a
Black-Scholes fair value calculation. The fair value of convertible notes
payable has been discounted to the extent that the fair value of the embedded
conversion option feature exceeds the face value of the note. This discount is
being amortized over the term of the convertible note.
7
Notes
Receivable: AccessKey has issued three notes receivable to
one third party. As of September 30, 2009 all of those notes
were past due and a reserve allowance for the entire amount of $42,000 has been
booked. We have accrued interest income on the notes of $6,942 since the notes
were made. We have also reserved against all of this accrued interest
receivable. See Note 7.
Inventories: AccessKey
carries its inventories at cost, inclusive of freight and sales
taxes.
Property
and Equipment: The Company began work on a demonstration model of its set top
box in the quarter ended September 30, 2009. The costs to date have
been capitalized as depreciable equipment, but it has yet to be placed in
service. Upon completion we will depreciate the cost of this unit
over a 5 year period.
CONVERTIBLE
NOTES PAYABLE AND DERIVATIVE LIABILITIES: AccessKey accounts for convertible
notes payable and warrants in accordance with Statement of Financial Accounting
Standards (SFAS) No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES," ASC Topic 815. This standard requires the conversion feature of
convertible debt be separated from the host contract and presented as a
derivative instrument if certain conditions are met. Emerging Issue Task Force
(EITF) 00-19, "ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO AND
POTENTIALLY SETTLED IN A COMPANY'S OWN STOCK" and EITF 05-2, "THE MEANING OF
"CONVENTIONAL CONVERTIBLE DEBT INSTRUMENT" IN ISSUE NO. 00-19" were also
analyzed to determine whether the debt instrument is to be considered a
conventional convertible debt instrument or classified in stockholders'
equity.
Certain
convertible notes payable issued by AccessKey were evaluated and determined not
conventional convertible and, therefore, because of certain terms and provisions
the embedded conversion option was bifurcated and has been accounted for as a
derivative liability instrument. The accounting guidance also requires that the
conversion feature be recorded at fair value for each reporting period with
changes in fair value recorded in the consolidated statements of
operations. Several convertible notes payable were renegotiated into
non-convertible notes payable in 2008 and 2009 at which time the derivative
liability associated with these notes was reduced to zero.
A
Black-Scholes valuation calculation was applied to the conversion features of
convertible debentures at issuance dates and again as of the end of each
quarter. The issuance date valuation was used for the effective debt discount
that these instruments represent. The debt discount was amortized over the life
of the debts using the effective interest method. The September 30, 2008,
December 31, 2008 and September 30, 2009 valuation was used to record the fair
value of these instruments at the end of the reporting period with any
difference from prior period calculations reflected in the consolidated
statement of operations.
Similarly,
certain warrants issued by AccessKey were determined to meet the criteria for
liability treatment under EITF 00-19. These warrants were initially
valued using a Black-Scholes valuation calculation on the dates of
issuance. They were again valued at September 30, 2008, December 31,
2008 and September 30, 2009. These latter valuations were used to
record the fair value of these instruments at the end of the reporting period
with any difference from prior period calculations reflected in the consolidated
statement of operations.
Stock
Options: AccessKey follows the guidance of Statement of Financial
Accounting Standards (SFAS) No. 123R, "SHARE-BASED PAYMENT," ASC Topic 718, for
treatment of its stock options. The Company issued stock options in
November of 2008 and did not properly reserve shares to cover the exercise of
the options. As a result, the Company did not have the ability to
settle with shares and accounted for these options as a
liability. These options issued by AccessKey were initially valued
using a Black-Scholes valuation calculation on the dates of
issuance. This amount was deducted as compensation
expense. They were again valued at December 31, 2008 and September
30, 2009. These valuations were used to record the fair value of
these instruments at the end of the reporting period with any difference from
prior period calculations reflected in the consolidated statement of
operations. Despite increasing its number of authorized shares from
400 million to 1.5 billion, the Company has continued to treat the value of
these options as a liability. The Company issued 1 million new
options on September 29, 2009 to a consultant. The Company has
reserved adequate shares to settle these options in shares and has expensed the
value of these options in the quarter ended September 30, 2009.
Common
Stock: On September 25, 2009, AccessKey increased the number of
authorized $0.001 par value common stock shares from 400,000,000 to
1,500,000,000.
8
Preferred
Stock: AccessKey has authorized 5,000,000 shares of preferred
stock. On June 21, 2002, the Company designated 1,500,000 of these
shares as Series A Preferred Stock. The Series A stock is entitled to
common stock dividends. The preferred stock does not have any
conversion rights into common stock. AccessKey has the right but not
the obligation to redeem each share of Series A stock at a price of $10.00 per
share. In the event of voluntary or involuntary liquidation,
dissolution, or winding up of the corporation, each share of Series A shall be
entitled to receive from the assets of the Company $10.00 per share, which shall
be paid or set apart before the payment or distribution of any assets of the
corporation to the holders of the Common Stock or any other equity securities of
the Company. Holders of the preferred stock are not entitled to vote
on all matters with the holders of the Common Stock. On September 21,
2009, the Company designated 1,200,000 of these shares as Series B Convertible
Preferred Stock. Each share of Series B stock can convert into one
(1) share of common stock; provided however, that no conversion shall be
permitted unless (i) the Corporation's common stock is quoted for public trading
in the United States or other international securities market and (ii) the
Corporation's market capitalization (i.e., the number of issued and outstanding
shares of common stock multiplied by the daily closing price) has exceeded Ten
Million Dollars ($10,000,000) for 90 consecutive trading days. Each
outstanding share of Series B Convertible Preferred Stock has six hundred twenty
five (625) votes on all matters submitted to the stockholders of the Corporation
and votes with the common stock on all matters. The Series B voting
separately as a class has the right to elect three persons to serve on the
Corporation’s board of directors. The shares of Series B Convertible
Preferred Stock (i) do not have a liquidation preference; (ii) do not accrue,
earn, or participate in any dividends; and (iii) are not subject to redemption
by the Corporation. As of September 30, 2009, the four holders of the Series B
shares held majority voting control of the Company.
Research
and Development: AccessKey incurred expenditures for research and
development of $13,625 in the nine months ended September 30, 2008 and $6,000 in
the nine months ended September 30, 2009. These costs were
incurred in finalizing the Company’s AccessKey IPTV technology.
Income
Taxes: Income tax expense is based on pretax financial accounting
income. Deferred tax assets and liabilities are recognized for the
expected tax consequences of temporary differences between the tax bases of
assets and liabilities and their reported amounts.
Net
Income (Loss) Per Share: Basic net loss per share for the quarter and nine
months ended September 30, 2009 includes no dilution and is computed by dividing
net loss available to common stockholders by the weighted average number of
common stock outstanding for the period. Diluted net loss per share does not
differ from basic net loss per share since potential shares of common stock are
anti-dilutive. Potential shares consist of outstanding warrants, stock options
and convertible debt.
Recently
Issued Accounting Pronouncements:
In June
2009 the FASB established the Accounting Standards Codification ("Codification"
or "ASC") as the source of authoritative accounting principles recognized by the
FASB to be applied by nongovernmental entities in the preparation of financial
statements in accordance with generally accepted accounting principles in the
United States ("GAAP"). Rules and interpretive releases of the Securities and
Exchange Commission ("SEC") issued under authority of federal securities laws
are also sources of GAAP for SEC registrants. Existing GAAP was not intended to
be changed as a result of the Codification, and accordingly the change did not
impact our financial statements. The ASC does change the way the guidance is
organized and presented.
Statement
of Financial Accounting Standards ("SFAS") SFAS No. 165 (ASC Topic 855),
"Subsequent Events", SFAS No. 166 (ASC Topic 810), "Accounting for Transfers of
Financial Assets-an Amendment of FASB Statement No. 140", SFAS No. 167 (ASC
Topic 810), "Amendments to FASB Interpretation No. 46(R)", and SFAS No. 168 (ASC
Topic 105), "The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles-a replacement of FASB Statement No.
162" were recently issued. SFAS No. 165, 166, 167, and 168 have no current
applicability to the Company or their effect on the financial statements would
not have been significant.
Accounting
Standards Update ("ASU") ASU No. 2009-05 (ASC Topic 820), which amends Fair
Value Measurements and Disclosures - Overall, ASU No. 2009-13 (ASC Topic 605),
Multiple-Deliverable Revenue Arrangements, ASU No. 2009-14 (ASC Topic 985),
Certain Revenue Arrangements that include Software Elements, and various other
ASU's No. 2009-2 through ASU No. 2009-15 which contain technical corrections to
existing guidance or affect guidance to specialized industries or entities were
recently issued. These updates have no current applicability to the Company or
their effect on the financial statements would not have been
significant.
NOTE 3 -
GOING CONCERN
The
Company's consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and liabilities and
commitments in the normal course of business. In the near term, the Company
expects funds generated from operations to cover its operating
expenses. The Company can give no assurance that it will be capable
of sustaining profitable operations. However, the Company has
incurred a substantial amount of debt, most of which is currently in
default. As of September 30, 2009, the Company is in default on total
notes due and payable of $3,931,860 plus accrued interest of
$1,375,359. The Company can give no assurance that it will be capable
of paying these notes. In addition to the defaulted notes, the
Company has additional notes in the amount of $1,391,047 due within the next
twelve months.
9
The
Company has successfully brought its Tekcases to market and began selling them
in May 2009. It also is actively involved in bringing its TeknoVault
product to market. It anticipates these new products increasing its
revenues to alleviate its working capital deficit. Further, it is
actively seeking additional capital. The Company cannot provide any
assurances that either increased revenues or new financings will occur or will
raise necessary capital to support its operations over the next twelve
months.
The
Company incurred a loss of $3,263,958 for the nine months ended September 30,
2009. It reported a net loss of $400,871 in the nine months ended
September 30, 2008. As of September 30, 2009, the Company had an
accumulated deficit of $16,778,579.
NOTE 4 -
ACCRUED EXPENSES
Accrued
expenses at September 30, 2009 consist of:
As
of September 30,
|
|||||
2009
|
|||||
Accrued
interest expense
|
$ | 1,629,519 | |||
Accrued
judgment payable
|
160,995 | ||||
Accrued
payroll tax liabilities
|
734,420 | ||||
Other
accrued expenses
|
2,745 | ||||
Accrued
liabilities (third parties)
|
2,527,679 | ||||
Accrued
interest payable to officers
|
584 | ||||
Accrued
bonuses to officers
|
13,000 | ||||
Accrued
liabilities to officers
|
13,584 | ||||
Total
accrued liabilities
|
$ | 2,541,263 |
NOTE 5 -
INCOME TAXES
The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 Accounting for Income Taxes [SFAS No. 109], ASC
Topic 740. SFAS No. 109 requires the Company to provide a net deferred tax
asset or liability equal to the expected future tax benefit or expense of
temporary reporting differences between book and tax accounting and any
available operating loss or tax credit carryforwards. At December 31, 2008 and
September 30, 2009, respectively, the total of all deferred tax assets was
approximately $59,226 and $26,164 and the total of the deferred tax liabilities
was none for both periods. The amount of and ultimate realization of the
benefits from the deferred tax assets for income tax purposes is dependent, in
part, upon the tax laws in effect, the Company's future earnings, and other
future events, the effects of which cannot be determined.
The
Company did not record a provision for income tax for the quarters ended
September 30, 2008 or September 30, 2009.
The
Company adopted the provisions of FASB Interpretation No. 48, ASC Topic 740,
Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a
result of the implementation of Interpretation 48, the Company recognized
approximately no increase in the liability for unrecognized tax
benefits.
The
Company has no tax positions at September 30, 2009 for which the ultimate
deductibility is highly certain but for which there is uncertainty about the
timing of such deductibility.
The
Company recognizes interest accrued related to unrecognized tax benefits in
interest expense and penalties in operating expenses. During the
quarters ended September 30, 2008 and 2009, the Company recognized no interest
and penalties. The Company had no accruals for interest and penalties
at September 30, 2009.
The tax
adjustments reconciling book income to tax income (prior to any net operating
loss deductions) is as follows:
Quarter
ended September 30,
|
||||||||
2008
|
2009
|
|||||||
Book
income (loss)
|
$ | (95,510 | ) | $ | (1,978,894 | ) | ||
Temporary
differences:
|
||||||||
Allowance
for bad debts
|
- | 1,257 | ||||||
Accrued
expenses to officers
|
- | (22,416 | ) | |||||
Permanent
differences:
|
||||||||
Finance
costs booked as interest expense on convertible debts
|
251,590 | 613,830 | ||||||
(Income)
loss due to change in derivative liability
|
(423,195 | ) | (529,940 | ) | ||||
Taxable
income (loss) before net operating loss deduction
|
$ | (267,115 | ) | $ | (1,916,163 | ) |
10
Nine
Months ended September 30,
|
||||||||
2008
|
2009
|
|||||||
Book
income (loss)
|
$ | (400,871 | ) | $ | (3,282,959 | ) | ||
Temporary
differences:
|
||||||||
Allowance
for bad debts
|
- | 16,942 | ||||||
Accrued
expenses to officers
|
- | (13,584 | ) | |||||
Permanent
differences:
|
||||||||
Finance
costs booked as interest expense on convertible debts
|
646,718 | 1,029,338 | ||||||
(Income)
loss due to change in derivative liability
|
(973,759 | ) | (656,092 | ) | ||||
Taxable
income (loss) before net operating loss deduction
|
$ | (727,912 | ) | $ | (2,906,355 | ) |
A
reconciliation of income tax expense from continuing operations at the federal
statutory rate to income tax expense at the company's effective rate is as
follows as of September 30:
2008
|
2009
|
|||||||||
Computed
tax at the expected statutory rate
|
0.00 | % | 0.00 | % | ||||||
State
and local income taxes, net of federal benefit
|
0.00 | % | 0.00 | % | ||||||
Other
Items
|
0.00 | % | 0.00 | % | ||||||
Income
tax expense
|
0.00 | % | 0.00 | % |
The
components of income tax expense (benefit) from continuing operations for the
nine months ended September 30, 2008 and 2009 were (based on a federal tax rate
of 34% and a state tax rate of 7.6%):
Nine
Months ended September 30,
|
||||||||
2008
|
2009
|
|||||||
Current
income tax expense (benefit):
|
||||||||
Federal
|
- | - | ||||||
State
|
- | - | ||||||
Current
tax expense (benefit)
|
- | - | ||||||
Deferred
tax expense (benefit) arising from:
|
||||||||
Net
operating loss carryforwards
|
(2,531,448 | ) | (4,574,431 | ) | ||||
Allowance
for bad debt
|
- | (20,360 | ) | |||||
Accrued
expenses to officers
|
- | (5,651 | ) | |||||
Allowance
for returns
|
- | (154 | ) | |||||
Valuation
allowance due to uncertainty of future income
|
2,531,448 | 4,600,597 | ||||||
Net
deferred tax expense (benefit)
|
- | - |
11
As of
September 30, 2009, the Company has net operating loss carryforwards,
approximately, of $9.8 million to reduce future federal and state taxable
income. To the extent not utilized, the carryforwards will begin to
expire through 2028. The Company's ability to utilize its net
operating loss carryforwards is uncertain and thus the Company has not booked a
deferred tax asset, since future profits are indeterminable. A
valuation allowance as per FAS 109 paragraph 17(e), ASC Topic 740, has been
established to reduce the deferred tax asset to zero.
NOTE 6 -
NET INCOME (LOSS) PER SHARE
The
following table sets forth the computation of basic and diluted net income
(loss) per share:
For
the quarter ended September 30,
|
|||||||||
2008
|
2009
|
||||||||
Net
income (loss)
|
$ | (95,510 | ) | $ | (1,978,894 | ) | |||
Basic net income (loss) per share | nil | $ | (0.01 | ) | |||||
Fully diluted net income (loss) per share | nil | $ | (0.01 | ) | |||||
Weighted
average number of common shares
|
361,109,721 | 365,590,555 | |||||||
Fully
diluted weighted average number of common shares
|
361,109,721 | 365,590,555 | |||||||
For
the nine months ended September 30,
|
|||||||||
2008 | 2009 | ||||||||
Net
income (loss)
|
$ | (400,871 | ) | $ | (3,263,958 | ) | |||
Basic
net income (loss) per share
|
nil
|
$ | (0.01 | ) | |||||
Fully
diluted net income (loss) per share
|
nil
|
$ | (0.01 | ) | |||||
Weighted
average number of common shares
|
354,191,872 | 364,242,222 | |||||||
Fully
diluted weighted average number of common shares
|
354,191,872 | 364,242,222 |
As the
Company incurred net losses for the quarter and nine months ended September 30,
2008 and 2009, it has excluded from the calculation of diluted net loss per
share approximately 232 million shares and 130 million shares, respectively.
These shares assume that all convertible notes could be converted at the market
price as of September 30, 2008 and 2009, respectively. Included
in the fully diluted weighted average number of common shares for the quarter
ended September 30, 2009 are outstanding warrants and options as well as the
amount of shares that all remaining convertible notes could be converted into at
the market price as of September 30, 2009. As of September 30, 2009,
the Company has one note that is partially convertible at the option of the
holder. The remaining debt obligations of the Company are convertible
at the sole option of the Company.
12
NOTE 7 - RELATED PARTY TRANSACTIONS
On
November 30, 2008, the Company entered into a Note with The Stealth Fund, LLLP.
("The Stealth Fund"). The principal balance of the note was
$1,441,613. This note superseded two notes with total principal
balances of $1,373,180 that were entered into earlier in 2008. The
Company’s Chief Executive Officer, George Stevens, is an investment advisor with
The Stealth Fund. See Note 11 for additional information about this
note. In the quarter ended June 30, 2009, the Company made a $6,000
payment on this note.
As of
September 30, 2009, the Company had accrued and unpaid bonuses to its officers
in the total amount of $13,000.
From
April through July of 2008, the Company made three loans that totaled $42,000 to
Hot Web, Inc. During this time period, the Company’s Chief Executive
Officer and Chairman, George Stevens, was also the CEO and Chairman of Hot Web,
Inc. As of September 30, 2009, all of these loans were in default and
the Company has set up a reserve against them. As of August 2008, Mr.
Stevens is no longer affiliated with Hot Web.
In
February 2009, the Company entered into a note agreement with George Stevens in
the amount of $30,000. The note bore an interest rate of 18% per
annum. The Company immediately applied a $20,000 bonus payable due to
Mr. Stevens that was accrued in 2008 against this note, leaving a net balance of
$10,000. Mr. Stevens made a payment against the note in March
2009 and paid the remaining balance of $9,747 in April 2009.
On July
1, 2009, the Company entered into a consulting agreement with Grant Stevens, the
son of the Company’s CEO. The contract calls for Grant Stevens to act
as sales manager for the Company at a fee of $4,000 per month. He was
also issued 500,000 shares of the Company’s restricted common stock (valued at
$6,000) under the terms of the agreement. This contract can be
cancelled by either party with 30 days notice.
In July
2009, George Stevens loaned the Company $24,000. This note was
unsecured and bore a flat interest rate of 10%. The Company paid the
loan back in full along with interest of $2,400 in September 2009.
In August
2009, Mark Kasok loaned the Company $32,000. This note is unsecured
and bears an interest rate of 12%. As of September 30, 2009, the
Company has accrued interest of $584 on this note.
On
September 21, 2009, George Stevens, Bruce Palmer, Craig Erickson and Mark Kasok
(all officers of the Company and/or its wholly-owned subsidiary) were each
issued 300,000 shares of Series B Convertible Preferred Stock at a value of
$284,000 each. The value was arrived at by taking the total market
capitalization of the Company on the date of issuance (approximately $4.4m)
and assuming the value of voting control of the Company to be equal
to approximately 25% of this value, or $1.1m. The Company intends on having
a third party appraisal on these shares prior to the end of the year. This
appraisal will likely result in an adjustment to this value. The
voting rights of these preferred shares were equal to 625 votes per share, or a
total of 750,000,000 votes. This action gave the four officers
majority voting control of the Company.
13
NOTE 8 -
SEGMENT INFORMATION
SFAS No.
131 "Disclosures about Segments of an Enterprise and Related Information," ASC
Topic 280, requires that a publicly traded company must disclose information
about its operating segments when it presents a complete set of financial
statements. The Company has two segments, the parent company (AccessKeyIP, Inc.)
and TeknoCreations, Inc., a wholly-owned subsidiary. The balance
sheet and statement of operations for each segment (and the total consolidated
amounts) are shown below:
AccessKey
IP, Inc. and subsidiary
|
||||||||||||
Segment-by-segment
balance sheets
|
||||||||||||
Tekno-
|
Consolidated
|
|||||||||||
ASSETS
|
AccessKey
|
Creations
|
September 30, 2009
|
|||||||||
Current
assets
|
||||||||||||
Cash
|
$ | 5,458 | $ | 36,227 | $ | 41,685 | ||||||
Accounts
receivable
|
88,000 | 73,464 | 161,464 | |||||||||
Inventory
|
- | 401,552 | 401,552 | |||||||||
Notes
receivable (net of reserve)
|
- | - | ||||||||||
Interest
receivable
|
- | - | ||||||||||
Prepaid
expenses
|
5,000 | 5,000 | ||||||||||
Deposits
|
- | - | - | |||||||||
Total
current assets
|
98,458 | 511,243 | 609,701 | |||||||||
Property
and equipment
|
7,500 | - | 7,500 | |||||||||
TOTAL
ASSETS
|
$ | 105,958 | $ | 511,243 | $ | 617,201 | ||||||
LIABILITIES AND STOCKHOLDERS'
DEFICIT
|
||||||||||||
Current
liabilities
|
||||||||||||
Accounts
payable
|
$ | 40,740 | $ | 35,812 | $ | 76,552 | ||||||
Accrued
liabilities
|
2,523,680 | 17,583 | 2,541,263 | |||||||||
Notes
payable, net of unamortized discount
|
4,841,866 | 270,630 | 5,112,496 | |||||||||
Note
payable to officer
|
- | 32,000 | 32,000 | |||||||||
Total
current liabilities
|
7,406,286 | 356,025 | 7,762,311 | |||||||||
Intercompany
balance
|
(1,358,925 | ) | 1,358,925 | - | ||||||||
Derivative
liability
|
1,027,396 | - | 1,027,396 | |||||||||
Stockholders'
deficit
|
||||||||||||
Series
A preferred stock
|
1,231 | - | 1,231 | |||||||||
Series
B convertible preferred stock
|
1,200 | 1,200 | ||||||||||
Common
stock
|
372,989 | - | 372,989 | |||||||||
Paid-in
capital
|
8,230,653 | - | 8,230,653 | |||||||||
Accumulated
deficit
|
(15,574,872 | ) | (1,203,707 | ) | (16,778,579 | ) | ||||||
Total
stockholders' deficit
|
(6,968,799 | ) | (1,203,707 | ) | (8,172,506 | ) | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$ | 105,958 | $ | 511,243 | $ | 617,201 |
14
AccessKey
IP, Inc. and subsidiary
|
|||||||||
Segment-by-Segment
Statements of Operations
|
Quarter ended September 30, 2008 |
September
30,
2008
|
Quarter
ended September 30, 2009
|
September
30, 2009
|
|||||||||||||||||||||
AccessKey
|
TeknoCreations
|
Consolidated
|
AccessKey
|
TeknoCreations
|
Consolidated
|
|||||||||||||||||||
Service
Revenues
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Product
sales
|
- | 174,790 | 174,790 | - | 151,488 | 151,488 | ||||||||||||||||||
Total
revenues
|
- | 174,790 | 174,790 | - | 151,488 | 151,488 | ||||||||||||||||||
Cost
of sales
|
- | 148,367 | 148,367 | - | 218,268 | 218,268 | ||||||||||||||||||
Gross
profit
|
- | 26,423 | 26,423 | - | (66,780 | ) | (66,780 | ) | ||||||||||||||||
Selling,
general and administrative
|
63,323 | 160,476 | 223,799 | 1,217,606 | 198,677 | 1,416,283 | ||||||||||||||||||
Bad
debt expense
|
- | - | - | 1,257 | - | 1,257 | ||||||||||||||||||
Total
expenses
|
63,323 | 160,476 | 223,799 | 1,218,863 | 198,677 | 1,417,540 | ||||||||||||||||||
Operating
loss
|
(63,323 | ) | (134,053 | ) | (197,376 | ) | (1,218,863 | ) | (265,457 | ) | (384,320 | ) | ||||||||||||
Interest
expense
|
(323,910 | ) | (90,495 | ) | (414,405 | ) | (984,090 | ) | (41,681 | ) | (1,025,771 | ) | ||||||||||||
Interest
income
|
- | - | - | 1,257 | - | 1,257 | ||||||||||||||||||
Debt
forgiveness income
|
93,076 | - | 93,076 | - | - | - | ||||||||||||||||||
Income
(loss) due to change in derivative liability
|
345,669 | 77,526 | 423,195 | 314,767 | 215,173 | 529,940 | ||||||||||||||||||
Net
income (loss) before income taxes
|
51,512 | (147,022 | ) | (95,510 | ) | (1,886,929 | ) | (91,965 | ) | (1,978,894 | ) | |||||||||||||
Provision
for income taxes
|
- | - | - | - | - | - | ||||||||||||||||||
Net
income (loss)
|
$ | 51,512 | $ | (147,022 | ) | $ | (95,510 | ) | $ | (1,886,929 | ) | $ | (91,965 | ) | $ | (1,978,894 | ) |
15
AccessKey
IP, Inc. and subsidiary
|
||||||||
Segment-by-Segment
Statements of Operations
|
Nine
months ended September 30, 2008
|
September
30,
2008
|
Nine
months ended September 30, 2009
|
September
30, 2009
|
|||||||||||||||||||||
AccessKey
|
TeknoCreations
|
Consolidated
|
AccessKey
|
TeknoCreations
|
Consolidated
|
|||||||||||||||||||
Service
Revenues
|
$ | - | $ | - | $ | - | $ | 910,650 | $ | - | $ | 910,650 | ||||||||||||
Product
sales (net of returns of none and $433,933)
|
- | 184,790 | 184,790 | - | 32,180 | 32,180 | ||||||||||||||||||
Total
revenues
|
- | 184,790 | 184,790 | 910,650 | 32,180 | 942,830 | ||||||||||||||||||
Cost
of sales (net of returns of none and $271,876)
|
- | 148,924 | 148,924 | - | 155,917 | 155,917 | ||||||||||||||||||
Gross
profit
|
- | 35,866 | 35,866 | 910,650 | (123,737 | ) | 786,913 | |||||||||||||||||
Selling,
general and administrative
|
186,161 | 402,251 | 588,412 | 1,408,666 | 592,820 | 2,001,486 | ||||||||||||||||||
Research
& development costs
|
13,000 | 625 | 13,625 | 6,000 | - | 6,000 | ||||||||||||||||||
Bad
debt expense
|
- | - | - | 16,942 | - | 16,942 | ||||||||||||||||||
Total
expenses
|
199,161 | 402,876 | 602,037 | 1,431,608 | 592,820 | 2,024,428 | ||||||||||||||||||
Operating
income (loss)
|
(199,161 | ) | (367,010 | ) | (566,171 | ) | 579,042 | (716,557 | ) | (137,515 | ) | |||||||||||||
Interest
expense
|
(978,373 | ) | (231,605 | ) | (1,209,978 | ) | (2,626,349 | ) | (60,044 | ) | (2,686,393 | ) | ||||||||||||
Interest
income
|
- | - | - | 3,858 | - | 3,858 | ||||||||||||||||||
Debt
forgiveness income
|
401,519 | - | 401,519 | - | - | - | ||||||||||||||||||
Income
(loss) due to change in derivative liability
|
858,614 | 115,145 | 973,759 | 389,478 | 266,614 | 656,092 | ||||||||||||||||||
Net
income (loss) before income taxes
|
82,599 | (483,470 | ) | (400,871 | ) | (2,753,791 | ) | (509,987 | ) | (3,263,958 | ) | |||||||||||||
Provision
for income taxes
|
- | - | - | - | - | - | ||||||||||||||||||
Net
income (loss)
|
$ | 82,599 | $ | (483,470 | ) | $ | (400,871 | ) | $ | (2,753,791 | ) | $ | (509,987 | ) | $ | (3,263,958 | ) |
16
NOTE 9 - LEASE OBLIGATION
The
Company is not currently obligated under any lease agreement. The
corporate officers use their personal office space to conduct the business of
the Company.
The total
rent expense for the quarters and nine months ended September 30, 2008 and 2009
was none.
NOTE 10 -
GUARANTEES
The
Company from time to time enters into certain types of contracts that
contingently require the Company to indemnify parties against third-party
claims. These contracts primarily relate to: (i) divestiture agreements, under
which the Company may provide customary indemnifications to purchasers of the
Company's businesses or assets; and (ii) certain agreements with the Company's
officers, directors and employees, under which the Company may be required to
indemnify such persons for liabilities arising out of their employment
relationship.
The terms
of such obligations vary. Generally, a maximum obligation is not explicitly
stated. Because the obligated amounts of these types of agreements often are not
explicitly stated, the overall maximum amount of the obligation cannot be
reasonably estimated. Historically, the Company has not been obligated to make
significant payments for these obligations, and no liabilities have been
recorded for these obligations on its balance sheet as of September 30,
2009.
NOTE 11 -
NOTES PAYABLE AND DERIVATIVE LIABILITIES
The
following are descriptions of our various notes payable. Some of the
notes described below have been superseded by new notes which are also
described. As of September 30, 2009, the following notes payable are
outstanding:
Amount
|
Due Date
|
|||||
The
Nutmeg Group, L.L.C.
|
$ | 44,781 |
In
default
|
|||
Nutmeg
MiniFund II, LLLP
|
4,997 |
In
default
|
||||
Nutmeg
Lightning Fund, LLLP
|
48,320 |
In
default
|
||||
Nutmeg
October 2005, LLLP
|
114,770 |
In
default
|
||||
Nutmeg/Michael
Fund, LLLP
|
227,376 |
In
default
|
||||
Nutmeg/Fortuna
Fund LLLP
|
589,808 |
In
default
|
||||
Nutmeg/Patriot
Fund, LLLP
|
722,950 |
In
default
|
||||
Nutmeg/Mercury
Fund, LLLP
|
1,050,553 |
In
default
|
||||
Nutmeg
MiniFund, LLLP
|
120,612 |
In
default
|
||||
The
Stealth Fund, LLLP
|
1,007,693 |
In
default
|
||||
Physicians
Healthcare Management Group, Inc.
|
715,015 |
January
28, 2010
|
||||
Altholtz
Irrevocable Trust
|
200,000 |
January
15, 2010
|
||||
Micro
Pipe Fund I, LLC
|
205,402 |
September
1, 2010
|
||||
Micro
Pipe Fund I, LLC (note with subsidiary)
|
270,630 |
September
1, 2010
|
||||
Total
principal balance of notes outstanding
|
$ | 5,322,907 |
10%
$250,000 Convertible Note – Superseded by an 18% $270,630 Note (not
convertible)
On
October 29, 2007, the Company’s wholly-owned subsidiary, TeknoCreations, Inc.,
entered into a Secured Convertible Note (the "Note") with Micro Pipe Fund I,
LLC. The principal balance of the note was $250,000 and it bore an
interest rate of 10% per annum and had a maturity date of October 29,
2008. The note is an obligation of the Company's subsidiary but the
Company has informally agreed to allow conversion into its common stock. The
Company assumes no obligation to repay this debt. Payments under the Note were
to commence in February 2008, with monthly payments of interest and 1/12 of
outstanding principal. The Company was in default under this original
note and entered into a Superseding Secured Note with a principal balance of
$270,630 with an interest rate of 18% per annum and a maturity date of September
1, 2010. Under the terms of the new note, TeknoCreations signed a new
Pledge and Security Agreement on all of its assets to the lender.
17
The
original $250,000 convertible note granted the holder the right to convert all
amounts owed under the note into common shares of the Company. As such, the
Company accounted for the conversion option in the debenture as a derivative
liability in accordance with ASC Topic 815, SFAS 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES," EITF 00-19, "ACCOUNTING FOR DERIVATIVE
FINANCIAL INSTRUMENTS INDEXED TO AND POTENTIALLY SETTLED IN A COMPANY'S OWN
STOCK" and EITF No. 05-2, "THE MEANING OF "CONVENTIONAL CONVERTIBLE DEBT
INSTRUMENT" IN ISSUE NO. 00-19." The Company attributed beneficial conversion
features to the convertible debt using the Black-Scholes Option Pricing Model.
The fair value of the conversion feature was included as a discount to debt on
the Company’s balance sheet up to the proceeds received, with any excess charged
to interest and financing expense. The discount was amortized over the life of
each debenture using the interest method. The valuation was
made upon the date of issuance of the original note and each quarter thereafter
with the change in value being recorded as additional expense (in the case of an
increase in the valuation of the conversion feature) or as income (in the case
of a decrease in the value). Upon entering into the Superseding
Secured Note, the balance of the valuation of the conversion feature ($215,173)
was recognized as income.
The
following tables describe the valuation of the conversion feature of the
original note:
Approximate
risk free rate upon issuance
|
4.16%
|
|
Average
expected life
|
1
year
|
|
Dividend
yield
|
0%
|
|
Volatility
|
158%
|
|
Estimated
fair value of conversion feature on date of note
|
$
358,518
|
|
Estimated
fair value of conversion feature as of December 31, 2008
|
$
266,614
|
|
Estimated
fair value of conversion feature as of June 30, 2009 (amount recognized as
income in the quarter ended September 30, 2009
|
$
215,173
|
The
Company recorded the fair value of the conversion feature as a discount to the
convertible debt in the accompanying balance sheet up to the proceeds received,
with the excess of $108,518 charged to interest expense. The Company reported
income of $215,173 in other income for the change in value in the quarter ended
September 30, 2009 when this note was superseded by a non-convertible note
($266,614 in income was recorded in the nine months ended September 30, 2009 due
to the changes in valuation and superseding of this note). The value of the
derivative liability as of September 30, 2009 was none.
$1,441,613
Note Dated November 30, 2008
On
November 30, 2008, the Company entered into a Note (the "Note") with The Stealth
Fund, LLLP. The principal balance of the note was
$1,441,612.52. This note superseded two notes with total principal
balances of $1,373,180 that were entered earlier in 2008. The
Company’s Chief Executive Officer, George Stevens, is an investment advisor with
The Stealth Fund.
The note
calls for interest to be measured as a function of the common stock price of the
Company. Interest is to be paid quarterly calculated as
follows: Subject to certain ceilings in the amounts (creating the
Maximum Interest, as set forth below), the amount of interest payable under the
Note will approximate the amount of profit that the Holder would have made with
a stock investment of a like amount, instead of the purchase of this Note.
Specifically, the parties have made the assumption that the Note Amount would
have acquired a specified number of shares the “Applicable Shares”, which term
shall mean, at any time, the principal balance of the Note, divided by $0.0075.
In other words, the Note Amount, divided by $0.0075 results in the beginning
number of Applicable Shares, upon which the calculation of theoretical profit is
made. The amount of interest payable to the Holder is a function of stock price
increases, if any, times this number of Applicable Shares, subject to the
Maximum Interest and the Minimum Interest, as set forth below. If the share
price doubles, then the Holder should double its money, earning, as interest, an
amount equal to the stock price increase on the Applicable Shares, in addition
to being repaid the amount of the Note. Significantly, as the price goes up, the
value of this Note increases accordingly. However, the number of shares for the
Company to repurchase the Note, remains constant, equal to the Applicable
Shares, which, if paid in stock, at the election of the Company, would be at a
25% discount. The following formula creates that result. The outstanding
principal balance of this Note shall bear interest, payable quarterly, in an
amount equal to the product (X) of the following formula: X= (Y-Y1) x (Z). Y is
the greater of (a) the closing bid price of the Company’s common stock on the
Interest Date or (b) the average closing bid price for Common Stock on the five
trading days immediately prior to the Interest Date; Y1 is the pricing used for
the preceding Interest Date or other applicable prior pricing Interest Date and
Z is the number of Applicable Shares. For purposes of the first Interest Date
computation, $0.0075 shall be used as the Y1. Until there is any payment of
Principal on the Note, Z, the number of Applicable Shares, shall be 117,231,940.
Other than for the first Interest Date computation, Y1 shall never be less than
the Y1 for any preceding Interest Date computation (no double benefit for price
increases, followed by a price decrease followed by another price increase). For
purposes of this computation, pricing shall be as reported on pinksheets.com on
such dates (or other analogous reporting source agreed upon by both parties if
pinksheets.com is no longer reporting the Company’s common stock price).
Notwithstanding the preceding, the Interest for any quarter shall not be less
than 2½% (the “Minimum Interest”) of the Principal balance at the beginning of
the quarter. Notwithstanding the preceding, Y shall not be greater than 125% of
the Y1 (the “Maximum Interest”).
18
As a
result of the above interest calculations, the Company could be obligated to pay
a maximum interest rate of 25% per quarter, and at no times shall pay less than
2.5% per quarter. For the year ended December 31, 2008, the Company
accrued interest expense of 2.5% per quarter on this Note. The total
accrued interest on this Note on 12/31/08 was $72,081. Under the
terms of the Note, this amount is added to the principal of the note as of
December 31, 2008. The adjusted principal balance of this note with
The Stealth Fund as of December 31, 2008 was $1,513,693. The Company
made a $500,000 payment against this note in the quarter ended March 31, 2009,
so the adjusted balance as of March 31, 2009 was $1,013,693.
Under the
terms of the note agreement, the maximum interest rate applied on this note with
The Stealth Fund for the quarter ended March 31, 2009. The Company
accrued $185,475 in interest on this note for the quarter ended March 31,
2009. As a result of not paying this interest amount, which was due
in April of 2009, the Company defaulted on the note and is now subject to a
minimum interest rate of 18% under the terms of the note. The Company
accrued interest at this rate for the quarter ended September 30, 2009 which was
equal to $45,616 for the quarter (the Company’s stock price did not rise in the
current quarter, so the note was not subject to the aforementioned interest
calculations).
$157,663
Note Dated August 22, 2008 – Superseded by a $205,402 Note Dated September 1,
2009
On August
22, 2008, the Company entered into a Note (the "Note") with Micro Pipe Fund I,
LLC. ("Micro Pipe"). The principal balance of the note was
$157,662.83. This note was superseded by a $205,402 note dated September
1, 2009. The revised note balance reflected the original note balance
plus accrued interest. The August 22, 2008 note called for interest
calculations identical to the $1,441,613 note above. The superseding
note has a one year term with an annual interest rate of 18%. The
Company has the right, but not the obligation, to settle this note through the
issuance of common stock. The price of such conversion (which can be
made any time after March 1, 2010) shall be the lesser of $0.007 and 70% of the
average closing bid price on the five trading days immediately prior to
conversion.
Warrants
to Micropipe
On
November 12, 2008, the Company issued warrants to purchase 20 million shares of
common stock to MicroPipe. The warrants have a strike price of $0.01
per share and can be exercised through November 12, 2013. The
warrants were issued in lieu of interest payments.
The
following tables describe the valuation of the warrants:
Approximate
risk free rate upon issuance
|
3.75%
|
|
Average
expected life
|
5.0
years
|
|
Dividend
yield
|
0%
|
|
Volatility
|
204%
|
|
Estimated
fair value of conversion feature on date of warrants
|
$
195,895
|
|
Estimated
fair value of conversion feature as of September 30, 2009
|
$
185,029
|
The
Company recorded the value of the warrants as interest expense. The Company
reported an expense of $3,206 for the change in value in the quarter ended
September 30, 2009 (net expense of $8,944 was recorded in the nine months ended
September 30, 2009 due to the change in value). The value of the derivative
liability as of September 30, 2009 was $185,029.
Note
Restructurings
The
following 7 notes were restructured into 9 new note agreements on December 23,
2008:
Date
of Original Note
|
Note
Holder
|
Original
Note Amount
|
|||||
September
5, 2006
|
The
Nutmeg Group
|
$
|
1,637,000.00
|
||||
September
14, 2007
|
Nutmeg/Mercury
Fund
|
585,607.88
|
|||||
September
14, 2007
|
The
Nutmeg Group
|
103,962.37
|
|||||
November
5, 2007
|
Philly
Financial
|
175,292.72
|
|||||
November
5, 2007
|
Sam
Wayne
|
136,438.08
|
|||||
November
27, 2007
|
Financial
Alchemy
|
5,934.72
|
|||||
November
27, 2007
|
The
Nutmeg Group
|
25,200.00
|
|||||
Total
Principal
|
$
|
2,669,435.77
|
19
The new
notes, all dated December 23, 2008, were entered into with the following
entities:
New
Note Holders
|
New
Note Balance
|
||||
The
Nutmeg Group, L.L.C.
|
$
|
42,648.90
|
|||
Nutmeg
MiniFund II, LLLP
|
4,758.82
|
||||
Nutmeg
Lightning Fund, LLLP
|
46,019.00
|
||||
Nutmeg
October 2005, LLLP
|
109,304.96
|
||||
Nutmeg/Michael
Fund, LLLP
|
216,548.19
|
||||
Nutmeg/Fortuna
Fund LLLP
|
561,721.98
|
||||
Nutmeg/Patriot
Fund, LLLP
|
688,523.65
|
||||
Nutmeg/Mercury
Fund, LLLP
|
1,000,526.57
|
||||
Nutmeg
MiniFund, LLLP
|
114,868.96
|
||||
Total
New Principal on December 22, 2008
|
$
|
2,784,921.03
|
The new
notes superseded the original notes.
The terms
of all nine new notes are identical (hereinafter referred to as the “New
Notes”).
The New
Notes call for interest to be measured as a function of the common stock price
of the Company. Interest is to be paid quarterly calculated as
follows: Subject to certain ceilings in the amounts (creating the
Maximum Interest, as set forth below), the amount of interest payable under the
New Notes will approximate the amount of profit that the Holder would have made
with a stock investment of a like amount, instead of the purchase of this Note.
Specifically, the parties have made the assumption that the Note Amount would
have acquired a specified number of shares the “Applicable Shares”, which term
shall mean, at any time, the principal balance of the Note, divided by $0.0075.
In other words, the Note Amount, divided by $0.0075 results in the beginning
number of Applicable Shares, upon which the calculation of theoretical profit is
made. The amount of interest payable to the Holder is a function of stock price
increases, if any, times this number of Applicable Shares, subject to the
Maximum Interest and the Minimum Interest, as set forth below. If the share
price doubles, then the Holder should double its money, earning, as interest, an
amount equal to the stock price increase on the Applicable Shares, in addition
to being repaid the amount of the New Notes. Significantly, as the price goes
up, the value of these New Notes increase accordingly. However, the number of
shares for the Company to repurchase the New Notes, remains constant, equal to
the Applicable Shares, which, if paid in stock, at the election of the Company,
would be at a 25% discount. The following formula creates that result. The
outstanding principal balance of these New Notes shall bear interest, payable
quarterly, in an amount equal to the product (X) of the following formula: X=
(Y-Y1) x (Z). Y is the greater of (a) the closing bid price of the Company’s
common stock on the Interest Date or (b) the average closing bid price for
Common Stock on the five trading days immediately prior to the Interest Date; Y1
is the pricing used for the preceding Interest Date or other applicable prior
pricing Interest Date and Z is the number of Applicable Shares. For purposes of
the first Interest Date computation, $0.0075 shall be used as the Y1. Until
there is any payment of Principal on the Note, Z, the number of Applicable
Shares, shall be 371,322,804. Other than for the first Interest Date
computation, Y1 shall never be less than the Y1 for any preceding Interest Date
computation (no double benefit for price increases, followed by a price decrease
followed by another price increase). For purposes of this computation, pricing
shall be as reported on pinksheets.com on such dates (or other analogous
reporting source agreed upon by both parties if pinksheets.com is no longer
reporting the Company’s common stock price). Notwithstanding the preceding, the
Interest for any quarter shall not be less than 2½% (the “Minimum Interest”) of
the Principal balance at the beginning of the quarter. Notwithstanding the
preceding, Y shall not be greater than 125% of the Y1 (the “Maximum
Interest”).
As
a result of the above interest calculations, the Company could be obligated to
pay a maximum interest rate of 25% per quarter, and at no times shall pay less
than 2.5% per quarter. For the year ended December 31, 2008, the
Company accrued interest expense of 2.5% per quarter on these New
Notes. The total accrued interest on the New Notes on through
December 31, 2008 was $139,246. Under the terms of the New Notes,
this amount is added to the principal of the notes as of December 31,
2008. The adjusted principal balance of the New Notes is $2,924,167
as of September 30, 2009.
Each of
the aforementioned New Notes was entered into by the Company with a
stipulation by the Company that stated that the Company executed the New Notes
under the stipulation that it did not agree with the interest
calculations. The New Notes were executed as written because the
Company and the holders agreed that it was in the best interest of both parties
to do so. However, both parties agreed that they should renegotiate
the interest calculations under the New Notes. These calculations
shall be tied to a profit-sharing calculation tied to stock appreciation, but
under less onerous terms as written in the New Note
documents. Although we were actively attempting to renegotiate these
notes, we are currently unable to renegotiate our notes with the Nutmeg Group
who hold a substantial amount of our notes payable (as of September 30, 2009 the
total principal balance on these notes was equal to $2,784,921). On March 25,
2009, the SEC froze the assets of the Nutmeg Group, LLC and other related
entities. This action may negatively impact our ability to
renegotiate these notes.
20
Under the terms of the note agreements, the maximum interest rate applied on these notes for the quarter ended March 31, 2009. The Company accrued $835,476 in interest on these notes for the quarter ended March 31, 2009. As a result of not paying this interest amount, which was due in April of 2009, the Company defaulted on the note and is now subject to a minimum interest rate of 18% under the terms of the note. The Company accrued interest at this rate for the quarters ended June 30, 2009 and September 30, 2009 which was equal to $131,588 for each quarter.
$640,000
Convertible Note Dated January 28, 2009 – Superseded by a $715,015 Amended
Convertible Note Dated July 31, 2009
On
January 28, 2009, the Company entered into a note agreement with Physicians
Healthcare Management Group, Inc., a Nevada corporation
(“PhyHealth”). Under the terms of the agreement, PhyHealth made a one
year loan of $640,000 to the Company. The Company is required to make
payments of $150,000 on April 15, 2009, June 15, 2009 and September 15, 2009.
The payment due on April 15, 2009 was not made as of the date of this filing.
The remaining balance due, along with accrued interest at 10%, is payable on
January 28, 2010. The Company may prepay the note at 110% of the
outstanding principal amount. At any time, PhyHealth may convert up
to $300,000 of the outstanding principal balance of the note into fully paid and
non-assessable shares of the Company’s common stock. The conversion
price shall be equal to 50% of the lesser of the
following: a) $.0125; b) the closing bid price for common
stock on the trading day one day prior to PhyHealth notifying the Company of its
intention to convert; c) the average closing bid price for the common stock on
the five trading days immediately prior to PhyHealth notifying the Company of
its intention to convert, or if a registration statement is not effective on the
180 day anniversary of closing (“d” and “e” not otherwise applying); d) the
closing bid price for the common stock on the 180 day anniversary of closing; e)
the average closing bid price for the common stock on the five trading days
immediately prior to the 180 day anniversary of closing. The Company
failed to make the required payments in April and June and was in default on
this note when it entered into an Amended Convertible Note dated July 31,
2009. The amended note revised the principal balance of the note to
$715,015, which represented the original principal balance ($640,000), accrued
interest of $45,015 and a penalty of $30,000. The conversion feature
on $300,000 remained the same, but the interest rate was adjusted to
22%. The entire balance is due and payable on January 28,
2010. The Company also agreed to issue to the lender 15,000,000
shares of its common stock. As of September 30, 2009, these shares
were not issued to the lender but the Company has recorded a liability of
$187,500 to reflect this obligation.
The
following tables describe the valuation of the conversion feature of the portion
of the note that can be converted ($300,000):
Approximate
risk free rate upon issuance
|
0.48%
|
|
Average
expected life
|
1
year
|
|
Dividend
yield
|
0%
|
|
Volatility
|
203%
|
|
Estimated
fair value of conversion feature on date of note
|
$
473,062
|
|
Estimated
fair value of conversion feature as of September 30, 2009
|
$
354,717
|
The
Company recorded the fair value of the conversion feature as a discount to the
convertible debt in the accompanying balance sheet up to the proceeds
received. The Company reported income of $32,589 for the change
in value in the quarter ended September 30, 2009 (income of $118,347 was
recorded for the nine months ended September 30, 2009 due to the valuation
change). The value of the derivative liability as of September 30, 2009 was
$354,717.
The
Company also issued warrants to purchase 20 million shares of common stock to
PhyHealth. The warrants have a strike price of $0.005 per share and
can be exercised through December 31, 2013. These warrants were
cancelled and 25 million new warrants were issued with the same price and
expiration date. However, should the Company default on its note with
PhyHealth, the total exercise price of the warrants is reduced from a total of
$125,000 (25,000,000 warrants at $0.005 per share) to a total of
$100. Further, the number of warrants will triple from 25 million to
75 million. Thus, should the Company not pay PhyHealth $797,361 on
January 28, 2010 (the total amount of principal and the accrued interest
projected to be owed as of the due date), the Company will be required to issued
75 million shares of its common stock to PhyHealth at a total price of $100
(subject to the contractual limit of PhyHealth owning no more than 4.99% of the
Company’s outstanding common stock).
The
following tables describe the valuation of the original 20 million
warrants:
Approximate
risk free rate upon issuance
|
1.70%
|
|
Average
expected life
|
4.8
year
|
|
Dividend
yield
|
0%
|
|
Volatility
|
203%
|
|
Estimated
fair value of conversion feature on date of warrants
|
$
176,687
|
|
Estimated
fair value of conversion feature recorded as income in the quarter ended
September 30, 2009 as a result of the cancellation of these
warrants
|
$
188,917
|
21
The Company recorded the value of the warrants as a discount to the convertible debt in the accompanying balance sheet up to the proceeds received (less the discount recorded associated with the convertible feature in the note), with the excess of $9,749 charged to interest expense. The Company reported income of $188,917 in the quarter ended September 30, 2009 as a result of these warrants being cancelled.
The
following tables describe the valuation of the new 25 million
warrants:
Approximate
risk free rate upon issuance
|
2.53%
|
|
Average
expected life
|
4.4
year
|
|
Dividend
yield
|
0%
|
|
Volatility
|
160.759%
|
|
Estimated
fair value of conversion feature on date of warrants
|
$
332,548
|
|
Estimated
fair value of conversion feature as of September
30, 2009
|
$
236,287
|
The
Company recorded the value of the warrants as additional interest expense on the
note. The Company reported income of $96,261 in the quarter ended
September 30, 2009 as a result of the decrease in the value of these warrants in
the quarter. The derivative liability associated with these warrants
as of September 30, 2009 was $236,287.
$200,000
Note Payable Dated April 3, 2009 – Superseded by a $200,000 Note Payable Dated
September 1, 2009
On April
3, 2009, the Company entered into a note agreement with The Melanie S. Altholtz
Irrevocable Trust (“Altholtz”). Under the terms of the agreement, the
Company was to make principal payments to Altholtz in the amounts of $100,000 on
July 3, 2009 and July 15, 2009 along with accrued interest of 12% for the three
month period (not an annualized interest rate). The Company failed to
make the required payments and as of July 3, 2009 was in default under the note
agreement. The Company entered into a Superseding Note for $200,000
which calls for interest to accrue at the rate of 6% every three
months. The Company also agreed to a $50,000 penalty on this note as
a result of the default under a Forbearance Agreement entered into with the
noteholder.
The
Company also issued warrants to purchase 5 million shares of common stock to
Altholtz. The warrants have a strike price of $0.015 per share and
can be exercised through April 3, 2014.
The
following tables describe the valuation of the warrants:
Approximate
risk free rate upon issuance
|
1.87%
|
|
Average
expected life
|
5.0
year
|
|
Dividend
yield
|
0%
|
|
Volatility
|
190%
|
|
Estimated
fair value of conversion feature on date of warrants
|
$
67,735
|
|
Estimated
fair value of conversion feature as of September 30, 2009
|
$
45,920
|
The
Company recorded the value of the warrants as a discount to the convertible debt
in the accompanying balance sheet. The Company reported an expense of $151 for
the change in value from the date of issuance to the end of the quarter on
September 30, 2009 (total net income of $21,815 was reported for the nine months
ended September 30, 2009). The value of the derivative liability as of September
30, 2009 was $45,920.
22
The following table summarizes our derivative liability and the income (expense) due to the changes in our derivative liability for the quarter and nine months ended September 30, 2009:
|
|
Income
(Expense) due to change in derivative liability
|
||||||||||||||||||||||
Derivative
Liability Balance as of |
Derivative
Liability Balance as of |
For
quarter
ended
|
For
nine months ended
|
For
quarter
ended
|
For
nine
months ended
|
|||||||||||||||||||
December 31, 2008
|
September 30, 2009
|
September 30, 2008
|
September 30, 2008
|
September 30, 2009
|
September 30, 2009
|
|||||||||||||||||||
Micropipe
note with TeknoCreations
|
266,614 | - | 38,763 | 76,382 | 215,173 | 266,614 | ||||||||||||||||||
PhyHealth
note
|
- | 354,717 | - | 32,589 | 118,347 | |||||||||||||||||||
Micropipe
warrants
|
176,084 | 185,029 | - | (3,206 | ) | (8,944 | ) | |||||||||||||||||
PhyHealth
warrants (cancelled)
|
- | - | - | 188,917 | 176,687 | |||||||||||||||||||
PhyHealth
warrants (new)
|
- | 236,287 | - | 96,261 | 96,261 | |||||||||||||||||||
Old
warrants (expired in July 2009)
|
2,248 | - | - | - | 2,245 | |||||||||||||||||||
Stock
options
|
188,510 | 205,443 | - | 357 | (16,933 | ) | ||||||||||||||||||
Altholtz
warrants
|
- | 45,920 | - | (151 | ) | 21,815 | ||||||||||||||||||
Other
notes (renegotiated)
|
- | - | 384,432 | 897,377 | (1 | ) | - | |||||||||||||||||
Total
|
$ | 633,456 | $ | 1,027,396 | $ | 423,195 | $ | 973,759 | $ | 529,940 | $ | 656,092 |
23
Maturities
of Notes Payable:
The
majority of our notes payable is in default and is currently due and
payable. The remainder is due and payable within the next 12
months. Here is a summary table of the note due dates:
Notes
currently in default
|
$ | 3,931,860 | |||
Notes
due in January 2010
|
915,015 | ||||
Notes
due in September 2010
|
476,032 | ||||
Total
face value of notes payable
|
5,322,907 | ||||
Unamortized
note discount
|
(210,411 | ) | |||
Total
notes payable
|
$ | 5,112,496 |
NOTE 12 –
PREPAID RESEARCH & DEVELOPMENT
At
December 31, 2008, the Company recorded a prepaid research and development
liability under a Master Development Agreement. The Agreement
outlines the terms by which a third party (“CSI Digital”) is paying the Company
$1.5 million to integrate its technology into a set-top box. As of
December 31, 2008, the Company had received $1.4 million from CSI Digital and
booked this amount as prepaid research and development. As of this
date, the Company had spent $483,710 fulfilling its obligations under the
contract. These expenditures were recorded as a reduction in the
prepaid research and development liability account as of December 31,
2008. The Company completed this project in June of
2009. During 2009, the Company received additional payments of
$12,000 from CSI Digital and has booked the remaining $88,000 as an account
receivable. In 2009, the Company incurred additional costs of
$105,640 to fulfill its obligations under the agreement (the total costs
incurred by the Company to fulfill its obligations under the agreement was equal
to $589,350). Upon completion of the contract the Company has
included the net deferred amount of $910,650 in revenues for the quarter ended
June 30, 2009 and nine months ended September 30, 2009.
NOTE 13 –
STOCK OPTIONS
The
Company entered into a series of stock option agreements with its officers,
Bruce Palmer and George Stevens, as well as two other
consultants. The options have a 10-year term and all were fully
vested when issued on November 12, 2008. A Black-Scholes valuation
was done on all options with the resulting valuation being deducted in the year
ended December 31, 2008. The Company has expensed $209,439 relating
to the issuance of these options. On September 29, 2009, the Company
issued 1 million options to one consultant with an exercise price of $0.015 per
share and an expiration date of December 31, 2015. The options
outstanding as of September 30, 2009 are summarized in the following
tables:
Options
outstanding as of December 31, 2007
|
-
|
|||
Options
issued in 2008
|
21,000,000
|
|||
Options
expired in 2008
|
-
|
|||
Options
outstanding as of December 31, 2008
|
21,000,000
|
|||
Options
issued in the nine months ended September 30, 2009
|
1,000,000
|
|||
Options
expired in the nine months ended September 30, 2009
|
-
|
|||
Options
outstanding as of September 30, 2009
|
22,000,000
|
24
The
following is a summary of the options outstanding as of September 30,
2009:
Number
of options
|
Option
prices
|
Weighted-average
Option
price
|
Black
Scholes
Value
at
issuance
|
|||||||||||||
Bruce
Palmer
|
7,000,000
|
$
|
0.045-0.10
|
$
|
0.071
|
$
|
69,813
|
|||||||||
George
Stevens
|
7,000,000
|
$
|
0.045-0.10
|
$
|
0.071
|
69,813
|
||||||||||
Craig
Erickson
|
3,500,000
|
$
|
0.045-0.10
|
$
|
0.071
|
34,906
|
||||||||||
Mark
Kasok
|
3,500,000
|
$
|
0.045-0.10
|
$
|
0.071
|
34,907
|
||||||||||
Richard
O. Weed
|
1,000,000
|
$
|
0.015
|
$
|
0.015
|
9,623
|
||||||||||
Total
|
22,000,000
|
$
|
0.015-0.10
|
$
|
0.068
|
$
|
219,062
|
In
determining the value of the options, the following assumptions were applied at
the grant date for the options to Palmer, Stevens, Erickson and Kasok (all of
these options were issued on the same date so the assumptions were the same for
each option agreement):
Expected
volatility
|
204.003%
|
|
Expected
dividend yield
|
0.00%
|
|
Expected
term (in years)
|
10
|
|
Risk-free
rate
|
3.75%
|
In
determining the value of the 1 million options issued to Weed, the following
assumptions were applied at the grant date:
Expected
volatility
|
170.437%
|
|
Expected
dividend yield
|
0.00%
|
|
Expected
term (in years)
|
6.25
|
|
Risk-free
rate
|
2.31%
|
The
Company has followed the guidance of ASC Topic 718, Statement of Financial
Accounting Standards (SFAS) No. 123R, "SHARE-BASED PAYMENT" for treatment of
these stock options. When the stock options were issued to its
officers (21 million options total) in November of 2008, the Company did not
properly reserve shares to cover the exercise of the options. As a
result, the Company may not have the ability to settle with shares and must
account for the options as a liability.
The
options were again valued at December 31, 2008. The following
assumptions were applied at December 31, 2008:
Expected
volatility
|
206.719%
|
|||||
Expected
dividend yield
|
0.00%
|
|||||
Expected
term (in years)
|
9.87
|
|||||
Risk-free
rate
|
2.25%
|
In using
the assumptions above, the options were revalued at a total valuation of
$188,510, resulting in the Company booking income of $20,928 due to a change in
the derivative liability associated with these options for the fiscal year ended
December 31, 2008.
25
These November 2008 options were again valued at September 30, 2009. The following assumptions were applied at September 30, 2009:
Expected
volatility
|
170.610%
|
|
Expected
dividend yield
|
0.00%
|
|
Expected
term (in years)
|
9.1
|
|
Risk-free
rate
|
3.31%
|
In using
the assumptions above, these options were revalued at a total valuation of
$205,443, resulting in the Company booking income of $16,932 due to a change in
the derivative liability associated with these options for the nine months ended
September 30, 2009 (income of $358 for the quarter ended September 30,
2009.
For the
options issued in September 2009, the Company had adequate shares reserved (it
increased its authorized shares from 400 million to 1.5 billion on September 25,
2009). As such, the Company expensed the value of the 1 million
options issued in this month. The value of $9,623 was deducted in the
quarter ended September 30, 2009.
NOTE 14 –
WARRANTS
The
Company issued 20 million warrants to purchase shares of its common stock at a
price of $0.01 per share. The warrants expire on December 31,
2013. The warrants were issued to Micro Pipe Fund I, LLC as a result
of the Company defaulting on its note with Micro Pipe. A
Black-Scholes valuation was done on the warrants with the resulting valuation
being deducted in the year ended December 31, 2008. The Company
expensed $195,895 as interest expense as a result of issuing these
warrants.
In
determining the value of these warrants, the following assumptions were applied
at the grant date:
Expected
volatility
|
204.003%
|
|
Expected
dividend yield
|
0.00%
|
|
Expected
term (in years)
|
10.1
|
|
Risk-free
rate
|
3.75%
|
These
warrants were determined to meet the criteria for liability treatment under EITF
00-19. They were again valued at December 31, 2008. The
following assumptions were applied at December 31, 2008:
Expected
volatility
|
206.719%
|
|
Expected
dividend yield
|
0.00%
|
|
Expected
term (in years)
|
4.8658
|
|
Risk-free
rate
|
3.75%
|
In using
the assumptions above, the warrants were revalued at a total valuation of
$176,084, resulting in the Company booking income of $19,810 due to a change in
the derivative liability associated with these options for the fiscal year ended
December 31, 2008.
These
warrants were again valued at September 30, 2009. The following
assumptions were applied at September 30, 2009:
Expected
volatility
|
170.610%
|
|
Expected
dividend yield
|
0.00%
|
|
Expected
term (in years)
|
4.25
|
|
Risk-free
rate
|
2.31%
|
In using
the assumptions above, the warrants were revalued at a total valuation of
$185,029 resulting in the Company booking an expense of $3,206 due to a change
in the derivative liability associated with these warrants for the quarter ended
September 30, 2009 (expense of $8,944 was booked in the nine months ended
September 30, 2009).
26
On
January 28, 2009, the Company issued 20 million warrants to purchase shares of
its common stock at a price of $0.005 per share. The warrants expire
on December 31, 2013. The warrants were issued to Physicians
Healthcare Management Group, Inc. in connection with the issuance of a $640,000
Convertible Note. A Black-Scholes valuation was done on the warrants
on the date of issuance with the resulting valuation being recorded as a
discount to the note. These warrants were valued at $176,687 on the
date of issuance.
These
warrants were again valued at June 30, 2009 at a total valuation of
$188,917. The Company cancelled these warrants when 25 million new
warrants were issued as part of a forbearance agreement. The Company
recorded the $188,917 as income in the quarter ended September 30, 2009 due to
cancelling these warrants (income of $176,687 was booked in the nine months
ended September 30, 2009 in connection with these warrants). The new
25 million warrants were valued at $332,548 and an expense in this amount was
recorded in the quarter ended September 30, 2009.
In
determining the value of these new warrants, the following assumptions were
applied at the grant date:
Expected
volatility
|
160.759%
|
|
Expected
dividend yield
|
0.00%
|
|
Expected
term (in years)
|
4.4
|
|
Risk-free
rate
|
2.53%
|
These
warrants were determined to meet the criteria for liability treatment under EITF
00-19. These warrants were again valued at September 30,
2009. The following assumptions were applied at September 30,
2009:
Expected
volatility
|
170.610%
|
|
Expected
dividend yield
|
0.00%
|
|
Expected
term (in years)
|
4.25
|
|
Risk-free
rate
|
2.31%
|
In using
the assumptions above, the warrants were revalued at a total valuation of
$236,287, resulting in the Company booking income of $96,261 due to the change
in the derivative liability associated with these warrants for the quarter ended
September 31, 2009.
On July
16, 2006, the Company issued 4 million warrants to purchase shares of its common
stock at a price of $0.10 per share. These warrants expired on July
16, 2009. The warrants were issued to a former
officer. The Company expensed $20,000 in 2006 as a result of issuing
these warrants. This expense amount represented the approximate value
of the warrants after applying a Black-Scholes valuation.
On July
16, 2006, the Company issued 2 million warrants to purchase shares of its common
stock at a price of $0.10 per share. These warrants expire on July
16, 2009. The warrants were issued to a corporate
attorney. The Company expensed $10,000 in 2006 as a result of issuing
these warrants. This expense amount represented the approximate value
of the warrants after applying a Black-Scholes valuation.
In
determining the value of these warrants issued on July 16, 2006, the following
assumptions were applied at the grant date:
Expected
volatility
|
165.973%
|
|
Expected
dividend yield
|
0.00%
|
|
Expected
term (in years)
|
3
|
|
Risk-free
rate
|
5.05%
|
27
On
December 31, 2008 the warrants issued on July 16, 2006 were revalued using the
following assumptions:
Expected
volatility
|
206.719%
|
|
Expected
dividend yield
|
0.00%
|
|
Expected
term (in years)
|
0.5
|
|
Risk-free
rate
|
0.27%
|
In using
the assumptions above, the warrants were revalued at a total valuation of
$2,246, resulting in the Company booking an expense of $194 due to a change in
the derivative liability associated with these warrants for the fiscal year
ended December 31, 2008.
On March
31, 2009 the warrants issued on July 16, 2006 were revalued using the following
assumptions:
Expected
volatility
|
193.401%
|
|
Expected
dividend yield
|
0.00%
|
|
Expected
term (in years)
|
0.3
|
|
Risk-free
rate
|
0.02%
|
In using
the assumptions above, the warrants were revalued at a total valuation of
$1,322, resulting in the Company booking income of $924 due to a change in the
derivative liability associated with these warrants for the quarter ended March
31, 2009.
Since the
warrants issued on July 16, 2006 were set to expire on July 16, 2009, the value
was close to zero and the value as of March 31, 2009 of $1,322 was written off
in the quarter ended June 30, 2009.
The
following table summarizes the outstanding warrants of the Company for December
31, 2008 and September 30, 2009:
Warrants
outstanding as of December 31, 2007
|
6,000,000
|
|||
Warrants
issued in 2008
|
20,000,000
|
|||
Warrants
expired in 2008
|
-
|
|||
Warrants
outstanding as of December 31, 2008
|
26,000,000
|
|||
Warrants
issued in nine months ended September 30, 2009
|
50,000,000
|
|||
Warrants
expired in nine months ended September 30, 2009
|
(6,000,000
|
) | ||
Warrants
cancelled in nine months ended September 30, 2009
|
(20,000,000
|
) | ||
Warrants
outstanding as of September 30, 2009
|
50,000,000
|
The
following table summarizes all of the Company’s outstanding warrants as of
September 30, 2009:
Date
of
|
Expiration
|
Stock
Price
on
date of
|
Valuation
on
issuance
|
|||||||||||||
Number
of Warrants
|
Issuance
|
Date
|
Strike
Price
|
issuance
|
date
|
|||||||||||
20
million
|
11/12/2008
|
12/31/2013
|
$
|
0.01
|
$
|
0.01
|
$
|
195,895
|
||||||||
5
million
|
4/3/09
|
4/3/2012
|
$
|
0.015
|
$
|
0.014
|
$
|
67,735
|
||||||||
25
million
|
7/31/09
|
12/31/2013
|
$
|
0.005
|
$
|
0.014
|
$
|
332,548
|
28
NOTE 15 – NOTES RECEIVABLE
The
Company entered into three note agreements with Hot Web, Inc. These
notes totaled $42,000. Each note had a term of six months and bore an
interest rate of 12% per annum. As of September 30, 2009, all of the
notes are delinquent. The Company has set up a reserve and has
written this amount of delinquency off to bad debt expense. Hot Web,
Inc. is a publicly traded company and AccessKey believes that if they do not pay
the notes in cash, the parties can negotiate a stock settlement that will leave
AccessKey with publicly traded stock that eventually could be
sold. The Company’s Chief Executive Officer and Chairman, George
Stevens, was the CEO and Chairman of Hot Web, Inc. at the time the loans were
made. As of August, 2008 he is no longer affiliated with Hot Web,
Inc. The Company has also accrued interest income of $6,942 on
these notes. A reserve has also been set up against this accrued
interest receivable.
In
February 2009, the Company entered into a note agreement with George Stevens in
the amount of $30,000. The note bore an interest rate of 18% per
annum. The Company immediately applied a $20,000 bonus payable due to
Mr. Stevens that was accrued in 2008 against this note, leaving a net balance of
$10,000. Mr. Stevens made a payment against the note in March
2009 and paid the remaining balance of $9,747 in April 2009.
NOTE 16
–MATERIAL CONTRACTS
On April
1, 2008, the Company entered into an agreement with Bruce Palmer. The
Agreement calls for Mr. Palmer to be President of the Company’s wholly-owned
with a monthly compensation of $7,000. Mr. Palmer also serves as the
Company’s President and CFO. Mr. Palmer was issued 7 million options
with prices ranging from $0.045 per share to $0.10 per share. The
agreement does not have a term, however it is stated that if the contract is
terminated (by either party) a payment of $84,000 shall be due and
payable.
On April
1, 2008, the Company entered into an agreement with George
Stevens. The Agreement calls for Mr. Stevens to be CEO of the Company
with a monthly compensation of $7,000. Mr. Stevens was issued 7
million options with prices ranging from $0.045 per share to $0.10 per
share. The agreement does not have a term, however it is stated that
if the contract is terminated (by either party) a payment of $84,000 shall be
due and payable.
On May
22, 2007, the Company entered into an agreement with Craig Erickson, its Vice
President of Technology. The Agreement calls for Mr. Erickson to
perform various services for the Company with a monthly compensation of
$11,000. Mr. Erickson was also issued 3.5 million options with prices
ranging from $0.045 per share to $0.10 per share. The agreement does
not have a term, but may be cancelled with a 30-day notice.
On May
22, 2007, the Company's subsidiary entered into an agreement with Mark
Kasok, its Vice President of Sales and Marketing. The Agreement calls
for Mr. Kasok to perform various services for the Company with a monthly
compensation of $7,500. Mr. Kasok was also issued 3.5 million options
with prices ranging from $0.045 per share to $0.10 per share. The
agreement does not have a term, but may be cancelled with a 30-day
notice. Mr. Kasok was due 500,000 shares of the Company’s common
stock under the terms of the agreement. This stock was not issued,
but was expensed when due to Mr. Kasok. An accrued expense in the
amount of $8,250 is included on the balance sheet as of December 31,
2008. This stock was issued in August 2009.
On May
15, 2008, the Company entered into an agreement with CSI Digital,
Inc. Under the terms of the agreement, CSI agreed to pay the Company
$1.5 million to implement its encryption software into a proprietary internet
protocol television (“IPTV”) middleware product and dongle that collectively
will enable the authorized delivery of video on demand and live streaming IPTV
video to a television via a CSI specified set top box. As of
September 30, 2009 the project was complete and the Company had received
$1,412,000 from CSI under this contract with the remaining $88,000 due and
payable from CSI.
29
NOTE 17 – SIGNIFICANT CUSTOMERS
TeknoCreations
has historically done a significant amount of business with Jack of All Games
(Canada), Inc. (“JOAG-C”). Sales to this customer represented
$1,378,386 of the $1,596,038 (86.3% of total revenues) reported in the year
ended December 31, 2008. Sales to JOAG-C in the nine months ended
September 30, 2009 were equal to $210,142. This represented 50.1% of
Tekno’s gross sales of $415,611 (this gross sales figure does not include
returns). As of March 31, 2009, JOAG-C owed Tekno $472,155 as an
account receivable from sales in 2008. This amount was fulfilled in
the quarter ended June 30, 3009 by a return of sales originally valued at
$433,933 and payment of the remaining balance. We believe that these
returns were due to extraneous circumstances and should not be indicative of
future returns. As of September 30, 2009, JOAG-C owes Tekno
$67,680. In the quarter ended September 30, 2009 Tekno made one
discounted sale to one customer. This sale was made on the items
previously returned by JOAG-C and was in the amount of $118,224. This
represented 78.0% of the sales in the quarter.
NOTE 18 –
SUBSEQUENT EVENTS
On
October 5, 2009, the company resolved claims made by a former employee and
incurred a non-cash expense of $540,000. The $540,000 non-cash
expense (the issuance of 92,000,000 shares of common stock) relates to a
triggering event under agreements with the former employee. Terms of
the settlement are confidential.
On
October 28, 2009, the company borrowed $100,000 for working
capital. As a partial inducement for the $100,000 loan, shares issued
under the settlement agreement were pledged by the former employee as additional
collateral for the loan. In future period, the loan amount may
increase to $500,000.
The
Company has evaluated subsequent events from the balance sheet date through
November 23, 2009 and determined there are no other events to
disclose
30
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Some of
the statements in this Form 10-Q are forward-looking statements about what may
happen in the future. Forward looking statements include statements regarding
our current beliefs, goals, and expectations about matters such as our expected
financial position and operating results, our business strategy, and our
financing plans. The forward-looking statements in this Form 10-Q are not based
on historical facts, but rather reflect the current expectations of our
management concerning future results and events. The forward-looking statements
generally can be identified by the use of terms such as “believe,” “expect,”
“anticipate,” “intend,” “plan,” “foresee,” “likely” or other similar words
or phrases. Similarly, statements that describe our objectives, plans
or goals are or may be forward-looking statements.
Forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause our actual results, performance or achievements to be different from
any future results, performance and achievements expressed or implied by these
statements. We cannot guarantee that our forward-looking statements will turn
out to be correct or that our beliefs and goals will not change. Our actual
results could be very different from and worse than our expectations for various
reasons. You should review carefully all information included herein and in our
Form 10, particularly the discussion of risk factors in Part I along with
the financial statements and the notes to the financial statements included in
the Form 10. The forward-looking statements in this Form 10-Q are made only as
of the date of this Form 10-Q. We do not have any obligation to publicly update
any forward-looking statements to reflect subsequent events or
circumstances.
OVERVIEW
AccessKey
IP has developed a patent-pending encryption technology that has been applied to
enable the secure delivery of High Definition quality TV content to both the
home television and personal computer. AccessKey has developed
and tested its products but the Company has not sold any units to date. Upon the
receipt of orders, the Company is prepared to manufacture products.
The
Company is currently selling consumer electronics through its TeknoCreations
subsidiary. Specifically, the Company began sales of the InCharge inductive
charger through TeknoCreations in July 2008 and its Tekcases in May
2009. The InCharge system enables users of Nintendo Wii, Sony
PlayStation 3 or Microsoft Xbox 360 to rapidly recharge their gaming handsets
through the InCharge charging base. Our Tekcases are leather
cases with rechargeable Lithium Ion batteries built in that give Nintendo DS
Lite and DSi portable gaming devices twice the playing time in between battery
charges.
AccessKey
IP
AccessKey
IP was founded to participate in the explosive growth of digital communications
and entertainment related services. Through our patent pending technology,
we have developed a line of products to enable Telcos (telecommunication
companies) to offer converged services comprising broadband Internet access and
IP (Internet Protocol) based TV and entertainment. Our technology has
been implemented into a set top box and a USB device. Both of these
devices enable secure subscriber identification. The set top box
implements our technology for use with a television and the USB device
implements our technology for use with a personal computer. As of the
end of June 2009 both of these products have been fully
developed and completed but to date, we have not sold any
units. The Company is building a demonstration unit to use to
generate interest in its encrypted set top box product.
TeknoCreations
(Subsidiary)
TeknoCreations,
Inc., a Nevada corporation, was founded to participate in consumer electronics
and business security needs. TeknoCreations designs high quality products with
attractive pricing to enhance the consumer’s favorite electronics product and
the expanding security needs of corporate America. The focus of the
company is to sell products wholesale; through distributors and direct to
retailers, Etailers and DMRs (Direct Market
Retailers).
31
TeknoCreations
began marketing and selling InCharge products in July 2008. The InCharge units
replace the batteries in handheld controller units for home-based gaming
systems with a rechargeable battery pack that is recharged through contactless
magnetic induction. These are available for the Sony PlayStation,
Nintendo Wii and the Microsoft Xbox.
TeknoCreations
began selling TekCases for the Nintendo DS Lite and DSi in May 2009. The
TekCases give the units twice the playtime as well as make them more attractive
and protect them as well. The Lithium Ion rechargeable battery inside
of the case requires no removal for recharging.
Significant
Customers
TeknoCreations
has historically done a significant amount of business with Jack of All Games
(Canada), Inc. (“JOAG-C”). Sales to this customer represented
$1,378,386 of the $1,596,038 (86.3% of total revenues) reported in the year
ended December 31, 2008. Sales to JOAG-C in the nine months ended
September 30, 2009 were equal to $210,142. This represented 50.1% of
Tekno’s gross sales of $415,611 (this gross sales figure does not include
returns). As of March 31, 2009, JOAG-C owed Tekno $472,155 as an
account receivable from sales in 2008. This amount was fulfilled in
the quarter ended June 30, 3009 by a return of sales originally valued at
$433,933 and payment of the remaining balance. We believe that these
returns were due to extraneous circumstances and should not be indicative of
future returns. As of September 30, 2009, JOAG-C owes Tekno
$67,680. In the quarter ended September 30, 2009 Tekno made one
discounted sale to one customer. This sale was made on the items
previously returned by JOAG-C and was in the amount of $118,224. This
represented 78.0% of the sales in the quarter.
JOINT
VENTURE – CSI Digital
AccessKey
has recently completed adopting its technology to a customized set top box under
a joint development contract with CSI Digital (hereinafter referred to
as "CSI" or "CSI Digital"). This agreement was entered into on
May 15, 2008. AccessKey and CSI are both engaged in the development
and delivery of technology, products, services, and content associated with the
Cable TV and Internet Protocol Television (“IPTV”) industries. Under the
$1.5 million contract, AccessKey is providing specialized IPTV related
development services for CSI Digital and its customers. AccessKey
completed the development of the specialized boxes in June
2009.
32
RESULTS
OF OPERATIONS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO THE THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 2008
Net
Sales Revenue
We
reported net revenues of $151,488 in the quarter ended September 30,
2009. Our net revenues decreased 13% from revenues of $174,790 in the
quarter ended September 30, 2008. The decrease in our revenues was a result of a
drop in the sales of our InCharge units by our TeknoCreations, Inc. subsidiary
(“Tekno”). The largest components of our sales were from InCharge
units for the Microsoft Xbox ($119,517 of gross revenues in the quarter or 78.9%
of gross revenues in the quarter) and InCharge units for the Nintendo Wii
($29,406 of gross revenues in the quarter or 19.4% of gross
revenues). Our InCharge Xbox sales were primarily related to a sale
to a single customer who purchased a lot of units that were previously
returned. This one sale represented $118,224 of our sales in the
quarter (78.0% of our total sales and 98.9% of our InCharge Xbox sales in the
quarter).
We
reported net revenues of $942,830 in the nine months ended September 30, 2009
(our gross revenues were equal to $1,376,763 and we received returns equal to
$433,933 from one customer resulting in our net revenue figure of $942,830). Our
net revenues increased 410% from total revenues of $184,790 in the nine months
ended September 30, 2008. The increase in our revenues was primarily the result
of our recording net revenues of $910,650 in 2009. These revenues
were recorded on a development services agreement that was completed in June
2009. We view this type of agreement as part of our ordinary
operations as we plan on entering into similar agreements to jointly develop
products in the future. Our wholly-owned subsidiary, TeknoCreations,
Inc. (“Tekno”), generated gross revenues of $466,113 (Tekno’s revenues net of
returns were equal to $32,180, as a result of returns equal to
$433,933). The largest components of our sales were from InCharge
units for the Nintendo Wii ($166,618 of gross revenues in the quarter or 53.0%
of gross revenues), TekCases for the Nintendo DSi ($72,080 of gross revenues in
the quarter or 22.9% of gross revenues) and TekCases for the Nintendo DS Lite
($63,440 of gross revenues in the quarter or 20.2% of gross revenues for the six
month period). We received returns from one customer in the amount of
$433,933. The returns were InCharge units sold in 2008 ($261,867
worth of InCharge units for the Microsoft Xbox and $172,066 worth of InCharge
units for the Sony Play Station 3). All of the returned Xbox units
were sold in the quarter ended September 30, 2009 and we believe that the
remaining returned items will be resold. They have been added back
into inventory. Further, we believe that these returns were due to
extraneous circumstances and should not be indicative of future
returns.
Cost
of Sales
Our total
cost of sales was $218,268 in the quarter ended September 30, 2009, compared to
our cost of sales of $148,367 in the same quarter in 2008 (an increase of 47.1%
in our cost of sales). Our gross profit in the quarter ended
September 30, 2009 was $(66,780). Our gross profit for the quarter
ended September 30, 2008 was equal to $26,423. We decided to sell our
returned Xbox units at a loss to move the inventory to free up working capital
for other uses. As a result of this transaction, we sold inventory
purchased at a price of $167,243 for a price of $118,224 (a loss of
$49,019). We also incurred high freight charges that were booked to
cost of sales. Some of this was associated with the cost of moving
our returned inventory back from Canada and should be
non-recurring. The total freight charges included in our cost of
sales was $27,725 in the quarter ended September 30, 2009. The cost
of sales on our InCharge Wii units was more typical of our ordinary
operation. The cost of sales on these units was $21,179 on sales of
$29,406, generating a gross profit of $8,227 (gross margin of
38.8%).
33
Our total
cost of sales (not including the returns that reduced our cost of sales by
$271,876 to $155,917) was $427,793 in the nine months ended September 30, 2009,
compared to cost of sales of $148,924 in the nine months ended September 30,
2008. After accounting for our returns, our gross profit was equal to
$786,913 in the nine months ended September 30, 2009. Our gross
profit for the nine months ended September 30, 2008 was equal to
$35,866.
The
revenues reported from our development services agreement was required to be
reported net of the costs to complete the project. This resulted in
no cost of sales being reported on this transaction, so all cost of sales is a
result of Tekno’s activity. Tekno recorded $427,793 in cost of sales
in the nine months ended September 30, 2009 (not including the cost of returns
of $271,876). This resulted in a gross profit on sales of $38,320 (a
gross margin of 8.2%). Our gross profit and margins were hampered by
a large sale that generated revenues less than our cost. We
anticipate that this is a one time event. Our newer products (the
TekCases for Nintendo DS Lite and DSi) currently generate a higher gross margin
than our other products. The cost of sales on our TekCase for the DSi
was $37,480 for the nine months ended September 30, 2009, generating a gross
profit of $37,480 (a gross margin of 50%). The cost of sales on our
TekCase for the DS Lite was $31,480, generating a gross profit of $31,480 (a
gross margin of 50%). The cost of sales on our InCharge units for the
Nintendo Wii was $129,811, generating a gross profit of $66,212 (a gross margin
of 33.8%).
Selling,
General and Administrative
Our
selling, general and administrative expenses were $1,416,283 in the quarter
ended September 30, 2009. This was an increase of approximately 532.8% from the
selling, general and administrative expenses of $223,799 reported in the quarter
ended September 30, 2008. The increase in SG&A is primarily attributable to
additional advertising and professional fees. We also recorded an expense of
$1,100,000 related to the issuance of Series B preferred shares issued to our
officers. This amount is included in professional services expense.
The
largest components of our SG&A are legal and professional services and
advertising. Our advertising expense increased from none in the
quarter ended September 30, 2008 to $48,598 in the quarter ended September 30,
2009. In the prior year, we had just begun to advertise our Tekno
products.
We spent
$1,293,456 on legal and professional fees in the quarter ended September 30,
2009. This was
an increase of 1243% over the legal and professional fees of $96,295 in the
quarter ended September 30, 2008. A large portion of our legal and
professional fees related to the task of making various filings required by the
SEC and responding to comments of the SEC relating to those
filings. We also incurred additional professional fees as we moved to
our listing on the OTC Bulletin Board. We also recorded an expense of $1,100,000
related to the issuance of Series B preferred shares issued to our officers.
This amount is included in professional services expense.
Our
selling, general and administrative expenses were $2,001,486 in the nine month
period ended September 30, 2009. This was an increase of approximately 240% from
the selling, general and administrative expenses of $588,412 reported in the
nine months ended September 30, 2008. The increase in SG&A is attributable
to additional advertising and professional fees. We also recorded an expense of
$1,100,000 related to the issuance of Series B preferred shares issued to our
officers. This amount is included in professional services expense.
34
Operating Loss
We
reported a net operating loss of $(1,484,320) in the quarter ended September 30,
2009 compared to an operating loss of $(197,376) in the quarter ended September
30, 2008. The additional loss was as a result of higher SG&A, lower
sales and lower profit margins.
We
reported an operating loss of $(1,237,515) in the nine months ended September
30, 2009 compared to an operating loss of $(566,171) in the nine months ended
September 30, 2008. Our loss was higher in the current year due to our
booking the $1.1m expense on the Series B preferred stock issuance
despite recording service revenues of $910,650 on a development service
agreement that was completed in June 2009.
Interest Expense
We
incurred interest expense of $1,025,771 in the quarter ended September 30,
2009. This was an increase of 147.5% from interest expense of
$414,405 which was incurred in the quarter ended September 30,
2008.
Our total
interest expense is a function of two components – the interest expense accrued
under our various note agreements and the financing costs booked as interest
expense due to certain accounting rules relating to convertible
debentures. The interest portion related to the accrual of interest
under the terms of our various note agreements was $411,941 for the quarter
ended September 30, 2009 and the portion related to financing costs was
$613,830.
Of the
interest expense in the quarter ended September 30, 2008, $162,815 was due to
accrual of interest under the terms of the note agreements. The remaining
$251,590 in interest expense related to financing costs.
The
increase in the accrued interest expense under our note agreements (from
$162,815 to $411,941, an increase of 153.0%) is as a result of a higher
principal balance and a higher effective interest rate as all some of our notes
are were in default in the quarter ended September 30, 2009 and the others were
renegotiated with less favorable terms. The default interest rate on
$3,931,860 of our notes was accrued at 18%. Our notes were
renegotiated to increase the interest rates between 18-24%.
We
incurred interest expense of $2,686,393 in the nine months ended September 30,
2009. This was an increase of 122.0% from interest expense of
$1,209,978 which was incurred in the nine months ended September 30,
2008.
Our total
interest expense is a function of two components – the interest expense accrued
under our various note agreements and the financing costs booked as interest
expense due to certain accounting rules relating to convertible
debentures. The interest portion related to the accrual of interest
under the terms of our various note agreements was $1,846,771 for the nine
months ended September 30, 2009 and the portion related to financing costs was
$839,622.
Of the
interest expense in the nine months ended September 30, 2008, $422,979 was due
to accrual of interest under the terms of the note agreements. The remaining
$786,999 in interest expense related to financing costs.
The
increase in the accrued interest expense under our note agreements (from
$422,979 to $1,846,771, an increase of 336.6%) is as a result of a higher
principal balance and a higher effective interest rate as nearly all of our
notes are subject to the interest rate calculations described below for the
quarter ended March 31, 2008 (resulting in an interest charge of $1,087,828 for
this quarter on notes with a principal balance of approximately $4.7 million)
and nearly all of our notes payable were subject to higher interest rates in the
quarter ended September 30, 2009 as a result of either being in default or
renegotiated at higher interest rates.
35
We
renegotiated substantially all of our notes in 2008. Under the terms
of these new note agreements we accrue interest as a function of the increase in
our stock price. We view the terms of these new notes as usurious and
unfair. We signed these note agreements with the stipulation that the
interest calculations would be renegotiated by March 31, 2009. The
note holders verbally agreed that renegotiations should be entered
into. The majority of these notes are held by The Nutmeg Group LLC
and related entities (collectively, “Nutmeg”). On March 25, 2009, the
Securities and Exchange Commission (“SEC”) froze the assets of
Nutmeg. We are not a party to the action, but this action by the SEC
negated the ability of Nutmeg to continue with its negotiations to alter the
interest calculations under the notes (our total notes outstanding with Nutmeg
is equal to $2,924,167 as of September 30, 2009). Although there is
no guarantee, we expect to eventually have this interest calculation
adjusted. If we are able to renegotiate the note terms we will likely
have an adjustment to this interest accrual which will be booked as a
forgiveness of indebtedness.
Since our
stock price did not increase in the quarter ended September 30, 2009 (our
closing stock price was $0.01 at the beginning and end of the quarter), we
accrued the default annualized interest rate of 18% in the current
quarter. However, in quarters in which our stock price increases
(which occurred in the quarter ended March 31, 2009) and if we are unable to
renegotiate the interest expense calculation on our current notes, we could be
subject to interest expense that exceeds 25% per quarter on total note balances
of $4,595,523. The following table demonstrates the potential
interest rate charges that we could be forced to accrue on these notes as a
result of increases in our common stock price:
Quarterly
increase in
our
stock price
|
1%
|
3%
|
5%
|
10%
|
15%
|
25%
|
50%
|
|||||||||||||||||||||
Resulting
Interest Expense
|
$
206,799
|
$
206,799
|
$
332,345
|
$
664,689
|
$
997,034
|
$
1,661,723
|
$
1,661,723
|
|||||||||||||||||||||
(default
interest
rate
of 18%
per
year)
|
(default
interest rate of 18%
per
year)
|
(maximum
charge of 25%
per
quarter)
|
The
interest charges shown above are a function of our stock price and the original
principal balances of $4,384,197 (under the terms of the notes the accrued
interest in 2008 was added to the principal balances as of December 31, 2008 and
the new principal balance has been adjusted to $4,595,523). If our
stock price decreases, stays the same or increases less than 2.5% in any given
quarter, the interest for the quarter is a minimum of 2.5% on the original
principal balance. This rate has been adjusted to an annualized rate of 18%
based on the fact that these notes are now in default and carry a default
effective interest rate of 4.5% per quarter. If our common stock
price increases by more than 2.5% in any quarter, the current terms of the notes
require us to pay the holders cash interest payments equal to the price change
in our stock multiplied by 509,576,455 (the maximum price change is capped at
25% per quarter). This number of shares represents the cumulative
number of “applicable shares” in all of the note agreements.
Debt
Forgiveness Income
As of
January 1, 2008, we carried various accounts payable in the amount of $475,166
that related to an abandoned business. This business discontinued its
operations in 2004. These invoices were dated from
2003-2004. Our business was located in the state of California at the
time these debts were incurred. Under the California Code of Civil Procedure,
Section 337, an action upon certain written obligations, including any contract,
obligation or liability founded upon an instrument in writing must be brought
within four years. As these invoices reached the statute of limitations for
collectability, we wrote them off. We have obtained a legal opinion as to the
statute of limitations. We included these write-offs as debt forgiveness
income. We booked $93,076 in debt forgiveness income in the quarter
ended September 30, 2008. We did not book any such income in
the quarter ended September 30, 2009.
36
We booked total debt forgiveness income of $401,519 in the nine months ended September 30, 2008. No debt forgiveness income was recorded in the nine months ended September 30, 2009.
Income
Due to Change in Derivative Liability
We
reported income in the amount of $529,940 in the quarter ended September 30,
2009 due to the change in our derivative liability. This was compared to
income in the amount of $423,195 in the quarter ended September 30,
2008. These amounts were booked as a result of our treatment of
certain convertible notes payable, warrants and options. We are required to
value the convertible feature of each convertible note when they are
issued. We valued our options and warrants at the time of issuance as
well. These valuations are done again on a quarterly
basis. The changes in these values, which are based on a Black
Scholes valuation, are recorded as income if the value decreases or an expense
upon the increase in the valuation.
We
reported income in the amount of $656,092 in the nine months ended September 30,
2009 due to the change in our derivative liability. This was compared to
income of $973,759 in the nine months ended September 30,
2008.
Net Income (Loss)
Our net
income for the quarter ended September 30, 2009 was ($1,978,894), compared to a
loss of ($495,510) in the quarter ended September 30, 2008. This increased
net loss was due to a number of factors described above, primarily due to an
increase in SG&A and interest expense.
Our net
loss for the nine months ended September 30, 2009 was ($3,263,958), compared to
a loss of ($400,871) in the nine months ended September 30, 2008. This
dramatic increase in our net loss was due to a number of factors described
above. Despite recording income from our development services
agreement with CSI in the amount of $910,650 in 2009, our increased SG&A and
interest expense increased our net loss.
Liquidity
and Capital Resources
Our
principal use of cash is to pay for operating expenses. As of
September 30, 2009, we had total cash of $41,685 and total current assets of
$609,701. Our current assets were comprised of our cash, accounts
receivable of $161,464 and inventory of $401,552. We had a working
capital deficit of $7,152,610.
In the
nine months ended September 30, 2009, our operations required $503,374 in
cash. Our operations in the nine month ended September 30, 2008
required cash of $476,622. The increase in the cash requirement
for operations is a result of emerging from the development stage and our
beginning to incur additional SG&A costs in the nine months ended September
30, 2009. Additionally, our development services agreement generated
$876,340 in net cash in the nine months ended September 30, 2009.
We loaned
$10,000 to an officer in the nine months ended September 30,
2009. This loan was repaid, with interest, by the end of the period.
This note was made and paid back in full prior to AccessKey being a reporting
company so it is not a violation of Sarbanes-Oxley rules.
Our
operations were financed through the issuance of notes to various
investors. We netted $840,000 from the issuance of new notes in the
nine months ended September 30, 2009 (none was received in the quarter ended
September 30, 2009). In this period, we made payments of
$532,124 on our notes (none was made in the quarter ended September 30,
2009). We received total loans from officers of $56,000 in the
nine months ended September 30, 2009 (all within the quarter ended September 30,
2009). Of these loans, $24,000 was paid back in August
2009.
We have
one note in the amount of $715,015 that is partially convertible into shares of
our common stock ($300,000 of this note is convertible into common stock at the
option of the holder). As of September 30, 2009, the convertible
portion of this debt could have been converted into 60 million shares of our
common stock. We also have 50 million warrants and 22 million options
outstanding to purchase shares of our common stock.
37
We
anticipate that more of our working capital requirements will be met through
operating revenues in the future. However, our management may have to
continue funding operations through the issuance of additional notes or through
the sales of our stock. There is no guarantee that management will be
able to continue funding operations through the sale of notes or
stock.
We do not
currently maintain a long-term credit facility or any other external source of
long-term funding. The lack of such a facility or source may generate a material
deficiency in our liquidity. Our current debt obligations and long-term
operations will require a substantial amount of capital (approximately $5.32
million plus accrued interest). We anticipate that in the future our revenues
will be adequate to fund our operations and repay our debt obligations. If our
revenues are not adequate, we will be forced to raise additional capital through
the issuance of additional notes and/or through the sales of our stock. We may
also have to renegotiate our current debt as we are unable to honor the notes
under their current terms. If we are able to do so, the new terms of
any renegotiated notes may have less favorable terms than the current terms of
the notes. We are currently in default under a substantial portion of our note
obligations. We are in default on notes with a face value of
$3,931,860 for failure to make interest payments due in April 2009. We were able
to renegotiate some of our notes to extend the term, but all of our notes are
due and payable within the next 12 months. We are currently unable to
renegotiate our notes with the Nutmeg Group who hold a substantial amount of our
notes payable (as of September 30, 2009 the total principal balance on these
notes was equal to $2,924,167). On March 25, 2009, the SEC froze the assets of
the Nutmeg Group, LLC and other related entities. We can not provide any
assurances that either increased revenues or future capital raises, if any, will
be able to support our long-term operations and repay our long-term debt
obligations.
Commitments
and Contractual Obligations
We have
entered into various notes payable to finance our operations over the past three
years. The majority of these notes were renegotiated in
2008. These notes represent the bulk of our financial contractual
obligations. We entered into two new notes in 2009. As a
result of our failure to make required interest payments in April 2009, the
bulk of our notes is in default and are now due and payable. The total amount of
notes now currently due is $3,931,860 plus accrued interest.
All notes
payable renegotiated in 2008 are subject to certain interest calculations that
we are trying to renegotiate. The current interest calculations
are made quarterly as a function of our stock price and the original principal
balances of $4,384,197 (under the terms of the notes the accrued interest in
2008 was added to the principal balances as of December 31, 2008 to make the
current principal balances $4,595,523). If our stock price decreases,
stays the same or increases less than 2.5% in any given quarter, the interest
for the quarter is a minimum of 2.5% on the original principal balance (due to
our default under these notes, the default annual interest rate of 18% now
applies, so the minimum effective quarterly interest is now at 4.5% per
quarter). If our common stock price increases by more than 2.5%
in any quarter, the current terms of the notes require us to pay the holders
cash interest payments equal to the price change in our stock multiplied by
509,576,455. This number of shares represents the cumulative number
of “applicable shares” in all of the note agreements. As per the terms of
the note agreements, the maximum interest rate is 25% per quarter (based on the
original note balance). We originally signed these note agreements,
which superseded several old note agreements, with an addendum that stated we
did not accept the interest rate calculations. The addendum was not
signed by the note holders, but they agreed in principle to adjust the interest
calculations under the notes. We are confident that the interest
rates on the notes can be negotiated to a calculation that we feel is more
reasonable. As stated in the addendum, we had an understanding with our
note holders that the interest rate calculations would be adjusted by March 31,
2009. However, on March 25, 2009, the Securities and Exchange
Commission (“SEC”) froze the assets of The Nutmeg Group LLC and other related
entities (“Nutmeg”). Nutmeg holds the majority of our notes
payable. We are not a party to the action, but this action by the SEC
negated the ability of Nutmeg to continue with its negotiations to alter the
interest calculations under the notes. Because of this fact, we have
accrued interest at a rate of up to 30% for the quarter ended March 31, 2009
under some of these note agreements. The default interest rate of 18%
was accrued in the quarters ended June 30, 2009 and September 30,
2009. Although there is no guarantee, we expect to eventually have
this interest calculation adjusted. If we are able to
renegotiate the note terms we will likely have an adjustment to this
interest accrual which will be booked as a forgiveness of
indebtedness.
38
Material Contracts
We have
entered into consulting agreements with our officers: George Stevens
and Bruce Palmer and two other consultants, Craig Erickson and Mark Kasok
(both Erickson and Kasok are vice presidents). All of these
contracts call for monthly payments, stock options and bonuses to be granted as
we see fit, monthly expense reimbursements and, in some cases, a severance
payment upon termination.
The
agreement with George Stevens was made through his company, Stevens Resource
Group. It was executed on April 1, 2008 and calls for Mr. Stevens to
be our Chief Executive Officer. This contract does not have a
term and may be cancelled by either party with a 30-day notice. The
contract calls for us to pay Mr. Stevens $7,000 per month. We may grant
stock options and pay bonuses and we are required to pay Mr. Steven’s expenses
associated with carrying out his duties. If we cancel the contract,
we are required to pay Mr. Stevens $84,000. In conjunction with his
services rendered to the Company, we issued Mr. Stevens 7,000,000 stock
options. These stock options were issued in one million option blocks with
exercise prices between $0.045 and $0.10. The options have a
10-year term.
Our
agreement with Bruce Palmer was executed on April 1, 2008 and calls for Mr.
Palmer to be President of TeknoCreations, our wholly-owned subsidiary. Mr.
Palmer also acts as our Chief Financial Officer and President. His
contract does not have a term and may be cancelled by either party with a 30-day
notice. The contract calls for us to pay Mr. Palmer $7,000 per
month. We may grant stock options and pay bonuses and we are required
to pay Mr. Palmer’s expenses associated with carrying out his
duties. If we cancel the contract, we are required to pay Mr. Palmer
$84,000. In conjunction with his services rendered to the Company, we
issued Mr. Palmer 7,000,000 stock options. These stock options were issued
in one million option blocks with exercise prices between $0.045 and
$0.10. The options have a 10-year term.
Our
agreement with Craig Erickson was executed on May 22, 2007 and calls for Mr.
Erickson to perform various duties that include product design. This contract
does not have a term and may be cancelled by either party with a 30-day
notice. The contract calls for us to pay Mr. Erickson $11,000 per
month. We may grant stock options and pay bonuses and we are required
to pay Mr. Erickson’s expenses associated with carrying out his
duties. In conjunction with his services rendered to the Company, we
issued Mr. Erickson 3,500,000 stock options. These stock options were
issued in 500,000 option blocks with exercise prices between $0.045 and
$0.10. The options have a 10-year term.
Our
agreement with Mark Kasok was executed on May 22, 2007 and calls for him to
perform various duties relating to sales and marketing for
TeknoCreations. This contract does not have a term and may be cancelled by
either party with a 30-day notice. The contract calls for us to pay
Mr. Kasok $7,500 per month. We were also to issue 500,000 shares of
our common stock to Kasok. This stock was issued to Kasok in August
2009. We may also grant stock options and pay bonuses and we are
required to pay Mr. Kasok’s expenses associated with carrying out his
duties. In conjunction with his services rendered, we issued Mr. Mr.
Kasok 3,500,000 stock options. These stock options were issued in 500,000
option blocks with exercise prices between $0.045 and $0.10. The
options have a 10-year term.
On May
15, 2008, we entered into a Master Development Contract with CSI Digital,
Inc. Under the terms of the contract CSI is paying us $1.5 million to
integrate our technology into a set-top box. We completed our work
under this contract in June 2009. We received $1.4 million from CSI
Digital during the year ended December 31, 2008 and another $12,000 in
2009. The remaining $88,000 is owed to us as of September 30,
2009. We spent a total of $589,350 fulfilling our obligations under
the contract. Upon our completion of the contract in June 2009, we recorded
the net amount generated from the contract of $910,650 as revenues.
39
On May
17, 2008, we entered into a Contract for Consultancy with Diamond Apple,
Ltd. We contracted with Diamond Apple to assist us in the software
development for the set-top box under the CSI Digital agreement mentioned above.
We consider the amount paid to Diamond Apple proprietary
information.
Our
subsidiary, TeknoCreations, Inc., had one customer, Jack of All Games (Canada ),
Inc. (“JOAG-C”) that accounted for 86.3% of its total sales in 2008 and 50.1% of
sales in the nine months ended September 30, 2009. Tekno entered into
a Distribution Agreement with JOAG-C on March 12, 2008. The agreement
appointed JOAG-C as a non-exclusive distributor for Tekno in
Canada. Tekno is to supply JOAG-C with product requests with payments
due to Tekno in 45 days. Tekno can set prices and implement changes in
prices with 60 days notice. Tekno generated $1,378,386 in sales
during the year ended December 31, 2008 and $210,412 in the nine months ended
September 30, 2009 under the terms of this agreement. During
the quarter ended June 30, 2009, JOAG-C made returns of $433,933. As of
September 30, 2009, JOAG-C owed Tekno $67,680.
Tekno
entered into a Supplemental Vendor Purchase Agreement with D&H Distributing
Company (“D&H”) on March 7, 2008. Tekno entered into this agreement to
allow D&H to sell InCharge units to large format retailers, such as CompUSA,
Wal-Mart, Sam’s Club, Office Max, Office Depot and Staples. Tekno is to pay
D&H a marketing fee equal to the greater of 5% of net purchases or $3,000
per quarter. D&H is required to pay for its purchases within 45
days and is due a volume rebate equal to 2% of purchases. Tekno generated
$74,725 in sales during the year ended December 31, 2008 and $62,028 in the nine
months ended September 30, 2009 under the terms of this agreement. As of
September 30, 2009, D&H owed Tekno $5,784.
We
purchase our InCharge units through a Chinese company, Ever Sparkle. We do
not have a contract with them, but instead we issue purchase orders. Upon
payment in full, we assume ownership of inventory when it departs
China.
On July
1, 2009, the Company entered into a consulting agreement with Grant Stevens, the
son of the Company’s CEO. The contract calls for Grant Stevens to act as
sales manager for the Company at a fee of $4,000 per month. He was
also issued 500,000 shares of the Company’s restricted common stock (valued at
$6,000) under the terms of the agreement. This contract can be cancelled by
either party with 30 days notice.
OFF-BALANCE
SHEET ARRANGEMENTS
Through
September 30, 2009, we did not have any relationships with entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. In addition, we do not engage in trading activities involving
non-exchange traded contracts. As such, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if we had engaged
in these relationships. We do not have relationships or transactions with
persons or entities that derive benefits from their non-independent relationship
with us or our related parties.
40
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
4. CONTROLS AND PROCEDURES
ITEM
4T. CONTROLS AND PROCEDURES
We
maintain disclosure controls and procedures designed to ensure that material
information related to our company is recorded, processed, summarized and
reported within the time periods specified in the SEC rules and
forms.
(a) As of
the end of the period covered by this report, we carried out an evaluation under
the supervision and with the participation of our Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design
and operation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934). Based upon
that evaluation, our CEO and CFO concluded, as of the date of such evaluation,
that our disclosure controls and procedures were
effective. Subsequent to the period ended June 30, 2009, the
Company restated its financial statements for the years ended December 31, 2007
and 2008 and the quarterly period ended March 31, 2009 based on errors
discovered related to warrants and options needing to be treated as liabilities
rather than equity. This caused the Company to conclude its disclosure controls
and procedures were not effective. The Company implemented a new control
procedure to analyze all equity and derivative issuances for potential
liability. Since the Company has corrected the errors, the
Company now maintains that its disclosure controls and procedures (defined in
Rule 13a-15(e) or 15(d)-15(e) under the Exchange Act as controls and other
procedures of an issuer that are designed to ensure that information required to
be disclosed by the issuer in the reports that it files or submits under the Act
is recorded, processed, summarized and reported, within the time frames
specified in the Commission’s rules and forms) are effective
.
(b) Other
than the changes discussed above, no changes were made in our internal control
over financial reporting during our most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting. However, as
discussed above relating to the restatement, changes were made subsequent to
June 30, 2009 to ensure the controls are now effective.
(c)
Limitations. Our management, including our CEO and CFO, does not expect that our
disclosure controls or internal controls over financial reporting will prevent
all errors or all instances of fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that
the control system's objectives will be met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within our company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and any design may not succeed in achieving its stated goals
under all potential future conditions. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance
with policies or procedures. Because of the inherent limitation of a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
41
PART II.
- OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
On
January 10, 2005, a judgment in the amount of $160,995 was entered into in
Orange County, California. This judgment is payable to a former service
provider of the Company who provided technology services in an abandoned
business of the Company. The provider has made no contact with the
Company during the current management’s tenure. The full amount has
been booked as an accrued liability on the Company’s balance sheet as of
September 30, 2009. The statute of limitations in the state of
California on such a judgment is ten years.
ITEM
1A. RISK FACTORS
Not
required as we are a smaller reporting company.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Common
Stock
On August
6, 2009, the Company issued 500,000 shares of common stock to Mark Kasok, due
under his consulting agreement that was entered into on May 22,
2007. This stock was due and payable at the date of the execution of
the agreement and was valued at $8,250 on this date. This is a value
of $0.0165 per share, the value of the stock on May 22, 2007. The
Company had been carrying this amount as a payable to Mr. Kasok until the stock
was issued.
On August
6, 2009, the Company issued 1,500,000 shares of common stock to two consultants
for services. These shares were issued at $0.012 per share, the closing
price of the stock on the date that the resolution was passed for this issuance
(August 5, 2009). The total value of these shares was equal to
$18,000. Of these shares, 500,000 were issued to Grant Stevens, the
son of the CEO of the Company, under the terms of a consulting agreement with
the Company.
On
September 29, 2009, the Company issued 2,712,500 to an attorney for past
services rendered to the Company and for a $5,000 retainer for October
2009. These shares were issued at $0.01 per share, the closing price of the
stock on the date of issuance. The total value of these shares was
equal to $27,125.
On
September 1, 2009, the Company agreed to issue 5,000,000 shares of its common
stock to a note holder as part of a forbearance agreement. This stock was
not issued until November 2009, but was deemed to have been issued on the date
that the Company was contractually obligated to issue the shares. These shares were issued at $0.008 per
share, the closing price of the stock on the date of the forbearance
agreement. The total value of these shares was equal to $40,000 and
this amount was deducted as an interest expense.
Series B Convertible
Preferred Stock
On
September 21, 2009, the Company issued 1,200,000 shares of Series B Convertible
Preferred Stock to its four officers in satisfaction of $36,000 owed by the
Company and an additional $1.1m in compensation expense (a total valuation of
$1,136,000). George Stevens, Bruce Palmer, Craig Erickson and Mark Kasok
each received 400,000 shares of this stock. After the issuance of these shares,
these four individuals had majority voting control of the Company.
ITEM 3 -
DEFAULTS UPON SENIOR SECURITIES
None.
42
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 -
OTHER INFORMATION
None.
ITEM
6. EXHIBITS
Index to
Exhibits
No.
|
Description
|
3.1
|
Restated
Articles of Incorporation*
|
3.2
|
Bylaws*
|
4.1
|
Form
of Common Stock Certificate*
|
4.2
|
Certificate
of Designation of the Rights and Preferences of the Series A Preferred
Stock*
|
10.31
|
Amended
Convertible Note with Physicians Healthcare Management Group, Inc. dated
July 31, 2009
|
10.32
|
Common
stock purchase warrant with Physicians Healthcare Management Group, Inc.
dated July 31, 2009 for 25 million shares
|
10.33
|
Forbearance
Agreement with Physicians Healthcare Management Group, Inc. dated July 31,
2009
|
10.34 | Superseding Secured note between Micro Pipe Fund I, LLC and TeknoCreations, Inc. dated September 1, 2009 in the amount of $270,630 |
10.35 | Superseding Secured note between Micro Pipe Fund I, LLC and AccessKey IP, Inc. dated September 1, 2009 in the amount of $205,402 |
10.36 | Superseding note with The Melanie Altholtz Irrevocable Trust in the amount of $200,000 dated September 1, 2009 |
10.37 | Forbearance Agreement with The Melanie Altholtz Irrevocable Trust dated September 1, 2009 |
21.1 | Subsidiaries of the Registrant * |
31.1 | Certification of Chief Executive Officer as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of Chief Financial Officer as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification of Chief Executive Officer and Chief Financial Officer as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* Previously filed with the
Securities Exchange Commission as an Exhibit to the Registration Statement on
Form 10, File No. 000-53664
43
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.
ACCESSKEY IP, INC. | |
November 23, 2009 | /s/ George Q. Stevens |
George Q. Stevens | |
Chief Executive Officer and Chairman | |
November 23, 2009 | /s/ Bruce M. Palmer |
Bruce M. Palmer | |
President, Secretary and Chief Financial Officer |
44