Attached files
file | filename |
---|---|
EX-14.1 - EXHIBIT 14.1 - NET TALK.COM, INC. | a6119436ex14_1.htm |
EX-31.2 - EXHIBIT 31.2 - NET TALK.COM, INC. | a6119436ex31_2.htm |
EX-32.2 - EXHIBIT 32.2 - NET TALK.COM, INC. | a6119436ex32_2.htm |
EX-32.1 - EXHIBIT 32.1 - NET TALK.COM, INC. | a6119436ex32_1.htm |
EX-31.1 - EXHIBIT 31.1 - NET TALK.COM, INC. | a6119436ex31_1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
ý
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|
|
SECURITIES
EXCHANGE ACT OF 1934
|
||
For the fiscal year ended September 30, 2009 | ||
OR | ||
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|
|
SECURITIES
EXCHANGE ACT OF 1934
|
For the
transition period from ____________ to ____________
Commission
file number: 000-53668
NET
TALK.COM, INC.
(Exact
name of registrant as specified in its charter)
Florida
|
20
– 4830633
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
|
1100 NW 163rd Drive, Miami, FL
|
33169
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (305) 621 1200
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Title
of each class
|
Name
of each exchange on which registered
|
|
Common
Stock, $0.001 par value per share
|
OTCBB
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No X
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes o No X
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
X No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
1
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 [ ]
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).
Yes o No X
The
aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant, computed by reference to price at which the common equity was
sold, or the average bid and asked price of such common stock as of March 31,
2009, the last business day of the registrant’s most recently completed fiscal
quarter, was $0.25 . For purposes of this computation, the registrant
has excluded the market value of all shares of its common stock reported as
being beneficially owned by executive officers and directors and holders of more
than 10% of the common stock on a fully diluted basis of the registrant; such
exclusion shall not, however, be deemed to constitute an admission that any such
person is an “affiliate” of the registrant.
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.
Class
|
Outstanding
at December 14, 2009
|
|
Common
Stock, $0.001 par value per share
|
9,719,800
shares
|
2
Net
Talk.com, Inc.
Form
10-K
For
the fiscal year ended September 30, 2009
Table
of contents
|
Page
|
|
5
|
||
11
|
||
15
|
||
15
|
||
15
|
||
16
|
||
|
||
18
|
||
18
|
||
26
|
||
26
|
||
26
|
||
26
|
||
28
|
||
28
|
||
31
|
||
34
|
||
35
|
||
36
|
||
37
|
||
|
39
|
|
|
Financial
statements
|
42
|
3
Forward Looking
Statements
Certain
statements contained in this annual report on Form 10-K and other written
material and oral statements made from time to time by us do not relate to
historical or current facts. As such, they are referred to as
“forward-looking statements,” which are intended to convey our expectations or
predictions regarding the occurrence of possible future events or the existence
of trends and factors that may impact our future plans and operating results.
These forward-looking statements are derived, in part, from various assumptions
and analyses we have made in the context of our current business plan and
information currently available to us and in light of our experience and
perceptions of historical trends, current conditions and expected future
developments and other factors we believe to be appropriate in the
circumstances. You can generally identify forward-looking statements through
words and phrases such as “ seek, ” “ anticipate, ” “ believe, ” “ estimate, ” “
expect, ” “ intend, ” “ plan, ” “ budget, ” “ project, ” “ may be, ” “ may
continue, ” “ may likely result, ” and similar expressions. When reading any
forward looking statement, you should remain mindful that actual results or
developments may vary substantially from those expected as expressed in or
implied by that statement for a number of reasons or factors, such as those
relating to:
●
|
whether
or not a market for our products and services develop and, if a market
develops, the pace at which it
develops;
|
●
|
our
ability to successfully sell our products and services if a market
develops;
|
●
|
our
ability to attract the qualified personnel to implement our growth
strategies;
|
●
|
our
ability to develop sales and marketing
capabilities;
|
●
|
the
accuracy of our estimates and
projections;
|
●
|
our
ability to fund our short-term and long-term financing
needs;
|
●
|
changes
in our business plan and corporate strategies; and other risks and
uncertainties discussed in greater detail in the sections of this
prospectus, including the section captioned “Plan of
Operation”.
|
Each
forward-looking statement should be read in context with, and with an
understanding of, the various other disclosures concerning our Company and our
business made elsewhere in this prospectus, as well as other public reports
filed with the SEC. You should not place undue reliance on any forward-looking
statement as a prediction of actual results or developments. We are not
obligated to update or revise any forward-looking statement contained in this
report to reflect new events or circumstances unless and to the extent required
by applicable law.
4
Company
and Business
We are a
telephone company, who provides, sells and supplies commercial and residential
telecommunication services, including services utilizing voice over internet
protocol (“VoIP”) technology, session initiation protocol (“SIP”) technology,
wireless fidelity technology, wireless maximum technology, marine satellite
services technology and other similar type technologies. Our main product is the
TK 6000, an analog telephone adapter that provides connectivity for analog
telephones and faxes to home, home office or corporate local area networks
(“LAN”).
Our TK
6000 and its related services is a cost effective solution for individuals,
small businesses and telecommuters connecting to any analog telephone, fax or
private branch exchange (“PBX”). The TK 6000 provides one USB port,
one Ethernet port and one analog telephone port. A full suite of internet
protocol features is available to maximize universal connectivity. In addition,
analog telephones attached to the TK 6000 are able to use advanced calling
features such as call forwarding, caller ID, 3-way calling, call holding, call
retrieval and call transfer.
History
and Overview
We are a
Florida corporation, incorporated on May 1, 2006 under the name Discover
Screens, Inc. (“Discover Screens”).
Prior to
September 10, 2008, we were known as Discover Screens, a development-stage
company, dedicated to providing advertising through interactive,
audiovisual, information and advertising portals located in high-traffic
indoor venues. Our name and business operations changed in a series of
transactions beginning in December of 2007. Pursuant to an asset purchase
agreement dated December 30, 2007, we sold all of the assets associated
with the advertising business as a going concern to Robert H. Blank, who was
then our President and Chief Operating Officer. Following that transaction,
we ceased all existing operations, and from December 30, 2007 to
September 9, 2008, we owned nominal assets and generated no
revenue. In February of 2008, Mr. Blank resigned as officer and
director.
On
September 9, 2008, Robin C. Hoover, our sole remaining officer and
director, appointed four new members to the Board of Directors, Anastasios
Kyriakides, Kenneth Hosfeld, Guillermo Rodriguez and Leo Manzewitsch.
Mr. Hoover then resigned as an officer and director. Mr. Richard
Diamond was appointed by the Board of Directors to fill the vacancy left by
Mr. Hoover’s resignation. Mr. Diamond resigned as a director of
the Company, effective November 23, 2009.
On
September 10, 2008, we changed our name from Discover Screens, Inc. to Net
Talk.com, Inc. On September 10, 2008, we entered into a Contribution
Agreement with Vicis Capital Master Fund (“Vicis”) by which Vicis
contributed certain operating assets to the Company in exchange for (a) a
12% Senior Secured Convertible Debenture in the principal amount of $1,000,000;
and (b) a Series B Warrant to purchase 4,000,000 shares of common stock of
the Company. Also on September 10, 2008, the Company entered into a
Securities Purchase Agreement with Debt Opportunity Fund, LLP (“DOF”) by which
DOF purchased (a) a 12% Senior Secured Convertible Debenture in the
principal amount of $500,000; and (b) a Series B Warrant to purchase
2,000,000 shares of Common Stock of the Company.
On
September 10, 2008, we acquired certain tangible and intangible assets,
formerly owned by Interlink Global Corporation (“Interlink”), (the “Interlink
Asset Group”) directly from Interlink’s creditor who had seized the assets
pursuant to a Security and Collateral Agreement. Our purpose in acquiring these
assets, which included employment rights to the executive management team of
Interlink, who now currently serve as our officers, was to advance the TK 6000
VoIP Technology Program, which Interlink launched in July 2008. Accordingly,
these assets substantially comprise our current business assets and the
infrastructure for our future operations. Contemporaneously with this purchase,
we executed an assignment and intellectual property agreement with Interlink
that served to perfect our ownership rights to the assets.
Consideration
for the acquisition consisted of a face value $1,000,000 convertible debenture,
plus warrants to purchase 4,000,000 shares of our common stock. On the date of
the Interlink Asset Group acquisition, we also entered into a financing
agreement with the DOF (as described above) that provided for the issuance of a
face value $500,000 convertible debenture, plus warrants to purchase 2,000,000
shares of our common stock for net cash consideration of $448,300. In connection
with this acquisition, we issued 6,000,000 shares of common stock to our new
management team in connection with the Interlink Asset Group acquisition.
5
Our
Strategy
We
continue to improve and enhance the following factors in building and expanding
our customer base:
●
|
Deployment
and distribution of our main product TK 6000
device.
|
●
|
Attractive
and innovative value proposition. We offer our customers an
attractive and innovative value proposition: a portable telephone
replacement with multiple and unique features that differentiates our
services from the competition.
|
●
|
Innovative,
high technology and low cost technology platform. We believe
our innovative software and network technology platform provides us with a
competitive advantage over our competition and allows us to maintain a low
cost infrastructure relative to our
competitors.
|
Plan
of Operation
We
provide, sell and supply commercial and residential telecommunication services,
including services utilizing voice over internet protocol (“VoIP”) technology,
session initiation protocol (“SIP”) technology, wireless fidelity technology,
wireless maximum technology, marine satellite services technology and other
similar type technologies. We are developing our business infrastructure and new
products and services.
Our
Product
At this
time, our main product is the “TK 6000”. The TK 6000 is designed to provide
specifications unique to each customer’s existing equipment. It allows the
customer full mobile flexibility by being able to take internet interface
anywhere the customer has an internet connection. The TK 6000 has the following
features:
A
Universal Serial Bus (“USB”) connection allowing the interconnection of the TK
6000 to any computer. The USB connection results in shared power between the TK
6000 and the host computer.
In
addition to the USB power source option, the TK 6000 will also have an external
power supply allowing the phone to independently power itself when not connected
to a host computer;
Unlike
most VoIP telephone systems, the TK 6000 has a standalone feature allowing it to
be plugged directly into a standard internet connection.
The TK
6000 is a compact, space-efficient product.
The TK
6000 has an interface component so that the customer can purchase multiple units
that can communicate with each other allowing simultaneous ringing from multiple
locations.
Our
product is portable and allows our customers to make and receive phone calls
with a telephone anywhere broadband internet connection is
available. We transmit the calls using Voice over Internet Protocol
“VOIP” technology, which converts voice signals into digital data transmissions
over the internet.
Our
Services
Our
business is to provide products and services that utilize Voice Over Internet
Protocol, which we refer to as “VoIP.” VoIP is a technology that allows the
consumer to make telephone calls over a broadband internet connection instead of
using a regular (or analog) telephone line. VoIP works by converting the user’s
voice into a digital signal that travels over the internet until it reaches
its destination. If the user is calling a regular telephone line number, the
signal is converted back into a voice signal once it reaches the end user. Our
business model is to develop and commercialize software technology solutions for
cost effective, real-time communications over the internet and related
services.
6
Services
provided or to be provided:
Text to phone reminder
service. We are currently developing a service that will allow VoIP to
synchronize with the customer’s data base schedule management system
(such as Microsoft Office Outlook ©
). Our goal is to develop a service that will call the customer
at a pre-designated time to provide an audio reminder of that day’s
agenda to the customer. By offering this service at a low price point of less
than five dollars per month we hope to appeal to a broad customer
base. This software is currently under development.
Free conference server. This
product is currently available to all our customers.
Future
Voice Message Delivery. This service allows the user to record a voice
message which will be delivered to a recipient at a later date and time
specified by the user.
Speech to text services for the
hearing impaired. This is a standalone service that will allow the
hearing impaired to receive real time conversion of incoming voice
signals into text displayed on an incorporated display panel.
Marketing
We have
developed direct sales channels, as represented by web sites and toll free
numbers. Our direct sales channels are supported by highly integrated
advertising campaigns across multiple media such as infomercials, television and
other media channels. Our website is www.nettalk.com, our
telephone number is 305 621 1200 and our fax number is 305 621
1201.
Our
primary source of revenue is the sale and distribution of our TK 6000
product. We also generate revenue from the sale of accessories to our
product and international long distance monthly charges that are billed to our
customers.
Advertising
Our goal
is to position ourselves as a premier supplier of choice for VoIP services. Our
current business strategy is to focus our advertising dollars on our home market
in South Florida. Our advertising will consist of mass marketing
campaigns focusing on television infomercials for the South Florida market and
other states including cable television channels. We
have been running infomercial since July 2009 at the present time the
infomercials are running through the United States on a routinely basis every
week.
Customers
Our
customers are made up of residential and small businesses. We anticipate that
future services will appeal to our existing customers and hope that our
additional phone products and services will provide a complete phone package
experience to our customers.
Our target
audience is individual consumers and small businesses looking to lower their
current cost of telecommunications. We are also reaching a large audience with
our websites. We hope that consumers will find our websites by doing an internet
search for VoIP service providers. We also use other means of advertising such
as direct to consumer sales, ecommerce and wholesale sales to retail
stores.
Geographic
Markets
Our
primary geographic market is our home market of South Florida. Our target
audience are individual consumers and small businesses looking to
lower their current cost of telecommunications. We also expect to
reach a large audience with our websites. We hope that consumers will find our
websites by doing an internet search for VoIP service providers. We will also
use other means of advertising such as direct to consumer sales, ecommerce and
wholesale sales to retail stores.
7
We have
been granted and or are applying for Competitive Local Exchange Carrier (“CLEC”)
Licenses in thirty-five states, as follows:
Alabama | Georgia | Massachusetts | New Mexico | South Dakota |
Arizona | Idaho | Minnesota | New York | Texas |
Arkansas | Illinois | Montana | North Carolina | Utah |
California | Indiana | Nebraska | North Dakota | Vermont |
Connecticut | Kansas | Nevada | Ohio | Washington DC |
Delaware | Kentucky | New Jersey | Oregon | Washington |
Florida | Maryland | New York | Pennsylvania | Wisconsin |
It is our
intent to focus our expansion on the geographic markets in which we have been
granted CLEC Licenses. We also intend to expand our market place to reach
customers worldwide.
The
Industry
In the
past decade, the use of the internet for all purposes has
exploded. VoIP is a technology that enables communications over the
internet through the compression of voice, video and/or other media into data
packets that can be efficiently transmitted over data networks and then
converted back into the original media at the other end of the transmission.
Since the introduction of the first VoIP technology in the mid 1990s, the
quality and clarity of VoIP connections have continued to evolve and
improve. Perhaps the biggest jump in VoIP quality came with the
introduction of SIP, or Session Initiation Protocol. SIP is a text-based
protocol suitable for integrated voice-data applications. Today SIP is the
predominant industry standard for establishing multimedia communications over
the Internet. As the clarity and quality of VoIP services have increased, so has
the acceptance of VoIP by consumers.
As a
result of the potential cost savings and added feature availability of VoIP,
consumers, industry leaders and traditional telecommunication service providers
see VoIP as the future of telecommunications. Factors that have been
contributing to the boom in VoIP use include: (a) increased consumer demand
for lower cost telephone services; (b) increased demand for long distance
services as the market place becomes increasingly global; (c) improved
reliability and quality of VoIP due to technological advances; and
(d) innovations that allow services for VoIP users that are not available
in traditional telephone services. These factor, and others, have resulted in
various service providers and consumers exploring VoIP alternatives to
traditional analog phone services.
Our
Competition
The
communications industry is highly competitive and significantly affected by
regulatory changes, technology evolution, marketing strategies, and pricing
decisions of the larger industry participants. The market for our
services is evolving rapidly and is subject to shifting customer demands and the
introduction of new products and services. Our current and potential competitors
come from different market sectors and vary in size and scope with respect to
the products and services that they offer or intend to offer in the
future.
One of our
competitors in the domestic market is traditional telephone service providers
that are increasingly adding advanced service features to traditional telephone
services. Domestic telephone providers have the advantage of having strong name
recognition, large research and development budgets and existing service and
market networks.
In
addition, numerous vendors sell products and services using VoIP technology. Our
competitors use innovations such as Analogue Terminal Adapters, or ATAs, to
connect an analogue telephone to a VoIP network. Sometimes referred to as VoIP
Gateways, these devices are widely advertised and sold. Sales are conducted by
many different methods, including internet and infomercial sales, and barriers
to entry into the business are low.
We also
face competition from alternative communication methods such as internet, fax
providers and voice mail service providers.
8
Many of
our competitors may be better established, larger and better financed than us,
and are able to use their visibility and substantial marketing resources to
attract customers. In particular, many of our competitors are large, established
network service providers that are able to market and distribute enhanced
communication services within their already large base of subscribers. As a
result, these competitors maybe able to adapt more quickly to new or emerging
technologies and changes in customer requirements. They
may also be able to devote greater resources to the promotion and sale of their
products. Moreover, we may not have sufficient resources to undertake
the continuing research and development necessary to remain
competitive.
We
differentiate our services from those offered by our competitors by offering
exceptional customer service and lower cost alternatives. We have worked hard to
control the development costs associated with the TK 6000. We have done
this by choosing phone components and component vendors that are economical but
do not compromise on quality. We have developed and marketed our own products
and services, rather than simply reselling another manufacturer’s innovations.
Finally, our TK 6000 product is a standalone phone product that does not require
the user to first invest in a computer. For these reasons, we know that our TK
6000 product is a lower cost alternative to similar telephone products currently
being marketed. Because we are engaged in the same cost saving measures for the
services we offer, we are able to offer those services at a competitive
price.
Our
products and services are user friendly and convenient for our customers. For
example, our packaging includes detailed, user friendly instructions and
diagrams to allow for easy installation and activation. We have distinguished
ourselves from our main competitors through the level of customer service
offered to our consumers following their purchase or our products or
services. Currently, our competitors only offer customer service through an
email query program. This does not allow the customer to receive rapid,
real-time problem solving assistance in the event our competitor’s product or
service fails. In contrast, we established a customer service online forum where
our users can post their questions and read other users’ responses. The forum
has key word or key phrase search option so that our customers can easily find a
solution to the problem they are experiencing. Our forum is moderated by one of
our development engineers to ensure that all questions are being properly
addressed and issues resolved. We also offer a pay-per-use live
customer support hotline. By paying a fee, either per minute or per call, our
customers are able to reach a support specialist to get a direct answer to their
questions. This allows us to provide superior customer service, while
still keeping our costs low.
Government
Regulation
As a
telecommunications supplier, we are subject to extensive government regulation.
The majority of our government regulation comes from the Federal Communications
Commission (the “FCC”).
Telecommunications
is an area of rapid regulatory change. Changes in the laws and regulations and
new interpretations of existing laws and regulations may affect permissible
activities, the relative costs associated with doing business and amounts paid
to us for our services. We cannot predict the future of federal, state and local
regulations or legislation, including FCC regulations.
Federal
Communications Commission (“FCC”)
regulation
The FCC is
an independent United States government agency. The FCC was established by the
Communications Act of 1934 and is charged with regulating interstate and
international communications by radio, television, wire, satellite and cable.
The FCC’s jurisdiction covers all fifty states, the District of Columbia and
U.S. possessions.
The FCC
works to create an environment promoting competition and innovation to benefit
communications customers. Where necessary, the FCC has acted to ensure VoIP
providers comply with important public safety requirements and public policy
goals.
Interconnected
VoIP providers must comply with the Commission’s Telecommunications Relay
Services (TRS) requirements, including contributing to the TRS Fund used to
support the provision of telecommunications services to persons with speech or
hearing disabilities, and offering 711 abbreviated dialing for access to relay
services. Interconnected VoIP providers and equipment manufacturers also must
ensure that, consistent with Section 255 of the Communication Act,
their services are available to and usable by individuals with
disabilities, if such access is readily achievable.
9
Finally,
the FCC now requires interconnected VoIP providers and telephone companies that
obtain numbers from them to comply with Local Number Portability (LNP) rules.
These rules allow telephone, and now VoIP, subscribers that change
providers to keep the subscribers telephone numbers provided that they stay in
the same geographic area. VoIP providers must also contribute to funds
established to share LNP and numbering administrative costs among all
telecommunications providers benefiting from these services.
The FCC
monitors and investigates complaints against VoIP providers and, if necessary,
can bring enforcement actions against VoIP providers that do not comply with
applicable regulations.
State
Telecommunication Regulation
We are
also registered with the Florida Public Utilities Commission as a Competitive
Local Exchange Carrier (“CLEC”) and Interexchange (“IXC”) Carrier.
In
Florida, a “competitive local exchange carrier” is defined as any company, other
than an incumbent local exchange company, certificated by the Public Service
Commission to provide local exchange telecommunication services in the state of
Florida on or after July 1, 1995. CLEC companies providing services in
Florida after July 1, 1995, must be certificated by the Florida Public
Service Commission, and competitive local exchange companies are required to
file a price list specifying their rates and charges for basic local
telecommunication services.
Florida,
as well as other states, also regulates providers of Interexchange
Telecommunications (“IXC”). The Florida Public Service Commission
includes the following as examples of IXC providers: (1) operator service
providers; (2) resellers; (3) switchless re-billers;
(4) multi-location discount aggregators; (5) prepaid debit card
providers; and (5) facilities based interexchange carriers.
Section 364.02(13) of the Florida Statutes requires IXCs to provide
current contact information and a tariff to the Florida Public Service
Commission.
We have
applied and or received CLEC and IXC registrations in 35 states
including:
Alabama | Georgia | Massachusetts | New Mexico | South Dakota |
Arizona | Idaho | Minnesota | New York | Texas |
Arkansas | Illinois | Montana | North Carolina | Utah |
California | Indiana | Nebraska | North Dakota | Vermont |
Connecticut | Kansas | Nevada | Ohio | Washington DC |
Delaware | Kentucky | New Jersey | Oregon | Washington |
Florida | Maryland | New York | Pennsylvania | Wisconsin |
The law
relating to regulation of VoIP technology is in a flux. In recent court cases,
other VoIP providers have challenged whether state regulations can be applied to
VoIP technology or whether such regulation has been preempted by the
Telecommunications Act of 1996 and other Federal laws. At least one of our
competitors has successfully fought the application of state laws to VoIP
technology. However, to be cautious, we will continue to obtain a competitive
local exchange carrier license from each state in which we conduct business. An
added advantage of obtaining a CLEC license from each state is that we can
obtain an operational carrier number from the North American Numbering Plan
Administration. The operational carrier number will allow us to assign our
customers telephone numbers in the area code in which they reside.
Employees
We employ
nine full-time and no part-time employees. None of our employees is subject to a
collective bargaining agreement, and we consider our employee relations to be
satisfactory.
Intellectual
Property
We regard
our domain names, patents, trademarks, copyrights, trade dress, trade secrets,
proprietary technologies and similar intellectual property as critical to our
success, and we rely on patent, trademark and copyright law, trade-secret
protection, and confidentiality and/or license agreements with our employees,
customers, partners, and others to protect our proprietary rights.
10
We have
filed 2 patent applications with the United States Patent and Trademark Office
for the technology associated with our products. We also have software under
development by our employees, subcontractors and consultants.
The status
of any patent involves complex legal and factual questions, and the breadth of
claims allowed is uncertain. Accordingly, we cannot assure you that any patent
application filed by us will result in a patent being issued or that our issued
patents, and any patents that may be issued in the future, will afford adequate
protection against competitors with similar technology. We similarly face the
risk that any patents issued to us might be infringed or designed around by
others.
Research
and Development
We expense
research and development expenses, as these costs are incurred. We account for
our offering-related software development costs as costs incurred internally in
creating a computer software product and are charged to expense when incurred as
research and development until technological feasibility has been established
for the product. Technological feasibility is established upon completion of a
detail program design or, in its absence, completion of a working
model. At this time our main product TK6000 is being sold in the
market place. Therefore, research and development cost reported in
our financial statements relates to pre – marketing cost and are expensed
accordingly.
This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of the “safe harbor” provisions of the Private Securities Litigation
Reform Act of 1995. Reference is made in particular to the description of our
plans and objectives for future operations, assumptions underlying such plans
and objectives and other forward-looking statements included in this section,
“Item 1 Business,” “Item 7 Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and in other places in this Annual Report.
Such statements may be identified by the use of forward-looking terminology such
as “may”, “will”, “expect”, “believe”, “estimate”, “anticipate”, “intend”,
“continue”, or similar terms, variations of such terms or the negative of such
terms. Such statements are based on management’s current expectations and are
subject to a number of factors and uncertainties that could cause actual results
to differ materially from those described in the forward-looking statements. We
expressly disclaim any obligation or undertaking to release publicly any updates
or revisions to any forward-looking statements contained herein to reflect any
change in our expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based. Factors that
could cause such results to differ materially from those described in the
forward-looking statements include those set forth below.
Risks Relating to Our
Business:
WE
HAVE A HISTORY OF LOSSES WHICH MAY CONTINUE, WHICH MAY NEGATIVELY IMPACT OUR
ABILITY TO ACHIEVE OUR BUSINESS OBJECTIVES.
We
incurred net losses of $2,737,817 and $2,009,907 for the years ended
September 30, 2009 and 2008, respectively. We cannot assure you that we can
achieve or sustain profitability on a quarterly or annual basis in the future.
Our operations are subject to the risks and competition inherent in the
establishment of a business enterprise. There can be no assurance that future
operations will be profitable. Revenues and profits, if any, will depend upon
various factors, including whether we will be able to continue expansion of our
revenue. We may not achieve our business objectives and the failure to achieve
such goals would have an adverse impact on us.
OUR
INDEPENDENT AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN, WHICH MAY HINDER OUR ABILITY TO OBTAIN FUTURE
FINANCING.
In their
report dated December 3, 2009, our independent auditors stated that our
financial statements for the year ended September 30, 2009 were prepared
assuming that we would continue as a going concern. Our ability to continue as a
going concern is an issue raised as a result of recurring losses from
operations. We continue to experience net operating losses. Our ability to
continue as a going concern is subject to our ability to generate a profit
and/or obtain necessary funding from outside sources, including obtaining
additional funding from the sale of our securities, increasing sales or
obtaining loans and grants from various financial institutions where possible.
Our continued net operating losses increase the difficulty in meeting such goals
and there can be no assurances that such methods will prove
successful.
11
WE
HAVE A LIMITED OPERATING HISTORY AND IF WE ARE NOT SUCCESSFUL IN CONTINUING TO
GROW OUR BUSINESS, THEN WE MAY HAVE TO SCALE BACK OR EVEN CEASE OUR ONGOING
BUSINESS OPERATIONS.
We have
received a limited amount of revenues from operations and have limited assets.
We have yet to generate positive earnings and there can be no assurance that we
will ever operate profitably. Our company has a limited operating history and
must be considered in the exploration stage. Our success is significantly
dependent on a successful acquisition, drilling, completion and production
program. Our operations will be subject to all the risks inherent in the
establishment of a developing enterprise and the uncertainties arising from the
absence of a significant operating history. We may be unable to locate
recoverable reserves or operate on a profitable basis. We are in the development
stage and potential investors should be aware of the difficulties normally
encountered by enterprises in the exploration stage. If our business plan is not
successful, and we are not able to operate profitably, investors may lose some
or all of their investment in our company.
OUR
BUSINESS MAY BE AFFECTED BY FACTORS OUTSIDE OF OUR CONTROL.
Our
ability to increase sales, and to profitably distribute and sell our products
and services, is subject to a number of risks, including changes in our business
relationships with our principal distributors, competitive risks such as the
entrance of additional competitors into our markets, pricing and technological
competition, risks associated with the development and marketing of new products
and services in order to remain competitive and risks associated with changing
economic conditions and government regulation.
IF
WE ARE UNABLE TO RETAIN THE SERVICES OF MR. KYRIAKIDES OR IF WE
ARE UNABLE TO SUCCESSFULLY RECRUIT QUALIFIED PERSONNEL HAVING EXPERIENCE IN THE
OIL AND GAS INDUSTRY, WE MAY NOT BE ABLE TO CONTINUE OUR OPERATIONS.
Our
success depends to a significant extent upon the continued services of Mr.
Anastasios Kyriakides, our Chief Executive Officer. Loss of the services of Mr.
Kyriakides could have a material adverse effect on our growth, revenues, and
prospective business. In order to successfully implement and manage our business
plan, we will be dependent upon, among other things, successfully recruiting
qualified personnel having experience in the oil and gas business. Competition
for qualified individuals is intense. There can be no assurance that we will be
able to find, attract and retain existing employees or that we will be able to
find, attract and retain qualified personnel on acceptable terms.
IF
WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED
FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO
SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN
THE SECONDARY MARKET.
Companies
trading on the OTC Bulletin Board, such as us, must be reporting issuers under
Section 12 of the Securities Exchange Act of 1934, as amended, and must be
current in their reports under Section 13, in order to maintain price quotation
privileges on the OTC Bulletin Board. If we fail to remain current on our
reporting requirements, we could be removed from the OTC Bulletin Board. As a
result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary
market.
12
OUR
COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE TRADING
MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR STOCK
CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The
Securities and Exchange Commission has adopted Rule 15g-9 which establishes the
definition of a "penny stock," for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules
require:
- that a broker
or dealer approve a person's account for transactions in penny stocks;
and
- the broker or
dealer receive from the investor a written agreement to the transaction, setting
forth the identity and quantity of the penny stock to be purchased.
In order
to approve a person's account for transactions in penny stocks, the broker or
dealer must:
- obtain financial
information and investment experience objectives of the person; and
- make a
reasonable determination that the transactions in penny stocks are suitable for
that person and the person has sufficient knowledge and experience in financial
matters to
be
capable of evaluating the risks of transactions in penny stocks.
capable of evaluating the risks of transactions in penny stocks.
The broker
or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the Commission relating to the penny stock
market, which, in highlight form:
- sets forth the
basis on which the broker or dealer made the suitability determination;
and
- that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
- that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally,
brokers may be less willing to execute transactions in securities subject to the
"penny stock" rules. This may make it more difficult for investors to dispose of
our common stock and cause a decline in the market value of our
stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
WE HAVE NOT PAID DIVIDENDS IN THE
PAST AND DO NOT EXPECT TO PAY DIVIDENDS IN THE FUTURE. ANY RETURN ON INVESTMENT
MAY BE LIMITED TO THE VALUE OF OUR COMMON STOCK .
We have
never paid cash dividends on our common stock and do not anticipate paying cash
dividends in the foreseeable future. The payment of dividends on our common
stock will depend on earnings, financial condition and other business and
economic factors affecting it at such time as the board of directors may
consider relevant.
EFFORTS
TO COMPLY WITH RECENTLY ENACTED CHANGES IN SECURITIES LAWS AND REGULATIONS WILL
INCREASE OUR COSTS AND REQUIRE ADDITIONAL MANAGEMENT RESOURCES, AND WE STILL MAY
FAIL TO COMPLY.
As
directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules
requiring public companies to include a report of management on the company’s
internal controls over financial reporting in their annual reports on Form 10-K.
. In addition, the public accounting firm auditing the company’s financial
statements must attest to and report on management’s assessment of the
effectiveness of the company’s internal controls over financial reporting are
unable to conclude that we have effective internal controls over financial
reporting or if our independent auditors are unable to provide us with an
unqualified report as to the effectiveness of our internal controls over
financial reporting as required by Section 404 of the Sarbanes-Oxley Act of
2002, investors could lose confidence in the reliability of our financial
statements, which could result in a decrease in the value of our securities.
13
WE
ISSUED A SERIES OF 12% SENIOR SECURED CONVERTIBLE DEBENTURES IN THE AGGREGATE
PRINCIPAL AMOUNT OF $4,200,000, ALL OF WHICH ARE CURRENTLY HELD BY VICIS CAPITAL
MASTER FUND, AS FOLLOWS:
$1,000,000
is due on September 10, 2010,
$ 500,000
is due on September 10, 2010,
$ 600,000
is due on January 30, 2011,
$ 500,000
is due on January 30, 2011,
$ 500,000
is due on July 20, 2011, and
$1,100,000
is due on September 30, 2011.
Payment
on all of our secured debentures is secured by a lien in all of our assets. If
we fail to repay the secured debentures on their respective maturity dates or if
an event of default occurs under the secured debenture for any other reason, it
may result in a material adverse effect on our operating results and financial
condition as Vicis Capital Master Fund may foreclose on our assets in an effort
to be repaid amounts due under the secured debentures. Additionally, if we seek
to prepay the secured debentures, we must pay a prepayment penalty equal to 110%
of the then outstanding principal, plus all other amounts due.
The
following events constitute events of default under the secured debentures held
by Vicis Capital Master Fund: (i) failure to pay any interest or principal
payment when due; (ii) failure to observe any covenant contained in the secured
debenture or the purchase agreement that we executed in connection with the
issuance of the secured debenture; (iii) the occurrence of an event of default
by us under any other material agreement or lease; (iv) entry of a
judgment against us in excess of $150,000; and (v) the appointment of a
receiver, the filing of bankruptcy by us, or if we otherwise become insolvent.
Additionally, if we seek to prepay the secured debentures, we must pay a
prepayment penalty equal to 110% of the then outstanding principal, plus all
other amounts due. The secured debentures contain negative covenants that
prohibit us from taking certain corporate actions without the prior
written consent of the holder of the secured debentures, Vicis Capital Master
Fund. We cannot take the following actions without Vicis Capital Master Funds’
consent while the secured debentures remain outstanding: (i)
incur any additional indebtedness or allow any lien to be filed against our
assets, except in certain limited instances; (ii) amend our articles of
incorporation or bylaws in a manner that adversely effects the holder of our
secured debentures; (iii) repay, repurchase or otherwise acquire more than a de
minimis number of shares of our common stock or common stock equivalents from
any security holder, except in certain limited instances; (iv) enter into any
transactions with our executive officers, directors or affiliates; (v) increase
our executive officers’ salary or bonus more than 15% from what was paid in the
previous year; or (vi) pay cash dividends or distributions on any of our equity
security.
14
Description
of properties
Our
principal executive offices are located at 1100 NW 163rd
Drive, Miami, Florida 33169. This office consists of approximately
1,000 square feet, which we rent for $8,975 per
month. Future minimum payments for the year ending September 30, 2010
is $107,700 . Our lease terminates August 31, 2010. This
facility is suitable for our purposes and is expected to accommodate our needs
for the foreseeable future.
Interconnection
Leasing Agreements
The
Company will be entering into lease arrangements to provide interconnection
services in multiple states. “Interconnection
services” is
defined in the Telecommunications Act of 1996 (the “Telecommunications Act”) as
the linking of two telecommunication systems so that users of either system may
utilize the system components of the other. Pursuant to the FCC rules
implementing the Telecommunications Act, we negotiate interconnection agreements
with incumbent local exchange carriers to obtain access to facilities.
Facilities leasing occurs where one network service provider leases the
facilities of another network service provider to provide services to end users.
We currently have executed two interconnection leasing agreements and are
negotiating an interconnection leasing agreement with other major
hosting/bandwidth companies. Our current interconnection leasing agreements are
with Quest Communications and AT&T. The agreements relate to facilities
located or to be located in the following states:
Alabama | Georgia | Massachusetts | New Mexico | South Dakota |
Arizona | Idaho | Minnesota | New York | Texas |
Arkansas | Illinois | Montana | North Carolina | Utah |
California | Indiana | Nebraska | North Dakota | Vermont |
Connecticut | Kansas | Nevada | Ohio | Washington DC |
Delaware | Kentucky | New Jersey | Oregon | Washington |
Florida | Maryland | New York | Pennsylvania | Wisconsin |
The
agreements will grant us interconnection leasing rights in all thirty five
states in which we have obtained or are pursuing a CLEC license. If we enter new
markets, we expect to establish interconnection agreements with incumbent local
exchange carriers on an individual state basis, as the need arises.
From time
to time, we may become involved in various lawsuits and legal proceedings, which
arise in the ordinary course of business. However, litigation is
subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm its business. We
are currently not aware of any such legal proceedings or claims that they
believe will have, individually or in the aggregate, a material adverse affect
on its business, financial condition or operating results.
None.
15
Our common
stock has been quoted on the OTC Bulletin Board under the symbol “NTLK ”
since September 15, 2009 . The following table sets forth, for the
periods indicated, the high and low bid prices of our common stock. These
prices reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
Fiscal
Year 2008
|
||
|
High
|
Low
|
First
Quarter
|
N/A
|
N/A
|
Second
Quarter
|
N/A
|
N/A
|
Third
Quarter
|
$1.50
|
$0.70
|
Fourth
Quarter (through December 14, 2009)
|
$1.20
|
$0.20
|
Dividends
We have
never paid cash dividends on our capital stock and do not anticipate paying any
cash dividends with respect to those securities in the foreseeable future. Our
current business plan is to retain future earnings to finance the expansion and
development of our business. Any future determination to pay cash dividends will
be at the sole discretion of the Board of Directors and will be dependent upon
our financial condition, results of operations, capital requirements and other
factors, as our Board of Directors may deem relevant at that time. Our Board of
Directors has the right to authorize the issuance of preferred stock, without
further shareholder approval, the holders of which may have preferences over the
holders of the common stock as to the payment of dividends.
Holders
As of
September 30, 2009, there were 56 registered holders or persons otherwise
entitled to hold our common stock. The number of record holders was
determined from the records of our transfer agent and does not include
beneficial owners of common stock whose shares are held in the names of various
security brokers, dealers, and registered clearing agencies. The transfer agent
of our common stock is Fidelity Transfer.
Outstanding
options, warrants and convertible securities
As of
September 30, 2009, there were 22,059,712 shares of our common stock subject to
outstanding Series A Common Stock Purchase Warrants, Series B Common Stock
Purchase Warrants, Series C Common Stock Purchase Warrants and Series BD Common
Stock Purchase Warrants.
As of
September 30, 2009, there were 16,800,000 shares of our common stock issuable
upon conversion of our 12% Senior Secured Convertible Debentures. The aggregate
face value amount outstanding under our 12% Senior Secured Convertible
Debentures is $4,200,000. The Debentures convert into shares of our common stock
at the option of the holder at $0.25 per share. Interest payments are due
quarterly. The Debentures also contain full ratchet anti-dilution price
protection.
16
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table sets forth certain information about the common stock that may
be issued upon the exercise of options under the equity compensation plans as of
September 30, 2009.
EQUITY
COMPENSATION PLAN INFORMATION
Plan
category
|
Number
of securities
to
be issued upon
exercise
of
outstanding
options,
warrants
and rights
|
Weighted
average
exercise
price of
outstanding
options,
warrants
and rights
|
Number
of securities
remaining
available for
future
issuance under equity
compensation
plans
(excluding
securities
reflected
in column (a)
|
(a)
|
(b)
|
(c)
|
|
Equity
compensation plans approved by security holders
|
-0-
|
-0-
|
-0-
|
Equity
compensation plans not approved by security holders
|
-0-
|
-0-
|
-0-
|
Total
|
-0-
|
-0-
|
-0-
|
Recent Sales of Unregistered
Securities
Unless
otherwise noted, the issuances noted below are all considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933,
as amended.
Share-based
payments employees and consultants:
On
September 10, 2008, we issued 6,000,000 shares of common stock to our new
management team in connection with the Interlink Asset Group acquisition (see
Note 4). These shares are compensatory in nature and are fully vested. We have
valued the shares at $0.25, consistent with fair value measurements used
elsewhere in our accounting.
Officer
|
Shares
|
|||||||
Anastasios
Kyriakides, CEO
|
2,100,000 | |||||||
Nicholas
Kyriakides
|
600,000 | |||||||
Kenneth
Hosfeld, EVP
|
1,100,000 | |||||||
Leo
Manzewitsch, CTO
|
1,100,000 | |||||||
Guillermo
Rodriguez, CFO
|
1,100,000 | |||||||
6,000,000 |
17
Share-based
payment for goods and services to non-employees:
During the
year ended September 30, 2008, we issued 2,150,000 shares of common stock to
non-employees for goods and services.
Consultant/Provider
|
Shares
|
|||||||
FAMALOM,
LLC
|
450,000 | |||||||
Decembra
Diamond
|
360,000 | |||||||
John
Clarke
|
100,000 | |||||||
Deadalus
Consulting, Inc.
|
90,000 | |||||||
Ron
Roule
|
1,000,000 | |||||||
Iseal
Aponte
|
150,000 | |||||||
2,150,000 |
On July 9,
2009, we issued 1,000,000 shares of our common stock to non-employees for goods
and services.
Consultant/Provider
|
Shares
|
|
||||||
Omni Reliant | 1,000,000 |
As a smaller reporting company, we are not required to include disclosure pursuant to this Item.
This
discussion and analysis of our financial condition and results of operations
contains forward-looking statements that involve
risks and uncertainties. We have based these
forward-looking statements on our current expectations and
projections of future events. However, our actual results could differ
materially from those discussed herein as a result of the risks that
we face, including but not limited to those
risks stated in "Risk Factors," or faulty assumptions on
our part. In addition, the following discussion should be read in conjunction
with the audited financial statements and the related notes thereto
included elsewhere in this Annual Report.
Background
Prior to
September 10, 2008, we were engaged in the development of advertising services
and strategies. On September 10, 2008, our management and Board of
Directors committed to the discontinuance and disposal of our advertising
business. We disposed of this asset to be able to concentrate our efforts
exclusively on the deployment of the TK6000 Product Offering. We concluded that
the advertising business constituted a component of our business and have
presented the unit in the accompanying financial statements on the basis that
(a) the operations and cash flows of the component have been eliminated from our
ongoing operations as a result of the disposal transaction and (b) we
have no significant continuing involvement in the operations of the component
after the disposal transaction. On September 10, 2008, we sold the advertising
business resulting in a gain on sale of $168,083.
Liquidity
and Capital Resources
We have
prepared our financial statements as a going concern. However, we are
engaged in developing our network infrastructure and new products and services.
During the year ended September 30, 2009 and 2008, we generated net losses of
$2,737,817 and $2,009,907, respectively. We used cash in our operations in the
amounts of $1,715,260 during year ended September 30, 2009 and $110,508 for the
period ended September 30, 2008. Our management is currently
addressing these conditions and trends, as our executive management team has
raised $3,100,000 and $1,100,000 during fiscal year September 30, 2009 and 2008,
respectively, in convertible debentures and warrants financing.
As of
September 30, 2009, we had cash on hand of $1,007,366.
18
Statement
of cash flow data:
|
September
30, 2009
|
September
30, 2008
|
|||||||
Net
cash provided (used) in operating activities
|
(1,715,260 | ) | (110,508 | ) | |||||
Net
cash provided (used) in investing activities
|
( 70,535 | ) | 534,112 | ||||||
Net
cash provided (used) in financing activities
|
2,453,700 | - | |||||||
Net
cash provided (used) discontinued operations
|
- | ( 80,811 | ) |
Our
largest operating expenditures currently consist of the following items: $14,500
per month on leasing our corporate office space and network operational center
(NOC) and includes our base rent and associated utility expenses and $62,000 per
month on payroll. We do not anticipate that our leasing costs will change during
the next 12 months.
Our
current long term business plan contemplates acquiring the ongoing business of
related companies, either through asset acquisitions, consolidations or
mergers.
We
currently have the following outstanding warrants:
|
●
|
Series
A Common Stock Purchase Warrants outstanding entitling the holders to
purchase up to an aggregate of 3,099,712 shares of our common stock at an
exercise price of $0.25 per share;
|
|
●
|
Series
B Common Stock Purchase Warrants outstanding entitling the holders to
purchase up to an aggregate of 6,000,000 shares of our common stock at an
exercise price of $0.50 per share;
|
|
●
|
Series C
Common Stock Purchase Warrants entitling the holders to purchase up to an
aggregate of 10,800,000 shares of our common stock at an exercise price of
$0.50 per share;
|
|
●
|
Series BD
Common Stock Purchase Warrants entitling the holders to purchase up to an
aggregate of 1,080,000 shares of our common stock at an exercise price of
$0.50 per share; and
|
|
●
|
Series BD
Common Stock Purchase Warrants entitling the holders to purchase up to an
aggregate of 1,080,000 shares of our common stock at an exercise price of
$0.25 per share.
|
If the
holders of our Series A, B, C and BD Common Stock Purchase Warrants
exercise these warrants, we will receive aggregate proceeds of $12,574,036.
However, we cannot provide any assurance that the Series A Common Stock Purchase
Warrants, the Series B Common Stock Purchase Warrants, Series C Common
Stock Purchase Warrants or Series BD Common Stock Purchase Warrants will be
exercised.
Borrowing
Arrangements
12% Senior Secured Convertible
Debentures
We issued
a series of 12% Senior Secured Convertible Debentures in the aggregate principal
amount of $4,200,000, all of which are currently held by Vicis Capital Master
Fund, as follows:
|
●
|
$1,000,000
is due on September 10, 2010,
|
|
●
|
$ 500,000
is due on September 10, 2010,
|
|
●
|
$ 600,000
is due on January 30, 2011,
|
|
●
|
$ 500,000
is due on January 30, 2011,
|
|
●
|
$ 500,000
is due on July 20, 2011,and
|
●
|
$1,100,000
is due on September 30, 2011.
|
Each
debenture bears interest on the principal amount outstanding and unpaid from
time to time at a rate of 12% per annum from the date of issuance until
paid in full. The debentures convert into shares of our common stock at the
option of the holder at $0.25 per share. The debentures are secured by a lien in
all our assets.
The
following constitute events of default under the secured debentures held by
Vicis Capital Master Fund: (i) failure to pay any interest or principal payment
when due; (ii) failure to observe any covenant contained in the secured
debenture or the purchase agreement that we executed in connection with the
issuance of the secured debenture; (iii) the occurrence of an event of default
by us under any other material agreement or lease; (iv) entry of a judgment
against us in excess of $150,000; and (v) the appointment of a receiver, the
filing of bankruptcy by us, or if we otherwise become insolvent. Additionally,
if we seek to prepay the secured debentures, we must pay a prepayment penalty
equal to 110% of the then outstanding principal, plus all other amounts
due.
19
The
debentures contain full ratchet anti-dilution price protection. The secured
debentures contain negative covenants that prohibit us from taking certain
corporate actions without the prior written consent of the holder of the
secured debentures, Vicis Capital Master Fund. We cannot take the following
actions without Vicis Capital Master Funds’ consent while the secured debentures
remain outstanding: (i) incur any additional indebtedness or
allow any lien to be filed against our assets, except in certain limited
instances; (ii) amend our articles of incorporation or bylaws in a manner that
adversely effects the holder of our secured debentures; (iii) repay, repurchase
or otherwise acquire more than a de minimis number of shares of our common stock
or common stock equivalents from any security holder, except in certain limited
instances; (iv) enter into any transactions with our executive officers,
directors or affiliates; (v) increase our executive officers’ salary or bonus
more than 15% from what was paid in the previous year; or (vi) pay cash
dividends or distributions on any of our equity security. We are currently in
compliance with all restrictive covenants.
Results
of Operations
Comparison -
fiscal years ended September 30, 2009 and 2008
Revenues: Our operating income
amounted to $115,571 for the fiscal year ended September 30, 2009 as compared to
$0 for comparable period 2008. The increase in revenues relates to
establishing our operating architecture and commencing revenue producing
activities.
Cost of sales: Our cost of
sales amounted to $118,563 for the fiscal year ended September 30, 2009 as
compared to $0 for comparable period 2008. The increase in cost of
sales relates to establishing our operating architectural and commencing revenue
producing activities.
Advertising: Our
advertising expenses amounted to $444,249 for fiscal year ended September 30,
2009 as compared to $0 for comparable period 2008. The breakdown of
our advertising expense is as follows:
September
30,
|
||||||||
2009
|
2008
|
|||||||
Infomercial/production
time
|
$ | 350,000 | $ | - | ||||
Media
and others
|
94,249 | - | ||||||
Total
|
$ | 444,249 | $ | - |
Compensation and Benefits: Our
compensation and benefits expense amounted to $446,807 for fiscal year
ended September 30, 2009 as compared to $1,544,701for the period
ended September 30, 2008. This amount represents normal salaries and
wages paid to management members and employees. During September 30,
2008, we made payments to officers in the amount of $1,500,000 reported as
share-based compensation.
Professional Fees: Our
professional fees amounted to $294,425 for the fiscal year ended September 30,
2009 as compared to $562,500 for the period ended September 30, 2008. This
amount includes normal payments and accruals for legal, accounting and other
professional services.
Depreciation and Amortization:
Depreciation and amortization amounted to $358,244 for the fiscal year ended
September 30, 2009 as compared to $14,625 for the period ended September 30,
2008. These amounts represent amortization of our long-lived tangible
and intangible assets using straight-line methods and lives commensurate with
the assets’ remaining utility. Our long-lived assets, both tangible and
intangible, are subject to annual impairment review, or more frequently if
circumstances so warrant. During the fiscal year ended September 30 2009, we did
not calculate or record impairment charges. However, negative trends in our
business and our inability to meet our projected future results could give rise
to impairment charges in future periods.
20
Research
and Development and Software Costs
We expense
research and development expenses, as these costs are incurred. We account for
our offering-related software development costs as costs incurred internally in
creating a computer software product and are charged to expense when incurred as
research and development until technological feasibility has been established
for the product. Technological feasibility is established upon completion of a
detail program design or, in its absence, completion of a working
model. At this time our main product TK6000 is being sold in the
market place. Therefore, research and development cost reported in
our financial statements relates to pre – marketing cost and are expensed
accordingly.
Components
of Research and development:
|
September 30, 2009
|
September 30, 2008
|
||||||
Product
development and engineering
|
$ | 201,436 | $ | - | ||||
Payroll
and benefits
|
212,998 | - | ||||||
Total
|
$ | 414,434 | $ | - |
General and Administrative
Expenses. General and administrative expenses amounted to $383,659 for
the fiscal year ended September 30, 2009 as compared to $49,737for the period
ended September 30, 2008 and consisted of general corporate expenses and certain
other start up expenses. General corporate expenses included $165,716 in
occupancy costs for the fiscal year ended September 30, 2009 and $43,753 for
same the period ended September 30, 2008. We have experienced a recent increase
in our general and administrative costs primarily because of professional
accounting and legal fees incurred in connection with the preparation and filing
of our registration statement on Form S-1. We believe that these
increased costs are associated with our efforts to become a public company.
However, our administrative and overall general costs will continue to remain
high now that our registration statement has been declared
effective. Our costs associated with legal and accounting fees will
remain higher than historical amounts because, as a reporting company, we are
required to comply with the reporting requirements of the Securities and
Exchange Act of 1934. This involves the preparation and filing of the quarterly
and annual reports required under the Exchange Act as well as the other filing
requirements found in that Act.
We will
also incur additional expenses associated with the services provided by our
transfer agent. In addition, to the work we are presently doing, we will
need to focus our time and energy to complying with the Exchange Act. This
will detract from our ability and efforts to develop and market our products and
services. We anticipate incurring these additional expenses related to
being a public company without receiving a substantial increase in revenues
associated with this undertaking.
Our
general and administrative expenses for the fiscal year ended September 30, 2009
and 2008 are made up of the following items:
Items
|
September 30, 2009
|
September 30, 2008
|
||||||
Rent
and occupancy
|
$ | 165,716 | $ | 43,753 | ||||
Taxes
and licenses
|
99,903 | - | ||||||
Telecommunication
|
13,660 | - | ||||||
Travel
|
18,277 | - | ||||||
Other
|
86,104 | 5,984 | ||||||
Total
|
$ | 383,659 | $ | 49,737 |
Interest Expense: Interest
expense amounted to $533,171 for the fiscal year ended September 30, 2009 as
compared to $25,470 for the period ended September 30, 2008. Such amount
represented (i) stipulated interest under our aggregate $4,200,000 face value
convertible debentures, (ii) the related amortization of premiums and
discounts (iii) the amortization of deferred finance
costs. Aggregate premiums continue to be credited to interest expense
over the term of the debentures using the effective interest
method.
21
Derivative Income : Derivative
income amounted to $128,646 for the fiscal year ended September 30, 2009 as
compared to $(7,800) for the period ended September 30, 2008. Such
amount represents the change in fair value of liability-classified warrants.
Derivative financial instruments are carried as liabilities, at fair value, in
our financial statements with changes reflected in income. In addition to the
liability-classified warrants, we also have certain compound derivative
financial instruments related to our $4,200,000 face value convertible
debentures that had de minimus values. We are required to adjust our warrant and
compound derivatives to fair value at each reporting period. The fair value of
our warrant derivative is largely based upon fluctuations in the fair value of
our common stock. The fair value of our compound derivative is largely based
upon estimates of cash flow arising from the derivative and credit-risk adjusted
interest rates. Accordingly, the volatility in these underlying valuation
assumptions will have future effects on our earnings.
Discontinued Operations:
Income from discontinued operations amounted to $186,128 for the fiscal
year ended September 30, 2008. Income from discontinued operations
during 2008 is net of $168,083 related to the gain on sale of assets and $18,045
related to a gain on debt forgiveness of an unrelated third-party. Prior to its
discontinuance, the former advertising business was a non-revenue producing
development stage enterprise. During these periods, the discontinued business
incurred compensation and general administrative costs. We have no continuing
involvement with that business.
Net Loss. The net loss
amounted to $2,737,817 for the fiscal year ended September 30, 2009, as compared
to a net loss of $2,009,907 for the period ended September 30, 2008. The
increase in net loss is primarily due to start up expenses associated with new
enterprise and compliance with regulatory requirements from the Security and
Exchange Commission.
Net Loss Per Common Share:
Basic loss per common share represents our net loss divided by the weighted
average number of common shares outstanding during the period. Diluted loss per
common share gives effect to all potentially dilutive securities. We compute the
effects on diluted loss per common share arising from warrants and options using
the treasury stock method. Applying this method, 22,059,712 shares indexed to
warrants were excluded from our computation because the effect was
anti-dilutive. We computed the effects on diluted loss per common share arising
from convertible securities using the if-converted method. The effects, if
anti-dilutive are excluded. Applying this method, 16,800,000 shares indexed to
our convertible debentures were excluded from our computation because the effect
was anti-dilutive.
Quarterly
results of operations
The
following table presents our quarterly statement of operations. We
derived the information from our unaudited financial statements which
we believe have been prepared on the same basis as our audited financial
statements. The operating results in any quarter are not necessarily
indicative of the results that may be expected for any future
period.
Statement
of operation data (unaudited):
|
Dec.
31, 2008
|
March
31, 2009
|
June
30, 2009
|
Sept.
30, 2009
|
|||||||||||||
Operating
revenues:
|
|||||||||||||||||
Product
sales
|
$ | - | $ | - | $ | - | $ | 115,571 | |||||||||
Other
|
- | - | - | ||||||||||||||
Operating
expenses:
|
|||||||||||||||||
Product
cost of sales
|
- | - | - | 118,563 | |||||||||||||
General,
administrative and other
|
358,185 | 293,552 | 423,698 | 908,139 | |||||||||||||
Depreciation
and amortization
|
66,724 | 66,835 | 134,264 | 90,421 | |||||||||||||
Loss
from operations
|
424,909 | 360,387 | 557,962 | 1,001,551 | |||||||||||||
Net
loss
|
$ | 408,579 | $ | 371,666 | $ | 789,734 | $ | 1,167,838 | |||||||||
Net
loss per common share:
|
|||||||||||||||||
Basic
and diluted
|
$ | 0.05 | $ | 0.04 | $ | 0.09 | $ | 0.13 | |||||||||
Weighted
– average common shares:
|
|||||||||||||||||
Basic
and diluted
|
8,749,800 | 8,749,800 | 8,749,800 | 9,015,553 |
22
Contractual
obligations
We lease
our principal office space under an operating lease agreement. Rent
and associated occupancy expenses for the fiscal year ended September 30, 2009
was $165,716 and for the period ended September 30, 2008 was
$43,753. Minimum non – cancellable future lease payments as of
September 30, 2009, are as follows:
|
●
|
Year
ended September 30, 2010
|
$107,700
|
We have
warrants outstanding to purchase 22,059,712 shares of our common
stock.
Off-Balance
Sheet Arrangements
None
Critical
Accounting Policies and estimates
Our
accounting policies are discussed and summarized in Note 1 to our financial
statements. The following describes our critical accounting policies
and estimates.
Critical
Accounting Policies
The
financial information contained in our comparative results of operations and
liquidity disclosures has been derived from our financial statements. The
preparation of those financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and notes. The following
significant estimates were made in the preparation of our financial statements
and should be considered when reading our Management’s Discussion and
Analysis:
|
●
|
Impairment
of Long-lived Assets: Our telecommunications equipment, other property and
intangible assets are material to our financial statements. Further, they
are subject to the potential negative effects arising from technological
obsolescence. We evaluate our tangible and definite-lived intangible
assets for impairment annually or more frequently in the presence of
circumstances or trends that may be indicators of impairment. Our
evaluation is a two step process. The first step is to compare our
undiscounted cash flows, as projected over the remaining useful lives of
the assets, to their respective carrying values. In the event that
the carrying values are not recovered by future undiscounted cash flows,
as a second step, we compare the carrying values to the related fair
values and, if lower, record an impairment adjustment. For purposes
of fair value, we generally use replacement costs for tangible fixed
assets and discounted cash flows, using risk-adjusted discount rates, for
intangible assets. These estimates are made by competent employees, using
the best available information, under the direct supervision of our
management.
|
|
●
|
Intangible
assets: Our intangible assets require us to make subjective estimates
about our future operations and cash flows so that we can evaluate the
recoverability of such assets. These estimates consider available
information and market indicators including our operational history, our
expected contract performance, and changes in the industries that we
serve.
|
|
●
|
Share-based
payment arrangements: We currently intend to issue share-indexed payments
in future periods to employees and non-employees. There are many valuation
techniques, such as Black-Scholes-Merton valuation model that we may use
to value share-indexed contracts, such as warrants and options. All
such techniques will require certain assumptions that require us to
develop forward-looking information as well as historical trends. For
purposes of historical trends, we may need to look to peer groups of
companies and the selection of such groups of companies is highly
subjective.
|
|
●
|
Common
stock valuation: Estimating the fair value of our common stock is
necessary in the preparation of computations related to acquisition,
share-based payment and financing transactions. We believe that the
most appropriate and reliable basis for common stock value is trading
market prices in an active
market.
|
|
●
|
Derivative
Financial Instruments: We generally do not use derivative financial
instruments to hedge exposures to cash-flow, market or foreign-currency
risks. However, we have entered into certain other financial instruments
and contracts, such as our secured convertible debenture and warrant
financing arrangements that are either (i) not afforded equity
classification, (ii) embody risks not clearly and closely related to host
contracts, or (iii) may be net-cash settled by the counterparty. We are
required to carried as derivative liabilities, at fair value, in our
financial statements. The fair value of share-indexed
derivatives will be significantly influenced by the fair value of our
common stock (see Common Stock Valuation, above). Certain other elements
of forward-type derivatives are significantly influenced by
credit-adjusted interest rates used in cash-flow analysis. Since we are
required to carry derivative financial instruments at fair value and make
adjustments through earnings, our future profitability will reflect the
influences arising from changes in our stock price, changes in interest
rates, and changes in our credit
standing.
|
23
Revenue
recognition
Operating
revenue consist of customer equipment sales of our main product TK6000,
telecommunication service revenues, shipping and handling revenues.
Most all
of our operating revenues are generated from the sale of customer equipment of
our main product the TK6000. We also derive service revenues from per
minute fees for international calls. Our operating revenue is fully recognized
at the time of our customer equipment sale. The device provides for
life time service (over the life of the device/equipment). Our
equipment is able to operate within our network/platform or over any other
network/platform. There is no need for income allocation between our
device and life time service provided. The full intrinsic value of
the sale is allocated to the device. Therefore, we recognized 100% of
revenue at time of customer equipment sale and do no allocate any income to life
time service provided. Shipping and handling is also recognized at time of
sale. International calls are billed as earned from our
customers. International calls are prepaid and customers account is
debited as minutes are used and earned.
Inventory
Inventory
consists of the cost of customer equipment and is stated at the lower of cost or
market. At the present time we do not provide for inventory allowance – we
have not experienced any returns from customers. As we continue to
sell our product we will evaluate the need for such an allowance.
September
30,
|
||||||||
Inventory
|
2009
|
2008
|
||||||
Productive
material and supplies
|
$ | 43,538 | $ | - | ||||
Finished
products
|
74,174 | - | ||||||
Total
|
$ | 117,712 | - |
During the
year ended September 30, 2009 and 2008, in accordance with our lower of cost or
market analyses we did not recorded any lower of cost or market adjustments to
our finished goods inventories.
Income
taxes
We
recognized deferred taxes for the expected tax consequences of temporary
differences between the tax bases of assets and liabilities and their reported
amounts using tax rates in effect for the year since the differences are
expected to reverse. We have recorded a valuation allowance on the
assumption that we will not have any future taxable
income.
Net
operating loss carry-forwards
As of
September 30, 2009, we had net operating loss carry-forwards for US federal and
state tax purposes expiring at various times from years 2023 and
2024.
24
Recent
accounting pronouncements
In June
2009. The Financial Accounting Standard Board (“FASB”) issued Accounting
Standards Update No. 2009-01, Generally Accepted Accounting Principles,
which establishes FASB Accounting Standards Codification (“the Codification”) as
the official single source of authoritative U. S, GAAP. All existing
accounting standards are superseded. All other accounting guidance
not included in the Codification will be considered non –
authoritative. The Codification also includes all relevant SEC
guidance organized using the same topical structure in separate sections within
the Codification.
Following
the Codification, the FASB will not issue standards in the form of Statements,
FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead
it will issue Accounting Standards Updates (“ASU”) which will serve to update
the Codification, provide background information about the guidance and provide
the basis for conclusions on the changes to the Codification.
The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification is effective for our fiscal year
ended September 30, 2009 financial statements and the principal impact on our
financial statements is limited to disclosures, as all future references to
authoritative accounting literature will be referenced in accordance
with the Codification.
In
December 2007, the FASB revised the authoritative guidance for business
combinations. This guidance establishes principles and requirements
for how the acquirer in a business combination recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities
assumed and any non – controlling interest in the
acquiree. This guidance changes the accounting for business
combinations in a number of areas, including the treatment of contingent
consideration, pre- acquisition contingencies, transaction costs and
restructuring costs. In addition , under the new guidance, changes in the
acquired entity’s deferred tax assets and uncertain tax positions after the
measurement period will impact income tax expense. This guidance was
effective for fiscal year beginning on or after December 15, 2008 and requires
the immediate expensing of acquisition related costs associated with
acquisitions completed after December 31, 2008. Adoption of this
guidance on October 1, 2009 had no impact on our results of operations, and
financial position. However, we expect this guidance will affect
acquisitions made thereafter, though the impact will depend upon the size and
nature of the acquisition.
In March
2008, the FASB issued authoritative guidance on disclosures about derivative
instruments and hedging activities. This guidance addresses enhanced
disclosure concerning (a) the manner in which an entity uses derivatives (and
the reasons is uses them), (b) the manner in which derivatives and related
hedged items are accounted for and (c) the effects that derivatives and related
hedged items have on an entity’s financial position, financial performance, and
cash flows. This guidance was effective for financial statements
issued for fiscal years and interim periods beginning on or after November 15,
2008. Adoption of this guidance did not have a material impact on our
financial position or results of operations.
In June
2008, the FASB issued authoritative guidance on the treatment of participating
securities in the calculation of earnings per shares (“EPS”). This
guidance addresses whether instruments granted in share – based payment
transactions are participating securities prior to vesting and, therefore, need
to be included in the earnings allocation in computing EPS under the two - class
method. This guidance was effective for fiscal years beginning on or
after December 15, 2008. Adoption of this guidance did not have a
material impact on our results of operations and financial position, or on basic
or diluted ESP.
In April
2009, the FASB issued authoritative guidance on interim disclosures about fair
value of financial instruments. This guidance requires disclosures
about fair value of financial instruments for interim reporting periods as well
as in annual financial statements for interim periods ending after June 15,
2009. Adoption of this guidance had no effect on our results of
operations of financial conditions.
25
In May
2009, the FASB issued authoritative guidance on subsequent
events. This guidance establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. This
guidance is effective for interim or annual financial periods ending after June
15, 2009. Adoption of this guidance did not have an impact on our
results of operations or financial position.
In August
2009, the FASB updated its authoritative guidance on fair value measurement and
disclosures. This update provides amendments to reduce potential ambiguity
in financial reporting when measuring the fair value of
liabilities. Among other provisions, this update provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the valuation techniques described in
ASC Update 2009 – 05. ASC Update 2009 – 05 will become effective for
our quarter financial statements at December 31, 2009. We have not
yet determined the impact that this update may have on our financial
statements.
We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 and, as such, are not required to provide the information under this
item.
The
financial statements begin on Page F-1.
None.
Disclosure
controls
We
maintain “disclosure controls and procedures,” as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange
Act”), that are designed to ensure that information required to be disclosed by
us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Additionally, in designing disclosure controls
and procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.
26
As of
September 30, 2009, we carried out an evaluation, under the supervision and with
the participation of our Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures. Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were not
effective in ensuring that information required to be disclosed by us in our
periodic reports is recorded, processed, summarized and reported, within the
time periods specified for each report and that such information is accumulated
and communicated to our management, including our principal executive and
principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.
In
connection with the assessment described above, management identified the
following control deficiencies that represent material weaknesses at September
30, 2009:
●
|
Due
to the Company’s limited resources, the Company has insufficient personnel
resources and technical accounting and reporting expertise to properly
address all of the accounting matters inherent in the Company’s financial
transactions. The Company does not have a formal audit committee,
and the Board does not have a financial expert, thus the Company lacks the
board oversight role within the financial reporting
process.
|
●
|
The
Company’s small size and “one-person” office prohibits the segregation of
duties and the timely review of accounts payable, expense reporting and
inventory management and banking information.
|
Our Chief
Executive Officer and Chief Financial Officer are in the process of determining
how best to change our current system and implement a more effective system to
insure that information required to be disclosed in this annual report on Form
10-K has been recorded, processed, summarized and reported accurately. Our
management acknowledges the existence of this problem, and intends to developed
procedures to address them to the extent possible given limitations in financial
and manpower resources. While management is working on a plan, no
assurance can be made at this point that the implementation of such controls and
procedures will be completed in a timely manner or that they will be adequate
once implemented. Failure to develop adequate internal control and hiring
of qualified accounting personnel may result in a “material weakness” in the
Company’s internal control relating to the above activities.
Management
report on internal control over financial reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financing reporting for our company. Internal control
over financial reporting is defined in Rule 13a – 15(f) and 15d – 15(f) of the
Securities and Exchange Act of 1934 as a process designed by or under the
supervision of our principal executive and principal financial officer and
effected by board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those
policies and procedures that:
|
●
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and disposition of assets of the
company;
|
|
●
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures are being made
only in accordance with authorizations of our management and directors;
and
|
|
●
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of company’s assets that
could have a material effect on the financial
statements.
|
27
Because of
the inherent limitations, internal control over financial reporting may not
detect or prevent misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2009. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in internal control – integrated framework. Based on our assessment, management concluded that as of September 30, 2009, our internal control over financial reporting is not effective based on those criteria.
In
connection with the assessment described above, management identified the
following control deficiencies that represent material weaknesses at September
30, 2009:
●
|
Due
to the Company’s limited resources, the Company has insufficient personnel
resources and technical accounting and reporting expertise to properly
address all of the accounting matters inherent in the Company’s financial
transactions. The Company does not have a formal audit committee,
and the Board does not have a financial expert, thus the Company lacks the
board oversight role within the financial reporting
process.
|
|
●
|
The
Company’s small size and “one-person” office prohibits the segregation of
duties and the timely review of accounts payable, expense reporting and
inventory management and banking information.
|
Our Chief
Executive Officer and Chief Financial Officer are in the process of determining
how best to change our current system and implement a more effective system to
insure that information required to be disclosed in this annual report on Form
10-K has been recorded, processed, summarized and reported accurately. Our
management acknowledges the existence of this problem, and intends to developed
procedures to address them to the extent possible given limitations in financial
and manpower resources. While management is working on a plan, no
assurance can be made at this point that the implementation of such controls and
procedures will be completed in a timely manner or that they will be adequate
once implemented. Failure to develop adequate internal control and hiring
of qualified accounting personnel may result in a “material weakness” in the
Company’s internal control relating to the above activities.
This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission.
Changes
in Internal Controls.
During the
three months ended September 30, 2009, there were no changes in our internal
control over financial reporting identified in connection with the evaluation
required by paragraph (f) of Rule 13a-15 or Rule 15d-15 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
None.
The
following table sets forth certain information with respect to each of our
directors, executive officers and key employees as of September 30, 2009. Their
ages, positions, dates of initial election or appointment, and the expiration of
their terms are as follows:
Name
|
Age
|
Position
|
Period
served
|
Anastasios
Kyriakides
|
61
|
Director,
Chief Executive Officer, Secretary
|
Sept.
2008 to present
|
Kenneth
A. Hosfeld
|
58
|
Director,
Executive Vice President
|
Sept.
2008 to present
|
Guillermo
Rodriguez
|
61
|
Director,
Chief Financial Officer
|
Sept.
2008 to present
|
Leo
Manzewitsch
|
46
|
Director,
Chief Technical Officer
|
Sept.
2008 to present
|
Unless
expressly indicated in the above table, each director and officer will serve in
these capacities until their successors are duly elected, qualified and seated
in accordance with the Company’s Articles of Incorporation and
Bylaws.
28
Background
of Executive Officers and Directors
Anastasios Kyriakides,
Director, Chief
Executive Officer, Secretary. Mr. Kyriakides has served as a
member of the Company’s board of directors and as the Company’s Chief
Executive Officer and Secretary since September 2008. Mr. Kyriakides
received a Bachelor of Science in business from Florida International University
in 1975. In 1977, he received a degree in investment banking from the
American Institute of Banking. From 1979 until
present, Mr. Kyriakides has consulted for numerous companies in the areas
of shipping, travel, banking and electronics. Mr. Kyriakides began his
career in the electronics development field when, in 1979, he founded and served
as Chairman of Lexicon Corporation, producer of the LK300, the first hand held
electronic language translator which translated words and phrases into 12
different languages. Lexicon was publicly traded on the NASDAQ, under the symbol
LEXI, until it was ultimately acquired by Nixdorf Computers
of Germany. Mr. Kyriakides was also the founder of Delcor
Industries, established in 1980 in Hollywood, Florida.
Delcor was
an electronics manufacturing facility employing over 150 employees to assemble
OEM products for various electronics companies including IBM mainframe and Gable
Division. In 1983, Mr. Kyriakides founded the Mylex Corporation to
develop and produce the world’s first hand-held optical scanner and VGA card for
personal computers. As the President and Chairman, Mr. Kyriakides guided
Mylex from its beginning as a private company to its becoming a public company
traded on the NASDAQ under the stock symbol MYLX until it was acquired as a
wholly owned subsidiary of IBM (NYSE: IBM). In 1983, Mr. Kyriakides was the
founder and Chairman of Tower Bank NA, a full service commercial bank, with
three offices, headquartered in Dade County, Florida. Mr. Kyriakides also
has extensive experience in the cruise line and travel industries. His cruise
ship career started with Carnival Cruise line out of the Port of Miami, and
continued to a successful start up with Tropicana Cruises; one of the first
gaming ships out of the Port of Miami. Mr. Kyriakides founded Regency
Cruise Line in 1984, as the world’s first publicly traded company in
passenger shipping, and served as its Chairman and Secretary until 1987.
Mr. Kyriakides also organized the successful start-up of Seawind Cruise
Line. In his three years with Seawind Cruise Line, Mr. Kyriakides served as
its founder, chairman, chief executive officer and secretary.
From 1994
to 1996, Mr. Kyriakides served as the Chairman of Montgomery Ward Travel, a
company created to provide full travel services to eight million Montgomery Ward
customers and credit card holders. Immediately prior to joining the Company,
Mr. Kyriakides served as Chief Executive Officer of Interlink Global
Corporation from 1994 until September, 2008. Interlink Global Corporation
provided telecommunications applications utilizing hardware and software that
enables its domestic and worldwide users to access the internet as a
transmission medium for placing telephone calls.
Kenneth Hosfeld, Director, Executive
Vice President. Mr. Hosfeld was appointed to serve on the Company’s
board of directors in September 2008. Mr. Hosfeld has over twenty-two years
of international sales, marketing, and business management experience in
the telecommunications industry. Most recently, Mr. Hosfeld served as
a member of the board of directors and the executive vice president for
Interlink Global Corporation (OTC: ILKG), a provider of private and public
telecommunication network and internet services. Prior to joining Interlink,
Mr. Hosfeld co-founded NetExpress. He has also served as the Regional
Director of Brazil, the Andinos, and the Caribbean for Tellabs, Inc., a
global supplier to the dynamic telecommunications industry that designs,
manufactures, markets and services voice, data a video transportation tools and
networks. While with Tellabs, Mr. Hosfeld secured that company’s first
“turn-key” contract which involved a complete, fully managed network deployment
including all products and services and project financing. He also opened
Tellabs’ offices in Brazil and regularly exceeded revenue targets. Prior to
that, Kenneth was Vice President of Nera Latin America, a subsidiary of
Nera Telecommunications (formerly ABB), a telecommunications and IT solutions
provider for microwave, satellite, wireless broadband access, networking
and broadcasting. Mr. Hosfeld had full production and logistic
responsibility for the Latin American region, including responsibilities for
opening offices throughout Latin America including such countries as
Brazil, Colombia, Mexico, and Venezuela, While with the company,
Mr. Hosfeld was also able to penetrate the Mexican and Chilean markets.
Prior to his work with Nera Latin America, Mr. Hosfeld was responsible for
similar product sales in Africa and in China. Mr. Hosfeld speaks over six
languages including fluent Spanish and Portuguese. Immediately prior to joining
the Company, Mr. Hosfeld served as Executive Vice President of Interlink
Global Corporation from 1994 until September, 2008. Interlink Global Corporation
provided telecommunications applications utilizing hardware and software that
enables its domestic and worldwide users to access the internet as a
transmission medium for placing telephone calls.
29
Guillermo Rodriguez, Director, Chief
Financial Officer. Mr. Rodriguez was appointed to the Company’s
board of directors in September 2008. Mr. Rodriguez is a certified public
accountant. He earned his Bachelor’s Degree with a major in accounting and
business administration from the University of Miami in Coral Gables, Florida.
Mr. Rodriguez earned his Masters of Business Administration from Nova
Southeastern University in Davie, Florida. He has extensive accounting and
financial reporting experience in banking, real estate brokering, property
management and the telecommunications industry. Prior to joining the Company in
September 2008, Mr. Rodriguez worked for Interlink Global Corporation from
2005 until September 2008 and as controller and financial officer for Land
Cellular Corporation from 2003 until 2005. Prior to that, Mr. Rodriguez
served as controller and financial officer for Bremer Real Estate, CSW
Associates and Consolidated Bank, N.A. Mr. Rodriguez also worked as an
auditor and investigator for the Federal Deposit Insurance Corporation (FDIC).
Mr. Rodriguez is fluent in Spanish.
Leo Manzewitsch, Director, Chief
Technology Officer. Mr. Manzewitsch’ has over eighteen years of
experience in the telecommunications industry. He received his Masters in
Electronics Engineering from the University of Buenos Aires, Argentina in 1991
and a degree in mechanics from the Argentinean National School of Technical
Education, Buenos Aires in 1981. Before joining the Company as a director and
the Chief Technology Officer in September 2008, Mr. Manzewitsch’ held
positions in sales support management with UT Starcom, a global leader in
internet protocol television, IPTV solutions, IPTV products, VoIP, mobile
internet and internet television. Mr. Hosfeld has also worked as the
Business Development Manager for STRATEKGY Telecom Solutions.
Mr. Manzewitsch’ has also held various positions at NEC Corporation, which
provides IT network integrated solutions and semiconductor solutions, including
new product engineer and manager of new product marketing. From 2000 until 2006,
Mr. Manzewitsch’ served as the Marketing Manager for Tellabs International
in their South American market. In 2006, Mr. Manzewitsch’ joined
Interlink Global Corporation, where he served as the Chief Technology Officer
until he joined the Company in September, 2008. Mr. Manzewitsch’ is fluent
in Spanish.
Significant
employees
Other than
the executive officers named above, the Company does not have any “significant
employees.”
Family
relationship
None.
Involvement
in legal proceedings
No
officer, director, promoter or significant employee has been involved in the
last five years in any of the following:
●
|
Any
bankruptcy petition filed by or against any business of which such person
was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time;
|
|
●
|
Any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor
offenses);
|
|
●
|
Being
subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoying, barring, suspending or otherwise limiting his
involvement in any type of business, securities or banking activities;
and
|
|
●
|
Being
found by a court of competent jurisdiction (in a civil action), the
Commission or the Commodity Futures Trading Commission to have violated or
state securities or commodities law, and the judgment has not been
reversed, suspended or vacated.
|
Committees
Our
business, property and affairs are managed by or under the direction of the
board of directors. Members of the board are kept informed of our business
through discussion with the chief executive and financial officers and other
officers, by reviewing materials provided to them and by participating at
meetings of the board and its committees. We presently do not have any
committees of our board of directors, however, our board of directors intends to
establish various committees at some point in the near future.
30
Employment
Agreements
On May 6,
2009, the Company entered into an Employment Agreement with Anastasios N.
Kyriakides (the “Kyriakides Employment Agreement”) pursuant to which Mr.
Kyriakides agreed to continue his service as President and Chief Executive
Officer of the Company through May 5, 2012.
Under the
Kyriakides Employment Agreement, Mr. Kyriakides’ base salary is $150,000 per
annum, subject to annual increases at the discretion of the Board of Directors.
In addition, under the Kyriakides Employment Agreement, Mr. Kyriakides is (a)
eligible for an annual performance based cash bonus up to a maximum annual award
of $112,500 to be determined based upon profitability of the Company, (b)
eligible to receive a onetime award on May 5, 2012 of shares of common stock
having a maximum value of up to $168,750 to be determined based upon
profitability of the Company during the 3 year period ending on May 5, 2012, (c)
entitled to receive health benefits and life insurance coverage, (d) entitled to
receive a monthly car allowance not to exceed $500 a month, (e) eligible to
receive other stock grants and/or options to purchase shares of the Company’s
common stock in amounts and upon terms as determined by the Company’s Board of
Directors from time to time The Kyriakides Employment Agreement may be
terminated by the Board of Directors at any time for cause, provided that Mr.
Kyriakides receives notice of such termination and fails to cure the alleged
breach. Upon termination by the Company without cause or resignation by Mr.
Kyriakides for good reason, Mr. Kyriakides is entitled to receive his base
salary, as severance, for a 12 month period.
Currently,
with the exception of Mr. Kyriakides Employment Agreement, all other employment
with the Company is at will and may be terminated by either the employee or the
Company at any time. We require each of our executive officers to execute a
Confidentiality and Non-Competition Agreement.
Compliance
with Section 16(a) of the Exchange Act
Section
16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers and persons who beneficially own more than ten percent of a
registered class of our equity securities to file with the SEC initial reports
of ownership and reports of change in ownership of common stock and other equity
securities of our company. Officers, directors and greater than ten percent
stockholders are required by SEC regulations to furnish us with copies of all
Section 16(a) forms they file. Based solely upon a review of Forms 3 and 4 and
amendments thereto furnished to us under Rule 16a-3(e) during the fiscal year
ended September 30, 2009, and Forms 5 and amendments thereto furnished to us
with respect to the fiscal year ended September 30, 2009, we believe that during
the year ended September 30, 2009, our executive officers, directors and all
persons who own more than ten percent of a registered class of our equity
securities have complied with all Section 16(a) filing requirements, except for
the changes on holdings of beneficial owners, as set forth below: Anastasios
Kyriakides, Guillermo Rodriguez, Kenneth Hosfeld and Leo Manzewitsch each filed
their Form 3 4 days late. Ronald J. Rule, Jr. filed his Form 3 11
days late.
Code
of Ethics
We have
adopted a Code of Ethics for our officers, directors and employees. A copy of
the Code of Ethics is attached hereto as Exhibit 14.1 to this Annual Report on
Form 10-K.
Compensation
of our executive officers
The
following table contains compensation information for our executive officers for
the fiscal years ended September 30, 2009 and September 30, 2008. No
other officer received compensation greater than $100,000 for either fiscal
year. All of the information included in this table reflects compensation earned
by the individuals for services rendered to our Company and all references in
the following tables to stock awards relate to awards of common stock granted by
us.
31
Name
and position
|
Year
|
Salary
|
Bonus
|
Common
Stock
awards
|
Non-equity
Option
awards
|
Nonqualified
incentive plan compensation
|
Deferred
compensation
|
Other
|
Total
|
||||||||||||||||||||||||
Robert
Blank (1)
|
2008 | $ | - | - | - | - | - | - | - | $ | - | ||||||||||||||||||||||
Former C.E.O. | |||||||||||||||||||||||||||||||||
Robin
C. Hoover (2)
|
2008 | $ | - | - | - | - | - | - | - | $ | - | ||||||||||||||||||||||
Former C.E.O. | |||||||||||||||||||||||||||||||||
Anastasios
Kyriakides,
|
2009
|
$ | 153,208 | - | - | - | - | - | - | $ | 153,208 | ||||||||||||||||||||||
Director,
Chief Executive Officer (3)
|
2008
|
$ | 8,000 | (4) | - | $ | 525,000 | (5) | - | - | - | - | $ | 533,000 | |||||||||||||||||||
Kenneth
Hosfeld,
|
2009
|
$ | 96,000 | - | - | - | - | - | $ | 96,000 | |||||||||||||||||||||||
Director,
Executive Vice President (9)
|
2008
|
$ | 5,333 | (10) | - | $ | 275,000 | (11) | - | - | - | - | $ | 280,333 | |||||||||||||||||||
Guillermo
Rodriguez,
|
2009
|
$ | 77,000 | - | - | - | - | - | - | $ | 77,000 | ||||||||||||||||||||||
Director,
Chief Financial Officer (6)
|
2008
|
$ | 4,000 | (7) | - | $ | 275,000 | (8) | - | - | - | - | $ | 279,000 | |||||||||||||||||||
Leo
Manzewitsch, Former C.E.O.
|
2009
|
$ | 96,000 | - | - | - | - | - | $ | 96,000 | |||||||||||||||||||||||
Director,
Chief Technical Officer (12)
|
2008
|
$ | 5,333 | (13) | - | $ | 275,000 | (14) | - | - | - | $ | 280,333 | ||||||||||||||||||||
Nicholas
Kyriakides,
|
2009
|
$ | 48,452 | - | - | - | - | - | - | $ | 48,452 | ||||||||||||||||||||||
Marketing
Director(15)
|
2008
|
$ | 2,222 | (16) | - | $ | 150,000 | (17) | - | - | - | - | $ | 152,222 |
(1) | Mr. Robert Blank resigned as officer and member of the Board of Directors on February 19, 2008. | |
(2) | Mr. Robin C. Hoover resigned as officer and member of the Board of Directors on September 9, 2008. | |
(3) | Mr. Kyriakides was appointed to serve as our Chief Executive Officer on September 10, 2008. All amounts reflected in this table are from the date of Mr. Kyriakides appointment to the end of fiscal years. | |
(4) | Mr. Kyriakides annual salary is $175,000.00. | |
(5) | The Board of Directors granted Mr. Kyriakides a stock grant of 2,100,000 shares on September 30, 2008. The stock has been valued at $0.25 per share. | |
(6) | Mr. Rodriguez was appointed to serve as Chief Financial Officer on September 30, 2008. All amounts reflected in this table are from the date of Mr. Rodriguez appointment to the end of fiscal years. | |
(7) | Mr. Rodriguez annual salary is $80,000.00. | |
(8) | The Board of Directors granted Mr. Rodriguez a stock grant of 1,100,000 shares on September 30, 2008. The stock has been valued at $0.25 per share. | |
(9) | Mr. Hosfeld was appointed to serve as our Executive Vice President on September 30, 2008. All amounts reflected in this table are from the date of Mr. Hosfeld appointment to the end of fiscal years. | |
(10) | Mr. Hosfeld annual salary is $96,000.00. | |
(11) | The Board of Directors granted Mr. Hosfeld a stock grant of 1,100,000 shares on September 30, 2008. The stock has been valued at $0.25 per share. | |
(12) | Mr. Manzewitsch was appointed to serve as our Chief Technology Officer on September 30, 2008. All amounts reflected in this table are from the date of Mr. Manzewitsch appointment to the end of fiscal years. | |
(13) | Mr. Manzewitsch annual salary is $96,000.00. | |
(14) | The Board of Directors granted Mr. Manzewitsch a stock grant of 1,100,000 shares on September 30, 2008. The stock has been valued at $0.25 per share. | |
(15) | Mr. Kyriakides was appointed to serve as Marketing Director on September 30, 2008. | |
(16) | Mr. Kyriakides annual salary is $61,000.00. | |
(17) | The Board of Directors granted Mr. Kyriakides a stock grant of 600,000 shares on September 30, 2008. The stock has been valued at $0.25 per share. |
32
Overview
The
following is a discussion of our program for compensating our named executive
officers and directors. Currently, we do not have a compensation committee, and
as such, our board of directors is responsible for determining the compensation
of our named executive officers. The primary goal of our executive compensation
policy is to attract and retain the most talented and loyal executives possible.
Our intent is to ensure that our executives are compensated effectively in a
manner consistent with our strategy and competitive practice and to align
executive compensation with the achievement of our short and long term business
objectives.
Our board
of directors considers a variety of factors in determining compensation of
executives including the executive’s background, training and prior work
experience.
Elements
of executive compensation
Our
compensation program for the named executive officers consists primarily of base
salary. There is no bonus plan, retirement plan, long-term incentive plan or
other such plans. The base salary we provide is intended to equitably compensate
the named executive officers based upon their level of responsibility,
complexity and implementation of our business plan.
Stock
grant
To
motivate key employees of the Company by providing them with an ownership
interest in the Company, on September 10, 2008, the Board of Directors
approved and authorized the issuance of six million shares of the Company’s
restricted stock to certain key employees. This stock grant was conditioned upon
the execution and delivery by each employee of a Confidentiality and
Non-Competition Agreement and was made in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as
amended and/or Regulation D promulgated under the Securities Act of
1933.
2010
Stock Option Plan
On
November 15, 2009, Net Talk.com, Inc. (the “Company”) adopted the 2010 Stock
Option Plan (the "Plan") which is intended to is to advance the interests of the
Company’s shareholders by enhancing the Company’s ability to attract, retain and
motivate persons who make (or are expected to make) important contributions to
the Company by providing such persons with equity ownership opportunities and
performance-based incentives and thereby better aligning the interests of such
persons with those of the Company’s shareholders. All of the Company’s
employees, officers, and directors, and those Company’s consultants and advisors
(i) that are natural persons and (ii) who provides bona fide services to the
Company not connected to a capital raising transaction or the promotion or
creation of a market for the company’s securities, are eligible to be
granted options or restricted stock awards under the Plan. The maximum aggregate
number of shares of the Company’s common stock that may be issued under the Plan
is 10,000,000 shares of the Company’s common stock. As of the date of this
Current Report on Form 8-K, there were no stock options outstanding under the
Plan and no restricted stock awards issued and outstanding, leaving 10,000,000
shares available for future issuances.
33
Compensation
of Directors
None of
the Company’s directors have received any cash or equity remuneration since
inception.
The
following table sets forth certain information, as of September 30, 2009 with
respect to the beneficial ownership of the outstanding common stock by
(i) any holder of more than five (5%) percent; (ii) each of our
executive officers and directors; and (iii) our directors and executive
officers as a group. Except as otherwise indicated, each of the stockholders
listed below has sole voting and investment power over the shares beneficially
owned.
Title
|
Name
of beneficiary
|
Amount
and nature of owner(2)
|
Percent
|
||||||
Common
stock
|
Anastasios
Kyriakides
|
2,164,400 | (3) | 4.46 | % | ||||
Common stock |
Kenneth
A. Hosfeld
|
1,100,000 | 2.26 | % | |||||
Common stock |
Guillermo
Rodriguez
|
1,100,000 | 2.26 | % | |||||
Common stock |
Leo
Manzewitsch’
|
1,100,000 | 2.26 | % | |||||
Common
stock
|
Nicholas
Kyriakides
|
600,000 | 1.24 | % | |||||
Executive
officers and directors, as a group (5 persons)
|
|
6,064,400 | 12.48 | % | |||||
Common
stock
|
Vicis
Capital Master Fund
|
33,600,000 | (4) | 69.16 | % | ||||
Common stock |
Ron
J. Rule, Jr.
|
1,032,200 | (5) | 2.13 | % | ||||
Common stock | Omni Reliant | 1,000,000 | (6) | 2.06 | % | ||||
Total
Common stock related
parties
|
|
41,696,600 | 85.83 | % |
(1)
|
Unless
otherwise indicated, the address of each shareholder is 1100 NW 163rd
Drive, Miami, Florida 33169.
|
(2)
|
Beneficial
ownership of shares is determined under Rule 13d-3(d)(1) of the Exchange
Act and generally includes any shares over which a person exercises sole
or shared voting or investment power and the number of shares that can be
acquired within sixty (60) days upon exercise of an option or
conversion of warrants and debentures. Common stock subject to these
convertible securities are deemed to be outstanding for the purpose of
computing the ownership percentage of the person holding
such convertible security, but are not deemed to be
outstanding for the purpose of computing the ownership
percentage of any other person. Applicable percentage of ownership is
based on 45,479,800 of fully diluted shares of Net Talk.com, Inc. common
stock being issued and outstanding as of September 30,
2009.
|
(3)
|
Includes:
(a) 2,110,000 shares of common stock owned jointly by
Mr. Kyriakides and his wife, Maria
Kyriakides; and (b) 54,400 shares of common
stock issuable upon exercise of a Series A Common Stock Purchase
Warrant, which may be exercised, at the option of the holder,
at an exercise price of $0.25 per
share
|
(4)
|
Includes:
(a) 6,000,000 shares of common stock issuable upon conversion of 12%
Senior Secured Convertible Debentures held by
Vicis Capital Master Fund in the aggregate principal amount of
$1,500,000; (b) 4,400,000 shares of
common stock issuable upon conversion of 12% Senior Secured Convertible
Debentures held by Vicis Capital Master Fund in the aggregate principal
amount of $1,100,000; (c) 2,000,000 shares of common stock
issuable upon conversion of 12% Senior Secured Convertible Debentures held
by Vicis Capital Master Fund in the aggregate principal amount of
$500,000; and (d) 4,400,000 shares of common stock
issuable upon conversion of 12% Senior Secured Convertible Debentures held
by Vicis Capital Master Fund in the aggregate principal amount of
$1,100,000. The 12% Senior Secured Convertible Debentures may be converted
at the option of the holder at $0.25 per share. It also
includes (e) 6,000,000 shares of common stock issuable upon exercise
of a Series B Common Stock Purchase Warrant, which may be exercised, at
the option of the holder, at an exercise price of $0.50 per share;
(f) 4,400,000 shares of common stock issuable upon exercise of a
Series C Common Stock Purchase Warrant, which may be exercised, at the
option of the holder, at an exercise price of $0.50 per share;
(g) 2,000,000 shares of common stock issuable upon exercise of a
Series C Common Stock Purchase Warrant, which may be exercised, at the
option of the holder, at an exercise price of $0.50 per share;
(h) 4,400,000 shares of common stock issuable upon exercise of a
Series C Common Stock Purchase Warrant, which may be exercised, at the
option of the holder, at an exercise price of $0.50 per
share The 12% Senior Secured Convertible Debentures
impose a contractual limitation on the holder’s ability to convert such
debenture into common stock. This limitation prevents such holder from
beneficially owning more than 4.99% of Net Talk.com, Inc.’s common
stock.
|
(5)
|
Ronald
J. Rule, Jr., 20711 Sterlington Drive, Land o lakes, Fl
34638
|
(6)
|
Omni
Reliant Holdings, Inc., 14375 Myerlake Circle, Clearwater,
Florida 33760,
|
34
Except as
set forth below, there were no transactions since the beginning of our last
fiscal year, and there are no proposed transactions, that involve amounts in
excess of $120,000 to which we were or are to become a party in which any
director, executive officer, beneficial owner of more than five
(5%) percent of our common stock, or members of their immediate
families had, or is to have, a direct or indirect material
interest.
Effective
December 30, 2007, we sold all of the assets associated with our
advertising business as a going concern to Robert H. Blank, who was then
our President and Chief Operating Officer. The purchase price for the assets was
$185,000. Mr. Blank paid the purchase price by assuming a convertible
debenture issued by us to Mr. Robin C. Hoover in the amount of
$185,000. The convertible debenture constituted substantially all of our
liabilities at the time of the acquisition. In addition, Mr. Hoover and
Mr. Blank tendered 208 and 200 shares of common stock, respectively, to the
Company. These shares had been issued to Mr. Blank and Mr. Hoover as
“founders” shares.
On
September 10, 2008, we acquired certain tangible and intangible assets,
formerly owned by Interlink Global Corporation (“Interlink”), (the “Interlink
Asset Group”) directly from Interlink’s creditor who had seized the assets
pursuant to a Security and Collateral Agreement. Our purpose in acquiring these
assets, which included employment rights to the executive management team of
Interlink, who now currently serve as our officers, was to advance the TK 6000
VoIP Technology Program, which Interlink launched in July 2008. Accordingly,
these assets substantially comprise our current business assets and the
infrastructure for our future operations. Contemporaneously with this purchase,
we executed an assignment and intellectual property agreement with Interlink
that served to perfect our ownership rights to the assets.
Consideration
for the acquisition consisted of a face value $1,000,000 convertible debenture,
plus warrants to purchase 4,000,000 shares of our common stock. On the date of
the Interlink Asset Group acquisition, we also entered into a financing
agreement with the DOF that provided for the issuance of a face value $500,000
convertible debenture, plus warrants to purchase 2,000,000 shares of our common
stock for net cash consideration of $448,300. In connection with this
acquisition, we issued 6,000,000 shares of common stock to our new management
team in connection with the Interlink Asset Group acquisition.
Effective September 10,
2008, we issued 1,000,000 shares to Apogee Financial Investments, Inc. in
connection with certain consulting services rendered to us. Mr.
Richard Diamond is president of Apogee Financial Investments, Inc. and
served as a member of our board of directors until his resignation on November
23, 2009. On the date of the issuance, Mr. Diamond was not a member of our
board of directors.
On
January 30, 2009, Midtown Partners & Co., LLC (“Midtown
Partners”), an FINRA registered broker dealer, acted as the placement agent for
the Company in connection with the 2009 Convertible Debt Offering. In connection
with the 2009 Convertible Debt Offering, we paid Midtown Partners a cash
commission equal to $88,000 and issued a Series BD Common Stock Purchase Warrant
to Midtown Partners entitling Midtown Partners to purchase 880,000 shares of the
Company’s common stock at an initial exercise price of $.50 per share. Midtown
Partners is a wholly-owned subsidiary of Apogee Financial Investments, Inc. Mr.
Richard Diamond is president of Apogee Financial Investments, Inc. and served as
a member of our board of directors until his resignation on November 23,
2009.
A company
owned or controlled by a major shareholder of NetTalk.com, Inc., provided
services to us, as follows:
In June
2009, we incurred advertising expense for the creation of an infomercial to be
aired during the deployment and launching of our TK6000. The
deployment and launching of our TK6000 has a been a success and the infomercial
is presently running weekly on most US markets. The advertising
expense incurred, was as follows:
Items
|
Amount
|
|||
Cash
payment
|
$ | 100,000 | ||
Share-based
payment (1,000,000 common shares)
|
250,000 | |||
Total
|
$ | 350,000 |
35
In
connection with the infomercial we issued 1,000,000 shares of our common stock
to non-employees for goods and services.
The
Company's board of directors reviews and approves audit and permissible
non-audit services performed by its independent accountants, as well as the fees
charged for such services. In its review of non-audit service fees and its
appointment of KLB LLP. as the Company's independent accountants, the board of
directors considered whether the provision of such services is compatible with
maintaining independence. All of the services provided and fees charged by KLB
LLP were approved by the board of directors.
Audit
Fees
The
aggregate fees billed for professional services for the audit of the annual
financial statements of the Company and the reviews of the financial statements
included in the Company's quarterly reports on Form 10-Q for 2009 and 2008 were
$77,701 and $0.0 respectively, net of expenses.
Audit-Related
Fees
There were
no other fees billed by during the last two fiscal years for assurance and
related services that were reasonably related to the performance of the audit or
review of the Company's financial statements and not reported under "Audit Fees"
above.
Tax Fees
There were
$-0- per year spent on tax filings.
All Other
Fees
There were
no other fees billed during the last two fiscal years for products and services
provided.
36
Exhibit
No. Description
3.01(1)
|
Articles of Incorporation of Net Talk.com, Inc. |
3.02(1)
|
Articles of Amendment to the Articles of Incorporation of Net Talk.com, Inc. |
3.03(1)
|
Articles of Amendment to the Articles of Incorporation of Net Talk.com, Inc. |
3.04(1)
|
Articles of Amendment to the Articles of Incorporation of Net Talk.com, Inc. |
3.05(1)
|
Bylaws of Net Talk.com. |
4.01(1)
|
Form
of Series A Common Stock Purchase Warrant.
|
4.02(1)
|
Form
of Series B Common Stock Purchase Warrant.
|
4.03(1)
|
Form
of Series C Common Stock Purchase Warrant.
|
4.04(1)
|
Form
of Series BD Common Stock Purchase Warrant.
|
4.05(1)
|
Form
of 12% Senior Secured Convertible Debenture due January 30,
2011.
|
4.06(3)
|
12%
Senior Secured Convertible Debenture dated September 25,
2011.
|
4.07(3)
|
Series
C Common Stock Purchase Warrant No. C-6
|
4.08(3)
|
Series
BD Common Stock Purchase Warrant No. BD-10
|
4.09(3)
|
Series
BD Common Stock Purchase Warrant No. BD-11
|
10.01(1)
|
Form of Stock Grant Agreement dated as of September 10, 2008. |
10.02(1)
|
Form of Subscription Document from the subscriber to the Company for certain purchases of the Company’s Common Stock, and Series A Common Stock Purchase Warrants. |
10.03(1)
|
Form of Registration Rights Agreement, by and among the Company, each of the purchasers of the Company’s Common Stock, and certain other persons a party thereto. |
10.04(1)
|
Form of Registration Rights Agreement entered into as of September 10, 2008 by and between the Company and each security holder identified on the signature page thereto. |
10.05(1)
|
Securities Purchase Agreement dated as of September 10, 2008 among the Company and Debt Opportunity Fund, LLLP. |
10.06
(1)
|
Contribution Agreement dated as of September 10, 2008 among the Company and Vicis Capital Master Fund. |
10.07
(1)
|
Form of Security Agreement dated as of September 10, 2008 among the Company and certain Secured Parties. |
37
10.08
(1)
|
Securities Purchase Agreement dated as of January 30, 2009 among the Company and Debt Opportunity Fund, LLLP. |
10.09
(1)
|
Form of Security Agreement dated as of January 30, 2009 among the Company and certain Secured Parties. |
10.10
(1)
|
Form
of Registration Rights Agreement entered into as of January 30, 2009 by
and between the Company and each security holder identified on the
signature page thereto.
|
10.11
(1)
|
Securities
Purchase Agreement dated as of February 6, 2009 among the Company and Debt
Opportunity Fund, LLLP.
|
10.12
(1)
|
Form
of First Amendment to the Security Agreement made and entered into as of
February 6, 2009 by and between the Company and Debt Opportunity Fund,
LLP
|
10.13
(1)
|
Form
of Registration Rights Agreement entered into as of February 6, 2009 by
and between the Company and each security holder identified on the
signature page thereto.
|
10.14
(1)
|
Form
of Confidentiality and Non-Competition Agreement.
|
10.15
(1)
|
Lease
Agreement entered into August 29, 2008, by and between Carrierhouse Corp.
and the Company.
|
10.16
(2)
|
Employment
Agreement by and between the Company and Anastasios Kyriakides dated
effective May 6, 2009.
|
10.17(3)
|
Securities
Purchase Agreement dated September 25, 2009.
|
10.18(3)
|
Third
Amendment to Security Agreement dated September 25,
2009
|
10.19(3)
|
Registration
Rights Agreement dated September 25, 2009
|
10.20
(4)
|
2010
Stock Option Plan
|
14.1
|
Code
of Ethics
|
31.1
|
Certification
of Principal Executive Officer pursuant to 13a-14(a) under the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
Certification
of Principal Financial Officer pursuant to 13a-14(a) under the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
Certification
of the Principal Executive Officer pursuant to U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
32.2
|
Certification
of the Principal Financial Officer pursuant to U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
(1)
|
Filed as an exhibit to the
Company’s Form S-1 which was filed with the Commission on February 2,
2009, and incorporated herein by
reference.
|
|
(2)
|
Filed as an exhibit to the
Company’s Form S-1/A which was filed with the Commission on May 8, 2009,
and incorporated herein by
reference.
|
|
(3)
|
Filed as an exhibit to the
Company’s Form 8-K which was filed with the Commission on October 1, 2009,
and incorporated herein by
reference.
|
|
(4)
|
Filed as an exhibit to the
Company’s Form 8-K which was filed with the Commission on December 1,
2009, and incorporated herein by
reference.
|
|
(5)
|
Filed as an exhibit to the
Company’s Form 8-K which was filed with the Commission on December 1,
2009, and incorporated herein by
reference.
|
38
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NET TALK.COM, INC. | |
Date: December
14, 2009
|
By
/s/ Anastasios
Kyriakides
|
Anastasios
Kyriakides
|
|
Chief
Executive Officer (Principal Executive Officer)
|
|
Date: December
14, 2009
|
By: /s/ Guillermo
Rodriguez
|
Guillermo
Rodriguez
|
|
Chief
Financial Officer (Principal Financial Officer and Principal Accounting
Officer)
|
POWER
OF ATTORNEY
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated. Each person whose signature appears below
hereby authorizes Anastasios Kyriakides or either of them acting in the absence
of the other as his or her true and lawful attorney-in-fact and agent, with full
power of substitution and re-substitution for him or her and in his or her name,
place and stead, in any and all capacities to sign any and all amendments to
this report, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission.
Name
|
Position
|
Date
|
/s/ Anastasios Kyriakides | ||
Anastasios
Kyriakides
|
Chief
Executive Officer (Principal Executive Officer) and
Director
|
December
14, 2009
|
/s/ Guillermo Rodriguez | ||
Guillermo
Rodriguez
|
Chief
Financial Officer (Principal Financial Officer and Principal Accounting
Officer)
and
Director
|
December
14, 2009
|
/s/
Kenneth Hosfeld
|
||
Kenneth
Hosfeld
|
Director
|
December
14, 2009
|
/s/ Leo Manzewitsch | ||
Leo
Manzewitsch
|
Director
|
December
14, 2009
|
39
Index to financial statements | Page | |
Report of Independent Registered Public Accountant firm KBL, LLP | 41 | |
Balance sheets as of September 30, 2009 | 42 | |
Statements of operations for the years ended September 30, 2009 and 2008 | 43 | |
Statements of cash flows for the years ended September 30, 2009 and 2008 | 44 | |
Statements of stockholders equity (deficit) for the years ended September 30, 2009 and 2008 | 46 | |
Notes to financial statements | 47 |
40
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
NetTalk.com,
Inc.
Miami,
Florida
We have
audited the accompanying balance sheets of NetTalk.com, Inc., as of September
30, 2009 and 2008 and the related statements of operations, stockholders’
deficit, and cash flows for the years then ended. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of NetTalk.com, Inc. as of
September 30, 2009 and 2008, and the results of their operations, changes
in their stockholders’ deficit and their cash flows for the years ended
September 30, 2009 and 2008, in conformity with accounting principles generally
accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As
shown in the financial statements and discussed in Note 3 of the accompanying
financial statements, the Company has incurred significant recurring losses from
operations since inception and is dependent on outside sources of financing for
continuation of its operations. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
/s/ KBL,
LLP
Tampa,
Florida
December
3, 2009
41
Part
II
|
||||||||
Item
8. Financial statements
|
||||||||
Net Talk.com, Inc. | ||||||||
Balance Sheets | ||||||||
September
30,
|
September
30,
|
|||||||
2009
|
2008
|
|||||||
|
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 1,007,366 | $ | 342,793 | ||||
Restricted
cash
|
3,332 | $ | - | |||||
Accounts
receivables, net of allowance bad debts $1,042
|
37,315 | $ | - | |||||
Inventory
|
117,712 | - | ||||||
Prepaid
advertising
|
5,008 | - | ||||||
Total current assets | 1,170,733 | 342,793 | ||||||
Telecommunication
equipment and other property, net
|
665,315 | 749,767 | ||||||
Intangible
assets, net
|
604,987 | 832,743 | ||||||
Deferred
financing costs and other assets
|
298,266 | 23,730 | ||||||
Total assets | $ | 2,739,301 | $ | 1,949,033 | ||||
Liabilities
and Stockholders' Deficit:
|
||||||||
Accounts
payable
|
$ | 264,912 | $ | 13,753 | ||||
Due
to officer
|
56,300 | - | ||||||
Accrued
interest
|
168,774 | 10,000 | ||||||
Accrued
expenses
|
49,320 | - | ||||||
Senior
secured convertible debentures ($1,500,000 face value) -
Current
|
1,509,880 | - | ||||||
Derivative
liabilities - Current
|
382,200 | - | ||||||
Total current liabilities | 2,431,386 | 23,753 | ||||||
|
||||||||
Senior
secured convertible debentures ($2700,000 face value)
|
1,136,875 | 1,520,415 | ||||||
Derivative
liabilities
|
945,072 | 563,400 | ||||||
Total liabilities | 4,513,333 | 2,107,568 | ||||||
Stockholders'
Deficit:
|
||||||||
Preferred
stock $.001 par value, 10,000,000 shares
|
- | - | ||||||
authorized,
none designated or issued
|
||||||||
Common
stock, $.001 par value, 300,000,000 shares
|
9,720 | 8,750 | ||||||
authorized,
9,719,800 and 8,749,800 issued and outstanding,
|
||||||||
as
of September 30, 2009 and 2008, respectively.
|
||||||||
Additional
paid in surplus
|
3,458,825 | 2,337,475 | ||||||
Accumulated
deficit
|
(5,242,577 | ) | (2,504,760 | ) | ||||
Total stockholders' deficit | (1,774,032 | ) | (158,535 | ) | ||||
Total liabilities and stockholders' deficit | $ | 2,739,301 | $ | 1,949,033 | ||||
The accompanying notes are an integral part of the financial statements |
42
Net Talk.com, Inc. | ||||||||
Statements of Operations | ||||||||
|
||||||||
Year
Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
|
|
|||||||
Revenues
|
115,571 | - | ||||||
Cost
of sales
|
118,563 | - | ||||||
Gross
margin
|
(2,992 | ) | - | |||||
Advertising
|
444,249 | - | ||||||
Compensation
and benefits
|
446,807 | 1,544,701 | ||||||
Professional
fees
|
294,425 | 562,500 | ||||||
Depreciation
and amortization
|
358,244 | 14,625 | ||||||
Research
and development
|
414,434 | - | ||||||
General
and administrative expenses
|
383,659 | 49,737 | ||||||
Total
operating expenses
|
2,341,818 | 2,171,563 | ||||||
Loss
from continuing operations
|
(2,344,810 | ) | (2,171,563 | ) | ||||
Other
income (expenses):
|
||||||||
Interest
expense
|
(533,171 | ) | (25,470 | ) | ||||
Derivative
income
|
128,646 | (7,800 | ) | |||||
Interest
income
|
11,518 | 765 | ||||||
|
(393,007 | ) | (32,505 | ) | ||||
|
||||||||
Loss
from continuing operations before income taxes
|
(2,737,817 | ) | (2,204,068 | ) | ||||
Benefit
for Income taxes
|
- | 8,033 | ||||||
Loss
from continuing operations
|
(2,737,817 | ) | (2,196,035 | ) | ||||
Discontinued
operations (Note 11)
|
||||||||
Income
(loss) from discontinued operations
|
||||||||
(including
gain on disposal of equipment of
|
||||||||
$168,083
in 2008)
|
- | 186,128 | ||||||
Net
loss
|
$ | (2,737,817 | ) | $ | (2,009,907 | ) | ||
Net
loss per shares:
|
||||||||
Continuing
operations:
|
||||||||
Basic
and diluted
|
$ | (0.30 | ) | $ | (2.10 | ) | ||
Weighted
average shares, basic and diluted
|
9,015,553 | 1,046,375 | ||||||
Discontinued
operations:
|
||||||||
Basic
|
$ | - | $ | 0.18 | ||||
Diluted
|
$ | - | $ | 0.04 | ||||
Weighted
average shares, basic and diluted
|
9,015,553 | 1,046,375 | ||||||
|
||||||||
The accompanying notes are an integral part of the financial statements |
43
Net
Talk.com, Inc.
Statements
of Cash Flows
|
||||||||
|
||||||||
Year
Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
|
|
|||||||
Cash
flow from operating activities:
|
||||||||
Net
income (loss)
|
$ | (2,737,817 | ) | $ | (2,009,907 | ) | ||
Adjustments
to reconcile net loss to cash used in operations:
|
||||||||
Depreciation
|
119,463 | 6,404 | ||||||
Amortization
|
238,780 | 8,221 | ||||||
Amortization
finance costs
|
72,802 | 668 | ||||||
Amortization
premium on debentures
|
170,941 | (588 | ) | |||||
Fair
value of derivatives
|
(128,646 | ) | 7,800 | |||||
Issuance
of common stock to officers as compensation
|
- | 1,500,000 | ||||||
Issuance
of common stock for consulting fees
|
250,000 | 537,500 | ||||||
Gain
on sale of assets
|
- | (168,083 | ) | |||||
Discontinued
operations, net
|
- | (23,045 | ) | |||||
Expenses
financed costs
|
- | 14,802 | ||||||
Deferred
income taxes
|
- | (8,033 | ) | |||||
Discontinued
operations, net
|
- | - | ||||||
Changes
in assets and liabilities:
|
||||||||
Accounts
receivables
|
(37,315 | ) | ||||||
Prepaid
expenses and other assets
|
(5,007 | ) | ||||||
Inventories
|
(117,712 | ) | ||||||
Accounts
payables
|
251,157 | - | ||||||
Accrued
expenses
|
208,094 | 23,753 | ||||||
Net
cash used in operating activities
|
(1,715,260 | ) | (110,508 | ) | ||||
Cash
flow used in investing activities:
|
||||||||
Acquisition
of fixed assets
|
(35,011 | ) | 448,300 | |||||
Proceeds
from sale of assets
|
- | 85,812 | ||||||
Patent
costs
|
(11,024 | ) | - | |||||
(Increase)
in deposits
|
(24,500 | ) | - | |||||
Net
cash used in investing activities
|
(70,535 | ) | 534,112 | |||||
Cash
flow used in financing activities:
|
||||||||
Issuance
of Senior Secured Debentures
|
2,397,400 | - | ||||||
Loans
from officers
|
56,300 | - | ||||||
Net
cash used in investing activities
|
2,453,700 | - | ||||||
Changes
in net assets - discontinued operations:
|
||||||||
Operating
activities
|
- | (80,811 | ) | |||||
Investing
activities
|
- | - | ||||||
Financing
activities
|
- | - | ||||||
Net
cash provided by discontinued operations
|
- | (80,811 | ) | |||||
Net
increase in cash
|
667,905 | 342,793 | ||||||
Cash
and equivalents, beginning
|
342,793 | - | ||||||
Cash
and equivalents, ending
|
$ | 1,010,698 | $ | 342,793 | ||||
The accompanying notes are an integral part of the financial statements |
44
Net Talk.com, Inc. | ||||||||
Statements
of Cash Flows
|
||||||||
|
||||||||
Year
Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
|
|
|||||||
Supplemental
disclosures:
|
||||||||
Cash
paid for interest
|
$ | 121,000 | $ | - | ||||
Cash
paid for income taxes
|
$ | - | $ | - | ||||
Supplemental
disclosures for non-cash items:
|
||||||||
Property
and equipment - addtion
|
$ | - | $ | 756,171 | ||||
Intangible
assets - addition
|
$ | - | $ | 840,964 | ||||
Issuance
of debentures
|
$ | 982,656 | $ | 1,020,414 | ||||
Issuance
of warrants
|
$ | 872,320 | $ | 563,400 | ||||
|
||||||||
The
accompanying notes are an integral part of the financial
statements
|
45
Net Talk.com, Inc. | ||||||||||||||||||||||||||||
Statement of Stockholders' Deficit | ||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||
Preferred
Stock
|
Common
Stock
|
Additonal
paid
|
Accumulated
|
Total
|
||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
in surplus
|
Deficit
|
Equity
|
||||||||||||||||||||||
Balance
at September 30, 2007
|
- | - | 600,208 | 600 | 308,125 | (494,853 | ) | (186,128 | ) | |||||||||||||||||||
Cancellation
of founders shares
|
- | - | (408 | ) | - | - | - | - | ||||||||||||||||||||
Issuance
of common shares:
|
||||||||||||||||||||||||||||
Officers
|
- | - | 6,000,000 | 6,000 | 1,494,000 | - | 1,500,000 | |||||||||||||||||||||
Consulting
fees
|
- | - | 2,150,000 | 2,150 | 535,350 | - | 537,500 | |||||||||||||||||||||
Net
loss - September 30, 2008
|
- | - | - | - | - | (2,009,907 | ) | (2,009,907 | ) | |||||||||||||||||||
Balance
at September 30, 2008
|
- | - | 8,749,800 | 8,750 | 2,337,475 | (2,504,760 | ) | (158,535 | ) | |||||||||||||||||||
Issuance
of commons shares:
|
||||||||||||||||||||||||||||
Consulting
fees
|
- | - | 1,000,000 | 1,000 | 249,000 | - | 250,000 | |||||||||||||||||||||
Convertible
debentures
|
- | - | - | - | 872,320 | - | 872,320 | |||||||||||||||||||||
beneficial
conversion
|
||||||||||||||||||||||||||||
Cancellation
of founders shares
|
- | - | (30,000 | ) | (30 | ) | 30 | - | - | |||||||||||||||||||
Net
loss - September 30, 2009
|
- | - | - | - | - | (2,737,817 | ) | (2,737,817 | ) | |||||||||||||||||||
Balance
at September 30, 2009
|
- | - | 9,719,800 | 9,720 | 3,458,825 | (5,242,577 | ) | (1,774,032 | ) | |||||||||||||||||||
The accompanying notes are an integral part of the financial statements |
46
NET TALK.COM, INC.
Notes
to Financial Statements
Year
ended September 30, 2009 and 2008
Note
1 – Nature of operations and basis of presentation
Net
Talk.com, Inc. (“Nettalk” or the “Company”) was incorporated on May 1, 2006
under the laws of the State of Florida. We are a telephone company, who
provides, sells and supplies commercial and residential telecommunication
services, including services utilizing voice over internet protocol (“VoIP”)
technology, session initiation protocol (“SIP”) technology, wireless fidelity
technology, wireless maximum technology, marine satellite services technology
and other similar type technologies. Our main product is the TK 6000, an analog
telephone adapter that provides connectivity for analog telephones and faxes to
home, home office or corporate local area networks (“LAN”). Our TK 6000 and its
related services is a cost effective solution for individuals, small businesses
and telecommuters connecting to any analog telephone, fax or private branch
exchange (“PBX”). The TK 6000 provides one USB port, one Ethernet
port and one analog telephone port. A full suite of internet protocol features
is available to maximize universal connectivity. In addition, analog telephones
attached to the TK 6000 are able to use advanced calling features such as call
forwarding, caller ID, 3-way calling, call holding, call retrieval and call
transfer.
Prior to
our fiscal year ended September 30, 2009, we were in our development
stage. Commencing with the fourth quarter of our year ended September
30, 2009, we concluded that we have substantially established our operating
architecture and have commenced revenue producing activities sufficient to
emerge from the development stage of operations.
Subsequent
events
We have
evaluated subsequent events that occurred after our fiscal year ended September
30, 2009 through the date that our financial statements are issued or December
14, 2009.
Note
2 - Summary of Significant Accounting Policies:
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires our management to
make estimates and assumptions that affect the amounts reported in the financial
statements and footnotes. Significant estimates inherent in the preparation of
our financial statements include developing fair value measurements upon which
to base our accounting for acquisitions of intangible assets and issuances of
financial instruments, including our common stock. Our estimates also include
developing useful lives for our tangible and intangible assets and cash flow
projections upon which we determine the existence of, or the measurements for,
impairments. In all instances, estimates are made by competent employees under
the supervision of management, based upon the current circumstances and the best
information available. However, actual results could differ from those
estimates.
Risk
and Uncertainties
Our future
results of operations and financial condition will be impacted by the following
factors, among others: dependence on the worldwide telecommunication markets
characterized by intense competition and rapidly changing technology, on
third-party manufacturers and subcontractors, on third-party distributors in
certain markets, on the successful development and marketing of new products in
new and existing markets. Generally, we are unable to predict the future status
of these areas of risk and uncertainty.
47
Revenue
recognition
Operating
revenue consist of customer equipment sales of our main product TK6000,
telecommunication service revenues, shipping and handling revenues.
Most all
of our operating revenues are generated from the sale of customer equipment of
our main product the TK6000. We also derive service revenues from per minute
fees for international calls. Our operating revenue is fully recognized at the
time of our customer equipment sale. The device provides for life
time service (over the life of the device/equipment). Our equipment
is able to operate within our network/platform or over any other
network/platform. There is no need for income allocation between our
device and life time service provided. The full intrinsic value of
the sale is allocated to the device. Therefore, we recognized 100% of revenue at
time of customer equipment sale and do no allocate any income to life time
service provided. Shipping and handling is also recognized at time of
sale. International calls are billed as earned from our
customers. International calls are prepaid and customers account is
debited as minutes are used and earned.
Cash
and Cash Equivalents
We
consider all highly liquid cash balances and debt instruments with an original
maturity of three months or less to be cash equivalents. We maintain cash
balances only in domestic bank accounts, which at times, may exceed federally
insured limits.
September 30,
|
||||||||
Inventory
|
2009
|
2008
|
||||||
Productive
material, work in process and supplies
|
$ | 43,538 | $ | - | ||||
Finished
products
|
74,174 | - | ||||||
Total
|
$ | 117,712 | $ | - |
During the
year ended September 30, 2009 and 2008, in accordance with our lower of cost or
market analyses we did not record lower of cost or market adjustments to our
finished goods inventories.
Telecommunications
Equipment and Other Property
Property,
equipment and telecommunication equipment includes acquired assets which consist
of network equipment, computer hardware, furniture and software. All of our
equipments are stated at cost with depreciation calculated using the straight
line method over the estimated useful lives of related assets, which ranges from
three to five years. The cost associated with major
improvements are capitalized while the cost of maintenance and repairs is
charged to operating expenses.
Intangible
Assets
Our
intangible assets were acquired in connection with the asset acquisition, more
fully described in Note 4. The intangible assets were recorded at our
acquisition cost, which encompassed estimates of their respective and their
relative fair values, as well as estimates of the fair value of consideration
that we issued. We amortize our intangible assets using the straight-line method
over lives that are predicated on contractual terms or over periods we believe
the assets will have utility.
48
Impairments
and Disposals
We
evaluate our tangible and definite-lived intangible assets for impairment
annually or more frequently in the presence of circumstances or trends that may
be indicators of impairment. Our evaluation is a two step process. The first
step is to compare our undiscounted cash flows, as projected over the remaining
useful lives of the assets, to their respective carrying values. In the event
that the carrying values are not recovered by future undiscounted cash flows, as
a second step, we compare the carrying values to the related fair values and, if
lower, record an impairment adjustment. For purposes of fair value, we generally
use replacement costs for tangible fixed assets and discounted cash flows, using
risk-adjusted discount rates for intangible assets.
During
December 2007, our management and board of directors approved the discontinuance
and sale of our advertising business in order to devote all resources to the
development of our VoIP offerings. We concluded that the advertising business
constituted a component of our business and have presented the unit in the
accompanying financial statements on the basis that (a) the operations and cash
flows of the component have been eliminated from our ongoing operations as a
result of the disposal transaction and (b) we have no significant continuing
involvement in the operations of the component after the disposal transaction.
Refer to Note 11 for additional information about the disposal.
Research
and Development and Software Costs
We expense
research and development costs, as these costs are incurred. We account for our
offering-related software development costs as costs incurred internally in
creating a computer software product and are charged to expense when incurred as
research and development until technological feasibility has been established
for the product. Technological feasibility is established upon completion of a
detail program design or, in its absence, completion of a working model.
Thereafter, all software production costs shall be capitalized and subsequently
reported at the lower of unamortized cost or net realizable value. Capitalized
costs are amortized based on current and future revenue for each product with an
annual minimum equal to the straight-line amortization over the remaining
estimated economic life of the product. At this time our main
product TK6000 is being sold in the market place. Therefore, research
and development cost reported in our financial statements relates to pre –
marketing costs and are expensed accordingly.
September 30, | ||||||||
Components
of Research and development:
|
2009
|
2008
|
||||||
Product
development and engineering
|
$ | 201,436 | $ | - | ||||
Payroll
and benefits
|
212,998 | - | ||||||
Total
|
$ | 414,434 | $ | - |
Reclassifications
Certain
reclassifications have been made to prior years financial statements in order to
conform to the current year’s presentation. The reclassification had
no impact on net earnings previously reported.
Share-Based
Payment Arrangements
In June
2008, the FASB issued authoritative guidance on the treatment of participating
securities in the calculation of earnings per shares (“EPS”). This
guidance addresses whether instruments granted in share – based payment
transactions are participating securities prior to vesting and, therefore, need
to be included in the earnings allocation in computing EPS under the two - class
method. This guidance was effective for fiscal years beginning on or
after December 15, 2008. Adoption of this guidance did not have a
material impact on our results of operations and financial position, or on basic
or diluted EPS.
We apply
the grant date fair value method to our share – based payment arrangements with
employees and consultants. Share – based compensation cost
to employees is measured at the grant date fair value based on the value of the
award and is recognized over the service period. Share – based
payments to non – employees are recorded at fair value on the measurement date
and reflected in expense over the service period.
49
Financial
Instruments
Financial
instruments, as defined in the Accounting Standards Codification (“ASC”) 825,
Financial
Instruments, consist of cash, evidence of ownership in an entity, and
contracts that both (i) impose on one entity a contractual obligation to deliver
cash or another financial instrument to a second entity, or to exchange other
financial instruments on potentially unfavorable terms with the second entity,
and (ii) conveys to that second entity a contractual right (a) to receive cash
or another financial instrument from the first entity, or (b) to exchange other
financial instruments on potentially favorable terms with the first entity.
Accordingly, our financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, accrued liabilities, secured convertible
debentures, and derivative financial instruments.
We carry
cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities at historical costs since their respective estimated fair values
approximate carrying values due to their current nature. We also carry
convertible debentures at historical cost. However, the fair values of debt
instruments are estimated for disclosure purposes (below) based upon the present
value of the estimated cash flows at market interest rates applicable to similar
instruments.
As of
September 30, 2009, estimated fair values and respective carrying values of our
secured convertible debentures are as follows:
Financial
Instrument
|
Note
|
Fair
Value
|
Carrying
Value
|
$
1,000,000 12% Secured Convertible Debenture
|
7
|
$ 1,129,294
|
$ 1,006,588
|
$
500,000 12% Secured Convertible Debenture
|
7
|
$ 564,647
|
$ 503,293
|
$
600,000 12% Secured Convertible Debenture
|
7
|
$ 636,181
|
$ 293,726
|
$
500,000 12% Secured Convertible Debenture
|
7
|
$ 530,151
|
$ 271,741
|
$
500,000 12% Secured Convertible Debenture
|
7
|
$ 501,794
|
$ 179,778
|
$
1,100,000 12% Secured Convertible Debenture
|
7
|
$ 1,080,422
|
$ 391,630
|
Derivative
financial instruments, as defined in ASC 815-10-15-83 Derivatives and
Hedging, consist of financial instruments or other contracts that contain
a notional amount and one or more underlying (e.g. interest rate, security price
or other variable), require no initial net investment and permit net settlement.
Derivative financial instruments may be free-standing or embedded in other
financial instruments. Further, derivative financial instruments are initially,
and subsequently, measured at fair value and recorded as liabilities or, in rare
instances, assets.
We
generally do not use derivative financial instruments to hedge exposures to
cash-flow, market or foreign-currency risks. However, we have entered into
certain other financial instruments and contracts, such as our secured
convertible debenture and warrant financing arrangements that are either (i) not
afforded equity classification, (ii) embody risks not clearly and closely
related to host contracts, or (iii) may be net-cash settled by the counterparty.
As required by ASC 815, these instruments are required to be carried as
derivative liabilities, at fair value, in our financial statements.
50
The fair
value of our derivative liabilities consist of the following:
Derivative
Financial Instrument
|
Indexed
Shares
|
September
30,
2009
|
September
30,
2008
|
|||||||||
Warrants:
|
||||||||||||
September
10, 2008 Series B warrants (Tranche 1)
|
2,000,000 | $ | 127,400 | $ | 187,800 | |||||||
September
10, 2008 Series B warrants (Tranche 2)
|
4,000,000 | 254,800 | 375,600 | |||||||||
January
30, 2009 Series C-3 warrants
|
2,400,000 | 167,040 | -- | |||||||||
January
30, 2009 Series BD warrants
|
480,000 | 33,408 | -- | |||||||||
February
6, 2009 Series C-4 warrants
|
2,000,000 | 139,400 | -- | |||||||||
February
6, 2009 Series BD warrants
|
800,000 | 55,760 | -- | |||||||||
July
20, 2009 Series C-5 warrants
|
2,000,000 | 146,600 | -- | |||||||||
September
25, 2009 Series C-6 warrants
|
4,400,000 | 335,720 | -- | |||||||||
September
25, 2009 Series BD warrants
|
880,000 | 67,144 | -- | |||||||||
Compound
Derivative Financial Instruments:
|
||||||||||||
$1,000,000
Convertible Debenture, dated September 10, 2008
|
4,000,000 | -- | -- | |||||||||
$500,000
Convertible Debenture, dated September
10, 2008
|
2,000,000 | -- | -- | |||||||||
$600,000
Convertible Debenture, dated January
30, 2009
|
2,400,000 | -- | -- | |||||||||
$500,000
Convertible Debenture, dated February 6, 2009
|
2,000,000 | -- | -- | |||||||||
$500,000
Convertible Debenture, dated July
20, 2009
|
2,000,000 | -- | -- | |||||||||
$1,100,000
Convertible Debenture, dated September 25, 2009
|
4,400,000 | -- | -- | |||||||||
Total
|
35,760,000 | $ | 1,327,272 | $ | 563,400 | |||||||
The
following table summarizes the effects on our income (loss) associated with (i)
changes in the fair values of our derivative financial instruments and
(ii)day-one losses resulting from inception date derivative fair values greater
than the underlying proceeds in our financings:
Year
Ended
|
||||||||
September
30
2009
|
September
30,
2008
|
|||||||
September
10, 2008 Series B warrants (Tranche 1)
|
$ | 60,400 | $ | (2,600 | ) | |||
September
10, 2008 Series B warrants (Tranche 2)
|
120,800 | (5,200 | ) | |||||
January
30, 2009 Series C-3 warrants
|
18,720 | -- | ||||||
January
30, 2009 Series BD warrants
|
3,744 | -- | ||||||
February
6, 2009 Series C-4 warrants
|
(4,800 | ) | -- | |||||
February
6, 2009 Series BD warrants
|
(1,920 | ) | -- | |||||
July
20, 2009 Series C-5 warrants
|
12,600 | -- | ||||||
Day-one
derivative losses
|
(80,898 | ) | -- | |||||
Total
|
$ | 128,646 | $ | (7,800 | ) |
51
Advertising
In June
2009, we incurred prepaid advertising for the creation of an infomercial to be
aired during the deployment and launching of our TK6000. The prepaid
advertising was charged to advertising expense, as follows:
Amount
|
||||
Cash
payment
|
$ | 100,000 | ||
Share-based
payment (1,000,000 common shares)
|
250,000 | |||
Total
|
$ | 350,000 |
Income
Taxes
We record
our income taxes using the asset and liability method. Under this method, the
future tax consequences attributed to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis are reflected as tax assets and liabilities using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences reverse. Changes in these deferred tax assets and
liabilities are reflected in the provision for income taxes. However, we are
required to evaluate the recoverability of net deferred tax assets. If it is
more likely than not that some portion of a net deferred tax asset will not be
realized, a valuation allowance is recognized with a charge to the provision for
income taxes.
Net
Loss per Common Share
Basic loss
per common share represents our net loss divided by the weighted average number
of common shares outstanding during the period. Diluted loss per common share
gives effect to all potentially dilutive securities. We compute the
effects on diluted loss per common share arising from warrants and options using
the treasury stock method. We compute the effects on diluted loss per common
share arising from convertible securities using the if-converted method. The
effects, if anti - dilutive are excluded.
Recent
accounting pronouncements
In June
2009. The Financial Accounting Standard Board (“FASB”) issued Accounting
Standards Update No. 2009-01, Generally Accepted Accounting Principles, which
establishes FASB Accounting Standards Codification (“the Codification”) as the
official single source of authoritative U. S, GAAP. All existing
accounting standards are superseded. All other accounting guidance
not included in the Codification will be considered non –
authoritative. The Codification also includes all relevant SEC
guidance organized using the same topical structure in separate sections within
the Codification.
Following
the Codification, the FASB will not issue standards in the form of Statements,
FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead
it will issue Accounting Standards Updates (“ASU”) which will serve to update
the Codification, provide background information about the guidance and provide
the basis for conclusions on the changes to the Codification.
The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification is effective for our fiscal year ended
September 30, 2009 financial statements and the principal impact on our
financial statements is limited to disclosures, as all future references to
authoritative accounting literature will be referenced in accordance
with the Codification.
In
December 2007, the FASB revised the authoritative guidance for business
combinations. This guidance establishes principles and requirements for how
the acquirer in a business combination recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities
assumed and any non – controlling interest in the acquiree. This
guidance changes the accounting for business combinations in a number of areas,
including the treatment of contingent consideration, preacquisition
contingencies, transaction costs and restructuring costs. In addition , under
the new guidance, changes in the acquired entity’s deferred tax assets and
uncertain tax positions after the measurement period will impact income tax
expense. This guidance was effective for fiscal year beginning on or
after December 15, 2008 and requires the immediate expensing of acquisition
related costs associated with acquisitions completed after December 31,
2008. Adoption of this guidance on October 1, 2009 had no impact on
our results of operations, and financial position. However, we expect
this guidance will affect acquisitions made thereafter, though the impact will
depend upon the size and nature of the acquisition.
52
In March
2008, the FASB issued authoritative guidance on disclosures about derivative
instruments and hedging activities. This guidance addresses enhanced
disclosure concerning (a) the manner in which an entity uses derivatives (and
the reasons is uses them), (b) the manner in which derivatives and related
hedged items are accounted for and (c) the effects that derivatives and related
hedged items have on an entity’s financial position, financial performance, and
cash flows. This guidance was effective for financial statements
issued for fiscal years and interim periods beginning on or after November 15,
2008. Adoption of this guidance did not have a material impact on our
financial position or results of operations.
In June
2008, the FASB issued authoritative guidance on the treatment of participating
securities in the calculation of earnings per shares (“ESP”). This
guidance addresses whether instruments granted in share – based payment
transactions are participating securities prior to vesting and, therefore, need
to be included in the earnings allocation in computing ESP under the two - class
method. This guidance was effective for fiscal years beginning on or
after December 15, 2008. Adoption of this guidance did not have a
material impact on our results of operations and financial position, or on basic
or diluted ESP.
In April
2009, the FASB issued authoritative guidance on interim disclosures about fair
value of financial instruments. This guidance requires disclosures
about fair value of financial instruments for interim reporting periods as well
as in annual financial statements for interim periods ending after June 15,
2009. Adoption of this guidance had no effect on our results of
operations of financial conditions.
In May
2009, the FASB issued authoritative guidance on subsequent
events. This guidance establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. This
guidance is effective for interim or annual financial periods ending after June
15, 2009. Adoption of this guidance did not have an impact on our
results of operations or financial position.
In August
2009, the FASB updated its authoritative guidance on fair value measurement and
disclosures. This update provides amendments to reduce potential ambiguity in
financial reporting when measuring the fair value of
liabilities. Among other provisions, this update provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the valuation techniques described in
ASC Update 2009 – 05. ASC Update 2009 – 05 will become effective for
our quarter financial statements at December 31, 2009. We have not
yet determined the impact that this update may have on our financial
statements.
Note
3 – Going Concern:
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States contemplates that operations will be
sustained for a reasonable period. However, we have incurred
operating losses of $2,737,817 and $2,009,907 during the year ended September
30, 2009 and 2008, respectively. In addition, during these periods, we used cash
of $1,715,260 and $110,508, respectively, in our operating activities.
Since our
inception, we have been dependent upon funds raised through the issuance of
debentures and warrants. These
conditions raise doubts about our ability to continue as a going concern for a
reasonable period. Our
ability to continue as a going concern for a reasonable period is dependent upon
our ability to raise sufficient capital to implement our business plan and to
generate profits to become financially viable. During the year ended
September 30, 2009 and 2008, we raised $2,397,400 and $448,300, respectively,
from the issuance of debentures and warrants.
We cannot
provide assurances regarding the success of our current operations. Our
financial statements do not include adjustments relating to the recoverability
of recorded assets or liabilities that might be necessary should we be unable to
continue as a going concern.
53
Note
4 - Interlink Asset Group Acquisition:
On
September 10, 2008, we acquired certain tangible and intangible assets, formerly
owned by Interlink Global Corporation (“Interlink”), (the “Interlink Asset
Group”) directly from Interlink’s creditor who had seized the assets pursuant to
a Security and Collateral Agreement. Our purpose in acquiring these assets,
which included employment rights to the executive management team of Interlink,
was to advance the TK6000 VoIP Technology Program, which Interlink launched in
July 2008. Accordingly, these assets substantially comprise our current business
assets and the infrastructure for our operations. Contemporaneously with this
purchase, we executed an assignment and intellectual property agreement with
Interlink that served to perfect our ownership rights to the
assets.
Consideration
for the acquisition consisted of a face value $1,000,000 convertible debenture,
plus warrants to purchase 4,000,000 shares of our common stock. On the date of
the Interlink Asset Group acquisition, we also entered into a financing
agreement with the creditor that provided for the issuance of a face value
$500,000 convertible debenture, plus warrants to purchase 2,000,000 shares of
our common stock for net cash consideration of $448,300. These financial
instruments, and our accounting therefore, are further addressed in Note
7.
The
transfer of the Interlink Asset Group required us to determine whether the group
of assets constituted a business, or whether the group of assets did not
constitute a business. We
accounted for the acquisition of the assets of Interlink Asset Group as an
acquisition of productive assets and not as a business. In addition to our
analysis that gave rise to the conclusion that the Interlink Asset Group did not
constitute a business, we considered whether the two aforementioned financing
arrangements should be combined for purposes of accounting for the acquisition.
In reaching a conclusions that they should be combined we considered and gave
substantial weight to the facts that (i) they were entered into
contemporaneously and in contemplation of one another, (ii) they were executed
with the same counterparty and the terms and conditions of the financial
instruments and underlying contracts are substantially the same and (iii) there
is otherwise no economic need nor
substantive business purpose for structuring the transactions separately.
Accordingly, for purposes of accounting for the Interlink Asset Group
acquisition we have combined the financing arrangements associated with both the
asset purchase and the cash financing arrangement. Accounting for the financial
instruments arising from these arrangements is further discussed in Note
7.
Notwithstanding
our conclusion that the Interlink Asset Group did not constitute a business. Our
measurement principles provide that, when consideration is not in the form of
cash, measurement is based upon the fair value of the consideration given or the
fair value of the assets acquired, whichever is more clearly and closely evident
and, thus more reliably measureable. We have concluded that the value of the
consideration given representing the financial instruments, is more clearly
evident and reliable for this purpose because (i) the exchange resulted from
exhaustive negotiations with the creditor, (ii) fair value measurements of our
financial instruments are in part based upon market indicators and assumptions
derived for active markets, and (iii) while ultimately reasonable, our fair
value measurements of the significant tangible and intangible asset relies
heavily on subjective estimates and prospective financial information. The
following table reflects the components of the consideration paid to effect the
acquisition:
Financial
Instrument or Cost:
|
Amount
|
|||
Convertible
debentures:
|
||||
$1,000,000
face value, 12% convertible debentures
|
$ | 1,014,002 | ||
$500,000
face value, 12% convertible debentures
|
507,000 | |||
Class
B warrants, indexed to 6,000,000 shares of common stock
|
555,600 | |||
Direct
costs
|
39,200 | |||
$ | 2,115,802 |
We have
evaluated the substance of the exchange for purposes of identifying all assets
acquired. The recognition of goodwill is not contemplated in an exchange that is
not a business or accounted for as a business combination.
54
The
following table reflects the acquisition date fair values and the final
allocation of the consideration to the assets acquired. The allocation was
performed under the assumption that an excess in consideration over the fair
values of the assets acquired is allocated to the assets subject to depreciation
and amortization, based upon their relative fair values, and not to those assets
with indefinite lives. A difference in the recognized basis in the value of the
consideration between book and income tax gives rise to the deferred income
taxes.. Our analysis did not result in impairment, but we are required to
continue to perform this analysis as provided in our impairments and disposals
policy (see Note 2).
Asset
or Account
|
Fair
Value
|
Allocation
|
||||||
Cash
|
$ | 487,500 | $ | 487,500 | ||||
Deferred
finance costs
|
24,398 | 24,398 | ||||||
Telecommunications
equipment and other property
|
411,203 | 756,171 | ||||||
Intangible
assets:
|
||||||||
Knowhow
of specialized employees
|
212,254 | 212,254 | ||||||
Trademarks
|
180,925 | 332,708 | ||||||
Employment
arrangements
|
122,400 | 225,084 | ||||||
Workforce
|
54,000 | 54,000 | ||||||
Telephony
license
|
5,000 | 9,195 | ||||||
Domain
names
|
4,200 | 7,723 | ||||||
Deferred
income taxes
|
-- | (8,033 | ) | |||||
Interest
expense (finance costs allocated to warrants)
|
14,802 | 14,802 | ||||||
Total
|
$ | 1,516,682 | $ | 2,115,802 |
In
connection with the above allocation, we evaluated the presence of in-process
research and development that may require recognition (and immediate write-off).
We concluded that in-process research and development was de minimus since
development is planned to be outsourced subsequent to the acquisition and, in
fact, no substantive effort and/or costs were found in the records of
Interlink. Research and development will be expensed as it is
incurred.
As more
fully discussed in Note 9, we issued 6,000,000 shares of common stock to our new
management team in connection with the Interlink Asset Group acquisition. These
shares are compensatory in nature and are fully vested. We have valued the
shares at $1,500,000, consistent with fair value measurements used elsewhere in
our accounting, and recognized the expense in compensation for the
period.
Note
5 - Telecommunications Equipment and Other Property:
Telecommunications
equipment and other property consist of the following:
September 30,
|
||||||||||||
Life
|
2009
|
2008
|
||||||||||
Telecommunication
equipment
|
7 | $ | 650,804 | $ | 641,460 | |||||||
Computer
equipment
|
5 | 106,577 | 85,111 | |||||||||
Office
equipment and furnishing
|
7 | 23,760 | 19,559 | |||||||||
Purchased
software
|
3 | 10,041 | 10,041 | |||||||||
Sub
– total
|
791,182 | 756,171 | ||||||||||
Less:
accumulated depreciation
|
(125,867 | ) | (6,404 | ) | ||||||||
Total
|
$ | 665,315 | $ | 749,767 |
Our
telecommunications equipment is deployed in our Network Operations Center
(“NOC”) as is most of the computer equipment. Other computer and office
equipment and furnishings are deployed at our corporate offices, which we lease
under an operating lease. Depreciation of the above assets amounted to $119,463
during the fiscal year ended September 30, 2009 and $6,404 during year ended
September 30, 2008.
55
Note
6 - Intangible Assets:
Intangible assets consist of following: |
Life
|
September
30,
|
||||||||||
|
2009
|
2008
|
||||||||||
Trademarks
|
5 | $ | 332,708 | $ | 332,708 | |||||||
Employment
agreements
|
3 | 225,084 | 225,084 | |||||||||
Knowhow
and specialty skills
|
3 | 212,254 | 212,254 | |||||||||
Workforce
|
3 | 54,000 | 54,000 | |||||||||
Telephony
licenses
|
2 | 9,195 | 9,195 | |||||||||
Patents
|
20 | 11,024 | - | |||||||||
Domain
names
|
2 | $ | 7,723 | $ | 7,723 | |||||||
851,988 | 840,964 | |||||||||||
Less accumulated amortization | (247,001 | ) | (8,221 | ) | ||||||||
$ | 604,987 | $ | 832,743 |
Amortization
of the above intangible assets amounted to $238,780 and $8,221 for year ended
September 30, 2009 and 2008, respectively. The weighted average
amortization period for the amortizable intangible assets is 3.0
years.
Estimated
future amortization of intangible assets for each year ending after September
30, 2009, is as follows:
2010
|
$ | 246,060 | ||
2011
|
225,910 | |||
2012
|
70,238 | |||
2013
|
62,779 | |||
Total
|
$ | 604,987 |
Note
7 - Secured Convertible Debentures and Warrant Financing
Arrangements:
The
carrying values of our 12% secured convertible debentures consist of the
following:
September 30, | |||
2009
|
2008
|
||
$1,000,000
face value convertible debenture, due September 10, 2010
|
$1,006,587
|
$1,013,611
|
|
$500,000
face value convertible debenture, due September 10, 2010
|
503,293
|
|
506,804
|
$600,000
face value convertible debenture, due January 30, 2011
|
293,726
|
--
|
|
$500,000
face value convertible debenture, due January 30, 2011
|
271,741
|
--
|
|
$500,000
face value convertible debenture, due July 20, 2011
|
179,778
|
--
|
|
$1,100,000
face value convertible debenture, due September 25, 2011
|
391,630
|
--
|
|
Total
|
$2,646,755
|
|
$1,520,415
|
Current portion | 1,509,880 | -- | |
Long portion | $1,136,875 | $1,520,415 |
2008 Convertible Debenture Financing
On
September 10, 2008, we issued a $1,000,000 face value, 12% secured convertible
debenture (T-1), due September 10, 2010 and Series B warrants indexed to
4,000,000 shares of our common stock in exchange for the Interlink Asset Group,
discussed in Note 4. Also on September 30, 2008, we issued a $500,000 face value
12% secured convertible debenture (T-2), due September 10, 2010 and Series B
warrants indexed to 2,000,000 shares of our common stock for net cash proceeds
of $472,800. The warrants have a term of five years. These financial instruments
were issued to the same creditor under contracts that are substantially similar,
unless otherwise mentioned in the following discussion.
56
The
principal amount of the debentures is payable on September 10, 2010 and the
interest is payable quarterly, on a calendar quarter basis. While the debenture
is outstanding, the investor has the option to convert the principal balance,
and not the interest, into shares of our common stock at a conversion price of
$0.25 per common share. The terms of the conversion option provide for
anti-dilution protections for traditional restructurings of our equity, such as
stock-splits and reorganizations, if any, and for sales of our common stock, or
issuances of common-indexed financial instruments, at amounts below the
otherwise fixed conversion price. Further, the terms of the convertible
debenture provide for certain redemption features. If, in the event of certain
defaults on the terms of the debentures, some of which are indexed to equity
risks, we are required at the investors option to pay the higher of (i) 110% of
the principal balance, plus accrued interest or (ii) the if-converted value of
the underlying common stock, using the 110% default amount, plus accrued
interest. If this default redemption is not exercised by the investor, we would
incur a default interest rate of 18% and the investor would have rights to our
assets under the related Security Agreement. We may redeem the convertible
debentures at anytime at 110% of the principal amount, plus accrued
interest.
Because
the two hybrid debt contracts were issued as compensation for the Interlink
Asset Group and as further discussed in Note 4 we concluded that they should be
combined for accounting purposes, the accounting resulted in no beneficial
conversion feature.
2009
Convertible Debenture Financings
We entered
into several Securities Purchase Agreements with Debt Opportunity Fund, LLP
(“DOF”) during the year ended September 30, 2009.
-
|
On
January 30, 2009 we issued (a) 12% Senior Secured Convertible
Debentures in the aggregate principal amount of $600,000 with a maturity
date of January 30, 2011, convertible into shares of common stock at a
conversion price of $0.25; and (b) Series C Warrants to purchase
2,400,000 shares of our common stock at an exercise price of $0.50 for net
cash proceeds of $507,900. The warrants have a term of five
years.
|
-
|
On
February 6, 2009 we issued (a) 12% Senior Secured Convertible
Debentures in the aggregate principal amount of $500,000 with a maturity
date of January 30, 2011, convertible into shares of common stock at a
conversion price of $0.25; and (b) Series C Warrants to purchase
2,000,000 shares of our common stock at an exercise price of $0.50 for net
cash proceeds of $443,250. The warrants have a term of five
years.
|
-
|
On
July 20, 2009, we issued (a) 12% Senior Secured Convertible
Debentures in the aggregate principal amount of $500,000 with a maturity
date of July 20, 2011, convertible into shares of common stock at a
conversion price of $0.25; and (b) Series C Warrants to purchase
2,000,000 shares of our common stock at an exercise price of $0.50 for net
cash proceeds of $446,250. The warrants have a term of five
years.
|
-
|
On
September 25, 2009, we issued (a) 12% Senior Secured Convertible
Debentures in the aggregate principal amount of $1,100,000 with a maturity
date of July 20, 2011, convertible into shares of common stock at a
conversion price of $0.25; and (b) Series C Warrants to purchase
4,400,000 shares of our common stock at an exercise price of $0.25 for net
cash proceeds of $1,000,000. The warrants have a term of five
years.
|
Each
debenture bears interest on the principal amount outstanding and unpaid from
time to time at a rate of 12% per annum from the date of issuance until
paid in full. Interest is calculated on the basis of a 360-day year and paid for
the actual number of days elapsed, and accrues and is payable quarterly or upon
conversion (as to the principal amount then being converted). The debentures
convert into shares of our common stock at the option of the holder at $0.25 per
share (which conversion price is subject to adjustment under certain
circumstances). The debentures are secured by a lien in all of the assets of the
Company. Further, the terms of the convertible debentures provide for default
redemption features similar to those described above. Since the Series C
warrants offered full ratchet anti-dilution protection, any previously issued
and outstanding warrants with a conversion price greater than $0.25
automatically had their conversion price ratchet down to $0.25 as subsequent
issuances were made with a lower conversion price. These financial instruments
included the Series C warrants associated with the January 2009, February 2009
and July 2009 financing. Each Series C Common Stock Purchase Warrant is
exercisable, in whole or in part, at any time after issuance and before the
close of business on the date five (5) years from the initial exercise
date.
57
The offer
and sale of the 12% Senior Secured Convertible Debentures, Series C Common Stock
Purchase Warrants and Series BD Common Stock Purchase Warrants was affected in
reliance on the exemptions for sales of securities not involving a public
offering, as set forth in Rule 506 promulgated under the Securities Act and in
Section 4(2) of the Securities Act, based on the following: (a) the
investors confirmed to us that they were either “accredited investors,” as
defined in Rule 501 of Regulation D promulgated under the Securities Act or had
such background, education and experience in financial and business matters as
to be able to evaluate the merits and risks of an investment in the securities;
(b) there was no public offering or general solicitation with respect to
the offering; (c) the investors were provided with certain disclosure
materials and all other information requested with respect to our company;
(d) the investors acknowledged that all securities being purchased were
“restricted securities” for purposes of the Securities Act, and agreed to
transfer such securities only in a transaction registered under the Securities
Act or exempt from registration under the Securities Act; and (e) a legend
was placed on the certificates representing each such security stating that it
was restricted and could only be transferred if subsequently registered under
the Securities Act or transferred in a transaction exempt from registration
under the Securities Act.
Midtown
Partners & Co., LLC (“Midtown Partners”), an NASD registered broker
dealer, acted as the placement agent for the Company in connection with the
January 30, July 20, and September 25, 2009 Convertible Debt Offerings (“2009
Convertible Debt Offerings”). We paid Midtown Partners cash commissions equal to
$198,000 and we issued Series BD Common Stock Purchase Warrants to Midtown
Partners entitling Midtown Partners to purchase 1,720,000 shares of the
Company’s common stock at an initial exercise price of $0.50 per share and
440,000 shares of the Company’s common stock at an initial exercise price $0.25
per share. Since the Series BD warrants offered full ratchet anti-dilution
protection, any previously issued and outstanding warrants with a conversion
price greater than $0.25 automatically had their conversion price ratchet down
to $0.25 as subsequent issuances were made with a conversion price of
$0.25.
On
September 22, 2009 we voided and reissued warrants in connection with our
financing transactions. The cancellation and reissuance of warrants was treated
as a modification under ASC 470-50 Modifications and
Extinguishments, although extinguishment accounting was not necessary
since the change in cash flow was <10%.
Cancelled
and re-issued warrants were as follows:
Original
Warrants
|
Indexed
Shares
|
Strike
Price
|
Reissued
Warrants
|
Indexed
Shares
|
Strike
Price
|
C-1
warrants
|
2,400,000
|
$0.50
|
C-3
warrants
|
2,400,000
|
$0.50
|
C-2
warrants
|
2,000,000
|
$0.50
|
C-4
warrants
|
2,000,000
|
$0.50
|
BD-1
warrants
|
480,000
|
$0.50
|
BD-4
warrants
|
240,000
|
$0.25
|
BD-5
warrants
|
240,000
|
$0.50
|
|||
BD-2
warrants
|
400,000
|
$0.50
|
BD-6
warrants
|
200,000
|
$0.25
|
BD-7
warrants
|
200,000
|
$0.50
|
|||
BD-3
warrants
|
200,000
|
$0.50
|
BD-8
warrants
|
200,000
|
$0.25
|
BD-4
warrants
|
200,000
|
$0.50
|
BD-9
warrants
|
200,000
|
$0.50
|
Accounting
for the Financing Arrangements:
We have
evaluated the terms and conditions of the secured convertible debentures under
the guidance of ASC 815, Derivatives and
Hedging. We have determined that, while the anti-dilution protections
preclude treatment of the embedded conversion option as conventional, the
conversion option is exempt from classification as a derivative because it
otherwise achieves the conditions for equity classification (if freestanding)
provided in ASC 815. We have further determined that the default redemption
features described above are not exempt for treatment as derivative financial
instruments, because they are not clearly and closely related in terms of risk
to the host debt agreement. On the inception date of the arrangements and as of
September 30, 2008 and 2009, we determined that the fair
value of these compound derivatives is de minus. However, we are required to
re-evaluate this value at each reporting date and record changes in its fair
value, if any, in income. For purposes of determining the fair value of the
compound derivative, we have evaluated multiple, probability-weighted cash flow
scenarios. These cash flow scenarios include, and will continue to include fair
value information about our common stock. Accordingly, fluctuations in our
common stock value will significantly influence the future outcomes from
applying this technique.
58
Since, as
discussed above, the embedded conversion options did not require treatment as
derivative financial instruments, we are required to evaluate the feature as
embodying a beneficial conversion feature under ASC 470-20, Debt with Conversion and
Other Options. A beneficial conversion feature (“BCF”) is present when
the fair value of the underlying common share exceeds the effective conversion
price of the conversion option. The effective conversion price is calculated as
the basis in the financing arrangement allocated to the hybrid convertible debt
agreement, divided by the number of shares into which the instrument is indexed.
Because the two hybrid debt contracts dated September 10, 2008 were issued as
compensation for the Interlink Asset Group and as further discussed in Note 4 we
concluded that they should be combined for accounting purposes, the accounting
resulted in no beneficial conversion feature. As reflected in the tables below,
the financings issued in 2009 were found to have a BCF. These amounts gives
effect to the (i) the trading market price on the contract dates and (ii) the
effective conversion price of each issuance after allocation of proceeds to all
financial instruments sold based upon their relative fair values.
Notwithstanding, BCF was limited to the value ascribed to the remaining hybrid
contract (using the relative fair value approach). Accordingly, the BCF
allocated to paid-in capital from the 2009 financings amounted to $872,320 for
the year ended September 30, 2009.
We have
evaluated the terms and conditions of the Series C and BD warrants under the
guidance of ASC 480, Distinguishing Liabilities
from Equity (“ASC 480”). The warrants embody a fundamental
change-in-control redemption privilege wherein the holder may redeem the
warrants in the event of a change in control for a share of assets or
consideration received in such a contingent event. This redemption feature
places the warrants within the scope of ASC 480-10, as put warrants and,
accordingly, they are classified in liabilities and measured at inception and on
an ongoing basis at fair value. Fair value of the warrants was measured using
the Black-Scholes-Merton valuation
technique and in applying this technique we were required to develop certain
subjective assumptions. We have valued the underlying common shares at $0.25 on
both the inception and the financial statement date being representative of our
best estimates of our enterprise value, applying discounted cash flow techniques
consistent with approaches outlined by the American Institute of Certified
Public Accountants.
Premiums
on the secured convertible debentures arose from initial recognition at fair
value, which is higher than face value. Discounts arose from initial recognition
at fair value, which is lower than face value. Premiums and discounts are
amortized through credits and debits to interest expense over the term of the
debt agreement. Amortization of debt (discount) premiums amounts to $(170,942)
and $587 for the years ended September 30, 2009 and 2008,
respectively.
Direct
financing costs are allocated to the financial instruments issued (hybrid debt
and warrants) based upon their relative fair values. Amounts related to the
hybrid debt are recorded as deferred finance costs and amortized through charges
to interest expense over the term of the arrangement using the effective
interest method. Amounts related to the warrants were charged directly to income
because the warrants were classified in liabilities, rather than equity, as
described above. Direct financing costs are amortized through charges to
interest expense over the term of the debt agreement.
59
The
following tables illustrate the initial allocation to the secured convertible
debentures and warrants financing arrangements:
September
10, 2008
$1,000,000
|
September
10, 2008
$500,000
|
|||||||
Financing
|
Financing
|
|||||||
Secured
convertible debentures
|
$ | 1,014,102 | $ | 507,000 | ||||
Series
B warrants (classified as liabilities)
|
370,400 | 185,200 | ||||||
Compound
derivative
|
-- | -- | ||||||
Total
|
$ | 1,384,502 | $ | 692,200 |
January
30, 2009
|
February
6, 2009
|
|||||||
$600,000 | $500,000 | |||||||
Financing
|
Financing
|
|||||||
Secured
convertible debentures
|
$ | 205,440 | $ | 200,400 | ||||
Series
C warrants (classified as liabilities)
|
185,760 | 134,600 | ||||||
Series
BD warrants (classified as liabilities)
|
37,152 | 53,840 | ||||||
Additional
paid-in capital (BCF)
|
196,800 | 150,000 | ||||||
Direct
financing costs
|
(93,001 | ) | (77,923 | ) | ||||
Day-one
derivative loss
|
(24,251 | ) | (17,667 | ) | ||||
Compound
derivative
|
-- | -- | ||||||
Total
|
$ | 507,900 | $ | 443,250 | ||||
July
20, 2009
|
September
25, 2009
|
|||||||
$500,000 | $1,100,000 | |||||||
Financing
|
Financing
|
|||||||
Secured
convertible debentures
|
$ | 160,800 | $ | 388,760 | ||||
Series
C warrants (classified as liabilities)
|
159,200 | 335,720 | ||||||
Series
BD warrants (classified as liabilities)
|
-- | 67,144 | ||||||
Additional
paid-in capital (BCF)
|
170,000 | 355,520 | ||||||
Direct
financing costs
|
(34,534 | ) | (117,380 | ) | ||||
Day-one
derivative loss
|
(9,216 | ) | (29,764 | ) | ||||
Compound
derivative
|
-- | -- | ||||||
Total
|
$ | 446,250 | $ | 1,000,000 |
On
September 24, 2009, we obtained an extension of the interest payments due June
30, 2009 and September 30, 2009 to June 30, 2010 and September 30, 2010,
respectively. The change in cash flow from this modification was analyzed to
determine if it was greater than 10% which would give rise to extinguishment
accounting. In each case, the change in cash flows was less than 10% so
extinguishment accounting was not applicable.
Fair
Value Considerations
We adopted
the provisions of ASC 820 Fair Value Measurements and
Disclosures (“ASC 820”) with respect to our financial instruments. As
required by of ASC 820, assets and liabilities measured at fair value are
classified in their entirety based on the lowest level of input that is
significant to their fair value measurement. Our derivative financial
instruments which are required to be measured at fair value on a recurring basis
under of ASC 815 as of September 30, 2009 and September 30, 2008 are all
measured at fair value using Level 3 inputs. Level 3 inputs are unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
60
The
following represents a reconciliation of the changes in fair value of financial
instruments measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the year ended September 30,
2009:
Beginning
balance: Derivative financial instruments
|
$ | 563,400 | ||
Total
gains (losses)
|
128,646 | |||
Purchases,
sales, issuances and settlements, net
|
635,226 | |||
Ending
balance
|
1,327,272 | |||
Current portion | 382,200 | |||
Long portion, derivative liabilities | $ | 945,072 |
The
warrants are valued using the Black-Scholes-Merton (BSM) valuation methodology
because that model embodies all of the relevant assumptions that address the
features underlying these instruments.
BSM inputs
are as follows:
Financing
inception dates
|
Series
B
Warrants
|
Series
C-3
Warrants
|
Series
C-4
Warrants
|
Series
C-5
Warrants
|
Series
C-6
Warrants
|
Series
BD
Warrants
|
Strike
price
|
$0.25
|
$0.25
|
$0.25
|
$0.25
|
$0.25
|
$0.25
|
Volatility
|
73%
|
76%
|
76%
|
82%
|
89%
|
76%-89%
|
Expected
term (years)
|
5.00
|
5.00
|
5.00
|
5.00
|
5.00
|
5.00
|
Risk-free
rate
|
2.91%
|
1.85%
|
1.97%
|
2.46%
|
2.31%
|
1.85%-2.31%
|
Dividends
|
--
|
--
|
--
|
--
|
--
|
--
|
September
30, 2008
|
Series
B
Warrants
|
Series
C-3
Warrants
|
Series
C-4
Warrants
|
Series
C-5
Warrants
|
Series
C-6
Warrants
|
Series
BD
Warrants
|
Strike
price
|
$0.25
|
--
|
--
|
--
|
--
|
--
|
Volatility
|
74%
|
--
|
--
|
--
|
--
|
--
|
Expected
term (years)
|
4.95
|
--
|
--
|
--
|
--
|
--
|
Risk-free
rate
|
2.98%
|
--
|
--
|
--
|
--
|
--
|
Dividends
|
--
|
--
|
--
|
--
|
--
|
--
|
September
30, 2009
|
Series
B
Warrants
|
Series
C-3
Warrants
|
Series
C-4
Warrants
|
Series
C-5
Warrants
|
Series
C-6
Warrants
|
Series
BD
Warrants
|
Strike
price
|
$0.25
|
$0.25
|
$0.25
|
$0.25
|
$0.25
|
$0.25
|
Volatility
|
93%
|
92%
|
92%
|
89%
|
89%
|
89%-93%
|
Expected
term (years)
|
3.95
|
4.34
|
4.36
|
4.81
|
5.00
|
3.95-5.00
|
Risk-free
rate
|
2.31%
|
2.31%
|
2.31%
|
2.31%
|
2.31%
|
2.31%
|
Dividends
|
--
|
--
|
--
|
--
|
--
|
--
|
61
Note
8 - Stockholders’ Deficit:
Share-based
payments (employees):
On
September 10, 2008, we issued 6,000,000 shares of common stock to our new
management team in connection with the Interlink Asset Group acquisition (see
Note 4). These shares are compensatory in nature and are fully vested. We have
valued the shares at $0.25, consistent with fair value measurements used
elsewhere in our accounting.
Officer
|
Shares
|
Expense
|
||||||
Anastasios
Kyriakides, CEO
|
2,100,000 | $ | 525,000 | |||||
Nicholas
Kyriakides
|
600,000 | 150,000 | ||||||
Kenneth
Hosfeld, EVP
|
1,100,000 | 275,000 | ||||||
Leo
Manzewitsch, CTO
|
1,100,000 | 275,000 | ||||||
Guillermo
Rodriguez, CFO
|
1,100,000 | 275,000 | ||||||
6,000,000 | $ | 1,500,000 |
Share-based
payment for goods and services to non-employees:
During the
year ended September 30, 2008, we issued 2,150,000 shares of common stock to
non-employees for goods and services.
Consultant/Provider
|
Shares
|
Expense
|
||||||
FAMALOM,
LLC
|
$ | 450,000 | $ | 112,500 | ||||
Decembra
Diamond
|
360,000 | 90,000 | ||||||
John
Clarke
|
100,000 | 25,000 | ||||||
Deadalus
Consulting, Inc.
|
90,000 | 22,500 | ||||||
Ron
Roule
|
1,000,000 | 250,000 | ||||||
Iseal
Aponte
|
150,000 | 37,500 | ||||||
2,150,000 | $ | 537,500 |
On July 9,
2009, we issued 1,000,000 shares of our common stock to non-employees for goods
and services.
Consultant/Provider
|
Shares
|
Expense
|
||||||
Omni Reliant | 1,000,000 | $ | 250,000 |
Warrants to purchase common
stock:
On
September 25, 2009, we issued Series C warrants to purchase 4,400,000 shares of
our common stock in connection with financing transactions discussed in Note 7.
These warrants have a strike price of $0.50 and five years from
issuance.
On July
20, 2009, we issued Series C warrants to purchase 2,000,000 shares of our common
stock in connection with financing transactions discussed in Note 7. These
warrants have a strike price of $0.50 and expire five years from
issuance.
On
February 6, 2009, we issued Series C warrants to purchase 2,000,000 shares of
our common stock in connection with financing transactions discussed in Note 7.
These warrants have a strike price of $0.50 and expire five years from
issuance.
On January
30, 2009, we issued Series C warrants to purchase 2,400,000 shares of our common
stock in connection with financing transactions discussed in Note 7. These
warrants have a strike price of $0.50 and expire five years from
issuance.
62
We also
issued Series BD warrants to purchase 1,080,000 shares of our common stock in
connections with financing transactions discussed in Note 7. These
warrants have a strike price of $0.50 and expire in five years from
issuance.
We also
issued Series BD warrants to purchase 1,080,000 shares of our common stock in
connections with financing transactions discussed in Note 7. These
warrants have a strike price of $0.25 and expire in five years from
issuance.
On
September 10, 2008, we issued Class B warrants to purchase 4,000,000 shares of
our common stock in connection with financing transactions discussed in Note 7.
These warrants have a strike price of $0.50 and expire five years from
issuance.
On
September 10, 2008, we issued Class B warrants to purchase 2,000,000 shares of
our common stock in connection with financing transactions discussed in Note 7.
These warrants have a strike price of $0.50 and expire five years from
issuance.
On January
17, 2007, we issued Class A warrants to purchase 3,099,712 shares of our common
stock in connection with a sale of common stock. These warrants have a strike
price of $0.25 and expire five years from issuance.
Indexed
Shares
|
Weighted
Strike
|
|||||||
October
1, 2006
|
|
|||||||
Issued
|
3,262,912 | $ | 1.00 | |||||
Exercised
|
- | - | ||||||
Expired
|
- | - | ||||||
September
30, 2007
|
3,262,912 | $ | 1.00 | |||||
Issued
|
6,000,000 | $ | 0.50 | |||||
Exercised
|
- | - | ||||||
Expired
|
- | - | ||||||
September
30, 2008
|
9,262,912 | $ | 0.67 | |||||
Issued
|
12,960,000 | $ | 0.50 | |||||
Exercised
|
- | - | ||||||
Expired/cancelled
|
(163,200 | ) | 0.25 | |||||
September
30, 2009
|
22,059,712 | $ | 0.57 |
The
weighted average remaining life of the aggregate warrants is 4.5
years.
Refer to
Note 2 for income associated with the classification of warrants liabilities at
year end September 30, 2009.
Note
9 - Commitment and Contingencies:
Leases
We lease
our principal office space under an arrangement that is an operating lease. Rent
and associated occupancy expenses for year ended September 30, 2009 and 2008 was
$165,716 and $43,753, respectively.
Minimum
non-cancellable future lease payments as of September 30, 2009, were as follows:
2010 - $98,725.
Employment
arrangements
We have
entered into an employment agreement with our Chief Executive Officer,
Anastasios Kyriakides and in consideration of his services to us, we
have agreed to pay him a base salary of $150,000 plus certain bonuses and awards
if the Company achieves certain profitability levels and adopts certain
incentive compensation plans. As of September 30, 2009, none of these incentive
arrangements and plans had been realized. The agreement is effective through
September 30, 2013.
63
Note
10 - Related Parties:
Effective
December 30, 2007, we sold all of the assets associated with our
advertising business as a going concern to Robert H. Blank, who was then our
President and Chief Operating Officer. The purchase price for the assets was
$185,000. Mr. Blank paid the purchase price by assuming a convertible
debenture issued by us to Mr. Robin C. Hoover in the amount of
$185,000. The convertible debenture constituted substantially all of our
liabilities at the time of the acquisition. In addition, Mr. Hoover and
Mr. Blank tendered 208 and 200 shares of common stock, respectively, to the
Company. These shares had been issued to Mr. Blank and Mr. Hoover as
“founders” shares.
Effective September 10,
2008, we issued 1,000,000 shares to Apogee Financial Investments, Inc. in
connection with certain consulting services rendered to us. Mr. Richard
Diamond is president of Apogee Financial Investments, Inc. and served as a
member of our board of directors until his resignation on November 23, 2009. On
the date of the issuance, Mr. Diamond was not a member of our board of
directors.
Midtown
Partners & Co., LLC (“Midtown Partners”), an FINRA registered broker dealer,
acted as the placement agent in connection with multiple Convertible Debt
Offerings. In connection with these offerings, we paid Midtown
Partners a cash commission equal to $198,000; issued Series BD Common Stock
Purchase Warrant to Midtown Partners entitling Midtown Partners to purchase
1,080,000 shares of our common stock at an initial exercise price
of $0.50 per share; and issued Series BD Common Stock Purchase
Warrant to Midtown Partners entitling Midtown Partners to purchase 1,080,000
shares of our common stock at an initial exercise price of $0.25 per share.
Midtown Partners is a wholly-owned subsidiary of Apogee Financial Investments,
Inc. Mr.
Richard Diamond is president of Apogee Financial Investments, Inc. and served as
a member of our board of directors until his resignation on November 23,
2009.
A company
owned or controlled by a major shareholder of NetTalk.com, Inc., provided
services to us, as follows:
In June
2009, we incurred advertising expense for the creation of an infomercial to be
aired during the deployment and launching of our TK6000. The
deployment and launching of our TK6000 has a been a success and the infomercial
is presently running weekly on most US markets. The advertising
expense incurred, was as follows:
Items
|
Amount
|
|||
Cash
payment
|
$ | 100,000 | ||
Share-based
payment (1,000,000 common shares)
|
250,000 | |||
Total
|
$ | 350,000 | ||
Accounts
payable to Omni Reliant
|
$ | 85,479 | ||
Advertising
costs – infomercial and media costs
|
$ | 85,479 |
At
September 30, 2009, Due to officers amounted to $56,300, the amount
is revolving and will be liquidated within one year.
Note
11 - Discontinued Operations:
On
September 10, 2008, at the time we acquired the Interlink Asset Group, our
management and Board of Directors committed to the discontinuance and disposal
of our advertising business. We disposed of this asset to be able to concentrate
our efforts exclusively on the deployment of the TK6000 product offering. We
concluded that the advertising business constituted a component of our business
and have presented the unit in the accompanying financial statements on the
basis that (a) the operations and cash flows of the component have been
eliminated from our ongoing operations a result of the disposal transaction and
(b) we have no significant continuing involvement in the operations of the
component after the disposal transaction. During fiscal year
ended September 30, 2008, we sold the advertising business resulting
in a gain on sale of $168,083.
There are
no assets or liabilities remaining at September 30, 2009.
The
caption discontinued operations on our statements of operations reflects the
following:
September 30, | ||||||||
2009
|
2008
|
|||||||
Income
from discontinued business
|
$ | - | $ | 18,045 | ||||
Gain
on sale of equipment
|
- | 168,083 | ||||||
Total
|
$ | - | $ | 186,128 | ||||
64
Note
12 - Income taxes:
Our income
tax provision (benefit) for the year ended September 30 consisted of the
following:
|
September
30,
|
|||||||
2009
|
2008
|
|||||||
Current
provision
|
$ | - | $ | (8,033 | ) | |||
Deferred
provision
|
- | - | ||||||
Changes
in valuation allowance
|
- | - | ||||||
$ | - | $ | (8,033 | ) |
Our
effective tax rate differs from statutory tax rates, as
follows:
|
September
30,
|
|||||||
2009
|
2008
|
|||||||
Federal
statutory rate
|
34.0 | % | 34.0 | % | ||||
State
rate, net of federal benefit
|
3.6 | % | 3.6 | % | ||||
Derivative
income
|
4.3 | % | - | % | ||||
Change
in valuation allowance
|
(41.9 | %) | (37.6 | %) | ||||
Effective
tax rate
|
0.0 | % | 0.0 | % |
Deferred
tax assets and (liabilities) reflects the net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and amounts used for income tax
purposes. Significant components of our deferred tax assets are as
follows, as of September 30, 2009 and 2008:
|
September
30,
|
|||||||
2009
|
2008
|
|||||||
Property
and fixed assets
|
$ | (45,284 | ) | $ | (1,254 | ) | ||
Reserves
and accruals
|
392 | - | ||||||
Net
operating loss carry forwards
|
1,332,725 | 212,448 | ||||||
1,287,834 | 211,194 | |||||||
Valuation
allowance
|
(1,287,834 | ) | (211,194 | ) | ||||
Net
deferred taxes, after valuation allowance
|
$ | - | $ | - |
Our
valuation allowance increased $1,076,640 and $211,194 during the year ended
September 30, 2009 and 2008, respectively.
Based on
our prior earnings and sufficiency of income to be utilized in carry back years
and future taxable income, it is more likely than not that these net deferred
tax assets will not be utilized. Therefore, a valuation allowance has been set
up to reduce deferred tax assets to zero. As of September 30, 2009, we have net
operating loss carry forward amounting to $3,544,482 that are available, subject
to limitations, to offset future taxable income through 2024. All prior tax
years, subject to limitations, remain subject to examination by Federal and
state taxing authorities.
65
Note
13 - Subsequent Events:
Effective
November 15, 2009, our Board of directors approved our 2010 Stock Option Plan.
Our plan is a long – term retention program that is intended to attract, retain
and provide incentives for our talented employees, officers and directors and to
align shareholders and employee interests. We will grant stock options from our
2010 Stock Option Plan during our fiscal year ending on September 30,
2010.
On
November 25, 2009 we filed Form 8 K to report the resignation of Mr. Richard
Diamond as our director.
On
December 1, 2009 we filed Form 8 K to report the approval and implementation of
our Code of Ethics.
66