Attached files
| file | filename |
|---|---|
| EX-4.1 - MOBIVITY HOLDINGS CORP. | v201183_ex4-1.htm |
| EX-10.1 - MOBIVITY HOLDINGS CORP. | v201183_ex10-1.htm |
| EX-10.2 - MOBIVITY HOLDINGS CORP. | v201183_ex10-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 OR 15(d) of The Securities Exchange Act of 1934
Date of
Report (Date of earliest event reported): November 2, 2010
CommerceTel
Corporation
(Exact
name of registrant as specified in its charter)
|
Nevada
|
000-53851
|
26-3439095
|
||
|
(State
or Other Jurisdiction
|
(Commission
File
|
(I.R.S.
Employer
|
||
|
of
Incorporation)
|
Number)
|
Identification
Number)
|
8929 Aero
Drive, Suite E
San Diego, CA
92123
(Address
of principal executive offices) (zip code)
(866)622-4261
(Registrant’s
telephone number, including area code)
4600
Lamont Street #4-327
San Diego, CA 92109-3535
(Former
name or former address, if changed since last report)
Copies
to:
Louis A.
Brilleman, Esq.
1140
Avenue of the Americas, 9th
Floor
New York,
New York 10036
Phone:
(212) 584-7805
Fax:
(646) 380-6899
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2. below):
o Written communications
pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material
pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
o Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
Some of
the statements contained in this Form 8-K that are not historical facts are
“forward-looking statements” which can be identified by the use of terminology
such as “estimates,” “projects,” “plans,” “believes,” “expects,” “anticipates,”
“intends,” or the negative or other variations, or by discussions of strategy
that involve risks and uncertainties. We urge you to be cautious of
the forward-looking statements, in that such statements, which are contained in
this Form 8-K, reflect our current beliefs with respect to future events and
involve known and unknown risks, uncertainties, and other factors affecting our
operations, market growth, services, products, and licenses. No
assurances can be given regarding the achievement of future results, as actual
results may differ materially as a result of the risks we face, and actual
events may differ from the assumptions underlying the statements that have been
made regarding anticipated events. Such statements reflect our
current view with respect to future events and are subject to risks,
uncertainties, assumptions and other factors (including the risks contained in
the section of this report entitled “Risk Factors”) relating to our industry,
operations and results of operations and any businesses that we may acquire, and
include, without limitation:
1. Our
ability to attract and retain management, and to integrate and maintain
technical information and management information systems;
2. Our
ability to generate customer demand for our products;
3. The
intensity of competition; and
4.
General economic conditions.
Should
one or more of these risks or uncertainties materialize, or should the
underlying assumptions prove incorrect, actual results may differ significantly
from those anticipated, believed, estimated, expected, intended or
planned.
All
written and oral forward-looking statements made in connection with this Form
8-K that are attributable to us or persons acting on our behalf are expressly
qualified in their entirety by these cautionary statements. Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Except as required by applicable law, including the securities
laws of the United States, we do not intend to update any of the forward-looking
statements to conform these statements to actual results. Given the
uncertainties that surround such statements, you are cautioned not to place
undue reliance on such forward-looking statements.
In this
report, unless otherwise specified, all dollar amounts are expressed in United
States dollars and all references to “common shares” refer to shares of our
common stock. The following discussion should be read in conjunction with the
audited annual financial statement, unaudited interim financial statements and
the related notes filed herein.
Unless
otherwise indicated or the context otherwise requires, all references below in
this current report on Form 8-K to “we”, “us”, “our”, and “the Company”, refer
to Ares Ventures Corp., a Nevada corporation, and its wholly-owned subsidiary,
CommerceTel, Inc.
Item
1.01 Entry into a Material Definitive Agreement.
Share
Exchange Agreement
On
November 2, 2010, CommerceTel Corporation, a Nevada corporation (the “Company”)
entered into a Share Exchange Agreement (the “Exchange Agreement”) with
CommerceTel Canada Corporation, an Ontario company and the principal shareholder
(the “Shareholder”) of CommerceTel, Inc., a Nevada corporation (“CommerceTel”),
as well as the other shareholders of CommerceTel (together with the Shareholder,
the “Sellers”), pursuant to which the Company purchased from the Sellers all
issued and outstanding shares of CommerceTel, in consideration for the issuance
to the Sellers of 10,000,000 shares of common stock of the Company (the “Share
Exchange”).
In
anticipation of the transaction, and as reported previously, effective October
5, 2010, the Company changed its name from Ares Ventures Corp. to CommerceTel
Corporation.
2
On
November 2, 2010, the Company issued to a number of accredited
investors a series of its 10% Senior Secured Convertible Bridge Note (the
“Notes”) in the aggregate principal amount of $1,000,000 (the
“Financing”). The Notes accrue interest at the rate of 10% per
annum. The entire principal amount evidenced by the Notes (the
“Principal Amount”) plus all accrued and unpaid interest is due on the earlier
of (i) the date the Company completes a financing transaction for the offer and
sale of shares of common stock (including securities convertible into or
exercisable for its common stock), in an aggregate amount of no less than 125%
of the principal amounts evidenced by the Notes (a “Qualifying Financing”), and
(ii) November 3, 2011.
On the
maturity date of the Notes, in addition to the repayment of the Principal Amount
and all accrued and unpaid interest, the Company will issue to each holder of
the Notes, at each such holder’s option, (i) three year warrants to purchase
that number of shares of its common stock equal to the Principal Amount plus all
accrued and unpaid interest divided by the per share purchase price of the
common stock offered and sold in the Qualifying Financing (the “Offering
Price”) which
warrants shall be exercisable at the Offering Price, or (ii) that number of
shares of Common Stock equal to the product arrived at by multiplying (x) the
Principal Amount plus all accrued and unpaid interest divided by the Offering
Price and (y) 0.33.
The
Company’s obligations under the Notes are secured by all of the assets of the
Company, including all shares of CommerceTel, its wholly owned
subsidiary.
WFG
Investments, Inc., a registered broker dealer, was paid a placement agent fee in
the amount of $40,000 for its services rendered in connection with the
Financing.
The
Company claims an exemption from the registration requirements of the Securities
Act of 1933, as amended (the “Act”), for the securities issued in the Share
Exchange and the Financing pursuant to Section 4(2) of the Act and/or Regulation
D promulgated there under since, among other things, the transaction did not
involve a public offering, the Investors are accredited investors and/or
qualified institutional buyers, the Investors had access to information about
the Company and their investment, the Investors took the securities for
investment and not resale, and the Company took appropriate measures to restrict
the transfer of the securities. As such, none of these securities may be offered
or sold in the United States unless they are registered under the Act, or an
exemption from the registration requirements of the Act is
available. No registration statement covering these securities has
been filed with the Securities Exchange Commission or with any state securities
commission.
Item
2.01 Completion of Acquisition or Disposition of Assets
On
November 2, 2010, the Company completed the transactions contemplated under the
Exchange Agreement. The Share Exchange resulted in a change in
control of the Company with the Shareholders owning in the aggregate 10,000,000
shares of common stock of the Company out of a total of 17,700,000 issued and
outstanding shares after giving effect to the Share Exchange. In
connection with the Share Exchange, subject to the Company’s compliance with the
provisions of Rule 14f under the Securities Exchange Act of 1934, as amended,
Shane Ellis, the sole director and officer of the Company prior to the Share
Exchange, resigned his position as an officer immediately, and as a director
effective on the date (the “Compliance Date”) the Company complies with the
filing and mailing requirements under Section 14(f) of the Securities Exchange
Act of 1934, as amended. Shareholder’s nominees were elected
directors of the Company, effective as of the Compliance Date, and appointed as
its executive officers, effective immediately
Pursuant
to the Exchange Agreement, the Shareholder transferred to the Company all of the
issued and outstanding shares of common stock of CommerceTel. In
consideration for the transfer of the shares of CommerceTel, the Company issued
an aggregate of 10,000,000 shares of common stock of the Company to the
Shareholders. As a result of the Exchange Agreement, (i) CommerceTel
became a wholly-owned subsidiary of the Company and (ii) the Company succeeded
to the business of CommerceTel as its sole business.
For
accounting purposes, the Share Exchange was treated as a recapitalization of
CommerceTel. CommerceTel is the accounting acquirer and the results
of its operations will be the results of the Company’s operations going
forward.
3
NOTE: The discussion contained
in this Item 2.01 relates primarily to CommerceTel. Information
relating to the business and results of operations of the Company and all other
information relating to the Company prior to the Share Exchange has been
previously reported in its Annual Report on Form 10-K for the year ended
December 31, 2009, and subsequent periodic filings with the Securities and
Exchange Commission and is herein incorporated by reference to those
reports.
Company
Overview
CommerceTel
is a provider of technology that enables major brands and enterprises to engage
consumers via their mobile phone. Interactive electronic communications with
consumers is a complex process involving communication networks and
software. CommerceTel removes this complexity through
its suite of services and technologies thereby enabling brands, marketers,
and content owners to communicate with their customers and consumers in
general. From Presidential elections to major broadcast events, we
are pioneers in the deployment of the mobile channel as the ultimate direct
connection to the consumer.
Mobile
phone users represent a large and captive audience. While
televisions, radios, and even PCs are often shared by multiple consumers, mobile
phones are personal devices representing a unique and individual address to the
end user. We believe that the future of digital media will be driven by mobile
phones where a direct, personal conversation can be had with the world’s largest
audience. The future of mobile includes banking, commerce,
advertising, video, games and just about every other aspect of both on and
offline life. Over four million consumers have been engaged via their mobile
device thanks to CommerceTel’s technology.
We
believe that our mobile marketing and advertising campaign platform is among the
most advanced in the industry as it allows real time interactive communications
with consumers. We generate revenue from licensing our software to
clients in our software as a service (Saas) model, per-message and per-minute
transactional fees, and customized professional services.
Our “C4”
Mobile Marketing and Customer Relationship Management (CRM) platform is a hosted
solution enabling our clients to develop, execute, and manage a variety of
engagements to a consumer’s mobile phone. Short Messaging Service (SMS),
Multi-Media Messaging (MMS), and Interactive Voice Response (IVR) interactions
can all be facilitated via a set of Graphical User Interfaces (GUIs). Reporting
and analytics capabilities are also available to our users through the C4
solution.
Mobile
devices are emerging as the principal interactive channel for brands to reach
consumers since it is the only media platform that has access to the consumer
virtually anytime and anywhere. Brands and advertising agencies are recognizing
the unique benefits of the mobile channel and they are increasingly integrating
mobile media within their overall advertising and marketing campaigns. Our
objective is to become the industry leader in connecting brands and enterprises
to consumers’ mobile phones.
Industry
Background
The area
of our business consists of advertising and marketing. While
advertising raises awareness and fosters positive perceptions of a product,
service or company through brand-building or individually-targeted campaigns,
marketing activities occur once the consumer decides to interact with the brand,
and are focused on convincing the consumer to take action, for example request
information, opt-in to a campaign, or make a purchase.
The
Mobile Marketing Association, the premier global non-profit trade association in
the area of mobile marketing, has defined mobile marketing as a set of practices
that enables organizations to communicate and engage with their audience in an
interactive and relevant manner through any mobile device or
network. Mobile marketing is commonly known as wireless
marketing.
Mobile
advertising is a rapidly growing business providing brands, agencies and
marketers the opportunity to connect with consumers beyond traditional and
digital media directly on their mobile phones. Today’s mobile phones
are utilized for more than just making and receiving calls. Besides voice
services, mobile users have access to data services such Short Message Service
(SMS), also known as text messaging, picture messaging, content downloads and
the Mobile Web. These media channels carry both content and advertising. The
mobile phone is an extremely personal device as each mobile phone typically has
one unique user. While televisions, radios, and even PCs are often
shared by multiple consumers, mobile phones are personal devices representing a
truly unique and individual address to the end user. This makes the mobile phone
a precisely targeted communication channel, where users are highly engaged with
content. As a result, the mobile channel is a highly effective campaign tool and
its response levels are high compared to other media. Mobile is valuable as a
stand-alone medium for advertising, but it’s also well suited for a vital role
in fully integrated cross-media campaign plans, including TV, print, radio,
outdoor, cinema, online and direct mail. We believe that the future
of digital media will be driven by mobile phones where a direct, personal
conversation can be had with the world’s largest network. The future
of mobile includes banking, commerce, advertising, video, games and just about
every other aspect of both on and offline life.
4
Mobile
advertising campaigns may use multiple channels to reach the consumer, including
Mobile Web sites, mobile applications, mobile messaging and mobile video, all of
which can be integrated into interactive campaigns. Each channel can
link to additional mobile content or channels, as well as to complementing
traditional media. Mobile advertising provides a powerful, instant and
interactive response path in that consumers may send a keyword to a short code
via SMS, or register on a Mobile Web site.
Mobile
Web
The
Mobile Web is fast emerging as a mainstream information, entertainment and
transaction source for people on the move and away from a
PC. Browsing the Mobile Web is similar to traditional PC-based Web
browsing and provides users with access to news, sports, weather, entertainment
and shopping sites. However, there are some significant differences
between PC-based access and phone-based access:
|
•
|
The
mobile phone is a targeted device with typically only one
user. This enable the delivery of relevant communications
causing users to become engaged immediately with campaigns and content
resulting in increased campaign
effectiveness.
|
|
•
|
Mobile
phones do not permit detailed search and delivery. Rather,
mobile users will usually seek quick access to succinct information and
services. Space on mobile phone screens is at a premium, and users have
limited input mechanisms, so Mobile Web sites need to be easy to navigate
using just the mobile phone keypad.
|
|
•
|
Mobile
phones have a broad range of different form factors, screen sizes and
resolutions, all of which presents a challenge for the display and optimal
viewing of content and advertising.
|
Mobile
Messaging
Mobile
messaging technology enables users to communicate in a so-called asynchronous
manner, where messages are stored in the network and delivered to the recipient
as soon as the recipient’s mobile phone can receive it. Once
delivered, the message is stored on the users’ mobile phone. SMS
(Short Messaging Service) allows a mobile user to send and receive a text
message of up to 160 characters and across virtually any operator
network. This service is also referred to as “text messaging” or
“texting”. All recent mobile phone models support SMS. As
a result, the large installed base of SMS phones creates a large addressable
market for SMS-based mobile marketing campaigns. MMS (Multimedia
Messaging Service) is the rich media equivalent to SMS text
messages. An MMS message can include graphics photos, audio and
video, in addition to text. MMS is not yet universally supported by all
networks, however this market segment is growing. SMS and MMS
services are together referred to as “mobile messaging” or “messaging”. The
stickiness of Mobile Messaging, the enormous reach of SMS and the rich media
capabilities of MMS make this channel a highly rewarding advertising
opportunity.
We
believe that mobile messaging represents an important opportunity for
advertising placement. Media publishers are using messaging to distribute mobile
content. Businesses are providing consumer services through mobile messaging.
These messages provide inventory into which advertisements can be inserted. In
addition, it is now possible to purchase advertising in person-to person (P2P),
SMS and MMS messages.
Mobile
devices have become one of the most widely used means of communication globally.
Significant technological advancements have and are continuing to provide mobile
users with increased access to features previously available only on PCs, such
as Internet browsing, email and social networking. As mobile devices have
evolved, they have begun to enable brands and advertising agencies to interact
with consumers virtually anytime and anywhere, optimizing engagement with other
traditional media while lowering the cost of customer acquisition and
retention.
As a
result, mobile devices have emerged as an important media method for brands and
advertising agencies to interact with consumers. According to a
national market research firm specializing in global connectivity and emerging
technology, mobile marketing and advertising spending is expected to increase
from $1.64 billion in 2007 to nearly $29 billion in 2014.
The
CommerceTel Solution
CommerceTel
resolves three key technical barriers needing to be overcome for the marketplace
to achieve the ultimate goal of engaging the consumer via their mobile
devices:
|
·
|
Multimodal
Communication: Cell phones are used for voice conversations, to
take pictures, sending and receiving SMS text messages, and several other
tasks. Marketers and enterprises need to include multiple communication
modalities when interacting with the mobile consumer. Engaging
only one channel to the mobile consumer, for example SMS text messaging,
will only result in a partial engagement with the
consumer. CommerceTel solves this problem via its carrier-grade
integrated infrastructure delivering access to all modes of mobile
communication from SMS to MMS to IVR and
beyond.
|
5
|
·
|
Campaign Design and
Management. The
ability to conceptualize, create, and execute mobile marketing campaigns
or enterprise applications in an efficient manner is affected by software
and tools available at any given time. Fragmented tool sets,
costly service models, and prolonged time-to-market will impede and impair
the growth of the industry. CommerceTel’s Web-based solution,
“C4”, is a unified services creation environment that enables brands and
enterprises to create, manage, and report on campaigns through a
set of hosted Web tools.
|
|
·
|
Analytics. Fragmented
analytic solutions (i.e. the lack of a uniform tool set used to analyze
mobile consumers’ preferences) only provide insights into disparate
modalities of the mobile channel. For example, a Mobile Web
analytics solution reveals a consumer’s Internet consumption while
neglecting that same consumer’s SMS and Voice related activities.
CommerceTel’s patent pending “Personalization Engine” leverages an
innovative approach to gaining deep insight into mobile consumer
activities and their associated
profiles.
|
Our
Principal Competitive Strength
We
believe that we have a significant advantage over our main competitors for the
following reasons:
|
·
|
Proprietary
Technology: Our proprietary, patent pending technology
enables our customers to reach across all mobile phone
interfaces. We continue to develop, design and deploy
enterprise-grade software that we believe is more advanced than
technologies developed by our competitors.
|
|
|
|
·
|
IVR and Voice
Capabilities: Our IVR and Voice capabilities allow marketers,
content owners, and search operators the freedom of engaging mobile
consumers outside of wireless carrier controlled messaging
networks. In many instances our competitors have outsourced
business to CommerceTel to fill gaps in their service
offerings. It is this fundamental advantage that has allowed
CommerceTel to quickly penetrate major brands.
|
|
·
|
In-house
Expertise: We believe that our primary technical
advantage is that we've built most of our systems in-house, relieving
us from costly software licensing fees associated with IVR platforms, SMS
messaging and other platforms. For example, IVR software
typically ranges from $150.00US to $1,000.00US per port, plus annual
maintenance and support fees. CommerceTel's current infrastructure
supports over 10,000 IVR ports without any associated IVR licensing costs.
In addition, there are unavoidable provisioning times for interconnecting
with VOIP and PSTN networks that can take a minimum of 90 days, plus
another 30 days for equipment
provisioning.
|
Our
Strategy
Our
objective is to become the industry leader in connecting brands and enterprises
to consumers’ mobile phones. We intend to simplify utilizing the
unique benefits of mobile marketing and advertising
campaigns. Following are the principal elements of our strategy are
to:
|
·
|
Capitalize upon current
customer relationships and acquire new
customers. We intend to capitalize on our
customer relationships to widen the appeal of our
solutions.
|
|
·
|
Enable our platform by
addressing technology shifts in mobile devices and
computing. The mobile device marketplace by
its nature undergoes constant change as new technologies and products
emerge. In particular, we believe that smartphone devices as well as
tablet computers with mobile capabilities are growing and becoming
increasingly important components of mobile communications. We devote
significant resources to address this evolving technology landscape with
innovative application interfaces for our platform that ensures we will be
well positioned to address the mobile marketplace as consumer device
preferences evolve.
|
|
·
|
Extend our leadership position
by continuing to invest in our platform. We
believe that the technical capabilities of our platform significantly
surpass the ability of our competitors to provide brands, advertising
agencies, mobile operators and media companies a comprehensive view of a
consumer's interaction and engagement across a variety of
media. We intend to continue to invest in, and enhance the
functionality of our platform and develop new technology solutions to
further strengthen and broaden our end-to-end platform.
|
|
·
|
Encourage the adoption of our
platform by third parties. Our platform
allows third parties, including content delivery platform providers,
application providers, campaign optimization specialists, mobile ad
networks, and analytic and billing providers, to use our platform to
execute marketing and advertising campaigns as well as to create new
business opportunities and technology innovations. We have designed our
platform to become central to the creation of a connected, global mobile
marketing and advertising marketplace, and we believe that this platform
will form the basis for a global mobile marketing and advertising
ecosystem.
|
6
|
·
|
Continue expansion and pursue
partnerships and acquisitions. We intend to
continue our expansion into new markets. In addition, we will
continue to evaluate and pursue strategic partnerships and acquisitions,
to continue strengthening our platform, increase our presence, expand
relationships and enter into new
markets.
|
Marketing
and Sales
We
believe that a successful marketing campaign addressed to mobile marketing and
content operators, particularly large agencies and brands, is largely dependent
on strong personal relationships with executives and a solutions-based sales
approach. We intend to employ an executive level sales team capable of fostering
direct relationships with brands while business development resources will focus
on channel partnerships through IT systems integrators and marketing
agencies.
Certain
minimum capitalization and financial levels are usually required by large
enterprises when seeking technical vendors. Therefore, we intend to
employ a partnership strategy in selling to large enterprises. Partnerships will
allow us to sell into larger enterprises during our early growth period by
avoiding having to meet these minimum capitalization levels.
The
Company also intends to employ a small executive level sales team and continue
its market leadership position with our large brand name client base
establishing credibility and entrée to prospective, targeted accounts across all
vertical segments. As key accounts are won, and the Company begins to scale, our
strategy will employ a core "Client Services" team to serve existing clients and
drive revenue growth from existing business, while a direct sales force will be
tasked with focusing exclusively on new client relationships.
Our
Platform
Mobile
marketing is quickly becoming an extension of Web-based marketing, and
potentially more powerful. Consumers rank their mobile device as more important
than their home computer. The ability to create and execute mobile marketing
campaigns or enterprise applications will be directly affected by software and
tools available to design and deliver solutions efficiently and
effectively. Fragmented tool sets, costly service models, and
prolonged time-to-market will impede and impair the growth of the
industry.
The
optimal mobile marketing campaign marries the rich interaction of the Web with
the immediacy that a mobile device can provide. The CommerceTel C4 platform integrates these
two technologies easily. CommerceTel’s proprietary Web-based
solution, “C4”, is a
unified services creation environment empowering brands and enterprises with the
ability to create, manage, and report on campaigns through a set of
hosted Web tools.
We
believe that our C4
platform makes it simple for users to have instant access to their mobile and
online site. Adding IVR or SMS messaging capabilities to a Website is easily
facilitated via the C4
API interface. This expands the reach a brand can enjoy by offering content
across a number of platforms.
The
following two slides show actual screens of our C4 Web-based platform in
action.
7
8
Research
and Development
We
believe that having a dedicated, highly-trained advanced projects team enables
us to effectively address the rapidly evolving mobile marketing and advertising
services market. Accordingly, we have built a strong internal
software development team that has many years of experience in the mobile
advertising and marketing industries. As of June 30, 2010, we had
four engineers and software developers in our development centers located in San
Diego, CA. Our recent research and development activities have
been focused on making enhancements to our platform. Specifically,
our current research and development initiatives continue to focus on extending
our technology into payment processing, location based services, application
analytics, and other technical opportunities in the evolving mobile
industry.
Competition
Although
the market for mobile marketing and advertising solutions is relatively new, it
is very competitive. We compete with companies of all sizes in select
geographies that offer solutions that compete with single elements of our
platform, such as mobile advertising networks, mobile ad serving and ad routing
providers, mobile website and content creators, providers of mobile publishing
and application development, SMS aggregators or providers of mobile analytics.
We compete at times with interactive and traditional advertising agencies that
perform mobile marketing and advertising as part of their services to their
customers. Some of these entities have significantly greater
resources than we do.
As a
result of industry developments, some of our competitors may in the future
create an integrated platform with features similar to ours, for example,
Google, Inc.'s proposed acquisition of Admob, Inc. which was announced
in November 2009, Apple, Inc.'s acquisition of Quattro Wireless, Inc.
in January 2010, and the entry of larger companies such as Nokia, AOL, Microsoft
and Yahoo! into the mobile media markets. However, we do not directly compete
with these companies as we believe we are the only provider of an integrated,
end-to-end mobile marketing and mobile advertising platform with a significant
global presence.
We
believe that the key competitive factors that our customers use in selecting
solutions include the availability of:
|
·
|
an
integrated, scalable and relatively easy to implement platform that can
expand the reach of their future campaigns;
|
|
·
|
solutions
providing high quality functionality that meet their immediate marketing
and advertising needs;
|
|
·
|
sophisticated
analytics and reporting;
|
|
·
|
competitive
pricing;
|
|
·
|
existing
strategic relationships with customers globally;
|
|
·
|
high
levels of quality service and support; and
|
|
·
|
a
sophisticated and financially stable provider with a proven track
record.
|
We
believe that we compete favorably on each of these factors. Our extensive
experience managing global marketing and advertising campaigns, together with
experienced professional services to implement and integrate these options
globally, provides us with an advantage that many of our competitors
lack.
The
consolidation of our competitors offering point solutions into larger
organizations with increased resources is a recent trend in the industry. The
effects of such acquisitions on the market are still unclear.
Seasonality
Our
business, as is typical of companies in our industry, is highly seasonal. This
is primarily due to traditional marketing and advertising spending being
heaviest during the holiday season while brands, advertising agencies, mobile
operators and media companies often close out annual budgets towards the end of
a given year. Seasonal trends have historically contributed to, and
we anticipate will continue to contribute to fluctuations in our quarterly
results, including fluctuations in sequential revenue growth rates.
9
Intellectual
Property
We regard
the protection of our developed technologies and intellectual property rights as
an important element of our business operations and as crucial to our
success. We rely primarily on a combination of patent laws, trademark
laws, copyright laws, trade secrets, confidentiality procedures and contractual
provisions to protect our proprietary technology. We generally require our
employees, consultants and advisors to enter into confidentiality
agreements. These agreements provide that all confidential
information developed or made known to the individual during the course of the
individual's relationship with us is to be kept confidential and not disclosed
to third parties except under specific circumstances. In the case of our
employees, the agreements provide that all of the technology which is conceived
by the individual during the course of employment is our exclusive property. The
development of our technology and many of our processes are dependent upon the
knowledge, experience and skills of key scientific and technical
personnel.
We do not
own any patents. However, we have one pending U.S. patent
applications. Patent application 20070249369 was filed on
April 25, 2007. This patent application is described as a system,
method and apparatus for delivering Web content to a mobile telephone or related
device by using a dialing code is provided. In an exemplary
embodiment, a user who dials a telephone number, or other dialing code, and
subsequently receives content sent to the user's mobile handset. In
another embodiment, content is Web content sent to the user's phone via a
Wireless Application Protocol (WAP) process.
Any
future patents that may issue may not survive a legal challenge to their scope,
validity or enforceability, or provide significant protection for us. The
failure of our patents, or our reliance upon copyright and trade secret laws to
adequately protect our technology might make it easier for our competitors to
offer similar products or technologies. In addition, patents may not
issue from any of our current or any future applications.
Legal
Proceedings
We
currently, and from time to time, are, subject to claims arising in the ordinary
course of our business. We are not currently subject to any such claims that we
believe could reasonably be expected to have a material and adverse effect on
our business, results of operations and financial condition.
Employees
As of
September 30, 2010, we had 5 full-time employees and 3 contract
employees. Sales, marketing, and business development functions are
provided by one full time employee and one contract
consultant. Engineering and research and development functions are
provided by two full time employees and two contract
employees. General administration, finance, and executive management
consist of two full time employees.
Properties
We own no
real estate. We currently lease 3,751 square feet of office space
located at 8929 Aero Drive, Suite E, San Diego, CA 92123 at a monthly cost of
$5,441, and is believed to be suitable and adequate to meet current business
requirements. The original 60 month lease term expires June 30,
2012.
Government
Regulation
Mobile
data service providers are subject to regulations and laws applicable to
providers of mobile, Internet and voice over Internet protocol, or
VOIP. In addition, the application of existing domestic and
international laws and regulations relating to issues such as user privacy and
data protection, defamation, pricing, advertising, taxation, gambling,
sweepstakes, promotions, billing, real estate, consumer protection,
accessibility, content regulation, quality of services, telecommunications,
mobile, television and intellectual property ownership and infringement to
wireless industry providers and platforms in many instances is unclear or
unsettled. Further, the application of existing laws regulating or requiring
licenses for certain businesses of our advertisers can be unclear.
It is
possible that a number of laws and regulations may be adopted which may be
inconsistent and which could restrict the wireless communications industry,
including laws and regulations regarding network management and device
interconnection, lawful interception of personal data, taxation, content
suitability, copyright, distribution and antitrust. Furthermore, the growth and
development of the market for electronic storage of personal information may
prompt calls for more stringent consumer protection laws that may impose
additional burdens on companies that store personal information. We anticipate
that regulation of our industry generally will increase and that we will be
required to devote legal and other resources to address this
regulation.
10
We are
directly subject to certain regulations and laws applicable to providers of
Internet and mobile services both domestically and internationally. The
application of existing domestic and international laws and regulations relating
to issues such as user privacy and data protection, marketing, advertising,
consumer protection and mobile disclosures in many instances is unclear or
unsettled.
Regulatory
Environment
In
addition to its regulation of wireless telecommunications providers generally,
the U.S. Federal Communications Commission, or FCC, has shown interest in at
least three areas that impact our business: research and development with
regards to innovation, competition in the wireless industry and consumer
protection with an emphasis on truth-in-billing. The FCC has
examined, or is currently examining, how and when consumers enroll in mobile
services, what types of disclosures consumers receive, what services consumers
are purchasing and how much consumers are charged. In addition, the Federal
Trade Commission, or FTC, has been asked to regulate how mobile marketers can
use consumers' personal information. Consumer advocates claim that
many consumers do not know when their information is being collected from cell
phones and how such information is retained, used and shared with other
companies. Consumer groups have asked the FTC to identify practices that may
compromise privacy and consumer welfare; examine opt-in procedures to ensure
consumers are aware of what data is at issue and how it will be used;
investigate marketing tactics that target children and create policies to halt
abusive practices. The FTC has expressed interest in particular in the mobile
environment and services that collect sensitive data, such as location-based
information.
|
·
|
Deceptive Trade Practice
Law. The FTC and state attorneys general are
given broad powers by legislatures to curb unfair and deceptive trade
practices. These laws and regulations apply to mobile marketing campaigns
and behavioral advertising. The general guideline is that all material
terms and conditions of the offer must be "clearly and conspicuously"
disclosed to the consumer prior to the buying decision. In practice, the
definition of clear and conspicuous disclosure is often a subjective
determination. The balancing of the desire to capture a potential
customer's attention, while providing adequate disclosure, can be even
more challenging in the mobile context due to the lack of
space.
|
|
·
|
Behavioral
Advertising. Behavioral advertising is a
technique used by online publishers and advertisers to increase the
effectiveness of their campaigns. Behavioral advertising uses information
collected from an individual's web-browsing behavior, such as the pages
they have visited or the searches they have made, to select which
advertisements to display to that individual. This data can be valuable
for online marketers looking to personalize advertising initiatives or to
provide geo-tags through mobile devices. Currently, behavioral advertising
is not formally regulated in the U.S., but many businesses adhere to
industry self-governing principles, including an opt-out regime whereby
information may be collected until an individual indicates that he or she
no longer agrees to have this information collected. The FTC and EU member
states are considering regulations in this area, which may include
implementation of a more rigorous opt-in regime. An opt-in policy would
prohibit businesses from collecting and using information from individuals
who have not voluntarily consented. Among other things, the implementation
of an opt-in regime could require substantial technical support and
negatively impact the market for our mobile advertising products and
services. A few states have also introduced bills in the past two years
that would restrict or prohibit behavioral advertising within the state.
These bills would likely have the practical affect of regulating
behavioral advertising nationwide because of the difficulties behind
implementing state-specific policies or identifying the location of a
particular consumer.
|
|
·
|
Behavioral Advertising-Privacy
Regulation. Our business is affected by U.S.
federal and state laws and regulations governing the collection, use,
retention, sharing and security of data that we receive from and about our
users. In recent years, regulation has focused on the collection, use,
disclosure and security of information that may be used to identify or
that actually identifies an individual, such as an Internet Protocol
address or a name. Although the mobile and Internet advertising privacy
practices are currently largely self-regulated in the U.S., the FTC has
conducted numerous discussions on this subject and suggested that more
rigorous privacy regulation is appropriate, possibly including regulation
of non-personally identifiable information which could, with other
information, be used to identify an individual.
|
|
·
|
Marketing-Privacy
Regulation. In addition, there are U.S.
federal and state laws that govern SMS and telecommunications-based
marketing, generally requiring senders to transmit messages (including
those sent to mobile devices) only to recipients who have specifically
consented to receiving such messages. U.S. federal laws also govern e-mail
marketing, generally imposing an opt-out requirement for emails sent
within an existing business relationship.
|
|
·
|
SMS and Location-Based
Marketing Best Practices and Guidelines. We
are a member of the Mobile Marketing Association, or MMA, a global
association of 700 agencies, advertisers, mobile device manufacturers,
wireless operators and service providers and others interested in the
potential of marketing via the mobile channel. The MMA has published a
code of conduct and best practices guidelines for use by those involved in
mobile messaging activities. The guidelines were developed by a
collaboration of the major carriers and they require adherence to them as
a condition of service. We voluntarily comply with the MMA code of
conduct. In addition, the Cellular Telephone Industry Association, or
CTIA, has developed Best Practices and Guidelines to promote and protect
user privacy regarding location-based services. We also voluntarily comply
with those guidelines, which generally require notice and user consent for
delivery of location-based
services.
|
11
|
·
|
TCPA. The
United States Telephone Consumer Protection Act, or TCPA, prohibits
unsolicited voice and text calls to cell phones or the use of an
auto-dialing system unless the recipient has given prior consent. The
statute also prohibits companies from initiating telephone solicitations
to individuals on the national Do-Not-Call list, unless the individual has
given prior express consent or has an established business relationship
with the company, and restricts the hours when
such messages may be sent. In the case of text messages, a company must
obtain opt-in consent to send messages to a mobile device. Violations of
the TCPA can result in statutory damages of $500 per violation
(i.e., for each individual text message). U.S. state laws impose
additional regulations on voice and text calls.
|
|
·
|
CAN-SPAM. The
U.S. Controlling the Assault of Non-Solicited Pornography and Marketing
Act, or CAN SPAM, prohibits all commercial e-mail messages, as defined in
the law, to mobile phones unless the device owner has given "express prior
authorization." Recipients of such messages must also be allowed to
opt-out of receiving future messages the same way they opted-in. Senders
have ten days to honor opt-out requests. The FCC has compiled a list of
domain names used by wireless service providers to which marketers may not
send commercial e-mail messages. Senders have 30 days from the date
the domain name is posted on the FCC site to stop sending unauthorized
commercial e-mail to addresses containing the domain name. Violators are
subject to fines of up to $6.0 million and up to one year in jail for
some spamming activities. Carriers, the FTC, the FCC, and State Attorneys
General may bring lawsuits to enforce alleged violations of the
Act.
|
|
·
|
Communications Privacy
Acts. Foreign, U.S. federal and U.S. state
laws impose consent requirements for disclosures of contents of
communications or customer record information. To the extent that we
knowingly receive this information without the consent of customers, we
could be subject to class action lawsuits for statutory damages or
criminal penalties under these laws, which could impose significant
additional costs and reputational harm. EU member state laws also require
consent for our receiving this information, and if our carrier customers
fail to obtain such consent we could be subjected to civil or even
criminal penalties.
|
|
·
|
Security Breach Notification
Requirements. EU member state laws require
notice to the member state data protection authority of a data security
breach involving personal data if the breach poses a risk to individuals.
In addition, Germany recently enacted a broad requirement to notify
individuals in the event of a data security breach that is likely to be
followed by notification requirements to data subjects in other EU member
states. In the U.S., various states have enacted data breach notification
laws, which require notification of individuals and sometimes state
regulatory bodies in the event of breaches involving certain defined
categories of personal information. Japan and Uruguay have also
recently enacted security breach notice requirements. This new trend
suggests that breach notice statutes may be enacted in other
jurisdictions, including by the U.S. at the federal level, as
well.
|
|
·
|
Children. U.S.
federal privacy regulations implementing the Children's Online Privacy
Protection Act prohibit the knowing collection of personal information
from children under the age of 13 without verifiable parental consent, and
strictly regulate the transmission of requests for personal information to
such children. Other countries do not recognize the ability of children to
consent to the collection of personal information. In addition, it is
likely that behavioral advertising regulations will impose special
restrictions on use of information collected from minors for this
purpose.
|
12
MANAGEMENT’S
DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
The
following discussion and analysis relates to the results of CommerceTel only and
should be read in conjunction with the consolidated financial statements and the
related notes thereto and other financial information contained elsewhere in
this Form 8-K.
General
Overview
CommerceTel
is a provider of technology that enables major brands and enterprises to engage
consumers via their mobile phone. Interactive electronic communications with
consumers is a complex process involving communication networks and
software. CommerceTel removes this complexity through
its suite of services and technologies thereby enabling brands, marketers,
and content owners to communicate with their customers and consumers in
general. From Presidential elections to major broadcast events, we
are pioneers in the deployment of the mobile channel as the ultimate direct
connection to the consumer.
Mobile
phone users represent a large and captive audience. While televisions, radios,
and even PCs are often shared by multiple consumers, mobile phones are personal
devices representing a truly unique and individual address to the end user. The
future of digital media will be driven by mobile phones where a direct, personal
conversation can be had with the world’s largest audience. The future of mobile
includes banking, commerce, advertising, video, games and just about every other
aspect of both on and offline life. Over 4 million consumers have been engaged
via their mobile device thanks to CommerceTel’s technology.
We
believe that our mobile marketing and advertising campaign platform is among the
most advanced in the industry as it allows real time interactive communications
with consumers. We generate revenue from licensing our software to
clients in our software as a service (Saas) model, per-message and per-minute
transactional fees, and customized professional services.
Our “C4”
Mobile Marketing and Customer Relationship Management (CRM) platform is a hosted
solution enabling our clients to develop, execute, and manage a variety of
engagements to a consumer’s mobile phone. Short Messaging Service (SMS),
Multi-Media Messaging (MMS), and Interactive Voice Response (IVR) interactions
can all be facilitated via a set of Graphical User Interfaces (GUIs). Reporting
and analytics capabilities are also available to our users through the C4
solution.
Mobile
devices are emerging as the principal interactive channel for brands to reach
consumers since it is the only media platform that has access to the consumer
virtually anytime and anywhere. Brands and advertising agencies are recognizing
the unique benefits of the mobile channel and they are increasingly integrating
mobile media within their overall advertising and marketing campaigns. Our
objective is to become the industry leader in connecting brands and enterprises
to consumers’ mobile phones.
Critical
Accounting Policies and Estimates
We
prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires the use of estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Our
management periodically evaluates the estimates and judgments
made. Management bases its estimates and judgments on historical
experience and on various factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates.
The
following critical accounting policies affect the more significant judgments and
estimates used in the preparation of the Company’s consolidated financial
statements.
Revenue
recognition
We
recognize revenue when persuasive evidence of an arrangement exists, delivery
has occurred, the fee is fixed or determinable, and collectability is reasonably
assured. In the event that final acceptance of the product is
specified by the customer or is uncertain, revenue is deferred until all
acceptance criteria have been met. Cash received in advance of the
performance of services is recorded as deferred revenue.
Share-based
compensation cost is measured at the date of grant, based on the calculated fair
value of the stock-based award, and is recognized as expense over the employee’s
requisite service period (generally the vesting period of the
award). The Company estimates the fair value of employee stock
options granted using the Black-Scholes Option Pricing Model. Key assumptions
used to estimate the fair value of stock options include the exercise price of
the award, the fair value of the Company’s common stock on the date of grant,
the expected option term, the risk free interest rate at the date of grant, the
expected volatility and the expected annual dividend yield on the Company’s
common stock. We use comparable public company data among other
information to estimate the expected price volatility and the expected
forfeiture rate.
13
Results
of Operations
Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008
Revenues
Revenues
for the 12 months ended December 31, 2009 decreased $408,111, or 30%, compared
to the 12 months ending December 31, 2008. This decrease in revenue
was due to the significant revenue earned in 2008 during the 6 months leading up
to the presidential election, which did not continue into 2009.
Cost
of Revenues
Cost of
revenue for the year ended December 31, 2009 increased $22,544, or 4.3%
compared to the same period in 2008. This cost increase resulted from
the increase of infrastructure related costs, including, but not limited to, SMS
aggregation expenses, increased IP bandwidth, and throughput increase required
to handle increased SMS traffic levels.
Gross
Profit
Gross
profit for the year ended December 31, 2009 decreased by $430,655, or 52%,
compared to the same period in 2008. Gross profit as a percentage of revenue for
the year ended December 31, 2009 decreased to 42% compared to 61% in
2008.
Operating
Expenses
Operating
expenses for the year ended December 31, 2009 decreased by $1.07 million,
or 39%, as compared to the same period in 2008, resulting from efforts to reduce
CommerceTel’s operating overhead. The majority of the decrease came
from reduction in personnel expenses of $860,000, reduction in equipment and
facility related expenses of $77,000, and reduction of other operating expenses
of $210,000.
Loss
From Operations
Net loss
for the year ended December 31, 2009 decreased $643,493, or 31%, compared to the
year ended December 31, 2008.
Interest
Expense
Interest
expense for the year ended December 31, 2009 increased $17,208, or 24.5%,
compared to the year ended December 31, 2008. This resulted from
increased borrowings in notes payable.
Net
Loss
Net Loss
for the year ended December 31, 2009 and December 31, 2008 were $1,402,627 and
$2,028,912 respectively.
Six
Months Ended June 30, 2010 Compared to Three and Six Months Ended June 30,
2009
Revenues
Revenues
for the six months ended June 30, 2010 increased by $2,789, or .6%, compared to
the same period in 2009.
Cost of
Revenues
Cost of
revenue for the six months ended June 30, 2010 decreased $69,646, or 23%
compared to the same period in 2009. Gross profit for the six months ended June
30, 2010 increased by $72,435, or 39%, compared to the same period in 2009. This
increase in gross profit was due to cost reductions in the areas of SMS
aggregation, expenses to increase throughput capacity, and TF/DID line
inventory.
14
Gross
Profit
Gross
profit for the six months ended June 30, 2010 increased by $72,435,
or 39%, compared to the same period in 2009. This increase in gross profit was
due to cost reductions in the areas of SMS aggregation, expenses to increase
throughput capacity, and TF/DID line inventory.
Other
Income (Expenses)
CommerceTel
had other income of $114,551 during the six months ended June 30, 2010 compared
to zero ($0) during the period ended June 30, 2009. This resulted
from negotiated debt settlements on past due amounts from 2008 and
2009.
Operating
Expenses
Operating
expenses for the six months ended June 30, 2010 decreased by
$203,170, or 23%, as compared to the same period in 2009. This decrease in operating expenses was due to efforts to
reduce cost across all expense categories. The majority of the
decrease came from reduction in personnel related expenses of $121,692 and legal
fees of $106,721, partially offset by increases in travel and
accounting/auditing expense.
Interest
Expense
Interest
expense for the six months ended June 30, 2010 decreased $19,884, or 36%,
compared to the same period in 2009. Interest expense was
attributable to Notes Payable outstanding during the respective
periods.
Net
Loss
Net Loss
for the six months ended June 30, 2010 and June 30, 2009 were $389,813 and
$814,774 respectively. Net Loss for the six months ended June 30,
2010 a credit of $114,551 resulting from renegotiated debt settlements with
various suppliers.
Liquidity
and Capital Resources
As of June 30, 2010, we had
current assets of $121,102, including cash of $15,297, and current liabilities
of $2,169,180. As of December 31, 2009, we had current assets
of $121,182, including cash of $11,003, and current liabilities of
$2,029,344.
Operating
Activities. Our operating activities
resulted in a net cash used by operations of $245,603 for the six months ended
June 30, 2010 compared to net cash used by operations of $189,464 for the six
months ended June 30, 2009. The net cash used by operations for the
six months ended June 30, 2010 reflects a net loss of $455,664 offset
by depreciation of $3,338, increase in accrued liabilities of $181,954, stock
based compensation $65,851, reduction in deferred revenues and customer deposits
of $40,432, and other minor factors. The net cash used by
operations for the six months ended June 30, 2009 reflects a net loss of
$877,384 offset by depreciation of $18,258, stock based compensation of
$62,611, increase in accrued liabilities of $560,257, increase of $42,063
in accounts receivable, and other minor factors.
Investing
Activities. Our investing activities
resulted in a net cash outflow of $0 for the six months ended June 30, 2010
compared to a net cash outflow of $0 for the six months ended June 30,
2009.
Financing
Activities. Our financing activities
resulted in a cash inflow of $249,897 for the six months ended June 30, 2010 and
$245,783 for the six months ended June 30, 2009, which represents proceeds of
capital contributions from parent.
Seasonality
Our
business, as is typical of companies in our industry, is highly seasonal. This
is primarily due to traditional marketing and advertising spending being
heaviest during the holiday season while brands, advertising agencies, mobile
operators and media companies often close out annual budgets towards the end of
a given year. Seasonal trends have historically contributed to, and
we anticipate will continue to contribute to fluctuations in our quarterly
results, including fluctuations in sequential revenue growth rates.
15
Recent
Accounting Pronouncements
Please
see our audited and reviewed financial statements for management’s discussion
relating to the impact of recent accounting pronouncements.
Quantitative
and Qualitative Disclosures about Market Risk
We are
exposed to several financial risks such as market risk (change in exchange
rates, changes in interest rates, market prices, etc.), credit risk and
liquidity risk. Our principal liabilities mainly consist of bank loans and trade
payables. The main purpose of these liabilities is to provide the necessary
funding for our operations. We have various financial assets such as trade
receivables and cash and cash equivalents. Our cash and cash equivalent
instruments are managed such that there is no significant concentration of
credit risk in any one bank or other financial institution. Management monitors
closely the credit quality of the financial institutions with which it holds
deposits.
Our
financing facilities are monitored against working capital and capital
expenditure requirements on a rolling 12-month basis and timely action is taken
to have the necessary level of available credit lines. Our policy is to
diversify funding sources. Management aims to maintain an appropriate capital
structure that ensures liquidity and long-term solvency.
We do not
have significant concentrations of credit risk relating to our trade receivables
and cash investments, and review the creditworthiness of our customers in
connection with our contracting activities. The maximum exposure to the credit
risk as of June 30, 2010 is primarily from trade receivables and accrued
contract receivables amounting to $49,606 in total. Trade receivables and
accrued contract receivables are typically unsecured and are derived from
revenue earned from customers. Credit risk is managed through credit approvals,
establishing credit limits and continuously monitoring the creditworthiness of
customers to which the company grants credit terms in the normal course of
business. It is our policy that all customers who wish to trade on credit terms
are subject to credit verification procedures. In addition, receivable balances
are monitored on an ongoing basis and historically our exposure to bad debts has
been minimal. Credit risk from cash balances is considered low. We restrict cash
transactions to high credit quality financial institutions.
Liquidity
Risk
Our
financing requirements have significantly increased due to the expansion of our
business, which has in the past been funded primarily through proceeds received
from contributions of capital from our parent company. Nevertheless, we monitor
our risk to a shortage of funds using a recurring cash flow planning model. Our
objective is to maintain a balance between continuity of funding and flexibility
through the availability of bank credit lines and the generation of positive
operating cash flows.
Off
Balance Sheet Arrangements
We do not
have any off balance sheet arrangements that are reasonably likely to have a
current or future effect on our consolidated financial condition, revenues,
results of operations, liquidity or capital expenditures.
16
RISK
FACTORS
An
investment in our securities involves a high degree of risk. In
determining whether to purchase our securities, you should carefully consider
all of the material risks described below, together with the other information
contained in this current report on Form 8-K before making a decision to
purchase our securities. You should only purchase our securities if you
can afford to suffer the loss of your entire investment.
Risks
Related to our Business
Proceeds
from our recent bridge financing may not be sufficient to sustain our operations
and we may need to raise additional capital to grow our business.
We
anticipate, based on currently proposed plans and assumptions relating to our
ability to market and sell our products, that our cash on hand including the
proceeds from our recent bridge as well as revenues from operations will satisfy
our operational and capital requirements for the next 12
months. However, the operation of our business and our efforts to
grow our business further will require significant cash outlays and commitments.
The timing and amount of our cash needs may vary significantly depending on
numerous factors, including but not limited to:
|
·
|
market
acceptance of our mobile marketing and advertising
services;
|
|
|
|
·
|
the
need to adapt to changing technologies and technical
requirements;
|
|
·
|
the
need to adapt to changing regulations requiring changes to our processes
or platform; and
|
|
·
|
the
existence of opportunities for
expansion.
|
If our
existing working capital and the proceeds from our recent bridge financing are
not sufficient to meet our cash requirements, we will need to seek additional
capital, potentially through debt, or other equity financings, to fund our
growth. We may not be able to raise cash on terms acceptable to us or at all.
Financings, if available, may be on terms that are dilutive to our shareholders,
and the prices at which new investors would be willing to purchase our
securities may be lower than the current price of our ordinary shares. The
holders of new securities may also receive rights, preferences or privileges
that are senior to those of existing holders of our ordinary shares. If new
sources of financing are required but are insufficient or unavailable, we would
be required to modify our growth and operating plans to the extent of available
funding, which could harm our ability to grow our business.
Our
sales efforts require significant time and effort and could hinder our ability
to expand our customer base and increase revenue.
Attracting
new customers requires substantial time and expense, especially in an industry
that is so heavily dependent on personal relationships with
executives. We cannot assure that we will be successful in
establishing new relationships, or maintaining or advancing our current
relationships. For example, it may be difficult to identify, engage and market
to customers who do not currently perform mobile marketing or advertising or are
unfamiliar with our current services or platform. Further, many of
our customers typically require input from one or more internal levels of
approval. As a result, during our sales effort, we must identify multiple people
involved in the purchasing decision and devote a sufficient amount of time to
presenting our products and services to those individuals. The
complexity of our services, including our software-as-a-service model, often
requires us to spend substantial time and effort assisting potential customers
in evaluating our products and services including providing demonstrations and
benchmarking against other available technologies. We expect that our
sales process will become less burdensome as our products and services become
more widely known and used. However, if this change does not occur,
we will not be able to expand our sales effort as quickly as anticipated and our
sales will be adversely affected.
We
may not be able to enhance our mobile marketing and advertising platform to keep
pace with technological and market developments, or to remain competitive
against potential new entrants in our markets.
The
market for mobile marketing and advertising services is emerging and is
characterized by rapid technological change, evolving industry standards,
frequent new product introductions and short product life cycles. Our current
platform or platforms we may offer in the future, may not be acceptable to
marketers and advertisers. To keep pace with technological developments, satisfy
increasing customer requirements and achieve acceptance of our marketing and
advertising campaigns, we will need to enhance our current mobile marketing
solutions and continue to develop and introduce on a timely basis new,
innovative mobile marketing services offering compatibility, enhanced features
and functionality on a timely basis at competitive prices. Our inability, for
technological or other reasons, to enhance, develop, introduce and deliver
compelling mobile marketing services in a timely manner, or at all, in response
to changing market conditions, technologies or customer expectations could have
a material adverse effect on our operating results or could result in our mobile
marketing services platform becoming obsolete. Our ability to compete
successfully will depend in large measure on our ability to maintain a
technically skilled development and engineering staff and to adapt to
technological changes and advances in the industry, including providing for the
continued compatibility of our mobile marketing services platform with evolving
industry standards and protocols. In addition, as we believe the mobile
marketing market is likely to grow substantially, other companies which are
larger and have significantly more capital to invest than us may emerge as
competitors. For example, in May 2010, Google, Inc. acquired Admob, Inc.
Similarly, in January 2010, Apple, Inc. acquired Quattro
Wireless, Inc. New entrants could seek to gain market share by introducing
new technology or reducing pricing. This may make it more difficult for us to
sell our products and services, and could result in increased pricing pressure,
reduced profit margins, increased sales and marketing expenses or the loss of
market share or expected market share, any of which may significantly harm our
business, operating results and financial condition.
17
Our
customer contracts lack uniformity and often are complex, which subjects us to
business and other risks.
Our
customers include some of the largest enterprises which have substantial
purchasing power and negotiating leverage. As a result, we typically negotiate
contracts on a customer-by-customer basis and our contracts lack uniformity and
are often complex. If we are unable to effectively negotiate, enforce and
account and bill in an accurate and timely manner for contracts with our key
customers, our business and operating results may be adversely
affected. In addition, we could be unable to timely recognize revenue
from contracts that are not managed effectively and this would further adversely
impact our financial results.
Our
services are provided on mobile communications networks that are owned and
operated by third parties who we do not control and the failure of any of these
networks would adversely affect our ability to deliver our services to our
customers.
Our
mobile marketing and advertising platform is dependent on the reliability of
mobile operators who maintain sophisticated and complex mobile networks. Such
mobile networks have historically, and particularly in recent years, been
subject to both rapid growth and technological change. If the network of a
mobile operator with which we are integrated should fail, including because of
new technology incompatibility, the degradation of network performance under the
strain of too many mobile consumers using it, or a general failure from natural
disaster or political or regulatory shut-down, we will not be able provide our
services to our customers through such mobile network. This in turn, would
impair our reputation and business, potentially resulting in a material, adverse
effect on our financial results.
If
our mobile marketing and advertising services platform does not scale as
anticipated, our business will be harmed.
We must
be able to continue to scale to support potential ongoing substantial increases
in the number of users in our actual commercial environment, and maintain a
stable service infrastructure and reliable service delivery for our mobile
marketing and advertising campaigns. In addition, we must continue to expand our
service infrastructure to handle growth in customers and usage. If our mobile
marketing services platform does not efficiently and effectively scale to
support and manage a substantial increase in the number of users while
maintaining a high level of performance, the quality of our services could
decline and our business will be seriously harmed. In addition, if we are unable
to secure data center space with appropriate power, cooling and bandwidth
capacity, we may not be able to efficiently and effectively scale our business
to manage the addition of new customers and overall mobile marketing
campaigns.
The
success of our business depends, in part, on wireless carriers continuing to
accept our customers' messages for delivery to their subscriber
base.
We depend
on wireless carriers to deliver our customers' messages to their subscriber
base. Wireless carriers often impose standards of conduct or practice that
significantly exceed current legal requirements and potentially classify our
messages as "spam," even where we do not agree with that conclusion. In
addition, the wireless carriers use technical and other measures to attempt to
block non-compliant senders from transmitting messages to their customers; for
example, wireless carriers block short codes or Internet Protocol addresses
associated with those senders. There can be no guarantee that we, or short codes
registered to us, will not be blocked or blacklisted or that we will be able to
successfully remove ourselves from those lists. Although our services typically
require customers to opt-in to a campaign, minimizing the risk that our
customers' messages will be characterized as spam, blocking of this type could
interfere with our ability to market products and services of our customers and
communicate with end users and could undermine the effectiveness of our
customers' marketing campaigns. To date we have not experienced any material
blocking of our messages by wireless carriers, but any such blocking could have
an adverse effect on our business and results of operations.
18
We
depend on third party providers for a reliable Internet infrastructure and the
failure of these third parties, or the Internet in general, for any reason would
significantly impair our ability to conduct our business.
We
outsource all of our data center facility management to third parties who host
the actual servers and provide power and security in multiple data centers in
each geographic location. These third party facilities require uninterrupted
access to the Internet. If the operation of our servers is
interrupted for any reason, including natural disaster, financial insolvency of
a third party provider, or malicious electronic intrusion into the data center,
our business would be significantly damaged. As has occurred with
many Internet-based businesses, on occasion in the past, we have been subject to
"denial-of-service" attacks in which unknown individuals bombarded our computer
servers with requests for data, thereby degrading the servers' performance.
While we have historically been successful in relatively quickly identifying and
neutralizing these attacks, we cannot be certain that we will be able to do so
in the future. If either a third party facility failed, or our ability to access
the Internet was interfered with because of the failure of Internet equipment in
general or we become subject to malicious attacks of computer intruders, our
business and operating results will be materially adversely
affected.
Failure
to adequately manage our growth may seriously harm our business.
We
operate in an emerging technology market and have experienced, and may continue
to experience, significant growth in our business. If we do not effectively
manage our growth, the quality of our products and services may suffer, which
could negatively affect our brand and operating results. Our growth has placed,
and is expected to continue to place, a significant strain on our managerial,
administrative, operational and financial resources and our infrastructure. Our
future success will depend, in part, upon the ability of our senior management
to manage growth effectively. This will require us to, among other
things:
|
·
|
implement
additional management information systems;
|
|
·
|
further
develop our operating, administrative, legal, financial and accounting
systems and controls;
|
|
·
|
hire
additional personnel;
|
|
·
|
develop
additional levels of management within our company;
|
|
·
|
locate
additional office space in various countries; and
|
|
·
|
maintain
close coordination among our engineering, operations, legal, finance,
sales and marketing and customer service and support
organizations.
|
Moreover,
as our sales increase, we may be required to concurrently deploy our services
infrastructure at multiple additional locations or provide increased levels of
customization. As a result, we may lack the resources to deploy our mobile
marketing services on a timely and cost-effective basis. Failure to accomplish
any of these requirements would seriously harm our ability to deliver our mobile
marketing services platform in a timely fashion, fulfill existing customer
commitments or attract and retain new customers.
We
depend on the services of key personnel to implement our strategy. If we lose
the services of our key personnel or are unable to attract and retain other
qualified personnel, we may be unable to implement our strategy.
We
believe that the future success of our business depends on the services of a
number of key management and operating personnel, including Dennis Becker, our
chief executive officer, Shane Kading, our senior vice president of client
services, and Brad Morrow, our vice president of product management. We
currently have an no employment agreements in place. We do not
maintain any key-person life insurance policies. Some of these key employees
have strong relationships with our customers and our business may be harmed if
these employees leave us. The loss of members of our key management and certain
other members of our operating personnel could materially adversely affect our
business, operating results and financial condition.
In
addition, our ability to manage our growth depends, in part, on our ability to
identify, hire and retain additional qualified employees, including a
technically skilled development and engineering staff. We face intense
competition for qualified individuals from numerous technology, marketing and
mobile software and service companies. We require a mix of highly
talented engineers as well as individuals in sales and support who are familiar
with the marketing and advertising industry. In addition, new hires in sales
positions require significant training and may, in some cases, take more than a
year before they achieve full productivity. Our recent sales force hires and
planned hires may not become as productive as we would like, and we may be
unable to hire sufficient numbers of qualified individuals in the future in the
markets where we do business. Further, given the rapid pace of our
expansion to date, we may be unable to attract and retain suitably qualified
individuals who are capable of meeting our growing, creative, operational and
managerial requirements, or may be required to pay increased compensation in
order to do so. If we are unsuccessful in attracting and retaining these key
personnel, our ability to operate our business effectively would be negatively
impacted and our business, operating results and financial condition would be
adversely affected.
19
The
gathering, transmission, storage and sharing or use of personal information
could give rise to liabilities or additional costs of operation as a result of
governmental regulation, legal requirements, civil actions or differing views of
personal privacy rights.
We
transmit and store a large volume of personal information in the course of
providing our services. Federal, state and international laws and regulations
govern the collection, use, retention, sharing and security of data that we
receive from our customers and their users. Any failure, or perceived failure,
by us to comply with U.S. federal, state, or international privacy or consumer
protection-related laws, regulations or industry self-regulatory principles
could result in proceedings or actions against us by governmental entities or
others, which could potentially have an adverse effect on our business,
operating results and financial condition. Additionally, we may also be
contractually liable to indemnify and hold harmless our customers from the costs
or consequences of inadvertent or unauthorized disclosure of their customers'
personal data which we store or handle as part of providing our
services.
The
interpretation and application of privacy, data protection and data retention
laws and regulations are currently unsettled in the U.S. and internationally,
particularly with regard to location-based services, use of customer data to
target advertisements and communication with consumers via mobile devices. Such
laws may be interpreted and applied inconsistently from country to country and
inconsistently with our current data protection policies and practices.
Complying with these varying international requirements could cause us to incur
substantial costs or require us to change our business practices in a manner
adverse to our business, operating results or financial condition.
As
privacy and data protection have become more sensitive issues, we may also
become exposed to potential liabilities as a result of differing views on the
privacy of personal information. These and other privacy concerns, including
security breaches, could adversely impact our business, operating results and
financial condition.
In the
U.S., we have voluntarily agreed to comply with wireless carrier technological
and other requirements for access to their customers' mobile devices, and also
trade association guidelines and codes of conduct addressing the provision of
location-based services, delivery of promotional content to mobile devices and
tracking of users or devices for the purpose of delivering targeted advertising.
We could be adversely affected by changes to these requirements, guidelines and
codes, including in ways that are inconsistent with our practices or in conflict
with the rules or guidelines in other jurisdictions.
We
may not be able to effectively manage our growth, which may harm our
profitability.
Our
strategy envisions expanding our business. If we fail to effectively manage our
growth, our financial results could be adversely affected. Growth may place a
strain on our management systems and resources. We must continue to refine and
expand our business development capabilities, our systems and processes and our
access to financing sources. As we grow, we must continue to hire, train,
supervise and manage new employees. We cannot assure you that we will be able
to:
|
·
|
meet
our capital needs;
|
|
·
|
expand
our systems effectively or efficiently or in a timely
manner;
|
|
·
|
allocate
our human resources optimally;
|
|
·
|
identify
and hire qualified employees or retain valued employees;
or
|
|
·
|
incorporate
effectively the components of any business that we may acquire in our
effort to achieve growth.
|
If we are unable to manage our growth, our operations and our financial results could be adversely affected by inefficiency, which could diminish our profitability.
Loss
of Dennis Becker, our Chief Executive Officer, could impair our ability to
operate.
If we
lose Dennis Becker, our Chief Executive Officer, our business could suffer. Our
success is highly dependent on our ability to attract and retain qualified
management personnel. We have entered into an employment agreement
with Mr. Becker. The loss of Mr. Becker could have some effect on our
operations. If we were to lose our Chief Executive Officer, we may
experience temporary difficulties in competing effectively, developing our
technology and implementing our business strategies. We do not have key man life
insurance in place for any of our key personnel.
20
Our
management team has limited experience in public company matters, which could
impair our ability to comply with legal and regulatory
requirements.
Our
management team has only limited public company management experience or
responsibilities, which could impair our ability to comply with legal and
regulatory requirements such as the Sarbanes-Oxley Act of 2002 and applicable
federal securities laws including filing required reports and other information
required on a timely basis. There can be no assurance that our management will
be able to implement and affect programs and policies in an effective and timely
manner that adequately respond to increased legal, regulatory compliance and
reporting requirements imposed by such laws and regulations. Our failure to
comply with such laws and regulations could lead to the imposition of fines and
penalties and further result in the deterioration of our business.
RISKS
RELATED TO OUR COMMON STOCK
There
has been a limited trading market for our Common Stock.
It is
anticipated that there will be a limited trading market for the Common Stock on
the Over-the-Counter Bulletin Board. The lack of an active market may
impair your ability to sell your shares at the time you wish to sell them or at
a price that you consider reasonable. The lack of an active market may also
reduce the fair market value of your shares. An inactive market may also impair
our ability to raise capital by selling shares of capital stock and may impair
our ability to acquire other companies or technologies by using Common Stock as
consideration.
You
may have difficulty trading and obtaining quotations for our Common
Stock.
The
Common Stock may not be actively traded, and the bid and asked prices for our
Common Stock on the Over-the-Counter Bulleting Board may fluctuate widely. As a
result, investors may find it difficult to dispose of, or to obtain accurate
quotations of the price of, our securities. This severely limits the liquidity
of the Common Stock, and would likely reduce the market price of our Common
Stock and hamper our ability to raise additional capital.
The
market price of our Common Stock may be, and is likely to continue to be,
highly volatile and subject to wide fluctuations.
The
market price of our Common Stock is likely to be highly volatile and could be
subject to wide fluctuations in response to a number of factors that are beyond
our control, including:
|
·
|
dilution
caused by our issuance of additional shares of Common Stock and other
forms of equity securities, which we expect to make in connection with
future acquisitions or capital financings to fund our operations and
growth, to attract and retain valuable personnel and in connection with
future strategic partnerships with other
companies;
|
|
·
|
announcements
of new acquisitions or other business initiatives by our
competitors;
|
|
·
|
our
ability to take advantage of new acquisitions or other business
initiatives;
|
|
·
|
quarterly
variations in our revenues and operating
expenses;
|
|
·
|
changes
in the valuation of similarly situated companies, both in our industry and
in other industries;
|
|
·
|
changes
in analysts’ estimates affecting our company, our competitors and/or our
industry;
|
|
·
|
changes
in the accounting methods used in or otherwise affecting our
industry;
|
|
·
|
additions
and departures of key personnel;
|
|
·
|
announcements
by relevant governments pertaining to additional quota restrictions;
and
|
|
·
|
fluctuations
in interest rates and the availability of capital in the capital
markets.
|
These and
other factors are largely beyond our control, and the impact of these risks,
singly or in the aggregate, may result in material adverse changes to the market
price of our Common Stock and/or our results of operations and financial
condition.
21
Our
operating results may fluctuate significantly, and these fluctuations may cause
our stock price to decline.
Our
operating results will likely vary in the future primarily as the result of
fluctuations in our revenues and operating expenses, expenses that we incur,
prices of feed used in our business, the price that customer are willing and
able to pay for our products and other factors. If our results of operations do
not meet the expectations of current or potential investors, the price of our
Common Stock may decline.
We
do not expect to pay dividends in the foreseeable future.
We do not
intend to declare dividends for the foreseeable future, as we anticipate that we
will reinvest any future earnings in the development and growth of our business.
Therefore, investors will not receive any funds unless they sell their Common
Stock, and stockholders may be unable to sell their shares on favorable terms or
at all. Investors cannot be assured of a positive return on investment or that
they will not lose the entire amount of their investment in the Common
Stock.
Applicable
SEC rules governing the trading of “penny stocks” limit the trading and
liquidity of our Common Stock, which may affect the trading price of our Common
Stock.
Shares of
Common Stock may be considered a “penny stock” and be subject to SEC rules and
regulations which impose limitations upon the manner in which such shares may be
publicly traded and regulate broker-dealer practices in connection with
transactions in “penny stocks.” Penny stocks generally are equity securities
with a price of less than $5.00 (other than securities registered on
certain national securities exchanges or quoted on the NASDAQ system, provided
that current price and volume information with respect to transactions in such
securities is provided by the exchange or system). The penny stock rules require
a broker-dealer, prior to a transaction in a penny stock not otherwise exempt
from the rules, to deliver a standardized risk disclosure document that provides
information about penny stocks and the risks in the penny stock market. The
broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer’s account. In
addition, the penny stock rules generally require that prior to a transaction in
a penny stock, the broker-dealer make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the
purchaser’s written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for a stock that becomes subject to the penny stock rules which
may increase the difficulty investors may experience in attempting to
liquidate such securities.
22
SECURITY
OWNERSHIP OF CERTAIN
BENEFICIAL
OWNERS AND MANAGEMENT
The
following table sets forth as of November 5, 2010, certain information regarding
the beneficial ownership of the Company’s Common Stock giving effect to the
Share Exchange. The table sets forth the beneficial ownership of (i)
each person who, to our knowledge, beneficially owns more than 5% of the
outstanding shares of Common Stock; (ii) each of the nominees for director and
executive officer of the Company; and (iii) all of our executive officers and
nominees for director as a group. The number of shares owned includes
all shares beneficially owned by such persons, as calculated in accordance with
Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). Under such rules, beneficial ownership includes
any shares of Common Stock as to which a person has sole or shared voting power
or investment power and any shares of Common Stock which the person has the
right to acquire within 60 days of November 5, 2010 through the exercise of any
option, warrant or right, through conversion of any security or pursuant to the
automatic termination of a power of attorney or revocation of a trust,
discretionary account or similar arrangement. Unless otherwise
indicated, the address of each shareholder is c/o the Company, 8929 Aero
Drive, Suite E, San Diego, CA 92123.
|
Name of Beneficial Owner
|
Number of
Shares |
Percentage(1)
|
||||||
|
CommerceTel
Canada Corporation
1
First Canadian Place
100
King Street West
Toronto,
ON M5X 1B2
|
7,267,972 | 41.1 | % | |||||
|
Dennis
Becker (2)
|
7,360,335 | 41.6 | % | |||||
|
David
Souaid
|
-0- | N/A | ||||||
|
Fraser
Clarke (3)
|
7,267,972 | 4.1. | % | |||||
|
Executive
Officers and Directors as a Group
(three
persons)
|
7,360,335 | 41.6 | % | |||||
* Denotes
less than 1%
|
(1)
|
Beneficial
ownership percentages gives effect to the completion of the Share
Exchange, and are calculated based on shares of Common Stock
issued and outstanding. Beneficial ownership is determined in
accordance with Rule 13d-3 of the Exchange Act. The number of shares
beneficially owned by a person includes shares of Common Stock underlying
options or warrants held by that person that are currently exercisable or
exercisable within 60 days of November 5, 2010. The shares
issuable pursuant to the exercise of those options or warrants are deemed
outstanding for computing the percentage ownership of the person holding
those options and warrants but are not deemed outstanding for the purposes
of computing the percentage ownership of any other
person.
|
|
(2)
|
Includes 7,267,972
shares owned by CommerceTel Canada Corporation (“CTel Canada”) of which
Mr. Becker may be deemed to be the beneficial owner in his capacity as
President and Chief Executive Officer of that entity. Mr.
Becker disclaims beneficial ownership in the shares owned by CTel Canada
in excess of his proportional ownership of CTEl Canada.
|
|
(3)
|
Consists
of shares held by CTel Canada of which Mr. Clarke may be deemed the
beneficial owner in his capacity as Chairman of that
entity. Mr. Clarke disclaims beneficial ownership in the shares
owned by CTel Canada in excess of his proportional ownership of CTEl
Canada.
|
23
DIRECTORS
AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Executive
Officers and Directors
Below are
the names and certain information regarding the Company’s executive officers and
directors. Officers are appointed annually by the Company’s board of directors
(the “Board”). Each of the following officers and directors were appointed on
October 29, 2010.
|
Name
|
Age
|
Position
|
|||
|
Dennis
Becker
|
37
|
Chief
Executive Officer
|
|||
|
David
Souaid
|
37
|
Director
|
|||
|
H.
Fraser Clarke
|
35
|
Director
|
|||
Dennis
Becker - President & Chief Executive Officer
Dennis
Becker was appointed the Company’s Chief Executive Officer and a Director
effective as of the closing date of the Share Exchange. He will also act
as the Company’s Interim Chief Financial Officer until a more permanent
replacement will have been identified. Mr. Becker has been President and Chief
Executive Officer of CommerceTel, Inc. since September, 2007. He was
a founder of Frontieric Corporation, a pioneer in providing complex call routing
and merchant processing applications, where he was Chief Executive Officer from
2002 to 2005. Mr. Becker was also Chief Executive Officer of Bexel
Technologies, which served solutions to large enterprise, from 1999 to
2001. Mr. Becker studied Computer Science at the University of Oregon and
served in the United States Air Force.
David
Souaid, Director
David
Souaid was elected a director of the Company on the date of closing of the Share
Exchange, subject to the Company’s compliance with Section 14(f) of the Exchange
Act. He is currently the President of SterlingCard Payment Solutions and
was previously the Senior Vice President, Sales and Marketing of Optimal
Payments Inc., a credit card processing company, since 1999. He has also
been a director of Sterling Payment Solutions and Mercantile Advance Corp. since
2008 respectively. He holds a B.A. in Political Science from Mount Allison
University.
H.
Fraser Clarke, Director
Herbert
Fraser Clarke was elected a director of the Company on the date of closing of
the Share Exchange, subject to the Company’s compliance with Section 14(f) of
the Exchange Act. He has been the President and Chief Operating Officer of
Herbal Magic, a Toronto based weight loss company, since 2009. From 2008
to 2009 he was Chief Financial Officer of NLRC, a Newfoundland based oil and gas
refinery. From 2005 to 2008, he was the Chief Executive Officer of the
Hair Club, a hair restoration company. Mr. Clarke holds a business degree from
Memorial University. He is a chartered accountant and a chartered
financial analyst. He currently serves on a number of boards
including Europe’s largest provider of hair loss solutions, a United States
based mobile marketing company and a Canadian mid marketing leasing
firm.
Employment
Agreements
The
Company is currently negotiating an employment agreement with Dennis Becker, the
Company’s Chief Executive Officer.
Compensation
of Directors
Compensation
for the Directors and Executive Officers has not been determined at this
time.
24
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
No
director, officer, principal stockholder holding at least 5% of our common
shares, or any family member thereof, had any material interest, direct or
indirect, in any transaction, or proposed transaction, since the beginning of
our last fiscal year ended September 30, 2010, in which the amount involved in
the transaction exceeded or exceeds the lesser of $120,000 or one percent of the
average of our total assets at year-end for the last three completed fiscal
years.
Item
3.02 Unregistered Sales of Equity Securities.
Items 1.01 and 2.01, above, are responsive
to this Item 3.02 and are incorporated herein by reference.
Item
5.01 Changes in Control of Registrant.
Item
5.02 Departure of Directors or Principal Officers; Election of Directors;
Appointment of Principal Officers.
Section
5.06 Change in Shell Company Status.
As a
result of the Share Exchange, the Company has ceased to be a shell company as
such term is defined in Rule 12b-2 promulgated under the Securities Exchange Act
of 1934, as amended.
Attached
hereto
(b) Pro
forma financial information.
Not
applicable.
|
Exhibit
Number
|
Description
|
|
|
4.1
|
Form
of 10% Senior Secured Convertible Bridge Note
|
|
|
10.1
|
Form
of Security Agreement
|
|
|
10.2
|
Form
of Subsidiary Guaranty
|
25
SIGNATURES
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
|
COMMERCETEL
CORPORATION
|
|||
|
November
7, 2010
|
By:
|
/s/ Dennis
Becker
|
|
|
Chief
Executive Officer
|
|||
26
Financial
Statements
For the
Years Ended and As of December 31, 2009 and 2008
27
CommerceTel,
Inc.
Financial
Statements
For the
Years Ended and As of December 31, 2009 and 2008
|
Report
of Independent Registered Public Accounting Firm
|
29
|
|
|
Balance
Sheets at December 31, 2009 and 2008
|
30
|
|
|
Statements
of Operations for the Years Ended December 31, 2009 and
2008
|
31
|
|
|
Statements
of Changes in Stockholders’ Deficit for the Years Ended December 31, 2009
and 2008
|
32
|
|
|
Statements
of Cash Flows for the Years Ended December 31, 2009 and
2008
|
33
|
|
|
Notes
to Financial Statements
|
34
- 40
|
28
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
CommerceTel,
Inc.:
We have
audited the accompanying balance sheets of CommerceTel, Inc., as of December 31,
2009 and 2008 and the related statements of operations, changes in 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 presentation of the financial statements. 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 CommerceTel, Inc., at December 31,
2009 and 2008, and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. As described in Note 1 to the financial
statements, the Company has incurred net losses since inception and has an
accumulated deficit of $6,944,670 at December 31, 2009. These and
other factors discussed therein raise a substantial doubt about the ability of
the Company to continue as a going concern. Management’s plans in
regard to those matters are also described in Note 1. The Company’s
ability to achieve its plans with regard to those matters, which may be
necessary to permit the realization of assets and satisfaction of liabilities in
the ordinary course of business, is uncertain. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
|
/s/
Anton & Chia, LLP
|
|
|
Newport
Beach, California
|
|
|
November
2, 2010
|
29
CommerceTel,
Inc.
Balance
Sheets
|
December
31,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
|
$ | 11,003 | $ | 68,080 | ||||
|
Accounts
receivable
|
49,241 | 70,127 | ||||||
|
Other
current assets
|
6,664 | 12,669 | ||||||
|
Total
current assets
|
66,908 | 150,876 | ||||||
|
Equipment,
net
|
7,957 | 30,113 | ||||||
|
Other
assets
|
46,317 | 49,317 | ||||||
| $ | 121,182 | $ | 230,306 | |||||
|
Liabilities
and Stockholders' Deficit
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable and accrued liabilities
|
$ | 989,370 | $ | 337,926 | ||||
|
Notes
payable
|
571,984 | 571,984 | ||||||
|
Accrued
interest
|
140,205 | 72,958 | ||||||
|
Accrued
and deferred personnel compensation
|
196,819 | 78,724 | ||||||
|
Deferred
revenues and customer deposits
|
127,704 | 35,878 | ||||||
|
Other
current liabilities
|
3,262 | 2,423 | ||||||
|
Total
current liabilities
|
2,029,344 | 1,099,893 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders’
deficit:
|
||||||||
|
Common
stock; no par value; 10,000,000 shares authorized;
10,000,000
|
||||||||
|
shares
issued and outstanding at December 31, 2009 and 2008
|
5,036,508 | 4,672,456 | ||||||
|
Accumulated
deficit
|
(6,944,670 | ) | (5,542,043 | ) | ||||
|
Total
stockholders' deficit
|
(1,908,162 | ) | (869,587 | ) | ||||
| $ | 121,182 | $ | 230,306 | |||||
The
accompanying notes are an integral part of these financial
statements.
30
CommerceTel,
Inc.
Statements
of Operations
For
the years ended December 31, 2009 and 2008
|
2009
|
2008
|
|||||||
|
Revenues
|
$ | 940,094 | $ | 1,348,205 | ||||
|
Cost
of revenues
|
547,496 | 524,952 | ||||||
|
Gross
margin
|
392,598 | 823,253 | ||||||
|
Operating
expenses:
|
||||||||
|
Personnel
compensation and related
|
1,207,661 | 2,067,775 | ||||||
|
Equipment
and facility related
|
145,730 | 222,406 | ||||||
|
Bad
debt expense
|
115,568 | 3,585 | ||||||
|
Insurance,
legal and accounting
|
153,762 | 178,867 | ||||||
|
Depreciation
|
22,156 | 36,591 | ||||||
|
Other
operating, general and administrative
|
62,951 | 272,752 | ||||||
|
Total
operating expenses
|
1,707,828 | 2,781,976 | ||||||
|
Loss
from operations
|
(1,315,230 | ) | (1,958,723 | ) | ||||
|
Interest
expense
|
(87,397 | ) | (70,189 | ) | ||||
|
Net
loss
|
$ | (1,402,627 | ) | $ | (2,028,912 | ) | ||
|
Basic
and diluted net loss per share
|
$ | (0.14 | ) | $ | (0.20 | ) | ||
|
Basic
and diluted weighted average common shares
|
||||||||
|
outstanding
used in computing net loss per share
|
10,000,000 | 10,000,000 | ||||||
The
accompanying notes are an integral part of these financial
statements.
31
CommerceTel,
Inc.
Statements
of Changes in Stockholders' Deficit
For
the years ended December 31, 2009 and 2008
|
Total
|
||||||||||||||||
|
Common Stock
|
Accumulated
|
Stockholders'
|
||||||||||||||
|
Shares
|
Amount
|
Deficit
|
Deficit
|
|||||||||||||
|
Beginning
balance at January 1, 2008
|
10,000,000 | $ | 2,547,704 | $ | (3,513,131 | ) | $ | (965,427 | ) | |||||||
|
Capital
contributions by parent
|
- | 2,070,374 | - | 2,070,374 | ||||||||||||
|
Share
based compensation
|
- | 54,378 | - | 54,378 | ||||||||||||
|
Net
loss
|
- | - | (2,028,912 | ) | (2,028,912 | ) | ||||||||||
|
Balance
at December 31, 2008
|
10,000,000 | 4,672,456 | (5,542,043 | ) | (869,587 | ) | ||||||||||
|
Capital
contributions by parent
|
- | 245,783 | - | 245,783 | ||||||||||||
|
Share
based compensation
|
- | 118,269 | - | 118,269 | ||||||||||||
|
Net
loss
|
- | - | (1,402,627 | ) | (1,402,627 | ) | ||||||||||
|
Balance
at December 31, 2009
|
10,000,000 | $ | 5,036,508 | $ | (6,944,670 | ) | $ | (1,908,162 | ) | |||||||
The
accompanying notes are an integral part of these financial
statements.
32
CommerceTel,
Inc.
Statements
of Cash Flows
For
the years ended December 31, 2009 and 2008
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (1,402,627 | ) | $ | (2,028,912 | ) | ||
|
Adjustments
to reconcile net loss to cash flows from operating
activities:
|
||||||||
|
Bad
debt expense
|
115,568 | 3,585 | ||||||
|
Depreciation
expense
|
22,156 | 36,591 | ||||||
|
Stock
based compensation
|
118,269 | 54,378 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(94,682 | ) | (9,326 | ) | ||||
|
Other
assets
|
9,005 | 9,873 | ||||||
|
Accounts
payable and accrued liabilities
|
651,444 | 239,390 | ||||||
|
Accrued
interest
|
67,247 | (32,322 | ) | |||||
|
Accrued
and deferred personnel compensation
|
118,095 | 48,411 | ||||||
|
Deferred
revenues and customer deposits
|
91,826 | (24,496 | ) | |||||
|
Other
liabilities
|
839 | (3,352 | ) | |||||
|
Cash
flows from operating activities
|
(302,860 | ) | (1,706,180 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchases
of property and equipment
|
- | (7,000 | ) | |||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from capital contributions from parent
|
245,783 | 2,070,374 | ||||||
|
Repayments
of note payable
|
- | (316,277 | ) | |||||
|
Cash
flows from financing activities
|
245,783 | 1,754,097 | ||||||
|
Change
in cash during period
|
(57,077 | ) | 40,917 | |||||
|
Cash,
beginning of period
|
68,080 | 27,163 | ||||||
|
Cash,
end of period
|
$ | 11,003 | $ | 68,080 | ||||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash
paid during the period for:
|
||||||||
|
Interest
|
$ | 20,150 | $ | 102,511 | ||||
The
accompanying notes are an integral part of these financial
statements.
33
|
1.
|
Summary of significant
accounting policies
|
Nature
of business
CommerceTel,
Inc. (hereinafter referred to as “we” or “the/our Company”) was incorporated in
Nevada on October 13, 2005. Through December 31, 2009, we were wholly
owned by COMMERCETEL CANADA CORPORATION (“CT Canada”). We develop
marketing solutions and platforms for mobile devices.
Basis
of presentation
The
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles (“GAAP”) as promulgated in the
United States of America.
Going
concern
Our
financial statements have been prepared assuming that we will continue as a
going concern. Such assumption contemplates the realization of assets
and satisfaction of liabilities in the normal course of business.
However, we have incurred continued losses, have a net working
capital deficiency, and have an accumulated deficit of approximately $7 million
as of December 31, 2009. These factors among others create a
substantial doubt about our ability to continue as a going concern. We are
dependent upon sufficient future revenues, additional sales of our securities or
obtaining debt financing in order to meet our operating cash
requirements. Barring our generation of revenues in excess of our
costs and expenses or our obtaining additional funds from equity or debt
financing, we will not have sufficient cash to continue to fund the operations
of our Company through December 31, 2010. These financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
In
response to our Company’s cash needs, we received additional capital
contributions from CT Canada totaling $190,250 during the period from January 1,
2010 through April 21, 2010 and negotiated modifications to existing agreements
with suppliers. Longer term, we anticipate that we will continue to
raise additional equity financing through the sale of shares of our Company’s
common stock in order to finance our future investing and operating cash flow
needs. However, there can be no assurance that such financings will
be available on acceptable terms, or at all.
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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue
recognition
We are
responsible for providing access to technical services to customers who contract
for our services. Accordingly, we recognize revenue when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable, and collectability is reasonably assured. In the event
that final acceptance of the product is specified by the customer or is
uncertain, revenue is deferred until all acceptance criteria have been met.
Cash received in advance of the performance of services was recorded as
deferred revenue. Deferred revenues totaled $111,168 at December 31,
2009 ($17,720 at December 31, 2008) and are included in the accompanying balance
sheet line item “Deferred revenues and other customer deposits”.
Cash
and cash equivalents
We
consider all investments with an original maturity of three months or less to be
cash equivalents. Cash equivalents primarily represent funds invested
in money market funds, bank certificates of deposit and U.S. government debt
securities whose cost equals fair market value. At December 31, 2009
and 2008, respectively, the Company had no cash equivalents.
From time
to time, we may maintain bank balances in excess of the $250,000 insured by the
Federal Deposit Insurance Corporation. We have not experienced any
losses with respect to cash. Management believes our Company is not
exposed to any significant credit risk with respect to its cash and cash
equivalents.
34
Accounts
receivable
Accounts
receivable are carried at their estimated collectible amounts. We
grant unsecured credit to substantially all of our customers. Ongoing
credit evaluations are performed and potential credit losses are charged to
operations at the time the account receivable is estimated to be
uncollectible. Since we cannot necessarily predict future changes in
the financial stability of our customers, we cannot guarantee that our reserves
will continue to be adequate.
From time
to time, we may have a limited number of customers with individually large
amounts due. Any unanticipated change in one of the customer’s
creditworthiness could have a material effect on our results of operations in
the period in which such changes or events occurred. We had no
allowance for doubtful accounts at either December 31, 2009 or
2008.
Equipment
Equipment
is recorded at cost, consists primarily of computer equipment and is depreciated
using the straight-line method over the estimated useful lives of the related
assets (generally three years or less). Costs incurred for maintenance and
repairs are expensed as incurred and expenditures for major replacements and
improvements are capitalized and depreciated over their estimated remaining
useful lives. Depreciation expense totaled $22,156 and $36,591 in 2009 and
2008. Accumulated depreciation was $108,751 and $86,594 at December
31, 2009 and 2008, respectively.
Valuation
of long-lived assets
We
evaluate long-lived assets for impairment whenever events or changes in
circumstances indicate their net book value may not be recoverable. When such
factors and circumstances exist, we compare the projected undiscounted future
cash flows associated with the related asset or group of assets over their
estimated useful lives against their respective carrying amount. Impairment, if
any, is based on the excess of the carrying amount over the fair value, based on
market value when available, or discounted expected cash flows, of those assets
and is recorded in the period in which the determination is made. Our management
currently believes there is no impairment of our long-lived assets. There can be
no assurance, however, that market conditions will not change or demand for our
products under development will continue. Either of these could result in future
impairment of long-lived assets.
Income
taxes
We
provide for federal and state income taxes currently payable, as well as for
those deferred due to timing differences between reporting income and expenses
for financial statement purposes versus tax purposes. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted income tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect of a change in income tax rates
is recognized as income or expense in the period that includes the enactment
date.
Stock
based compensation
Stock
based compensation cost is measured at the date of grant, based on the
calculated fair value of the stock-based award, and is recognized as expense
over the employee’s requisite service period (generally the vesting period of
the award). We estimate the fair value of employee stock options
granted using the Black-Scholes Option Pricing Model. Key assumptions used to
estimate the fair value of stock options include the exercise price of the
award, the fair value of our common stock on the date of grant, the expected
option term, the risk free interest rate at the date of grant, the expected
volatility and the expected annual dividend yield on our common stock. We
use comparable public company data among other information to estimate the
expected price volatility and the expected forfeiture rate.
Net
loss per share
We
calculate basic earnings per share (“EPS”) by dividing our net loss by the
weighted average number of common shares outstanding for the period, without
considering common stock equivalents. Diluted EPS is computed by dividing
net income or net loss by the weighted average number of common shares
outstanding for the period and the weighted average number of dilutive common
stock equivalents, such as options and warrants. Options and warrants are
only included in the calculation of diluted EPS when their effect is
dilutive. Our Company had no options or warrants outstanding through
December 31, 2009 and therefore our basic and diluted calculations of loss per
share are identical.
35
Fair
value of financial instruments
The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties. As of
December 31, 2009, and 2008, the carrying value of our financial instruments
approximated fair value due to their short-term nature and
maturity.
Advertising
We
expense advertising costs as incurred. We have no existing arrangements
under which we provide or receive advertising services from others for any
consideration other than cash. Advertising expense totaled $3,220 and
$19,861 in 2009 and 2008, respectively.
Litigation
From time
to time, we may become involved in disputes, litigation and other legal actions.
We estimate the range of liability related to any pending litigation where
the amount and range of loss can be estimated. We record our best estimate
of a loss when the loss is considered probable. Where a liability is
probable and there is a range of estimated loss with no best estimate in the
range, we record a charge equal to at least the minimum estimated liability for
a loss contingency when both of the following conditions are met: (i)
information available prior to issuance of the financial statements indicates
that it is probable that an asset had been impaired or a liability had been
incurred at the date of the financial statements and (ii) the range of loss can
be reasonably estimated.
Recent
accounting pronouncements
Accounting
standards promulgated by the Financial Accounting Standards Board (“FASB”) are
subject to change. Changes in such standards may have an impact on
the Company’s future financial statements. The following are a
summary of recent accounting developments.
In May
2009, the FASB issued additional guidance concerning subsequent events that
requires that management must evaluate, as of each reporting period, events or
transactions that occur for potential recognition or disclosure in the financial
statements and the circumstances under which an entity should recognize events
or transactions occurring after the balance sheet date through the date that the
financial statements are issued or available to be issued. It also
requires the disclosure of the date through which an entity has evaluated
subsequent events. We adopted the FASB guidance during the year ended
December 31, 2009 and the required disclosures are included herein.
In April
2009, the FASB issued additional guidance defining fair value, establishing a
framework for measuring fair value and expanding disclosure requirements. The
new guidance emphasizes that even if there has been a significant decrease in
the volume and level of activity, the objective of a fair value measurement
remains the same. Fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction (that
is, not a forced liquidation or distressed sale) between market
participants. The guidance provides a number of factors to consider
when evaluating whether there has been a significant decrease in the volume and
level of activity for an asset or liability in relation to normal market
activity. In addition, when transactions or quoted prices are not
considered orderly, adjustments to those prices based on the weight of available
information may be needed to determine their appropriate fair
values. We adopted the new guidance for the year ended December 31,
2009 with no resulting impact on the Company’s financial
statements.
In June
2009, the FASB issued additional guidance which requires an enterprise to
determine whether its variable interest or interests give it a controlling
financial interest in a variable interest entity. The primary
beneficiary of a variable interest entity is that the enterprise that has both
(1) the power to direct the activities of a variable interest entity that
most significantly impact the entity's economic performance, and (2) the
obligation to absorb losses of the entity that could potentially be significant
to the variable interest entity or the right to receive benefits from the entity
that could potentially be significant to the variable interest
entity. The guidance also requires ongoing reassessments of whether
an enterprise is the primary beneficiary of a variable interest
entity. The new guidance is effective for our Company beginning
January 1, 2010. The Company is evaluating the impact of this
pronouncement but does not expect the adoption to have a material impact on its
financial statements.
36
|
2.
|
Notes payable and
accrued interest
|
Notes
payable consisted of the following at December 31, 2009 and 2008:
|
Notes payable
|
Accrued interest
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Note
payable due to a corporation, secured by the assets of our Company,
interest accrues at the rate of 12% per annum (as amended), all amounts
due and payable June 18, 2008
|
$ | 500,000 | $ | 500,000 | $ | 125,715 | $ | 65,879 | ||||||||
|
Unsecured
(as amended) note payable due to our Company’s former Chief Executive
Officer, interest accrues at the rate of 9% compounded annually, all
amounts due and payable December 31, 2008
|
20,000 | 20,000 | 5,803 | 3,590 | ||||||||||||
|
Note
payable due to a trust, interest accrues at the rate of 10% per annum, all
amounts due and payable December 31, 2006
|
51,984 | 51,984 | 8,687 | 3,489 | ||||||||||||
| $ | 571,984 | $ | 571,984 | $ | 140,205 | $ | 72,958 | |||||||||
Future
repayments of amounts due under the notes payable to the corporation and the
trust are subject to ongoing negotiations with both parties that may lead to
changes in existing repayment terms. Should our Company ultimately
settle amounts due under the notes for amounts as payment-in-full different than
the amounts currently due under the existing notes, the differences will be
recorded as a nonoperating gain or loss in the period in which: 1) the agreement
is reached; and 2) the ability of our Company to meet the revised requirements
under the note is assured.
Future
repayment of the note payable to our Company’s former Chief Executive Officer is
subject to the resolution of litigation matters described more fully
below.
Interest
expense in connection with all notes payable outstanding totaled $67,247 and
$68,340 for the years ended December 31, 2009 and 2008, respectively, and is
recorded as interest expense in the accompanying statements of
operations.
|
3.
|
Stockholders’
equity
|
Our
Company was wholly owned by CT Canada as of December 31, 2009 and for all
periods included in these financial statements. Our capital
requirements were completely financed by funds received from CT
Canada. Amounts advanced from CT Canada to our Company are accounted
for as capital contributions as they were not intended to be
repaid.
Share
based compensation
Certain
employees, directors and consultants of our Company (the “Optionees”) have
received stock options exercisable for the common stock of (and issued by) our
parent company CT Canada.
Results of operations for the year ended December 31, 2009 included share
based compensation costs (included in personnel compensation and related
expenses) totaling $118,269 ($54,378 for the year ended December 31, 2008) to
recognize the value of the CT Canada options granted to the Optionees. For
purposes of accounting for share based compensation, the fair value of each
option award is estimated on the date of grant using the Black-Scholes-Merton
option pricing formula. The following weighted average assumptions were utilized
for the calculations during the years ended December 31, 2009 and
2008:
|
2009
|
2008
|
|||||||
|
Expected
life (in years)
|
3.23
years
|
3.57
years
|
||||||
|
Weighted
average volatility
|
153 | % | 153 | % | ||||
|
Forfeiture
rate
|
24.6 | % | 70.2 | % | ||||
|
Risk-free
interest rate
|
1.68 | % | 0.70 | % | ||||
|
Expected
dividend rate
|
0 | % | 0 | % | ||||
37
The
weighted average expected option and warrant term for employee stock options
granted reflects the application of the simplified method set out in SEC Staff
Accounting Bulletin No. 107, Share-Based
Payment (SAB 107). The simplified method defines the life
as the average of the contractual term of the options and the weighted average
vesting period for all options. We utilized this approach as our
historical share option exercise experience does not provide a reasonable basis
upon which to estimate an expected term. Expected volatilities are based
on the historical volatility of the stock of a public company that provides
comparable services within our targeted industry. We estimated the
forfeiture rate based on our expectation for future forfeitures and our
estimates reflect our forfeiture rate experienced to date. The risk-free
rate for periods within the contractual life of the option is based on the U.S.
Treasury yield in effect at or near the time of grant. We have never
declared or paid dividends and have no plans to do so in the foreseeable
future.
As of
December 31, 2009, $197,790 of total unrecognized compensation cost related to
unvested share based compensation arrangements is expected to be recognized over
a weighted-average period of 16.7 months.
|
4.
|
Litigation
|
In August
2008, our Company and certain employees, shareholders and directors (the
“Plaintiffs”) initiated litigation against its former Chief Executive Officer
(the “Defendant”) alleging criminal conduct against the financial interests and
reputation of our Company. The Defendant countersued our
Company. In December 2009, a judgment was entered in the Plaintiffs’
favor awarding damages and enjoining the Defendant from certain behavior
prejudicial to our Company. We have not recognized any gains from the
damages that may be paid to our Company in the future due to the uncertainty of
their ultimate realization. Additionally, in a separate court action
our Company has been enjoined against the payment of any amounts owed to the
Defendant, including amounts due under a note payable noted above.
Our
Company has been sued by a vendor for amounts incurred for services under a
telecommunications service contract in May 2008. The vendor claims
that our Company owes for services totaling $64,848 and is seeking additional
amounts for interest, costs and fees of $16,702 (for a total of
$81,550). Our Company disputes the balance sought by the vendor,
claiming negligence in the performance of the services in
question. The parties have entered into negotiations for the
settlement of the disputed amount and barring settlement, trial is scheduled for
October 2010. Our Company intends to vigorously contest the vendor’s
claim although ultimate resolution of the matter is still
uncertain. Included in accounts payable and accrued liabilities at
December 31, 2009 is a liability for our estimate of our ultimate liability in
connection with this matter.
During
2009, two former employees of our Company brought complaints before the Labor
Commissioner of the State of California, seeking payment of unpaid back wages,
accrued time off and bonuses. Our Company entered into a settlement
agreement with one of the employees and had a judgment entered in favor of the
other that required the payment to them of a total of $57,841, in full
satisfaction of all liabilities. Our Company was unable to meet the
repayment terms required under either the settlement or the judgment although we
continue to make payments to the former employees as funds are available to do
so. Amounts remaining unpaid at December 31, 2009 under the
settlement agreements totaled $49,841. We do not foresee additional
liabilities at this time in connection with this matter.
|
5.
|
Amounts due to a
stockholder
|
Included
within accounts payable and accrued liabilities at December 31, 2009 are amounts
due to a company (the “Lender”) controlled by a stockholder for amounts advanced
to our Company totaling $84,158. During the year ended December 31,
2009, the Lender advanced our Company $173,615 against our future collections of
identified accounts receivable. The advances were discounted a total
of $20,150 (included in interest expense for the year ended December 31, 2009)
and are otherwise noninterest bearing. All advances were due in full
at or prior to the collection of the related accounts receivable which last
occurred on September 24, 2009. Our Company is currently negotiating
with the stockholder concerning the terms and timing of future
repayment.
The
Lender also advanced $20,000 to our Company in March 2007 under a note payable
which was repaid in full in November 2008. Interest under the note
payable to the stockholder charged to operations during the year ended December
31, 2008 totaled $1,849.
38
|
6.
|
Income
taxes
|
Our
provisions for income taxes for the years ended December 31, 2009, and 2008,
were as follows (using our blended effective Federal and State income tax rate
of 40.3%):
|
2009
|
2008
|
|||||||
|
Current
Tax Provision:
|
||||||||
|
Federal
and state
|
||||||||
|
Taxable
income
|
$
|
-
|
$
|
-
|
||||
|
Total
current tax provision
|
$
|
-
|
$
|
-
|
||||
|
Deferred
Tax Provision:
|
||||||||
|
Federal
and state
|
||||||||
|
Net
loss carryforwards
|
$
|
(818,000)
|
$
|
(565,000)
|
||||
|
Share
based compensation
|
48,000
|
22,000
|
||||||
|
Other
|
3,000
|
3,000
|
||||||
|
Change
in valuation allowance
|
(767,000)
|
(540,000)
|
||||||
|
Total
deferred tax provision
|
$
|
-
|
$
|
-
|
||||
We had
deferred income tax assets as of December 31, 2009, and 2008, as
follows:
|
2009
|
2008
|
|||||||
|
Loss
carryforwards
|
$
|
2,500,000
|
$
|
1,733,000
|
||||
|
Less
- valuation allowance
|
(2,500,000)
|
(1,733,000)
|
||||||
|
Total
net deferred tax assets
|
$
|
-
|
$
|
-
|
||||
As of
December 31, 2009, we had net operating loss carryforwards for income tax
reporting purposes of approximately $6,300,000 for federal and California state
income tax that may be offset against future taxable income. The net
operating loss carryforwards begin to expire in 2021. Current tax
laws limit the amount of loss available to be offset future taxable income when
a substantial change in ownership occurs or a change in the nature of the
business and therefore, the amount available to offset any future taxable income
that our Company may generate may be limited. No tax benefit has been
reported in the financial statements for the realization of loss carryforwards
as the Company believes there is a substantial doubt that the carryforwards will
be utilized in the future. Accordingly, the potential tax benefits of
the loss carryforwards are offset by a valuation allowance of an equivalent
amount. The items accounting for the difference between income taxes
computed at the federal statutory rate and the provision for income taxes were
as follows:
|
2009
|
2008
|
|||||||
|
Federal
statutory rate
|
34.0 | % | 34.0 | % | ||||
|
State
tax, net of federal benefits
|
6.3 | % | 6.3 | % | ||||
|
Less
valuation allowance
|
(40.3 | )% | (40.3 | )% | ||||
|
Effective
income tax rate
|
- | % | - | % | ||||
We
performed an analysis of our previous tax filings and determined that there were
no positions taken that we consider uncertain and therefore, there were no
unrecognized tax benefits as of December 31, 2009. Future changes in the
unrecognized tax benefit are not expected to have an impact on the effective tax
rate due to the existence of the valuation allowance. We estimate
that unrecognized tax benefit will not change within the next twelve
months. We will continue to classify income tax penalties and
interest, if any, as part of interest and other expenses in our statements of
operations. We have incurred no interest or penalties through
December 31, 2009. We have open tax years for federal and state of
2007 through 2009. Due to our significant net operating loss
carryforwards, even if certain of our tax positions were disallowed, we do not
believe we will be liable for the payment of taxes in the near future.
Consequently, we did not calculate the impact of interest or penalties on
amounts that might be disallowed.
39
|
7.
|
Commitments and
contingencies
|
Our
Company has a lease agreement for its office facilities through June
2012. Our monthly rentals were $5,169 at December 31, 2009 and
increase over time to $5,815 in January 2012. Deferred rent at
December 31, 2009 and 2008 totaled $3,262 and $2,423,
respectively. Rent expense (including related common area maintenance
charges) totaled $71,765 for the year ended December 31, 2009 ($132,231 for the
year ended December 31, 2008). At December 31, 2009, we were
delinquent in our payment of rent under our lease and owed $37,351 in back rent
and common area maintenance charges. We are currently in negotiations
with our landlord to settle past due amounts and possibly modify our existing
lease agreement. Future lease amounts due under our lease agreement
(as stated on December 31, 2009 and not including common area maintenance
charges) total: $64,513 - 2010; $67,094 - 2011; and $34,889 - 2012.
At
December 31, 2009, we were delinquent with respect to the payment of wages
earned by current and former employees of our Company. Subsequent to
January 1, 2010, from time to time we have been late with respect to additional
payrolls to existing employees due to an insufficient balance of cash on hand at
the time the payrolls were due to be paid to the employees. At
present, the employees have agreed to continue their employment in the
expectation of eventual payment of all amounts due to them in either cash,
equity of our Company or some combination thereof. It is our
Company’s full intention to satisfy or reach a settlement with respect to all
past due balances outstanding.
We
currently are delinquent with respect to payments due to a number of our vendors
and providers of services. We have entered into negotiations with
many of these creditors and expect to reach an agreement to modify balances
currently outstanding to them. Our accompanying financial statements
record transactions with these creditors at the original agreed upon payment for
services and our balance sheet at December 31, 2009 records liabilities at their
original values. If we subsequently come to an agreement to modify
amounts to our creditors, we will record such modifications as a nonoperating
gain or loss in the period that such modifications are agreed to and we
demonstrate the ability to satisfy the liabilities as modified.
|
8.
|
Employee benefit
plan
|
We have
an employee savings plan (the “Plan”) pursuant to Section 401(k) of the
Internal Revenue Code (the “Code”), covering all of our
employees. Participants in the Plan may contribute a percentage of
compensation, but not in excess of the maximum allowed under the
Code. Our Company may make contributions at the discretion of its
Board of Directors. During the years ended December 31, 2009 and
2008, we made no contributions to the Plan.
|
9.
|
Subsequent
events
|
Our
Company has evaluated subsequent events through the date that the financial
statements were issued on November
2, 2010.
40
CommerceTel,
Inc.
FINANCIAL
STATEMENTS
For the Six Months Ended and As of June
30, 2010 and 2009
41
CommerceTel,
Inc.
TABLE OF
CONTENTS
For the
Six Months Ended and As of June 30, 2010 and 2009
|
Balance
Sheet at June 30, 2010 and December 31, 2009
|
43
|
|
Statement
of Operations for the Six Months Ended June 30, 2009 and
2008
|
44
|
|
Statement
of Changes in Stockholders’ Deficit
|
45
|
|
Statement
of Cash Flows for the Six Months Ended June 30, 2010 and
2009
|
46
|
|
Notes
to Financial Statements
|
47
- 52
|
42
CommerceTel,
Inc.
Balance
Sheets
|
June
30,
|
December
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
(Unaudited)
|
(
Audited)
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
|
$ | 15,297 | $ | 11,003 | ||||
|
Accounts
receivable
|
49,606 | 49,241 | ||||||
|
Other
current assets
|
3,659 | 6,664 | ||||||
|
Total
current assets
|
68,562 | 66,908 | ||||||
|
Equipment,
net
|
4,618 | 7,957 | ||||||
|
Other
assets
|
47,922 | 46,317 | ||||||
|
Total
current assets
|
$ | 121,102 | $ | 121,182 | ||||
|
Liabilities
and Stockholders' Deficit
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable and accrued liabilities
|
$ | 1,047,343 | $ | 989,370 | ||||
|
Notes
payable
|
571,984 | 571,984 | ||||||
|
Accrued
interest
|
173,710 | 140,205 | ||||||
|
Accrued
and deferred personnel compensation
|
285,219 | 196,819 | ||||||
|
Deferred
revenues and customer deposits
|
87,272 | 127,704 | ||||||
|
Other
current liabilities
|
3,652 | 3,262 | ||||||
|
Total
current liabilities
|
2,169,180 | 2,029,344 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders'
deficit:
|
||||||||
|
Common
stock; no par value; 10,000,000 shares authorized; 10,000,000 shares
issued and outstanding at June 30, 2010 and December 31,
2009
|
5,352,256 | 5,036,508 | ||||||
|
Accumulated
deficit
|
(7,400,334 | ) | (6,944,670 | ) | ||||
|
Total
stockholders' deficit
|
(2,048,078 | ) | (1,908,162 | ) | ||||
|
Total
liabilities and stockholders' deficit
|
$ | 121,102 | $ | 121,182 | ||||
The
accompanying notes are an integral part of these financial
statements.
43
CommerceTel,
Inc.
Statements
of Operations
|
For the six-months ended
June 30,
|
||||||||
|
2010
|
2009
|
|||||||
|
Revenues
|
$ | 448,762 | $ | 445,973 | ||||
|
Cost
of revenues
|
227,492 | 297,138 | ||||||
|
Gross
margin
|
221,270 | 148,835 | ||||||
|
Operating
expenses:
|
||||||||
|
Personnel
compensation and related
|
593,762 | 711,873 | ||||||
|
Equipment
and facility related
|
67,914 | 65,650 | ||||||
|
Bad
debt expense
|
(5 | ) | 9,374 | |||||
|
Insurance,
legal and accounting
|
24,107 | 115,168 | ||||||
|
Depreciation
|
3,338 | 18,258 | ||||||
|
Other
operating, general and administrative
|
68,865 | 52,507 | ||||||
|
Total
operating expenses
|
757,981 | 972,830 | ||||||
|
Loss
from operations
|
(536,711 | ) | (823,995 | ) | ||||
|
Interest
expense
|
33,504 | 53,389 | ||||||
|
Gain
on settlement of operations Expenses
|
(114,551 | ) | - | |||||
|
Net
loss
|
$ | (455,664 | ) | $ | (877,384 | ) | ||
|
Basic
and diluted net loss per share
|
$ | (0.05 | ) | $ | (0.09 | ) | ||
|
Basic
and diluted weighted average common shares outstanding
|
10,000,000 | 10,000,000 | ||||||
The
accompanying notes are an integral part of these financial
statements.
44
CommerceTel,
Inc.
Statements
of Changes in Stockholders' Deficit
|
Total
|
||||||||||||||||
|
Common Stock
|
Accumulated
|
Stockholders'
|
||||||||||||||
|
Shares
|
Amount
|
Deficit
|
Deficit
|
|||||||||||||
|
Balance
at December 31, 2008
|
10,000,000 | $ | 4,672,456 | $ | (5,542,043 | ) | $ | (869,587 | ) | |||||||
|
Capital
contributions by parent
|
- | 245,783 | - | 245,783 | ||||||||||||
|
Share
based compensation
|
- | 118,269 | - | 118,269 | ||||||||||||
|
Net
loss
|
- | - | (1,402,627 | ) | (1,402,627 | ) | ||||||||||
|
Balance
at December 31, 2009
|
10,000,000 | 5,036,508 | (6,944,670 | ) | (1,908,162 | ) | ||||||||||
|
Capital
contributions by parent
|
- | 249,897 | - | 249,897 | ||||||||||||
|
Share
based compensation
|
- | 65,851 | - | 65,851 | ||||||||||||
|
Net
loss
|
- | - | (455,664 | ) | (455,664 | ) | ||||||||||
|
Balance
at June 30, 2010
|
10,000,000 | $ | 5,352,256 | $ | (7,400,334 | ) | $ | (2,048,078 | ) | |||||||
The
accompanying notes are an integral part of these financial
statements.
45
CommerceTel,
Inc.
Statement
of Cash Flows
|
For the six-months ended
June 30,
|
||||||||
|
2010
|
2009
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (455,664 | ) | $ | (877,384 | ) | ||
|
Adjustments
to reconcile net loss to cash flows from operating
activities:
|
||||||||
|
Bad
debt expense
|
(5 | ) | 9,374 | |||||
|
Depreciation
expense
|
3,338 | 18,258 | ||||||
|
Stock
based compensation
|
65,851 | 62,611 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
365 | 42,063 | ||||||
|
Other
assets
|
(1,400 | ) | (315 | ) | ||||
|
Accounts
payable and accrued liabilities
|
57,973 | 406,862 | ||||||
|
Accrued
interest
|
33,505 | 33,240 | ||||||
|
Accrued
and deferred personnel compensation
|
90,476 | 120,155 | ||||||
|
Deferred
revenues and customer deposits
|
(40,432 | ) | (3,536 | ) | ||||
|
Other
liabilities
|
390 | (792 | ) | |||||
|
Cash
flows from operating activities
|
(245,603 | ) | (189,464 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from capital contributions from parent
|
249,897 | 245,783 | ||||||
|
Repayments
of note payable
|
- | - | ||||||
|
Cash
flows from financing activities
|
249,897 | 245,783 | ||||||
|
Change
in cash during period
|
4,294 | (56,319 | ) | |||||
|
Cash,
beginning of period
|
11,003 | 68,080 | ||||||
|
Cash,
end of period
|
$ | 15,297 | $ | 11,761 | ||||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash
paid during the period for:
|
||||||||
|
Interest
|
$ | - | $ | 20,150 | ||||
The
accompanying notes are an integral part of these financial
statements.
46
|
1.
|
Summary of significant
accounting policies
|
Nature of
business
CommerceTel,
Inc. (hereinafter referred to as “we” or “the/our Company”) was incorporated in
Nevada on October 13, 2005. Through June 30, 2010, we were wholly owned by
COMMERCETEL CANADA CORPORATION (“CT Canada”). We develop marketing
solutions and platforms for mobile devices.
Basis of
presentation
The
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles (“GAAP”) as promulgated in the
United States of America.
Going
concern
Our
financial statements have been prepared assuming that we will continue as a
going concern. Such assumption contemplates the realization of assets and
satisfaction of liabilities in the normal course of business.
However, we have incurred continued losses, have a net working
capital deficiency, and have an accumulated deficit of approximately $7.4
million as of June 30, 2010. These factors among others create a
substantial doubt about our ability to continue as a going concern. We are
dependent upon sufficient future revenues, additional sales of our securities or
obtaining debt financing in order to meet our operating cash requirements.
Barring our generation of revenues in excess of our costs and expenses or our
obtaining additional funds from equity or debt financing, we will not have
sufficient cash to continue to fund the operations of our Company through
December 31, 2010. These financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
In
response to our Company’s cash needs, we received additional investment from CT
Canada totaling $249,897 for the six months ended June 30, 2010. Longer
term, we anticipate that we will continue to raise additional equity financing
through the sale of shares of our Company’s common stock in order to finance our
future investing and operating cash flow needs. However, there can be no
assurance that such financings will be available on acceptable terms, or at
all.
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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue
recognition
Revenue
is recognized on the accrual basis of accounting when earned. We are
responsible for providing access to technical services to customers who contract
for our services. Accordingly, we recognized revenue at the time that the
services were rendered, the selling price was fixed, collection was reasonably
assured and when both title and risk of loss transferred to the customer,
provided no significant obligations remained. Cash received in advance of
the performance of services was recorded as deferred revenue. Deferred
revenues totaled $71,271 ($111,168 at December 31, 2009).
Cash
and cash equivalents
We
consider all investments with an original maturity of three months or less to be
cash equivalents. Cash equivalents primarily represent funds invested in
bank checking accounts, money market funds, bank certificates of deposit and
U.S. government debt securities whose cost equals fair market value. At
June 30, 2010 and December 31, 2009, respectively, the Company had no cash
equivalents.
From time
to time, we may maintain bank balances in excess of the $250,000 insured by the
Federal Deposit Insurance Corporation. We have not experienced any losses
with respect to cash. Management believes our Company is not exposed to
any significant credit risk with respect to its cash and cash
equivalents.
Accounts
receivable
Accounts
receivable are carried at their estimated collectible amounts. We grant
unsecured credit to substantially all of our customers. Ongoing credit
evaluations are performed and potential credit losses are charged to operations
at the time the account receivable is estimated to be uncollectible. Since
we cannot necessarily predict future changes in the financial stability of our
customers, we cannot guarantee that our reserves will continue to be
adequate.
47
From time
to time, we may have a limited number of customers with individually large
amounts due. Any unanticipated change in one of the customer’s
creditworthiness could have a material effect on our results of operations in
the period in which such changes or events occurred. We had no allowance
for doubtful accounts at either June 30, 2010 or December 31, 2009.
Equipment
Equipment
is recorded at cost, and consists primarily of computer equipment and is
depreciated using the straight-line method over the estimated useful lives of
the related assets (generally three years or less). Costs incurred for
maintenance and repairs are expensed as incurred and expenditures for major
replacements and improvements are capitalized and depreciated over their
estimated remaining useful lives. Depreciation expense for the six months
ended is $3,338 and $18,258 in 2010 and 2009, respectively. Accumulated
depreciation for the Company’s equipment is $112,089 and $108,751 at June 30,
2010 and December 31, 2009, respectively.
Valuation
of long-lived assets
The
Company evaluates long-lived assets for impairment whenever events or changes in
circumstances indicate their net book value may not be recoverable. When such
factors and circumstances exist, the Company compares the projected undiscounted
future cash flows associated with the related asset or group of assets over
their estimated useful lives against their respective carrying amount.
Impairment, if any, is based on the excess of the carrying amount over the fair
value, based on market value when available, or discounted expected cash flows,
of those assets and is recorded in the period in which the determination is
made. The Company’s management currently believes there is no impairment of its
long-lived assets. There can be no assurance, however, that market conditions
will not change or demand for the Company’s products under development will
continue. Either of these could result in future impairment of long-lived
assets.
Income
taxes
The
Company provides for federal and state income taxes currently payable, as well
as for those deferred due to timing differences between reporting income and
expenses for financial statement purposes versus tax purposes. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted income tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect of a change in
income tax rates is recognized as income or expense in the period that includes
the enactment date.
Share
based compensation
Stock-based
compensation cost is measured at the date of grant, based on the calculated fair
value of the stock-based award, and is recognized as expense over the employee’s
requisite service period (generally the vesting period of the award). The
Company estimates the fair value of employee stock options granted using the
Black-Scholes Option Pricing Model. Key assumptions used to estimate the fair
value of stock options include the exercise price of the award, the fair value
of the Company’s common stock on the date of grant, the expected option term,
the risk free interest rate at the date of grant, the expected volatility and
the expected annual dividend yield on the Company’s common stock. We use
comparable public company data among other information to estimate the expected
price volatility and the expected forfeiture rate.
Net
loss per share
We
calculate basic earnings per share (“EPS”) by dividing our net loss by the
weighted average number of common shares outstanding for the period, without
considering common stock equivalents. Diluted EPS is computed by dividing
net income or net loss by the weighted average number of common shares
outstanding for the period and the weighted average number of dilutive common
stock equivalents, such as options and warrants. Options and warrants are
only included in the calculation of diluted EPS when their effect is
dilutive. The Company has no anti-dilutive securities as of June 30, 2010
and December 31, 2010.
Fair
value of financial instruments
The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties. As of June 30,
2010, and 2009, the carrying value of the Company’s financial instruments
approximated fair value due to their short-term nature and
maturity.
48
Litigation
From time
to time, we may become involved in disputes, litigation and other legal actions.
We estimate the range of liability related to any pending litigation where
the amount and range of loss can be estimated. We record our best estimate
of a loss when the loss is considered probable. Where a liability is
probable and there is a range of estimated loss with no best estimate in the
range, we record a charge equal to at least the minimum estimated liability for
a loss contingency when both of the following conditions are met: (i)
information available prior to issuance of the financial statements indicates
that it is probable that an asset had been impaired or a liability had been
incurred at the date of the financial statements and (ii) the range of loss can
be reasonably estimated.
Recent
accounting pronouncements
Accounting
standards promulgated by the Financial Accounting Standards Board (“FASB”) are
subject to change. Changes in such standards may have an impact on the
Company’s future financial statements. The following are a summary of
recent accounting developments.
In
January 2010, the FASB issued ASU No. 2010-06 Fair Value Measurements and
Disclosures Topic 820 “Improving Disclosures about Fair Value
Measurements”. This ASU requires some new disclosures and clarifies some
existing disclosure requirements about fair value measurement as set forth in
Codification Subtopic 820-10. The FASB’s objective is to improve these
disclosures and, thus, increase the transparency in financial
reporting. This pronouncement is effective for interim and annual reporting
periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances, and settlements in the roll forward of activity in
Level 3 fair value measurements. Those disclosures are effective for
fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years. The adoption of this ASU will not have a material
impact on the Company’s consolidated financial statements.
In
October 2009, the FASB issued guidance on revenue recognition that will become
effective for the Company beginning July 1, 2010, with earlier adoption
permitted. Under the new guidance on arrangements that include software
elements, tangible products that have software components that are essential to
the functionality of the tangible product will no longer be within the scope of
the software revenue recognition guidance, and software-enabled products will
now be subject to other relevant revenue recognition guidance. Additionally, the
FASB issued guidance on revenue arrangements with multiple deliverables that are
outside the scope of the software revenue recognition guidance. Under the new
guidance, when vendor specific objective evidence or third party evidence for
deliverables in an arrangement cannot be determined, a best estimate of the
selling price is required to separate deliverables and allocate arrangement
consideration using the relative selling price method. The new guidance includes
new disclosure requirements on how the application of the relative selling price
method affects the timing and amount of revenue recognition. We believe adoption
of this new guidance will not have a material impact on our financial
statements.
|
2.
|
Notes payable and
accrued interest
|
Notes
payable consisted of the following at June 30, 2010 and December 31,
2009:
|
Notes payable
|
Accrued interest
|
|||||||||||||||
|
6/30/2010
|
12/31/2009
|
6/30/2010
|
12/31/2009
|
|||||||||||||
|
Note
payable due to a corporation, secured by the assets of our Company,
interest accrues at the rate of 12% per annum (as amended), all amounts
due and payable June 18, 2008
|
$ | 500,000 | $ | 500,000 | $ | 155,469 | $ | 125,715 | ||||||||
|
Unsecured
(as amended) note payable due to our Company’s former Chief Executive
Officer, interest accrues at the rate of 9% compounded annually, all
amounts due and payable December 31, 2008
|
20,000 | 20,000 | 6,976 | 5,803 | ||||||||||||
|
Note
payable due to a trust, interest accrues at the rate of 10% per annum, all
amounts due and payable December 31, 2006
|
51,984 | 51,984 | 11,265 | 8,687 | ||||||||||||
| $ | 571,984 | $ | 571,984 | $ | 173,710 | $ | 140,205 | |||||||||
Future
repayments of amounts due under the notes payable to the corporation and the
trust are subjected to ongoing negotiations with both parties that may lead to
changes in existing repayment terms. Should our Company ultimately settle
amounts due under the notes for amounts as payment-in-full different than the
amounts currently due under the existing notes, the differences will be recorded
as a nonoperating gain in the period in which: 1) the agreement is reached; and
2) the ability of our Company to meet the revised requirements under the note is
assured.
49
Future
repayment of the note payable to our Company’s former Chief Executive Officer is
subject to the resolution of litigation matters described more fully
below.
Interest
expense in connection with all notes payable outstanding totaled $33,505 and
$33,240 for the six months ended June 30, 2010 and 2009, respectively, and is
recorded as interest expense in the accompanying statement of
operations.
|
3.
|
Stockholders’
equity
|
Our
Company was wholly owned by CT Canada as of June 30, 2010 and for all periods
included in these financial statements. Our capital requirements were
completely financed by funds received from CT Canada. Amounts advanced
from CT Canada to our Company are accounted for as capital contributions as they
were not intended to be repaid.
Share
based compensation
Certain
employees, directors and consultants of our Company (the “Optionees”) have
received stock options exercisable for the common stock of (and issued by) our
parent company CT Canada. Results of operations
for the year ended June 30, 2010 include share based compensation costs totaling
$65,851 ($62,611 for the six months ended June 30, 2009) to recognize the value
of the CT Canada options granted to the Optionees. For purposes of
accounting for share based compensation, the fair value of each option award is
estimated on the date of grant using the Black-Scholes-Merton option pricing
formula. The following weighted average assumptions were utilized for the
calculations for the six months ended June 30, 2010 and 2009:
|
2010
|
2009
|
|||||||
|
Expected
life (in years)
|
2.73
years
|
3.23
years
|
||||||
|
Weighted
average volatility
|
153 | % | 153 | % | ||||
|
Forfeiture
rate
|
24.7 | % | 24.6 | % | ||||
|
Risk-free
interest rate
|
0.94 | % | 1.68 | % | ||||
|
Expected
dividend rate
|
0 | % | 0 | % | ||||
The
weighted average expected option and warrant term for employee stock options
granted reflects the application of the simplified method set out in SEC Staff
Accounting Bulletin No. 107, Share-Based
Payment (SAB 107). The simplified method defines the life
as the average of the contractual term of the options and the weighted average
vesting period for all options. We utilized this approach as our
historical share option exercise experience does not provide a reasonable basis
upon which to estimate an expected term. Expected volatilities are based
on the historical volatility of the stock of a public company that provides
comparable services within our targeted industry. We estimated the
forfeiture rate based on our expectation for future forfeitures and our
estimates mirror our forfeiture rate experienced to date. The risk-free
rate for periods within the contractual life of the option is based on the U.S.
Treasury yield in effect at or near the time of grant. We have never
declared or paid dividends and have no plans to do so in the foreseeable
future.
As of
June 30, 2010, $44,000 of total unrecognized compensation cost related to
unvested share based compensation arrangements is expected to be recognized over
a weighted-average period of 18.0 months (December 31, 2009, 16.7
months).
|
4.
|
Litigation
|
In August
2008, our Company and certain employees, shareholders and directors (the
“Plaintiffs”) initiated litigation against its former Chief Executive Officer
(the “Defendant”) alleging criminal conduct against the financial interests and
reputation of our Company. The Defendant countersued our Company. In
December 2009, a judgment was entered in the Plaintiffs’ favor awarding damages
and enjoining the Defendant from certain behavior prejudicial to our
Company. We have not recognized any gains from the damages that may be
paid to our Company in the future due to the uncertainty of their ultimate
realization. Additionally, in a separate court action our Company has been
enjoined against the payment of any amounts owed to the Defendant, including
amounts due under a note payable noted above.
Our
Company has been sued by a vendor for amounts incurred for services under a
telecommunications service contract in May 2008. The vendor claims that
our Company owes for services totaling $64,848 and is seeking additional amounts
for interest, costs and fees of $16,702 (for a total of $81,550). In
September, 2010, the parties have entered into negotiations for the settlement
of the disputed amount.
50
During
2009, two former employees of our Company brought complaints before the Labor
Commissioner of the State of California, seeking payment of unpaid back wages,
accrued time off and bonuses. Our Company entered into a settlement
agreement with one of the employees and had a judgment entered in favor of the
other that required the payment to them of a total of $57,841, in full
satisfaction of all liabilities. Our Company was unable to meet the
repayment terms required under either the settlement or the judgment although we
continue to make payments to the former employees as funds are available to do
so. Amounts remaining unpaid at June 30, 2010 under the settlement
agreements totaled $49,841.We do not foresee additional liabilities at this time
in connection with this matter.
|
5.
|
Amounts due to a
stockholder
|
Included
within accounts payable and accrued liabilities at June 30, 2010 are amounts due
to a company (the “Lender”) controlled by a stockholder for amounts
advanced to our Company totaling $84,158. During the year ended December
31, 2009, the Lender advanced our Company $173,615 against our future
collections of identified accounts receivable. The advances were
discounted a total of $20,150 (included in interest expense for the year ended
December 31, 2009) and are otherwise noninterest bearing. All advances
were due in full at or prior to the collection of the related accounts
receivable which last occurred on September 24, 2009. Our Company is
currently negotiating with the stockholder concerning the terms and timing of
future repayment.
|
6.
|
Commitments and
contingencies
|
Our
Company has a lease agreement for its office facilities through June 2012.
Our monthly rentals were $5,376 at June 30, 2010 and increase over time to
$5,815 in January 2012. Deferred rent at June 30, 2010 and December 31,
2009 totaled $3,652 and $3,262, respectively. Rent expense (including
related common area maintenance charges) totaled $36,167 for the six months
ended June 30, 2010 ($35,034 for the six months ended June 30, 2009). At
June 30, 2010, we were delinquent in our payment of rent under our lease and
owed $59,598 in back rent and common area maintenance charges. We are
currently in negotiations with our landlord to settle past due amounts and
possibly modify our existing lease agreement. Future lease amounts due
under our lease agreement (as stated on June 30, 2010 and not included common
area maintenance charges) total: $32,257 - 2010; $67,094 - 2011; and $34,889 -
2012.
At June
30, 2010, we were delinquent with respect to the payment of wages earned by
current and former employees of our Company. Subsequent to July 1, 2010,
from time to time we have been late with respect to additional payrolls to
existing employees due to an insufficient balance of cash on hand at the time
the payrolls were due to be paid to the employees. At present, the
employees have agreed to continue their employment in the expectation of
eventual payment of all amounts due to them in either cash, equity of our
Company or some combination thereof. It is our Company’s full intention to
satisfy or reach a settlement with respect to all past due balances
outstanding.
We
currently are delinquent with respect to payments due to a number of our vendors
and providers of services. We have entered into negotiations with many of
these creditors and expect to reach an agreement to modify balances currently
outstanding to them. Our accompanying financial statements record
transactions with these creditors at the original agreed upon payment for
services and our balance sheet at June 30, 2010 records liabilities at their
original values. If we subsequently come to an agreement to modify amounts
to our creditors, we will record such modifications as a nonoperating gain or
loss in the period that such modifications are agreed to.
|
7.
|
Employee benefit
plan
|
We have
an employee savings plan (the “Plan”) pursuant to Section 401(k) of the
Internal Revenue Code (the “Code”), covering all of our employees.
Participants in the Plan may contribute a percentage of compensation, but not in
excess of the maximum allowed under the Code. Our Company may make
contributions at the discretion of its Board of Directors. During the six
months ended June 30, and the year ended December 31, 2009, we made no
contributions to the Plan.
|
8.
|
Subsequent
events
|
In
preparing these financial statements, the Company has evaluated events and
transactions for potential recognition or disclosure through November 2, 2010,
the date the financial statements were available for issue.
On July
1, 2010, we entered into service agreement to Linay Enterprises, LLC.
Beginning July 1, 2010, Linay Enterprises, LLC to consult and work directly with
the Company’s CEO for a term of 90 days from the Commencement Date (July 1,
2010). The Company shall pay the compensation to Linay Enterprises, LLC at
the rate of $26,667 per month. Total compensation is $80,000 for initial
90 days.
51
On July
1, 2010, we entered into service agreement to Mark Sandson. Beginning July
1, 2010, Mark Sandson to consult and work directly with the Company’s CEO for a
term of 90 days from the Commencement Date (July 1, 2010). The Company
shall pay the compensation to Mark Sandson at the rate of $5,000 per
month.
We have
an outstanding loan issued by Mark L. Sandson. It is for the amount
of $42,615 at 10% interest; issued on September 1, 2010 and due on August 31,
2011. All principal and interest is due in full at the date of
maturity, August 31, 2011 or at such time as the Company files bankruptcy or
becomes insolvent. This loan is convertible to shares in the Company,
at any time, at the price of $0.08 per share.
52