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EX-31.2 - CERTIFICATION - Dot VN, Inc.dotvn_ex312.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

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

For the quarterly period ended October 31, 2011

OR

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

For the transition period from _____ to ____
 
Commission File No. 000-53367

DOT VN, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
20-3825987
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

9449 Balboa Avenue, Suite 114
San Diego, California 92123
(Address of principal executive offices, zip code)

(858) 571-2007
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year,
if changed since last report)

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.           Yes  x   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (check one):
 
Large accelerated filer o Accelerated filer o
Non-accelerated filer
(Do not check if a smaller
reporting company)
o Smaller reporting company x
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) .   Yes  o   No  x

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

APPLICABLE ONLY TO CORPORATE ISSUERS

As of December 9, 2011, there were 62,705,266 shares of the issuer’s common stock, par value $0.001 per share, outstanding.
 


 
 

 

DOT VN, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED OCTOBER 31, 2011

INDEX

Index
   
Page
 
         
Part I.
Financial Information
     
         
 
Item 1.Financial Statements
    4  
           
 
Basis of Presentation.
    4  
           
 
Report of Independent Registered Public Accounting Firm.
    5  
           
 
Condensed Consolidated Balance Sheets as of October 31, 2011 (unaudited) and April 30, 2011.
    6  
           
 
Condensed Consolidated Statements of Operations for the Three months ended October 31, 2011 and 2010 (unaudited).
    7  
           
 
Condensed Consolidated Statements of Operations for the Six months ended October 31, 2011 and 2010 (unaudited).
    8  
           
 
Condensed Consolidated Statements of Changes in Stockholders Equity for the Six months ended October 31, 2011 (unaudited) and Year ended April 30, 2011.
    9  
           
 
Condensed Consolidated Statements of Cash Flows for the Six months ended October 31, 2011 and 2010 (unaudited).
    11  
           
 
Notes to Condensed Consolidated Financial Statements (unaudited).
    13  
           
 
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
    71  
           
 
Item 3.Quantitative and Qualitative Disclosures About Market Risk.
    89  
           
 
Item 4.Controls and Procedures.
    90  
           
Part II.
Other Information
       
           
 
Item 1.Legal Proceedings.
    91  
           
 
Item 1A.Risk Factors.
    91  
           
 
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
    91  
           
 
Item 3.Defaults Upon Senior Securities.
    91  
           
 
Item 4.(Removed and Reserved).
    91  
           
 
Item 5.Other Information.
    91  
           
 
Item 6.Exhibits.
    92  
           
Signatures
    93  
           
Certifications
       
 
 
2

 
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q of Dot VN, Inc., a Delaware corporation (the “Company”) contains “forward-looking statements“.  In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “could”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of such terms and other comparable terminology.  These forward-looking statements include, without limitation, statements about our market opportunity, our strategies, competition, expected activities and expenditures as we pursue our business plan, and the adequacy of our available cash resources.  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.  Actual results may differ materially from the predictions discussed in these forward-looking statements.  The economic environment within which we operate could materially affect our actual results.  Additional factors that could materially affect these forward-looking statements and/or predictions include, among other things: (i) our limited operating history; (ii) our ability to obtain additional financing to complete our business plan; (iii) our ability to pay down existing debt; (iv) unforeseen costs and expenses; (v) potential litigation with our shareholders, creditors and/or former or current investors; (vi) the Company’s ability to comply with federal, state and local government regulations; (vii) the Company’s ability to maintain current material agreements with the government of Vietnam and secure additional agreements in furtherance of the Company’s business in Vietnam; and (viii) the exercise of the approximately 54.79% control Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors, holds of the Company’s voting securities, (ix) the exercise of the approximately 43.22% control Lee Johnson, the Company’s President, Chief Technology Officer, and Chief Financial Officer and a Director, holds of the Company’s voting securities, (x) other factors over which we have little or no control; and (xii) other factors discussed in the Company’s filings with the Securities and Exchange Commission (“SEC”).

Our management has included projections and estimates in this Form 10-Q, which are based primarily on management’s experience in the industry, assessments of our results of operations, discussions and negotiations with third parties and a review of information filed by our competitors with the Securities and Exchange Commission or otherwise publicly available.  We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.  We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
 
 
3

 

Dot VN, INC. AND SUBSIDIARIES


PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and the instructions for Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all information and footnote disclosures necessary for a complete presentation of the financial position, results of operations, cash flows, and stockholders equity in conformity with generally accepted accounting principles.  In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature.

The unaudited condensed consolidated balance sheet of the Company as of October 31, 2011, and the related consolidated balance sheet of the Company as of April 30, 2011, which is derived from the Company's audited consolidated financial statements, the un-audited condensed consolidated statement of operations and cash flows for the six months ended October 31, 2011 and 2010 and the condensed consolidated statement of stockholders equity for the period of April 30, 2010 to October 31, 2011 are included in this document.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s most recently filed Form 10-K.

Operating results for the six months ended October 31, 2011 are not necessarily indicative of the results that can be expected for the year ending April 30, 2012.
 
 
 
 
4

 

PLS CPA, A Professional Corp.
t 4725 MERCURY STREET SUITE 210 t SAN DIEGO t CALIFORNIA 92111 t
t TELEPHONE (858)722-5953 t FAX (858) 761-0341  t FAX (858) 764-5480
t E-MAIL changgpark@gmail.com t


Report of Independent Registered Public Accounting Firm
 
 
To the Board of Directors of
Dot Vn, Inc.
9449 Balboa Avenue, Suite 114
San Diego, CA 92123

We have reviewed the accompanying condensed consolidated balance sheet of Dot VN, Inc. (the “Company”) as of October 31, 2011, and the related condensed consolidated statements of operations for the three and six months ended October 31, 2011 and 2010, condensed consolidated statements of changes in stockholders’ equity (deficit) and condensed consolidated cash flows for the six months ended October 31, 2011 and 2010.  These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 17 to the condensed consolidated financial statements, the Company's losses from operations raise substantial doubt about its ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 

/s/ PLS CPA
____________________________
PLS CPA, A Professional Corp.

December 15, 2011
San Diego, California


 
 
 
 
Registered with the Public Company Accounting Oversight Board
 
 
5

 

Dot VN, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

   
October 31,
   
April 30,
 
   
2011
   
2011
 
   
(unaudited)
       
ASSETS
           
Current assets:
           
Cash
  $ 19,572     $ 132,627  
Accounts receivable, net of zero allowance for doubtful accounts
    118,435       162,550  
Inventories
    -       22,688  
Prepaid expenses and other current assets
    68,365       120,954  
Prepaid warrant expense, current
    2,558       17,904  
Notes receivable, net
    -       -  
Total current assets
    208,930       456,723  
                 
Equipment, net
    1,006,205       958,091  
Intangible assets
    1,023,222       1,023,143  
Other noncurrent assets
    349,249       327,865  
Total assets
  $ 2,587,606     $ 2,765,822  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
               
Current liabilities:
               
Accounts payable
  $ 314,292     $ 295,836  
Customer deposits
    23,206       9,241  
Due to related parties, net of zero and zero discount
    1,947,110       1,814,842  
Short-term convertible debt, net of $45,926 and zero discount
    80,219       27,705  
Short-term debt and current portion of long-term debt
    3,280,035       3,401,773  
Accrued and other liabilities
    1,640,199       1,163,036  
Total current liabilities
    7,285,061       6,712,433  
                 
Long-term liabilities:
               
Due to related parties, net of $171,172 and $190,199 discount
    618,589       565,350  
Long-term convertible debt, net of $222,494 and $301,383 discount
    1,120,088       1,297,948  
Long-term debt, net of current portion
    221,834       201,010  
Total long-term liabilities
    1,960,511       2,064,308  
Total Liabilities
    9,245,572       8,776,741  
                 
Commitments and contingencies
               
                 
Shareholders' equity (deficit):
               
Preferred stock: 50,000,000 shares authorized of $0.001 par value; 120,000
               
shares designated Series A, $10.00 stated value; 0 issued and outstanding
               
as of October 31 and April 30, 2011
    -       -  
Common stock: 250,000,000 shares  authorized of $0.001 par value;
               
62,217,715 and 59,557,403 shares issued and outstanding as of October 31
               
and April 30, 2011
    62,218       59,557  
Additional paid-in capital
    47,782,523       46,055,778  
Accumulated deficit
    (54,530,825 )     (52,149,757 )
Accumulated comprehensive income
    28,118       23,503  
Total shareholders' equity (deficit)
    (6,657,966 )     (6,010,919 )
Total liabilities and shareholders' equity (deficit)
  $ 2,587,606     $ 2,765,822  
 
The accompanying notes are an integral part of these condensed consolidated financial statements
 
 
6

 

Dot VN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)

   
Three Months Ended October 31,
 
   
2011
   
2010
 
         
 
 
Revenues
  $ 225,374     $ 244,802  
Cost of revenues
    80,199       107,664  
Gross profit
    145,175       137,138  
                 
General and administrative expenses:
               
Consulting and professional fees
    92,305       22,856  
Marketing and promotion
    12,000       12,000  
Option bonus
    -       216,162  
Bad debt expense
    2,608       585  
Other general & administrative expenses
    393,558       561,326  
Total general and administrative expenses
    500,471       812,929  
                 
(Loss) from operations
    (355,296 )     (675,791 )
                 
Other income (expenses):
               
Interest income
    92       250  
Finance (expense)
    (193,155 )     (3,777 )
Interest (expense)
    (918,754 )     (307,968 )
Foreign exchange (loss)
    (14,531 )     (9,877 )
Other (expense)
    -       (172 )
Total other income (expenses)
    (1,126,348 )     (321,544 )
                 
Net loss
  $ (1,481,644 )   $ (997,335 )
                 
Loss per common share:
               
Basic and diluted
  $ (0.02 )   $ (0.02 )
                 
Weighted average common shares outstanding:
               
Basic and diluted
    61,638,697       42,656,527  
                 
Comprehensive income (loss):
               
Net loss
  $ (1,481,644 )   $ (997,335 )
Other comprehensive (loss) income:
               
Foreign currency translation
    5,980       2,494  
                 
Comprehensive loss
  $ (1,475,664 )   $ (994,841 )
 
The accompanying notes are an integral part of these condensed consolidated financial statements
 
 
7

 

Dot VN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)

   
Six Months Ended October 31,
 
   
2011
   
2010
 
         
 
 
Revenues
  $ 464,886     $ 578,310  
Cost of revenues
    165,448       222,499  
Gross profit
    299,438       355,811  
                 
General and administrative expenses:
               
Consulting and professional fees
    191,874       77,079  
Marketing and promotion
    24,000       24,000  
Option bonus
    141,660       720,539  
Bad debt expense
    3,009       3,872  
Other general & administrative expenses
    860,717       1,082,044  
Total general and administrative expenses
    1,221,260       1,907,534  
                 
(Loss) from operations
    (921,822 )     (1,551,723 )
                 
Other income (expenses):
               
Interest income
    192       476  
Finance (expense)
    (250,709 )     (141,324 )
Interest (expense)
    (1,195,956 )     (1,250,759 )
Foreign exchange (loss)
    (12,773 )     (14,539 )
Other income
    -       393  
Total other income (expenses)
    (1,459,246 )     (1,405,753 )
                 
Net loss
  $ (2,381,068 )   $ (2,957,476 )
                 
Loss per common share:
               
Basic and diluted
  $ (0.04 )   $ (0.07 )
                 
Weighted average common shares outstanding:
               
Basic and diluted
    60,989,354       42,296,843  
                 
Comprehensive income (loss):
               
Net loss
  $ (2,381,068 )   $ (2,957,476 )
Other comprehensive (loss) income:
               
Foreign currency translation
    4,615       2,542  
                 
Comprehensive loss
  $ (2,376,453 )   $ (2,954,934 )
 
The accompanying notes are an integral part of these condensed consolidated financial statements
 
 
8

 

Dot VN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) (Unaudited)

                           
Accumulated
       
         
Common
   
Additional
         
other
       
   
Common
   
stock
   
paid-in
   
Accumulated
   
comprehensive
       
   
stock
   
amount
   
capital
   
deficit
   
(loss) income
   
Total
 
                                     
Balance, April 30, 2010
    41,039,263     $ 41,039     $ 40,342,899     $ (47,146,271 )   $ 8,089     $ (6,754,244 )
                                                 
Shares issued for cash
    1,313,715       1,314       357,486       -       -       358,800  
                                                 
Shares issued to employees
    101,000       101       17,549       -       -       17,650  
                                                 
Shares issued for services
    660,000       660       121,740       -       -       122,400  
                                                 
Shares issued upon conversion of convertible debentures
    15,409,846       15,410       3,295,277       -       -       3,310,687  
                                                 
Shares issued as payment on term debt
    1,033,579       1,033       257,362       -       -       258,395  
                                                 
Discount on convertible debentures
    -       -       90,264       -       -       90,264  
                                                 
Detachable warrants vested upon conversion of convertible debentures
    -       -       175,271       -       -       175,271  
                                                 
Warrants issued for deferred debt issuance costs
    -       -       183,293       -       -       183,293  
                                                 
Warrants issued for services
    -       -       63,943       -       -       63,943  
                                                 
Stock options expensed
    -       -       1,150,694       -       -       1,150,694  
                                                 
Comprehensive loss, April 30, 2011
    -       -       -       (5,003,486 )     15,414       (4,988,072 )
                                                 
Balance, April 30, 2011
    59,557,403       59,557       46,055,778       (52,149,757 )     23,503       (6,010,919 )
                                                 
 
The accompanying notes are an integral part of these condensed consolidated financial statements
 
 
9

 

Dot VN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) (Unaudited)

                           
Accumulated
       
         
Common
   
Additional
         
other
       
   
Common
   
stock
   
paid-in
   
Accumulated
   
comprehensive
       
   
stock
   
amount
   
capital
   
deficit
   
(loss) income
   
Total
 
                                     
Balance, April 30, 2011
    59,557,403       59,557       46,055,778       (52,149,757 )     23,503       (6,010,919 )
                                                 
Shares issued for deferred debt issuance costs
    100,000       100       11,900       -       -       12,000  
                                                 
Shares issued upon conversion of convertible debentures
    1,660,312       1,661       313,798       -       -       315,459  
                                                 
Shares issued as payment on term debt
    900,000       900       224,100       -       -       225,000  
                                                 
Discount on convertible debentures
    -       -       739,784       -       -       739,784  
                                                 
Detachable warrants vested upon conversion of convertible debentures
    -       -       136,776       -       -       136,776  
                                                 
Warrants issued for deferred debt issuance costs
    -       -       127,327       -       -       127,327  
                                                 
Warrants issued for services
    -       -       31,400       -       -       31,400  
                                                 
Stock options expensed
    -       -       141,660       -       -       141,660  
                                                 
Comprehensive loss, October 31, 2011
    -       -       -       (2,381,068 )     4,615       (2,376,453 )
                                                 
Balance, October 31, 2011
    62,217,715     $ 62,218     $ 47,782,523     $ (54,530,825 )   $ 28,118     $ (6,657,996 )
 
The accompanying notes are an integral part of these condensed consolidated financial statements
 
 
10

 

Dot VN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)

   
For the Six Months Ended
October 31,
 
   
2011
   
2010
 
             
Cash flows from operating activities:
           
Net loss
  $ (2,381,068 )   $ (2,957,476 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
               
Depreciation and amortization
    18,852       12,372  
Accrued interest expense
    365,590       424,682  
Equity in loss of IT.VN
    -       24,207  
Amortization of deferred debt issuance costs
    108,142       1,636  
Amortization of service warrants
    46,747       -  
Amortization of debt discounts
    791,775       915,607  
Detachable warrants vested upon conversion of convertible debentures
    136,776       -  
Stock options expensed
    141,660       720,539  
Stock issued to employees
    -       990  
Amortization of stock issued for services
    51,000       -  
Changes in operating assets and liabilities:
               
Decrease (increase) in accounts receivable
    48,640       (14,613 )
Decrease in inventory
    22,688       57,000  
Decrease (increase) in prepaid expenses and other current assets
    1,297       (3,021 )
Decrease  (increase) in other noncurrent assets
    11,853       10,353  
Increase (decrease) in accounts payable
    13,701       (4,722 )
Increase (decrease) in customer deposits
    14,007       (1,976 )
Increase in accrued liabilities
    414,099       373,487  
Net cash (used in) operating activities
    (194,241 )     (440,935 )
                 
Cash flows from investing activities:
               
Purchase of equipment
    (25,840 )     (10,713 )
Purchase of intangible assets
    (87 )        
Cash advanced to IT.VN
    -       (60,000 )
Net cash (used in) investing activities
    (25,927 )     (70,713 )
                 
Cash flows from financing activities:
               
Proceeds from convertible debentures
    95,000       -  
Payment of deferred debt issuance costs
    (5,500 )     -  
Proceeds from term notes
    -       102,531  
Repayment of term notes
    (49,198 )     (26,194 )
Advances from related parties
    118,317       211,976  
Repayments to related parties
    (61,073 )     -  
Proceeds from stock issuances
    -       106,300  
Net cash provided by financing activities
    97,546       394,613  
                 
Effect of exchange rate changes on cash
    9,567       7,236  
                 
Net (decrease) in cash
    (113,055 )     (109,799 )
Cash, beginning of the period
    132,627       135,664  
Cash, end of the period
  $ 19,572     $ 25,865  
 
The accompanying notes are an integral part of these condensed consolidated financial statements
 
 
11

 

Dot VN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)

   
For the Six Months Ended
October 31,
 
   
2011
   
2010
 
             
Non-cash investing and financing activities:
           
Increase in construction in progress from accrued interest
  $ 42,784     $ 35,116  
Common stock issued in exchange for convertible debentures
  $ 315,459     $ -  
Common stock issued for services
  $ -     $ 23,500  
Common stock issued as payment on term debt
  $ 225,000     $ -  
Common stock issued as payment of deferred debt issuance costs
    12,000       -  
                 
Supplemental cash flow disclosure:
               
Interest paid
  $ 18,521     $ 29,001  
Taxes paid
  $ -     $ 3,900  
 
The accompanying notes are an integral part of these condensed consolidated financial statements
 
 
12

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011


1.      Condensed consolidated financial statements

The accompanying October 31, 2011 condensed consolidated financial statements have been prepared by the Company without audit.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at October 31, 2011 and 2010 and for all periods presented have been made.  Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  It is suggested that these condensed consolidated financial statements be read in conjunction with the Company's April 30, 2011 audited consolidated financial statements and related notes included in the Company’s most recent Form 10-K as filed with the Securities and Exchange Commission.  The results of operations for periods ended October 31, 2011 and 2010 are not necessarily indicative of the operating results for the full years.

2.      Organization

The Company

Dot VN, Inc., its subsidiaries, and its predecessors (the “Company” or “Dot VN”), is a leading technology company deploying cutting edge infrastructure solutions and innovative online services and solutions focused on the Vietnamese and South East Asian markets.  Dot VN provides first class Internet related services including domain name registration, web hosting and Internet advertising through its management of the INFO.VN platform and web portal.  Dot VN is also focused on commercializing cutting edge infrastructure technology in the South East Asian region.  Dot VN has signed agreements with industry leaders in the data center and wireless sectors to develop a market for their products in the region.  In order to maximize the benefits the Company can derive from the technology, the Company also intends:

·
to drive growth in registrations of the Vietnamese ‘.vn’ country code top level domain names (“ccTLD”);
·
to develop and operate industry leading web portals and online services;
·
to build and operate Internet data centers based on micro-modular data center technology  in major city centers in Vietnam;
·
to commercialize the use of multi-gigabit capacity virtual fiber systems, a wireless point-to-point layer one solution;
·
to commercialize the use of micro-modular data center solutions; and
·
to identify, deploy and commercialize best of breed technologies and applications in Vietnam.

Dot VN was incorporated in the State of Delaware on May 27, 1998, under the name Trincomali Ltd. (“Trincomali”).  Over the course of its history, Trincomali underwent additional name changes until being renamed Malers, Inc. (“Malers”) on April 28, 2005.  On July 17, 2006, Malers completed an Agreement and Plan of Merger with Dot VN, Inc., a California corporation (“Dot VN CA”), the completion of which transaction resulted in Malers being renamed “Dot VN, Inc.” and Dot VN CA was renamed Hi-Tek Multimedia, Inc. becoming a wholly owned subsidiary of the Company.  Final state regulatory approval was received on August 17, 2006.  For accounting purposes, the acquisition has been treated as a recapitalization of Dot VN CA with Dot VN CA as the acquirer (reverse acquisition).  Dot VN CA was treated as the acquirer for accounting purposes because after the acquisition the shareholders of Dot VN CA controlled Malers and the officers and directors of Dot VN CA assumed the same positions at Malers; Malers is the surviving entity for legal purposes.  The historical financial statements prior to July 17, 2006 are those of Dot VN CA.

Dot VN has signed agreements with the Vietnamese Internet Network Information Center (“VNNIC”) to serve as the only domain name registrar empowered with independent authority to approve and register in real time, without VNNIC participation, Vietnamese domain names and we are the only registrar authorized to process all third level registrations online which provides Dot VN with a competitive advantage vis-à-vis other domain name registrars (the “VNNIC Registrars Agreement”).  The current VNNIC Registrars Agreement has no fixed term.  On May 25, 2009, the Company signed an exclusive rights agreement with VNNIC to promote and advertise the registration of the ‘.vn’ ccTLD with the commercialization of a pay-per-click (“PPC”) parking page program for ‘.vn’ domain registrations; VNNIC directs all Internet traffic requesting a non-existent or expired domain name to a web page managed by the Company which Dot VN will leverage towards developing industry leading online services and web portals.  On February 22, 2011, the Company signed an agreement with VNNIC which designates Dot VN as VNNIC’s sole partner in developing, promoting and managing the Vietnamese native language internationalized domain name (the “Vietnamese IDNs”) system.
 
 
13

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011


2.      Organization (continued)

The Company (continued)
 
In response to the continued development of Internet access and online services, the Company has expanded our business to encompass two additional sectors: (i) online services and (ii) infrastructure solutions.  In connection with this shift, we are beginning to offer content through our main web portal INFO.VN, and are developing products and services for consumers based on a “freemium” model, which offers users both free and paid premium services, in an effort to attract and engage a broader group of consumers and encourage adoption of our upgraded premium services.

Consistent with our focus on content, online services and generating online advertising revenues, we have begun executing a long term strategic plan to reinvigorate growth in our revenues and profits by taking advantage of the Vietnamese market’s migration of commerce, information and advertising to the Internet.  Our strategy is to focus our resources on Dot VN’s core competitive strengths in web portals, consumer and business applications, while expanding the presence of our advertising and paid services, content, product and service offerings on multiple platforms and digital devices centered on Dot VN’s INFO.VN web portal.  Particular areas of strategic emphasis include:

·
Developing Exclusive Content Offerings. We are expanding our offerings of relevant and engaging online consumer content by focusing on the creation and development of exclusive original content targeted at the Vietnamese Market.
·
Pursuing Local Focused Initiatives. As of 2009, there were over 415,000 registered businesses in Vietnam.  We believe that there are significant opportunities for growth in the area of local content, platforms and services, by providing comprehensive listings covering all geographic areas from local neighborhoods to major metropolitan areas.  By enhancing these local offerings we seek to provide consumers with a complete neighborhood experience.
·
Increasing Advertising Sales on Our Own Properties and Developing Third Party Network. We seek to provide premium local and international advertisers with effective and efficient means of reaching Vietnamese consumers.  In addition, we seek to create a best of breed third-party advertising network by developing an open, transparent and easy-to-use advertising system that allows advertisers and publishers the ability to find their ideal match.
·
Becoming a Consumer-Friendly Retailer of Subscription Products and Services. Given the nascent stage of online payment in Vietnam, we seek to develop, test and market a first of its kind subscription processing service which manages products and services that are owned by us and by third parties.  To facilitate this goal, we are planning to develop a single, consumer-facing platform that will allow us to manage and distribute these additional online products as well as our premium services.

INFO.VN offerings include content produced through a large network of content providers, which includes established journalists and other writers aggregated into one convenient web portal “INFO.VN”.  Featured offerings will include the following:

·
News & Information;
·
Travel and Culture;
·
Entertainment and Sports; and
·
Marketplace Solutions (including Classified Ads and Business Directory Services).

In addition to online services, Dot VN is currently in the process of designing an Internet data center (“IDC” in the singular or “IDCs” in the plural) which will serve as an internal data and telecommunications network within the country of Vietnam for Dot VN’s Online Services.  The IDCs will provide web hosting, collocation, and disaster recovery services as well as serve as the basic infrastructure for additional Internet and data technologies such as virtual fiber connectivity, distance e-learning and e-government projects.  The Company has secured a 35-year lease, ending September 21, 2043, for approximately 8,768 square meters of land in the Danang Industrial Zone in Danang City, Vietnam upon which it intends to construct a dedicated IDC building.  The IDC developments are anticipated to occur in the mid-term.  In the long term, the Company intends to develop additional IDCs in the rest of the Country of Vietnam.
 
 
14

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011


2.      Organization (continued)

The Company (continued)
 
Dot VN has a signed agreement with E-Band Communications Corporation providing the Company the right to distribute E-Band’s multi-gigabit capacity virtual fiber systems and related E-Band technology and services (the “E-Band Products”) in Vietnam, as well as, the right to distribute E-Band Products in Cambodia, Thailand and Laos.

Dot VN has a signed agreement with Elliptical Mobile Solutions, LLC (“EMS”) providing the Company the exclusive right to distribute EMS’s micro-modular data centers solutions and related technology and services (the “EMS Products”) in Vietnam, and the non-exclusive right to distribute EMS Products in Asia.

Dot VN will continue to explore and test, and analyze, new and best of breed technologies and applications for deployment in Vietnamese and South East Asian markets.

3.      Inventories

Inventories at October 31 and April 30, 2011 consisted of the following:

 
October 31,
 
April 30,
 
 
2011
 
2011
 
                                                                                    
 
 
   
 
 
Products, held in Vietnam
  $ -     $ 22,688  
Total inventories
  $ -     $ 22,688  

Inventories consists of micro-modular data centers (“MMDC”) units manufactured by EMS stated at the lower of cost, using the first-in first-out method, or market.  The MMDC unit in inventory at April 30, 2011 was shipped to Singapore on May 22, 2011 at the request of EMS for a credit on our account.

4.      Prepaid expenses and other current assets

Prepaid expenses and other current assets at October 31 and April 30, 2011 consisted of the following:

   
October 31,
   
April 30,
 
   
2011
   
2011
 
                                                                                    
 
 
   
 
 
Prepaid expenses and other advances
  $ 26,037     $ 81,699  
Prepaid land lease, Danang City, Vietnam
    209,000       215,829  
Vietnam value added tax (“VAT”) receivable
    4,818       3,368  
Domain registration deposits
    2,033       7,514  
Miscellaneous receivable
    28,924       21,711  
      270,812       330,121  
Less prepaid land lease included in other noncurrent assets  (see Note 9)
    202,447       209,167  
Total prepaid expenses and other current assets
  $ 68,365     $ 120,954  

 
15

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011


4.      Prepaid expenses and other current assets (continued)

On January 15, 2011, in accordance with the terms on a twelve month consulting agreement the Company issued 600,000 restricted shares of the Company’s Common Stock at an agreed contract rate of $0.25 per share to Tomasovich Development.  The Company recorded $102,000 as a prepaid expense based on the market close of $0.17.  Consulting expense charged to operations was $51,000 and $29,750 for the six months ended October 31, 2011 and the year ended April 30, 2011.  The balance as of October 31 and April 30, 2011 was $21,250 and $72,250, respectively.

On August 21, 2008, Dot VN Company, Ltd. (Danang City), an entity existing under the laws of the Country of Vietnam (“Dot VN Danang”), a wholly owned subsidiary of the Dot VN, Inc., entered into a Land Sublease Agreement (the “Land Sublease”) with Massda Land Company Limited, an entity existing under the laws of the Country of Vietnam.  Pursuant to the Land Sublease, Dot VN Danang leases approximately 8,768 square meters of land known as Lot 47, Danang Industrial Zone, Son Tra District, Danang City, Vietnam, for the express purpose of building an Internet data center and related uses, for a term of approximately 35 years expiring September 21, 2043.  Base rent is $32/square meter, excluding the value added tax (“VAT”) and other possible fees and costs, for the term is payable in three installments of 50%, 30% and 20%.  Base rent (excluding VAT) of $140,293, $84,175 and $56,118 was paid September 22, 2008, March 16, 2009 and August 27, 2009, respectively.  Lease expense charged to operations was $3,314 and $7,035 for the six months ended October 31, 2011 and the year ended April 30, 2011.

Dot VN Danang is required to bill and collect from its customers a Ten Percent (10%) VAT.  In addition, Dot VN Danang can offset its obligation to pay the VAT collected from its customers with the VAT it pays to others during the tax reporting period (typically a calendar quarter) and can request a refund, if the net amount overpaid/collected is greater than 200,000,000 Vietnamese Dong (“đ”) (approximately $10,000).  On April 22, 2009, for the period from inception through December 31, 2008, Dot VN Danang received a $13,000 refund of VAT paid, principally on the first payment of the Land Sublease.  On November 4, 2009, for the nine month period ending September 30, 2009, Dot VN Danang received a $16,276 refund of VAT paid, principally on the second and final payments of the Land Sublease.  In addition, Dot VN Danang has paid $3,908 of accumulated VAT during the twenty-five month period ending October 31, 2011, for which it will request a future refund from the taxing authority.  In addition, IT.VN is also required to bill and collect from its customers a Ten Percent (10%) VAT and can offset its obligation to pay the VAT collected from its customers with the VAT it pays to others during the tax reporting period.  As of October 31, 2011, IT.VN has $910 of net VAT paid in excess of amounts collected from its customers and will request a future refund from the taxing authority.

The Company maintains a credit balance with the VNNIC from which it pays the domain name registration and renewal fees incurred daily.  The balance with VNNIC as of October 31 and April 30, 2011 was $2,033 and $7,514, respectively.  In addition, the Company maintains nominal deposits with other registrars.

During the year ended April 30, 2011, the Company provided administrative and technical support and office space to Business.VN, Inc., a Nevada corporation, for an aggregate fee of $2,500 per month for May and June 2010 and $1,500 per month from July 2010 through January 2011.  The monthly charge was reduced, effective July 1, 2010, to reflect the reduced level of services and office space being provided to Business.VN, further on February 1, 2011 the monthly charge was stopped when the services and office space provided to Business VN were terminated.  Business.VN, which develops travel related Internet applications focused on the country of Vietnam, is majority owned by Hi-Tek, Inc. a privately held California corporation (“Hi-Tek Private”), previously a related party (see Note 11).  On July 25, 2010, Hi-Tek Private instructed the Company to reduce the debt it owes to Hi-Tek Private (see Note 11) by $35,000 in satisfaction of the June 30, 2010 balance owed by Business.VN to the Company.  The remaining balance owed the Company as of October 31 and April 30, 2011 was $10,500.

5.      Prepaid warrant expense

The Company has issued warrants for the purchase of shares of the Company’s restricted common stock in connection with raising equity and debt financing and for other professional services.  The fair value of warrants issued is determined in accordance with Codification topic 470-20 (see Note 16).  The Company recognizes these costs on a straight-line basis; (i) detachable warrants issued in connection with debt instruments are recorded as debt discount (see Note 10) and amortized over the life of the debt to interest expense, (ii) warrants issued as deferred debt issuance costs are recorded as deferred charges (see Note 9) and amortized over the life of the debt to finance expense and (iii) warrants issued for services are recorded as a prepaid warrant expense and amortized over the requisite service period to consulting fees.  Changes in the carrying amounts of prepaid service warrants are as follows:
 
 
16

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011


5.      Prepaid warrant expense (continued)
 
   
October 31,
   
April 30,
 
   
2011
   
2011
 
                                                                                    
 
 
   
 
 
Balance, beginning of the year
  $ 17,904     $ -  
Warrants issued
    31,400       63,943  
Amortization of warrants
    46,747       46,039  
Balance, end of period
  $ 2,558     $ 17,904  

6.      Notes receivable

On January 31 and February 9, 2007, the Company issued a series of convertible debentures (see Note 10) for an aggregate of $1,148,212 due January 31, 2009 (the “February Financing”) which convert at the option of each individual noteholder (the “February Investors”) into restricted shares of the Company’s Common Stock at $1.00 per share.  The February Financing was funded in conjunction with a like amount of convertible debentures issued concurrently by Spot-On to the February Investors (the “Spot-On Debenture”).  The February Financing terms required that the convertible debentures issued by Spot-On be convertible into either membership units of Spot-On or common stock of the Company, at the option of the February Investors.  Upon the February Investors’ election to convert a Spot-On Debenture into the Company’s Common Stock the Spot-On Debenture is assigned and transferred into the name of the Company (the “Assigned Spot-On Debentures”) at which time the Company issues the Common Stock and records a note receivable.  Future monthly interest payments, at Ten Percent (10%) per annum, accrue for the benefit of the Company; during the six months ended October 31, 2011 and the year ended April 30, 2011 interest of $11,908 and $23,621 has accrued, respectively.  On January 31, 2009, at maturity, the Spot-On Conversion right expired and the Assigned Spot-On Debentures principal and accrued interest was due to be paid by Spot-On.  On January 30, 2009, the Company received a request from Spot-On to (i) extend the maturity date to March 31, 2009 and (ii) waive any defaults under the Assigned Spot-On Debentures or any of the related documents or events of default which are outstanding or have occurred (the “Spot-On Offer”).  The Company did not accept the Spot-On Offer and continues discussing options to receive the full amount due, with accrued interest.  To date the Company has not received any payment from Spot-On on the Assigned Spot-On Debentures and Spot-On is unable to provide the Company with a firm repayment date as they negotiated to raise funds to satisfy their obligation under the Spot-On Debentures.

Spot-On is a private company and does not furnish the Company with financial statements to evaluate their ability to pay the Assigned Spot-On Debentures principal and accrued interest, currently in default.  The Company’s ability to collect the Assigned Spot-On Debentures is dependent on Spot-On’s ability to raise additional financing.  Due to the uncertainty of collection the Company has recorded a bad debt expense for the full amount of the Assigned Spot-On Debentures principal and does not record the monthly accrual of interest.  Interest income ($86,348) will be recognized upon collection from Spot-On.

   
October 31,
   
April 30,
 
   
2011
   
2011
 
                                                                                    
 
 
   
 
 
Notes receivable
  $ 236,213     $ 236,213  
Less allowance
    236,213       236,213  
Notes receivable, net
  $ -     $ -  

 
17

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011


7.      Equipment

Equipment at October 31 and April 30, 2011 consisted of the following:

   
October 31,
   
April 30,
 
   
2011
   
2011
 
                                                                                    
 
 
   
 
 
Computer and server equipment
  $ 168,241     $ 144,183  
MMDC equipment
    32,668       33,215  
Other furniture and equipment
    15,360       15,073  
Leasehold improvements
    3,293       3,348  
Internet data center, construction in progress
    880,942       838,158  
      1,100,504       1,033,977  
Less accumulated depreciation and amortization
    94,299       75,886  
Equipment, net
  $ 1,006,205     $ 958,091  

Depreciation expense charged to operations was $18,852 and $31,836 for the six months ended October 31, 2011 and the year ended April 30, 2011, respectively.  Amortization expense charged to operations was zero and $1,347 for the six months ended October 31, 2011 and the year ended April 30, 2011, respectively.  Capitalized interest on borrowings related to the Internet data center was $42,784 and $78,828 for the six months ended October 31, 2011 and the year ended April 30, 2011, respectively.

8.      Intangibles assets

On October 16, 2006, the Company acquired the rights to the US trademark “Dot VN” including its logo and certain related domain names for $360,000 in the form of a two year convertible note (see Note 10) from Hi-Tek Private, previously a related party (see Note 11).  The trademark was determined to have an indefinite useful life and is not amortized.  On March 8, 2011, the Company filed a declaration of continued use with the United States Patent and Trademark Office to maintain the US Trademark’s registration which was granted on March 18, 2011.

On June 29, 2007, the Company acquired the rights to the Vietnam trademark “Dot VN” from Business.com.VN, Co. Ltd. for 285,000 restricted shares of the Company’s common stock and a convertible note (see Note 10) in the amount of $100,000 due in one year (the “Business.com.VN Agreement”).  The note, which accrues no interest during its one year term, was recorded at its present value based on an 8% interest rate assumption.  The aggregate consideration of $662,336 was recorded as an indefinite lived intangible asset and is not amortized.

On December 21, 2009, the Company filed a U.S. trademark application on “INFO.VN” and paid $325 in filing fees.  On April 12, 2011, the “INFO.VN” trademark application was approved for registration on the supplemental register; the Company is awaiting a response for inclusion on the primary register.

On July 23, 2010, IT.VN filed Vietnam trademark applications on “INFO.VN” and “IT.VN” and paid 10,000,000đ (equivalent to $482) in filing fees.  On September 6, 2010, the Vietnam trademarks “INFO.VN and “IT.VN” were provisionally issued by the Vietnamese government to IT.VN.  On August 29, 2011 upon the payment of 1,840,000đ (equivalent to $87) the two Vietnam trademarks were affirmed for a ten year period.  The Company is the primary beneficiary of the variable interest entity IT.VN.
 
 
18

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011
 
8.      Intangibles assets (continued)

Indefinite lived assets are not amortized, but instead are evaluated for impairment annually and if events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with Codification topic 350-30.  If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.  After an impairment loss is recognized, the adjusted carrying amount of the intangible asset is its new accounting basis.  Subsequent reversal of a previously recognized impairment loss is prohibited.  The change in the carrying amount of intangible assets is as follows:

   
October 31,
   
April 30,
 
   
2011
   
2011
 
                                                                                    
 
 
   
 
 
Balance, beginning of the period
  $ 1,023,143     $ 1,022,661  
IT.VN trademark application (Vietnam)
    44       241  
INFO.VN trademark application (Vietnam)
    43       241  
Foreign currency translation change
    (8 )     -  
Balance, end of the period
  $ 1,023,222     $ 1,023,143  

9.      Other noncurrent assets

Other noncurrent assets at October 31 and April 30, 2011 consisted of the following:

   
October 31,
   
April 30,
 
   
2011
   
2011
 
                                                                                    
 
 
   
 
 
Deposits
  $ 11,434     $ 12,043  
Deferred debt issuance costs
    135,368       106,655  
Prepaid land lease Danang City, Vietnam (see Note 4)
    20,447       209,167  
Total other noncurrent assets
  $ 349,249     $ 327,865  

Following the January 31, 2009 maturity of the convertible debentures (see Note 10) the Company contacted the February Investors for an extension of the due date in exchange for modified terms, to include an amortized term note (see Note 11) and warrants.  The Company issued a series of warrants to thirteen (13) February Investors for the purchase of an aggregate of 36,623 restricted shares of the Company’s Common Stock (see Note 16) with a fair value of $10,754 capitalized as a deferred charge associated with the issuance of these debt instruments.  The deferred charge is amortized on a straight-line basis over the approximate thirty-six month term of the debt with $1,636 and $3,272 expensed in for the six months ended October 31, 2011 and the year ended April 30, 2011, respectively.

In connection with the December 30, 2009, issuance of a series of convertible debentures (see Note 10) the Company paid the placement agent a Ten Percent (10%) cash fee ($3,000).  The Company capitalized the fee as a deferred charge associated with the issuance of these debt instruments.  The deferred charge is amortized on a straight-line basis over the six month term of the debt with zero and $1,000 expensed in the six months ended October 31, 2011 and the year ended April 30, 2011, respectively.

In connection with the March 12, 2010, issuance of a series of convertible debentures (see Note 10) the Company paid the placement agent a Ten Percent (10%) cash fee ($35,500).  The Company capitalized the fee as a deferred charge associated with the issuance of these debt instruments.  The deferred charge is amortized on a straight-line basis over the thirty-six month term of the debt with $5,917 and $11,833 expensed in the six months ended October 31, 2011 and the year ended April 30, 2011, respectively.
 
 
19

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

9.      Other noncurrent assets (continued)

In connection with the December 10, 2010 amendments of three term debt agreements with IDCG SA de CV, a corporation established under the laws of the Country of Mexico (“IDCG SA”) the Company issued a series of three warrants for the purchase of shares of the Company’s restricted common stock.  The December 31, 2010 due date of each loan was extended to September 30, 2011 with no other change to the terms of the notes in exchange for a warrant for the purchase an aggregate of 1,000,000 restricted shares of the Company’s common stock at $0.25 valid for a term of three years.  The estimated aggregate fair value of $157,229 was capitalized as a deferred charge associated with the loan extensions and will be amortized on a straight-line basis over the nine month extension period.  On March 31, 2011, the Company issued IDCG 1,033,579 restricted shares of the Company’s Common Stock at $0.25 per unit as the full and final payment of the second of the three term notes recorded as a $258,395 payment of Vina Mex Second Loan (see Note 11).  The unamortized deferred charge on the second of the three notes ($20,964) was expensed.  An aggregate of $69,879 and $87,350 was expensed in the six months ended October 31, 2011 and the year ended April 30, 2011, respectively.

In connection with the January 18, 2011 cancellation of the two month promissory note and issuance of a new six month promissory note the Company issued G.F. Galaxy Corporation a warrant for the purchase of 200,000 shares of the Company’s restricted common stock at $0.25 valid for a term of two years (see Note 11).  The estimated fair value of $26,064 was capitalized as a deferred charge associated with the loan extension and will be amortized on a straight-line basis over the six month period with $11,294 and $14,769 expensed in the six months ended October 31, 2011 and the year ended April 30, 2011, respectively.

In connection with the May 26, 2011 and August 23, 2011, issuance of convertible debentures (see Note 10) the Company paid Asher Enterprises, Inc. (“Asher”) a cash fee of $2,500 and $3,000 for loan origination costs, respectively.  The Company capitalized the fees as a deferred charge associated with the issuance of this debt instruments.  The deferred charge is amortized on a straight-line basis over the nine month term of each debt instrument with $2,056 and zero expensed in the six months ended October 31, 2011 and the year ended April 30, 2011, respectively.

In connection with the August 18, 2011 cancellation of the January 18, 2011 promissory note and issuance of a new eleven month promissory note, the Company issued G.F. Galaxy Corporation 100,000 restricted shares on the Company’s Common Stock recorded as a $12,000 deferred debt issuance costs based on the market close of $0.12 and a warrant for the purchase of 1,300,000 shares of the Company’s restricted common stock recorded at the estimated fair value of $127,327 as a deferred debt issuance costs associated.  The aggregate $139,327 will be amortized on a straight-line basis over the eleven month period of the loan extension with $25,332 and zero expensed in the six months ended October 31, 2011 and the year ended April 30, 2011, respectively.

 
20

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

10.      Convertible notes

As of October 31, 2011, convertible notes consist of the following:

   
Issued date
 
Maturity
 
Conversion price
   
Amount
   
Debt discount
   
Accrued interest
   
Net amount
 
                                       
Convertible Note 1
 
Oct. 16, 2006
 
Dec. 31, 3011
  $ 0.10     $ 200,000     $ -     $ 1,713     $ 201,713  
Convertible Notes 2
 
Feb. 9, 2007
 
Jan. 31, 2009
  $ 1.00       -       -       -       -  
Convertible Note 3
 
June 29, 2007
 
Dec. 31, 2010
  $ 0.20       -       -       -       -  
Convertible Notes 4
 
Aug. 1, 2007
 
Aug. 1, 2008
  $ 1.43       -       -       -       -  
Convertible Notes 5
 
Aug. 14,2008
 
Mar. 31, 2009
  $ 1.43       -       -       -       -  
Convertible Notes 6
 
Apr. 20, 2009
 
Dec. 31, 2009
  $ 0.30       -       -       -       -  
Convertible Note 7
 
July 6, 2009
 
Mar. 31, 2012
  $ 0.11       113,244       -       23,048       136,292  
Convertible Notes 8
 
Nov. 17, 2009
 
Mar. 31, 2012
  $ 0.11       857,943       -       44,014       901,957  
Convertible Notes 9
 
Dec. 30, 2009
 
June 30, 2010
  $ 0.28       25,000       -       3,966       28,966  
Convertible Notes 10
 
Mar. 12, 2010
 
Mar. 12, 2013
  $ 0.19       561,333       (144,832 )     80,390       496,891  
Convertible Notes 11
 
Mar. 12, 2010
 
Mar. 12, 2013
  $ 0.19       678,667       (171,172 )     111,094       618,589  
Convertible Notes 12
 
June 17, 2010
 
June 17, 2013
  $ 0.10       617,246       (77,662 )     83,613       523,197  
Convertible Note13
 
May 26, 2011
 
Feb. 28, 2012
            45,000       (20,000 )     1,519       26,519  
Convertible Note14
 
Aug. 23, 2011
 
May 25, 2012
            50,000       (25,926 )     660       24,734  
                      3,148,433       (439,592 )     350,017       3,058,858  
Less notes 1, 7, 8 and 11 included in due to related parties (see Note 12)
      1,849,854       (171,172 )     179,869       1,858,551  
Less notes 9, 13 and 14 included in short-term convertible debt
      120,000       (45,926 )     6,145       80,219  
Long-term convertible notes, net of current portion
    $ 1,178,579     $ (222,494 )   $ 164,003     $ 1,120,088  

Convertibles Note 1 for $360,000 was issued on October 16, 2006 with a two year term, converts at the option of the holder into restricted shares of the Company’s Common Stock at $1.00 per share (the “Conversion Price”) and bears an interest rate of Ten Percent (10%) per annum.  The Conversion Price shall be adjusted downward in the event the Company issues common stock (or securities exercisable for or convertible into or exchangeable for common stock) at a price below the Conversion Price, to a price equal to such issue price.  The note is payable to Hi-Tek Private, a former related party (see Note 11), (the “Hi-Tek Trademark Loan”) (see Note 8).  The beneficial conversion feature was calculated to be $360,000 at the time of issuance in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  On October 13, 2008, the Hi-Tek Trademark Loan was amended to extend the due date to June 30, 2009, with no other change to the terms of the note or the conversion feature.  On June 25, 2009, the Hi-Tek Trademark Loan was amended to extend the due date to December 31, 2009, with no other change to the terms of the note or the conversion feature.  On December 4, 2009, the Hi-Tek Trademark Loan was amended to extend the due date to June 30, 2010, with no other change to the terms of the note or the conversion feature.  On May 19, 2010, the Hi-Tek Trademark Loan was amended to extend the due date to December 31, 2010 and split the note in two separate convertible notes.  The first note for $200,000 includes a new provision for the monthly payment of interest effective July 1, 2010 in arrears, there were no other change to the terms of the original note or the conversion feature (“Hi-Tek Trademark Loan One”).  The second note for $314,968 did not change the interest accrual or payment terms; there were no other change to the terms of the original note or the conversion feature (“Hi-Tek Trademark Loan Two”).  Also on May 19, 2010, Hi-Tek Private assigned the Hi-Tek Trademark Loan One to Mr. Howard Johnson, a related party.  Mr. Johnson is the father of Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors and Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director.  In accordance with Codification topic 470-20, there is no beneficial conversion feature at the time of the four extensions.  On January 14, 2010, the Company closed an offering of convertible debentures (see Convertible Notes 9) which at the option of the holder converts into restricted shares of the Company’s Common Stock at $0.30 per share (the “December Debentures”).  Accordingly, the Conversion Price of the Hi-Tek Trademark Loan is reduced to $0.30 per share consistent with the December Debentures.  On March 12, 2010, the Company closed an offering of convertible debentures (see Convertible Notes 10 and 11) which at the option of the holder converts into restricted shares of the Company’s Common Stock at $0.20 per share (the “March Debentures”).  Accordingly, the Conversion Price of the Hi-Tek Trademark Loan is reduced to $0.20 per share consistent with the March Debentures.  The additional beneficial conversion feature was calculated to be zero on January 14, 2010 and March 12, 2010 in accordance with Codification topic 470-20.  On December 13, 2010, Hi-Tek Private elected to convert the full amount due on the Hi-Tek Trademark Loan Two ($333,365) into 1,666,825 restricted shares of the Company’s Common Stock at $0.20 per share.  On December 28, 2010, the Hi-Tek Trademark Loan One was amended to extend the due date to June 30, 2011, with no other change to the terms of the note or the conversion feature.  Additionally, on June 29, 2011, the Hi-Tek Trademark Loan One was further amended to extend the due date to December 31, 2011, with no other change to the terms of the note or the conversion feature.  In accordance with Codification topic 470-20, there is no beneficial conversion feature at the time of the extensions.  On August 18, 2011, the Company issued a promissory note (see Term Note 34) which included a warrant for 1,300,000 restricted shares of the Company’s Common Stock exercisable at $0.10 per share (the “Galaxy 3rd. Loan”).  Accordingly, the Conversion Price of the Hi-Tek Trademark Loan One is reduced to $0.10 per share consistent with the Galaxy 3rd. Loan.  The additional beneficial conversion feature was calculated to be zero on August 18, 2011 in accordance with Codification topic 470-20.  As of October 31, 2011, the unamortized debt discount was zero.  Accrued interest was $1,713 and zero on the Hi-Tek Trademark Loan One and the Hi-Tek Trademark Loan Two at October 31, 2011, respectively.  On December 5, 2011, pursuant to the terms of the Asher First Debenture the Company issued 333,333 shares of the Company’s Common Stock at a conversion price of $0.024 per share (the “Asher First Conversion”).  Accordingly, the Conversion Price of the Hi-Tek Trademark Loan One is reduced to $0.024 per share consistent with the Asher First Conversion.  The additional beneficial conversion feature was calculated to be zero on December 5, 2011 in accordance with Codification topic 470-20.
 
 
21

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

10.      Convertible notes (continued)
 
Convertible Notes 2 are a set of sixteen (16) convertible debentures with an aggregate face value, net of conversions, of $949,500 issued January 31 and February 9, 2007 (the “February Debentures”) which are due January 31, 2009.  The convertible debentures bear no interest until July 2007 at which point they accrue Ten Percent (10%) per annum with interest payable monthly.  The Company accrued interest over the term of the February Debentures at an imputed rate of approximately Eight Percent (8%) per annum effective from the date the convertible debentures were issued.  The debentures converted at the option of each individual noteholder (the “February Investors”) into restricted shares of the Company’s Common Stock at $1.00 per share; representing a beneficial conversion feature.  In addition, the February Investor received a detachable warrant exercisable into restricted shares of the Company’s Common Stock; the number of shares of each warrant is equal to 30% of the note face value for an aggregate of 344,465 restricted shares.  The detachable warrants have an exercise price of $2.00 per share and a term of five years from the date of issuance.  The combined fair value of the beneficial conversion feature and detachable warrants, calculated in accordance with Codification topic 470-20, is limited to the proceeds of the debt and was allocated between the beneficial conversion feature and detachable warrants as $888,258 and $259,954, respectively.  The beneficial conversion feature and detachable warrants were recorded as debt discount with a corresponding credit to additional paid-in capital and were amortized over the life of the February Debentures.

The Company did not repay the $949,500 due the sixteen (16) February Investors and is negotiating an extension of the due date with the February Investors.  During March 2009, six (6) of the February Investors agreed to modify the terms of their February Debentures aggregating $125,000 as follows: (i) the February Debenture plus the unpaid liquidated damages ($10,125) are combined into a single amortized term note for each of the six (6) February Investors, (ii) interest accrues from February 1, 2009 at Twelve Percent (12%) per annum, (iii) a one-time Fifteen Percent (15%) principal payment was paid in March, and (iv) commencing April 1, 2009, the unpaid balance will be amortized over thirty-five (35) equal monthly payments.  On April 13, 2009, one (1) of the February Investors agreed to modify the terms of his $49,500 February Debentures as follows: (i) the February Debenture plus the unpaid liquidated damages ($4,455) are combined into a single amortized term note, (ii) interest accrues from February 1, 2009 at Twelve Percent (12%) per annum, (iii) a one-time Fifteen Percent (15%) principal payment was paid in April for March, and (iv) commencing April 1, 2009, the unpaid balance will be amortized over thirty-five (35) equal monthly payments.  During May 2009, three (3) of the February Investors agreed to modify the terms of their February Debentures aggregating $112,500 as follows: (i) the February Debenture plus the unpaid liquidated damages ($10,125) are combined into a single amortized term note for each of the three (3) February Investors, (ii) interest accrues from February 1, 2009 at Twelve Percent (12%) per annum, (iii) a one-time Fifteen Percent (15%) principal payment was paid in May, and (iv) commencing June 1, 2009, the unpaid balance will be amortized over thirty-six (36) equal monthly payments.  On August 25, 2009, three (3) of the February Investors agreed to modify the terms of their February Debentures aggregating $50,000 as follows: (i) the February Debenture plus the unpaid liquidated damages ($4,500) are combined into a single amortized term note, (ii) interest accrues from February 1, 2009 at Twelve Percent (12%) per annum, (iii) a one-time Fifteen Percent (15%) principal payment was paid in September, and (iv) commencing October 1, 2009, the unpaid balance will be amortized over thirty-nine (39) equal monthly payments.  In addition, warrants aggregating 36,623 restricted shares were issued to the thirteen (13) February Investors, upon agreeing to modify the terms of their February Debentures, with a $2 exercise price expiring on January 31, 2012 (collectively the “Extended Notes”).
 
 
22

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

10.      Convertible notes (continued)
 
On June 17, 2010, one (1) February Investor agreed to modify the terms of their February Debenture aggregating $500,000 as follows: (i) the unpaid February Debenture plus accrued interest at Ten Percent (10%) per annum for the period February 1, 2009 through May 31, 2010 was exchanged for a new $571,000 convertible debenture and (ii) the unpaid $45,000 in liquidated damages plus accrued interest at Ten Percent (10%) per annum for the period February 1, 2009 through May 31, 2010 was exchanged for a new $51,390 convertible debenture (collectively the “Vision Debentures”) (see Convertible Notes 12).  Unless otherwise converted into common stock of the Company, the Vision Debentures shall accrue interest at a rate of 10% per annum, interest payable in full, each calendar month starting with December 2010 to be paid on the first of the month and monthly thereafter on the first day of each month, in arrears for the prior month, in cash.  All outstanding principal and accrued and unpaid interest shall become due June 17, 2013.  At any time prior to or at the due date all principal and accrued interest due may be converted, in whole or in part at any time and from time to time, into common stock of the Company at $0.25 per share (the “Vision Conversion Price”) at the option of the holder; representing a beneficial conversion feature.  The fair value of the beneficial conversion feature, calculated in accordance with Codification topic 470-20, is $88,121.  The beneficial conversion feature is recorded as debt discount with a corresponding credit to additional paid-in capital and is amortized over the life of the Vision Debentures (three years).  If the Company, at any time while the amount of a debenture outstanding is equal to or greater than Fifty Percent (50%) of the debenture principal, shall issue securities or convertible securities, as defined, entitling the recipient to shares or the right to convert into shares of Common Stock at a price per share less than the Vision Conversion Price (the “New Securities Price”), then the Vision Conversion Price, of the so affected Vision Debenture, shall be reduced to the New Securities Price (the “New Vision Conversion Price”), as defined.

Two (2) February Investors holding February Debentures aggregating $112,500 have not responded to the Company’s request to modify their repayment terms, these amounts, which are no longer convertible into common stock of the Company, are included under term-debt as a current obligation (see Note 11).  The February Debentures were funded in conjunction with a like amount of convertible debentures issued concurrently by Spot-On Networks, LLC (“Spot-On”) to the February Investors.  The terms of the February Debentures required that the convertible debentures issued by Spot-On be convertible into either membership units of Spot-On or common stock of the Company (the “Spot-On Conversion”), at the option of the February Investors (see Note 6).  The Spot-On Conversion right expired on January 31, 2009.

On February 9, 2007, in connection with the February Debentures, the Company executed an investor’s registration rights agreement (the “IRRA”) by and between the February Investor participating in the February Debentures and the Company.  Pursuant to the terms of the IRRA, in connection with the February Debentures, the Company is required to file a registration statement on Form S-1 or SB-2 by August 15, 2007 (the “Registration Deadline”) and further required that the registration statement be declared effective 120 days from the date of the IRRA filing.  In the event that the Registration Deadline is not met, the February Investors shall be entitled to liquidated damages equal to One Percent (1%) of the outstanding convertible debentures issued in the February Debentures paid, at the option of the February Investors, in cash or restricted shares of the Company’s Common Stock (the “Liquidated Damages”) for every thirty (30) day period that the registration statement is not filed, limited to a total of ten such 30-day periods.  On August 10, 2007, in accordance with the requirements of Section 9 of the IRRA, the Company and certain February Debentures Investors representing two-thirds (2/3) of the amount invested executed an amendment to the IRRA whereby (i) the Registration Deadline was extended to September 15, 2007 (the “New Registration Deadline”); (ii) the February Investors received the Liquidated Damages for one month; and (iii) the registration statement must be declared effective within sixty (60) days if there are no comments by the SEC or within in ninety (90) days if SEC comments are received (the “Effectiveness Deadline”).  In the event that either the New Registration Deadline or the Effectiveness Deadline is not met, then the February Investors shall be entitled to the Liquidated Damages for every thirty (30) day period that the New Registration Deadline or the Effectiveness Deadline are not met, limited to a total of ten such 30-day periods (see Note 13).
 
 
23

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

10.      Convertible notes (continued)

Convertible Note 3 for $100,000 was issued on June 29, 2007 to Business.com.VN, a Vietnamese company, converts at the option of the holder into shares of the Company’s restricted Common Stock at $1.43 per share (the “Conversion Price”) and bears no interest during the one year term.  The note was recorded at the present value of $92,336 based on the stated default interest rate of Eight Percent (8%) per annum after the original maturity date of June 29, 2008 (see Note 8) (the “Business.com.VN Loan”).  The Conversion Price shall be adjusted downward in the event the Company issues common stock (or securities exercisable for or convertible into or exchangeable for common stock) at a price below the Conversion Price, to a price equal to such issue price.  The beneficial conversion feature was calculated to be $39,860 at the time of issuance in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  On July 23, 2008, the Business.com.VN Loan was amended to extend the due date to June 30, 2009 and accrue interest at the rate of Eight Percent (8%) per annum; there was no change to the conversion feature.  On June 25, 2009, the Business.com.VN Loan was amended to extend the due date to December 31, 2009, with no other change to the terms of the note or the conversion feature.  On December 4, 2009, the Business.com.VN Loan was amended to extend the due date to June 30, 2010, with no other change to the terms of the note or the conversion feature.  Additionally, on June 25, 2010, the Business.com.VN Loan was further amended to extend the due date to December 31, 2010, with no other change to the terms of the note or the conversion feature.  In accordance with Codification topic 470-20, there is no beneficial conversion feature at the time of the four extensions.  On January 14, 2010, the Company closed an offering of convertible debentures (see Convertible Notes 9) which at the option of the holder converts into restricted shares of the Company’s Common Stock at $0.30 per share (the “December Debentures”).  Accordingly, the Conversion Price of the Business.com.VN Loan is reduced to $0.30 per share consistent with the December Debentures; representing a beneficial conversion feature.  The additional beneficial conversion feature was calculated to be $52,476 on January 14, 2010 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  On March 12, 2010, the Company closed an offering of convertible debentures (see Convertible Notes 10 and 11) which at the option of the holder converts into restricted shares of the Company’s Common Stock at $0.20 per share (the “March Debentures”).  Accordingly, the Conversion Price of the Business.com.VN Loan is reduced to $0.20 per share consistent with the March Debentures; representing a beneficial conversion feature.  In accordance with Codification topic 470-20, there is no additional beneficial conversion feature on March 12, 2010.  The additional January 14, 2010 beneficial conversion feature is amortized over the remaining term (June 30, 2010) of the Business.com.VN Loan.  On December 13, 2010, Business.com.VN elected to convert the full amount due on the Business.com.VN Loan ($121,674) into 608,372 restricted shares of the Company’s Common Stock at $0.20 per share.

Convertible Notes 4 were a set of two individual notes with an aggregate face value of $3,978,132 issued August 1, 2007 to Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors, (50%) (the “TJ First Note”) and Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director, (50%) (the “LJ First Note”) issued in satisfaction of unpaid accrued salary, including interest, from January, 2003 through June, 2007 by each of Mr. Thomas Johnson and Dr. Lee Johnson under their respective employment agreements with the Company.  The notes are due August 1, 2008 and accrued interest monthly at Eight Percent (8%) per annum (see Note 12).  At the election of the holder, the amount due and owing pursuant to such note may be converted in restricted shares of the Company’s Common Stock at a per share price of $1.43 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into common stock) at a price below the Conversion Price, to a price equal to such issue price.  The beneficial conversion feature was calculated to be an aggregate of $1,446,594 at the time of issuance in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  On August 14, 2008, the unpaid notes and accrued interest ($343,401) were cancelled and replaced with new convertible notes with materially the same terms and conditions as Convertible Notes 4, with an aggregate face value of $4,321,533 issued to Mr. Thomas Johnson (50%) and Dr. Lee Johnson (50%) (see Convertible Notes 5).
 
 
24

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

10.      Convertible notes (continued)

Convertible Notes 5 are a set of two individual notes with an aggregate face value of $4,321,533 issued August 14, 2008 to Mr. Thomas Johnson (50%) (the “TJ Second Note”) and Dr. Lee Johnson (50%) (the “LJ Second Note”) in exchange for the unpaid balance owed under Convertible Notes 4 which were cancelled.  The notes were due February 15, 2009 and accrued interest monthly at Eight Percent (8%) per annum (see Note 12).  At the election of the holder, the amount due and owing pursuant to such note may be converted in restricted shares of the Company’s Common Stock at a per share price of $1.43 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into common stock) at a price (the “Subsequent Price”) below the Conversion Price, to a price equal to the Subsequent Price.  In accordance with Codification topic 470-20, there is no beneficial conversion feature at the time of issuance.  On February 15, 2009, the TJ Second Note and the LJ Second Note were amended to extend the due date thirty days to March 17, 2009 with no other change to the terms of the notes or the conversion feature.  On March 17, 2009, the TJ Second Note and the LJ Second Note were further amended to extend the due date fourteen days to March 31, 2009 with no other change to the terms of the notes or the conversion feature.  In accordance with Codification topic 470-20, there is no beneficial conversion feature at the time of the two extensions.  On April 20, 2009, the unpaid notes and accrued interest ($239,729) were cancelled and replaced with new convertible notes with materially the same terms and conditions as Convertible Notes 5, issued to Mr. Thomas Johnson (50%) and Dr. Lee Johnson (50%), except that in the new notes the adjusted Conversion Price is established as One Hundred Ten Percent (110%) of the Subsequent Price where previously the Subsequent Price became the adjusted Conversion Price (see Convertible Notes 6).

Convertible Notes 6 are a set of two individual notes with an aggregate face value of $5,769,316 issued April 20, 2009 to Mr. Thomas Johnson (50%) (the “TJ Third Note”) and Dr. Lee Johnson (50%) (the “LJ Third Note”) (i) in exchange for the unpaid balance owed under Convertible Notes 5 ($4,561,262) which were cancelled and (ii) in satisfaction of unpaid accrued salary and interest accruing since July 1, 2007 through January 31, 2009 by each of Mr. Thomas Johnson ($604,027) and Dr. Lee Johnson ($604,027) under their respective employment agreements with the Company.  The notes were due October 16, 2009 and accrued interest monthly at Eight Percent (8%) per annum (see Note 12).  At the election of the holder, the amount due and owing pursuant to such note may be converted in restricted shares of the Company’s Common Stock at a per share price of $0.30 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into or exchangeable for common stock) at a price (the “Subsequent Price”) below the Conversion Price times Ninety Percent (90%), to a price equal to such Subsequent Price times One Hundred Ten Percent (110%) (the “Adjusted Conversion Price”).  In accordance with Codification topic 470-20, there is no beneficial conversion feature at the time of issuance.  On October 12, 2009, the TJ Third Note and the LJ Third Note were amended to extend the due date to December 31, 2009 with no other change to the terms of the notes or the conversion feature.  In accordance with Codification topic 470-20, there is no beneficial conversion feature at the time of the extension.  On November 17, 2009, the Company agreed to a 50% conversion of the outstanding balances held by Mr. Thomas Johnson ($1,510,489.50) and Dr. Lee Johnson ($1,510,489.50) at $0.30 per share and issued 5,034,965 restricted shares of the Company’s Common Stock and a $1,510,489.41 convertible note due June 30, 2010 with materially the same terms as the cancelled notes each to Mr. Thomas Johnson and Dr. Lee Johnson, except that in the new notes the amount due and owing pursuant to such note may be converted, or any portion thereof, into restricted shares of the Company’s Common Stock (see Convertible Notes 8).
 
 
25

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

10.      Convertible notes (continued)

Convertible Note 7 for $113,244 was issued on July 6, 2009 to Mr. Louis P. Huynh, formerly the Company’s General Counsel, Executive Vice President of Operations and Business Development, Corporate Secretary and a Director, in satisfaction of unpaid accrued salary, including interest, from August 7, 2007 through July 6, 2009 under Mr. Huynh’s employment agreement with the Company (the “Huynh Note”).  The note was due October 16, 2009 and accrues interest monthly at Eight Percent (8%) per annum (see Note 12).  The Company has accrued interest of $23,048 at October 31, 2011.  The beneficial conversion feature was calculated to be zero at the time of issuance in accordance with Codification topic 470-20.  At the election of the holder, the amount due and owing pursuant to such note may be converted in restricted shares of the Company’s Common Stock at a per share price of $0.46 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into or exchangeable for common stock) at a price (the “Subsequent Price”) below the Conversion Price times Ninety Percent (90%), to a price equal to such Subsequent Price times One Hundred Ten Percent (110%) (the “Adjusted Conversion Price”).  On October 12, 2009, the Huynh Note was amended to extend the due date to December 31, 2009 with no other change to the terms of the note or the conversion feature.  On December 29, 2009, the Huynh Note was amended to extend the due date to June 30, 2010 with no other change to the terms of the note or the conversion feature.  On June 29, 2010, the Huynh Note was amended to extend the due date to December 31, 2010 with no other change to the terms of the note or the conversion feature.  On December 13, 2010, the Huynh Note was amended to extend the due date to September 30, 2011 with no other change to the terms of the note or the conversion feature.  Additionally, on September 29, 2011, the Huynh Note was further amended to extend the due date to March 31, 2012 with no other change to the terms of the note or the conversion feature.  In accordance with Codification topic 470-20, there is no beneficial conversion feature at the time of the five extensions.  On January 14, 2010, the Company closed an offering of convertible debentures (see Convertible Notes 9) which at the option of the holder converts into restricted shares of the Company’s Common Stock at $0.30 per share (the “December Debentures”).  Accordingly, the Adjusted Conversion Price of the Huynh Loan is reduced to $0.33 per share (the December Debentures conversion price of $0.30 times 110%); representing a beneficial conversion feature.  The additional beneficial conversion feature was calculated to be $40,732 on January 14, 2010 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The additional beneficial conversion feature was amortized over the remaining term (June 30, 2011) of the Huynh Note.  On March 12, 2010, the Company closed an offering of convertible debentures (see Convertible Notes 10 and 11) which at the option of the holder converts into restricted shares of the Company’s Common Stock at $0.20 per share (the “March Debentures”).  Accordingly, the Adjusted Conversion Price of the Huynh Loan is reduced to $0.22 per share (the March Debentures conversion price of $0.20 times 110%); representing a beneficial conversion feature.  The additional beneficial conversion feature was calculated to be $56,622 on March 12, 2010 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The additional beneficial conversion features are amortized over the remaining term (June 30, 2010) of the Huynh Note.  On August 18, 2011, the Company issued a promissory note (see Term Note 34) which included a warrant for 1,300,000 restricted shares of the Company’s Common Stock exercisable at $0.10 per share (the “Galaxy 3rd. Loan”).  Accordingly, the Adjusted Conversion Price of the Huynh Loan is reduced to $0.11 per share (the Galaxy 3rd. Loan warrant price of $0.10 times 110%); representing a beneficial conversion feature.  The additional beneficial conversion feature was calculated to be $15,890 on August 18, 2011 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The additional beneficial conversion feature was amortized over the remaining term (September 30, 2011) of the Huynh Note.  As of October 31, 2011 the unamortized debt discount was zero.  On December 5, 2011, pursuant to the terms of the Asher First Debenture the Company issued 333,333 shares of the Company’s Common Stock at a conversion price of $0.024 per share (the “Asher First Conversion”).  Accordingly, the Adjusted Conversion Price of the Huynh Loan is reduced to $0.0264 per share (the Asher First Conversion price of $0.024 times 110%); representing a beneficial conversion feature.  The additional beneficial conversion feature was calculated to be zero on December 5, 2011 in accordance with Codification topic 470-20.
 
 
26

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011


10.      Convertible notes (continued)

Convertible Notes 8 are a set of two individual notes with an aggregate face value of $3,020,979 issued November 17, 2009 to Mr. Thomas Johnson (50%) (the “TJ Fourth Note”) and Dr. Lee Johnson (50%) (the “LJ Fourth Note”) in exchange for the unpaid balance owed under Convertible Notes 6, which were cancelled, following the 50% conversion of the outstanding balances held by Mr. Thomas Johnson ($1,510,489.50) and Dr. Lee Johnson ($1,510,489.50) at $0.30 per share and issued 5,034,965 restricted shares of the Company’s Common Stock to each to Mr. Thomas Johnson and Dr. Lee Johnson.  The notes were due June 30, 2010 and accrued interest monthly at Eight Percent (8%) per annum (see Note 12).  The Company has accrued interest of $44,014 at October 31, 2011.  At the election of the holder, the amount due and owing pursuant to such note, or any portion thereof, may be converted in restricted shares of the Company’s Common Stock at a per share price of $0.30 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into or exchangeable for common stock) at a price (the “Subsequent Price”) below the Conversion Price times Ninety Percent (90%), to a price equal to such Subsequent Price times One Hundred Ten Percent (110%) (the “Adjusted Conversion Price”).  In accordance with Codification topic 470-20, there is no beneficial conversion feature at the time of issuance.  On June 29, 2010, the TJ Fourth Note and the LJ Fourth Note were amended to extend the due date to December 31, 2010 with no other change to the terms of the notes or the conversion feature.  On December 13, 2010, the TJ Fourth Note and the LJ Fourth Note were amended to extend the due date to September 30, 2011 with no other change to the terms of the notes or the conversion feature.  Additionally, on September 29, 2011, the TJ Fourth Note and the LJ Fourth Note were further amended to extend the due date to March 31, 2012 with no other change to the terms of the notes or the conversion feature.  In accordance with Codification topic 470-20, there is no beneficial conversion feature at the time of the three extensions.  On March 12, 2010, the Company closed an offering of convertible debentures (see Convertible Notes 10 and 11) which at the option of the holder converts into restricted shares of the Company’s Common Stock at $0.20 per share (the “March Debentures”).  Accordingly, the Adjusted Conversion Price of the TJ Fourth Note and the LJ Fourth Note are reduced to $0.22 per share (the March Debentures conversion price of $0.20 times 110%); representing a beneficial conversion feature.  The beneficial conversion feature was calculated to be an aggregate of $804,208 ($402,104 each TJ Fourth Note and the LJ Fourth Note) on March 12, 2010 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The additional beneficial conversion features are amortized over the remaining term (June 30, 2010) of the TJ Fourth Note and the LJ Fourth Note.  On March 16, 2011, the Company issued 4,545,455 shares of the Company’s common stock to Mr. Thomas Johnson pursuant to the terms of the TJ Fourth Note; Mr. Thomas Johnson exercised his right to convert $1,000,000, a portion of the funds owed to him under the TJ Fourth Note, into common stock of the Company at $0.22 per share.  Also on March 16, 2011, the Company issued 6,818,182 shares of the Company’s common stock to Dr. Lee Johnson pursuant to the terms of the LJ Fourth Note; Dr. Lee Johnson exercised his right to convert $1,500,000, a portion of the funds owed to him under the LJ Fourth Note, into common stock of the Company at $0.22 per share.  On August 18, 2011, the Company issued a promissory note (see Term Note 34) which included a warrant for 1,300,000 restricted shares of the Company’s Common Stock exercisable at $0.10 per share (the “Galaxy 3rd. Loan”).  Accordingly, the Adjusted Conversion Price of the TJ Fourth Note and the LJ Fourth Note are reduced to $0.11 per share (the Galaxy 3rd. Loan warrant price of $0.10 times 110%); representing a beneficial conversion feature.  The additional beneficial conversion feature was calculated to be $420,251 and $111,304 on August 18, 2011 in accordance with Codification topic 470-20 on the TJ Fourth Note and the LJ Fourth Note, respectively; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The additional beneficial conversion feature was amortized over the remaining term (September 30, 2011) of the TJ Fourth Note and the LJ Fourth Note.  As of October 31, 2011 the unamortized debt discount was zero.  On December 5, 2011, pursuant to the terms of the Asher First Debenture the Company issued 333,333 shares of the Company’s Common Stock at a conversion price of $0.024 per share (the “Asher First Conversion”).  Accordingly, the Adjusted Conversion Price of the TJ Fourth Note and the LJ Fourth Note are reduced to $0.0264 per share (the Asher First Conversion price of $0.024 times 110%); representing a beneficial conversion feature.  The additional beneficial conversion feature was calculated to be zero on December 5, 2011 in accordance with Codification topic 470-20.

Convertible Notes 9 are a set of two (2) convertible debentures with an aggregate face value, net of conversions, of $25,000 issued December 30, 2009 (the “December Debentures”).  The December Debentures have a six month term and are due June 30, 2010.  Interest accrues at Ten Percent (10%) per annum and is due quarterly.  The Company has accrued, but unpaid, interest from April 1, 2010 to October 31, 2011 of $3,966.  The debentures convert, in whole or in part, at the option of each individual noteholder (the “December Investors”) into restricted shares of the Company’s Common Stock at $0.30 per share (the “Conversion Price”); representing a beneficial conversion feature.  In addition, the December Investor received a detachable warrant for restricted shares of the Company’s Common Stock; the number of shares of each warrant is equal to 100% of the number of shares issuable pursuant to conversion of the debenture for an aggregate of 100,001 restricted shares.  The detachable warrants have an exercise price of $0.80 per share, a term of two years from the date of issuance, and vest upon the conversion of the debenture with a partial debenture conversion vesting a proportional number of warrant shares.  In the event the Company issues common stock (or securities exercisable for or convertible into or exchangeable for common stock), as defined, at a price below the Conversion Price then the Conversion Price shall be subject to a “broad-based” weighted average adjustment (the “BBWA”), as defined.  The fair value of the beneficial conversion feature, calculated in accordance with Codification topic 470-20, is $5,000; excluding the unvested detachable warrants.  The beneficial conversion feature is recorded as debt discount with a corresponding credit to additional paid-in capital and is amortized over the life of the December Debentures (six months).  On March 12, 2010, the Company closed an offering of convertible debentures (see Convertible Notes 10 and 11) which at the option of the holder converts into restricted shares of the Company’s Common Stock at $0.20 per share (the “March Debentures”).  Accordingly, the Conversion Price of the December Debentures is reduced to $0.28 per share, consistent with the BBWA, as defined.  The additional beneficial conversion feature was calculated to be $2,143 on March 12, 2010 in accordance with Codification topic 470-20.  As of October 31, 2011 the unamortized debt discount was zero.  On June 10, 2010 one (1) December Investor exercised the conversion option on a $5,000 debenture plus $62 of accrued interest and received 16,873 restricted shares of the Company’s Common Stock and the 16,667 share detachable warrant vested.  The fair value of the vested detachable warrant, calculated in accordance with Codification topic 470-20, is $2,162 and was recorded as debt discount, fully expensed when recorded, with a corresponding credit to additional paid-in capital.
 
 
27

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

10.      Convertible notes (continued)

Convertible Notes 10 are a set of fifteen (15) convertible debentures with an aggregate face value, net of conversions, of $836,333 issued February 12, February 26, and March 12, 2010 (the “March Debentures”).  The debentures issued February 12, 2010 were issued (i) in satisfaction of three (3) term notes due February 18, 2010 aggregating $149,216.31 and one term note due February 28, 2010 for $72,116.76, with interest accrued through February 12, 2010 (see Note 11) and (ii) as an $85,000.00 partial payment on the revolving credit arrangement with Hi-Tek Private, previously a related party (see Note 11).  The single debenture issued February 26, 2010 was issued (i) in satisfaction of four (4) term notes due February 28, 2010 aggregating $391,525 and (ii) as a $108,475 partial payment on a fifth term note due March 31, 2010, with interest accrued through February 26, 2010 (see Note 11).  The March 12, 2010 debentures were issued in exchange for cash payments aggregating $525,000.00 from nine (9) investors.  The March Debentures have a three year term and are due February 12, February 26, and March 12, 2013.  Interest accrues at Ten Percent (10%) per annum and is due quarterly.  The debentures convert, in whole or in part, at the option of each individual noteholder (the “March Investors”) into restricted shares of the Company’s Common Stock at $0.20 per share; representing a beneficial conversion feature.  In addition, the March Investor received a detachable warrant for restricted shares of the Company’s Common Stock; the number of shares of each warrant is equal to 100% of the number of shares issuable pursuant to conversion of the debenture for an aggregate of 6,656,666 restricted shares.  The detachable warrants have an exercise price of $0.30 per share, a term of three years from the date of issuance, and vest upon the conversion of the debenture with a partial debenture conversion vesting a proportional number of warrant shares.  In the event the Company issues common stock (or securities exercisable for or convertible into or exchangeable for common stock), as defined, at a price below the Conversion Price then the Conversion Price shall be subject to a BBWA adjustment, as defined.  The fair value of the beneficial conversion feature, calculated in accordance with Codification topic 470-20, is $639,417; excluding the unvested detachable warrants.  The beneficial conversion feature is recorded as debt discount with a corresponding credit to additional paid-in capital and is amortized over the life of the March Debentures (three years).  On August 18, 2011, the Company issued a promissory note (see Term Note 34) which included a warrant for 1,300,000 restricted shares of the Company’s Common Stock exercisable at $0.10 per share (the “Galaxy 3rd. Loan”).  Accordingly, the Conversion Price of the March Debentures is reduced to $0.19 per share, consistent with the BBWA, as defined.  The additional beneficial conversion feature was calculated to be $44,018 on August 18, 2011 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  On March 22, 2010, one (1) March Investor exercised the conversion option on $150,000 of principal, a portion of their March Debenture, and received 750,000 restricted shares of the Company’s Common Stock and 750,000 share of the detachable warrant vested.  The fair value of the vested detachable warrant, calculated in accordance with Codification topic 470-20, is $71,395 and was recorded as debt discount, fully expensed when recorded, with a corresponding credit to additional paid-in capital.  Upon conversion, $74,729 of unamortized debt discount, from the beneficial conversion feature, was also expensed.  On May 28, 2010, the same March Investor exercised the conversion option on $250,000 of principal, the remaining portion of their March Debenture, and received 1,250,000 restricted shares of the Company’s Common Stock and 1,250,000 share of the detachable warrant vested.  The fair value of the vested detachable warrant, calculated in accordance with Codification topic 470-20, is $118,992 and was recorded as debt discount, fully expensed when recorded, with a corresponding credit to additional paid-in capital.  Upon conversion, $117,604 of unamortized debt discount, from the beneficial conversion feature, was also expensed.  Additionally, on June 10, 2010, the same March Investor exercised the conversion option on $8,507 of accrued interest and received 42,535 restricted shares of the Company’s Common Stock.  On December 13, 2010, one (1) March Investor (Hi-Tek Private) elected to convert the full amount due on the March Debenture plus accrued interest ($92,079) into 460,398 restricted shares of the Company’s Common Stock and the 425,000 share detachable warrant vested.  The fair value of the vested detachable warrant, calculated in accordance with Codification topic 470-20, is $42,500 and was recorded as debt discount, fully expensed when recorded, with a corresponding credit to additional paid-in capital.  Upon conversion, $31,167 of unamortized debt discount, from the beneficial conversion feature, was also expensed.  On August 31, 2011, one (1) March Investor elected to convert the full amount due on two March Debentures plus accrued interest ($315,459) into 1,660,312 restricted shares of the Company’s Common Stock and the aggregate 1,375,000 share detachable warrants vested.  The fair value of the vested detachable warrants, calculated in accordance with Codification topic 470-20, is $136,776 and was recorded as debt discount, fully expensed when recorded, with a corresponding credit to additional paid-in capital.  Upon conversion, $77,724 of unamortized debt discount, from the beneficial conversion feature, was also expensed.  On April 16, 2010, in a private assignment of a $50,000 March Debenture an aggregate of $10,000 was assigned to Ms. Tran Lee Johnson ($5,000) and Ms. Lee Tran Johnson ($5,000), both a related party.  Ms. Tran Lee Johnson and Ms. Lee Tran Johnson are the daughters of Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director.  The two $5,000 assigned March Debentures, unamortized debt discount and accrued interest have been reclassified as a related party obligation and are included in Convertible Notes 11 below.  On November 23, 2011, one (1) March Investor exercised the conversion option on a March Debenture plus accrued interest ($29,301), and received 154,218 restricted shares of the Company’s Common Stock and the 125,000 share detachable warrant vested.  The fair value of the vested detachable warrant, calculated in accordance with Codification topic 470-20, is $12,434 and was recorded as debt discount, fully expensed when recorded, with a corresponding credit to additional paid-in capital.  Upon conversion, $5,921 of unamortized debt discount, from the beneficial conversion feature, was also expensed.  The Company has accrued interest, from inception, of $80,390 at October 31, 2011.  As of October 31, 2011, the unamortized debt discount was $144,832.  On December 5, 2011, pursuant to the terms of the Asher First Debenture the Company issued 333,333 shares of the Company’s Common Stock at a conversion price of $0.024 per share (the “Asher First Conversion”).  Accordingly, the Conversion Price of the March Debentures is reduced to $0.18 per share consistent with the BBWA, as defined.  The additional beneficial conversion feature was calculated to be $29,796 on December 5, 2011 in accordance with Codification topic 470-20.
 
 
28

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

10.      Convertible notes (continued)
 
Convertible Notes 11 are a set of three (3) convertible debentures with an aggregate face value of $668,667 issued March 12, 2010 with the same terms and conditions as the March Debentures in satisfaction of unpaid accrued salary and interest for (i) Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors from February 1, 2009 through December 12, 2009 ($329,510.48), (ii) Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director, from February 1, 2009 through December 12, 2009 ($329,510.48), and (iii) Mr. Louis P. Huynh, formerly the Company’s General Counsel, Executive Vice President of Operations and Business Development, Corporate Secretary and a Director from July 7, 2009 to January 9, 2010 ($9,645.97) under their respective employment agreements with the Company (the “March Officer Debentures”).  Interest accrues at Ten Percent (10%) per annum and is due quarterly.  The debentures convert, in whole or in part, at the option of each individual noteholder (the “March Officer Investors”) into restricted shares of the Company’s Common Stock at $0.20 per share; representing a beneficial conversion feature.  In addition, the March Officer Investor received a detachable warrant for restricted shares of the Company’s Common Stock; the number of shares of each warrant is equal to 100% of the number of shares issuable pursuant to conversion of the debenture for an aggregate of 3,346,336 restricted shares.  The detachable warrants have an exercise price of $0.30 per share, a term of three years from the date of issuance, and vest upon the conversion of the debenture with a partial debenture conversion vesting a proportional number of warrant shares.  In the event the Company issues common stock (or securities exercisable for or convertible into or exchangeable for common stock) at a price below the Conversion Price then the Conversion Price shall be subject to a BBWA adjustment, as defined.  The fair value of the beneficial conversion feature, calculated in accordance with Codification topic 470-20, is $300,900; excluding the unvested detachable warrants.  The beneficial conversion feature is recorded as debt discount with a corresponding credit to additional paid-in capital and is amortized over the life of the March Officer Debentures (three years).  On August 18, 2011, the Company issued a promissory note (see Term Note 34) which included a warrant for 1,300,000 restricted shares of the Company’s Common Stock exercisable at $0.10 per share (the “Galaxy 3rd. Loan”).  Accordingly, the Conversion Price of the March Officer Debentures is reduced to $0.19 per share, consistent with the BBWA, as defined.  The additional beneficial conversion feature was calculated to be $35,719 on August 18, 2011 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  On April 16, 2010, in a private assignment of a $50,000 March Debenture (see Convertible Notes 10 above) an aggregate of $10,000 was assigned to Ms. Tran Lee Johnson ($5,000) and Ms. Lee Tran Johnson ($5,000), both a related party.  Ms. Tran Lee Johnson and Ms. Lee Tran Johnson are the daughters of Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director.  The two $5,000 assigned March Debentures, unamortized debt discount and accrued interest have been reclassified as a related party obligation from Convertible Notes 10 and are included in these convertible notes.  The Company has accrued interest, from inception, of $111,094 at October 31, 2011.  As of October 31, 2011 the unamortized debt discount was $171,172.  On December 5, 2011, pursuant to the terms of the Asher First Debenture the Company issued 333,333 shares of the Company’s Common Stock at a conversion price of $0.024 per share (the “Asher First Conversion”).  Accordingly, the Conversion Price of the March Debentures is reduced to $0.18 per share consistent with the BBWA, as defined.  The additional beneficial conversion feature was calculated to be $37,704 on December 5, 2011 in accordance with Codification topic 470-20.
 
 
29

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

10.      Convertible notes (continued)
 
Convertible Notes 12 are a set of two (2) convertible debentures issued June 17, 2010, to one (1) February Investor who agreed to modify the terms of their February Debenture aggregating $500,000 as follows: (i) the unpaid February Debenture plus accrued interest at Ten Percent (10%) per annum for the period February 1, 2009 through May 31, 2010 was cancelled in exchanged for a new $570,999.85 convertible debenture and (ii) the unpaid $45,000 in liquidated damages plus accrued interest at Ten Percent (10%) per annum for the period February 1, 2009 through May 31, 2010 was exchanged for a new $51,390 convertible debenture (collectively the “Vision Debentures”).  Unless otherwise converted into common stock of the Company, the Vision Debentures shall accrue interest at a rate of 10% per annum, interest payable in full, each calendar month starting with December 2010 to be paid on the first of the month and monthly thereafter on the first day of each month, in arrears for the prior month, in cash.  As of the date of this filing only the December 2010 monthly interest payment has been made.  All outstanding principal and accrued and unpaid interest shall become due June 17, 2013.  At any time prior to or at the due date all principal and accrued interest due may be converted, in whole or in part at any time and from time to time, into common stock of the Company at $0.25 per share (the “Vision Conversion Price”) at the option of the holder; representing a beneficial conversion feature.  The fair value of the beneficial conversion feature, calculated in accordance with Codification topic 470-20, is $88,121.  The beneficial conversion feature is recorded as debt discount with a corresponding credit to additional paid-in capital and is amortized over the life of the Vision Debentures (three years).  If the Company, at any time while the amount of a debenture outstanding is equal to or greater than Fifty Percent (50%) of the debenture principal, shall issue securities or convertible securities, as defined, entitling the recipient to shares or the right to convert into shares of Common Stock at a price per share less than the Vision Conversion Price (the “New Securities Price”), then the Vision Conversion Price, of the so affected Vision Debenture, shall be reduced to the New Securities Price (the “New Vision Conversion Price”), as defined.  On August 18, 2011, the Company issued a promissory note (see Term Note 34) which included a warrant for 1,300,000 restricted shares of the Company’s Common Stock exercisable at $0.10 per share (the “Galaxy 3rd. Loan”).  Accordingly, the new Conversion Price of the Vision Debentures is reduced to $0.10 per share consistent with the Galaxy 3rd. Loan.  The additional beneficial conversion feature was calculated to be $34,269 on August 18, 2011 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  If, at any time, the Company proposes to file a registration statement, as defined, with the Securities and Exchange Commission the Company shall include the shares issuable under the debentures for resale in such Registration Statement.  The Company has accrued interest of $83,613 at October 31, 2011.  As of October 31, 2011 the unamortized debt discount was $77,662.  On December 5, 2011, pursuant to the terms of the Asher First Debenture the Company issued 333,333 shares of the Company’s Common Stock at a conversion price of $0.024 per share (the “Asher First Conversion”).  Accordingly, the Conversion Price of the Vision Debentures is reduced to $0.024 per share consistent with the Asher First Conversion.  The additional beneficial conversion feature was calculated to be zero on December 5, 2011 in accordance with Codification topic 470-20.

Convertible Note 13 for $45,000 was issued on May 26, 2011 to Asher Enterprises, Inc. (“Asher”).  The loan is evidenced by a convertible promissory note and matures 270 days from the issuance date on February 28, 2012 (the “Asher First Debenture”).  The Asher First Debenture accrues interest at the rate of 8% per annum.  The Company can prepay the note and accrued interest (the “Amount Due”) in full during the first 180 days by paying a) the Amount Due multiplied by b) a prepayment premium which ranges from 120% (a 20% premium during the first 60 days) to 145% (a 45% premium between 151 to 180 days).  Following the 180th day (November 22, 2011) Asher can convert the note, in whole or in part, into common stock at a 40% discount to the average of the three (3) lowest closing bid prices during the ten trading days prior to their notice to convert (the “Conversion Price”); representing a beneficial conversion feature.  The beneficial conversion feature was calculated to be $45,000 at the time of issuance in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The note contains a reset provision to the Conversion Price if the Company issues equity securities at a price less than the Conversion Price in effect on the day of such issuance.  In addition, the note contains covenants requiring Asher’s written consent for certain activities not in existence or not committed to by the Company on the issue date, as follows: (i) dividend distributions in cash or shares; (ii) stock, warrant or option repurchases; (iii) borrowings; (iv) sale or disposal of assets; (v) certain advances and loans in excess of $100,000; and (vi) certain guarantees to third-party liabilities.  In the event of default, the amount of principal and interest not paid bear interest at the rate of 22% per annum and the note becomes immediately due and payable.  Should that occur, the Company is liable to pay Asher 150% of the then outstanding principal, interest and default interest.  On August 18, 2011, the Company issued a promissory note (see Term Note 34) which included a warrant for 1,300,000 restricted shares of the Company’s Common Stock exercisable at $0.10 per share (the “Galaxy 3rd. Loan”).  Accordingly, the new Conversion Price ceiling of the Asher First Debenture is reduced to $0.10 per share consistent with the Galaxy 3rd. Loan.  The additional beneficial conversion feature was calculated to be zero on August 18, 2011 in accordance with Codification topic 470-20.  The Company has accrued interest of $1,519 at October 31, 2011.  As of October 31, 2011 the unamortized debt discount was $20,000.  On December 5, 2011, Asher exercised their option to convert $8,000 of the debenture into 333,333 non-restricted shares of the Company’s Common Stock at a Conversion Price of $0.024 based on a 40% discount applied to the average of the three (3) lowest closing bid prices during the ten trading days prior to their notice.  Upon conversion, $2,667 of unamortized debt discount, from the beneficial conversion feature, was also expensed.
 
 
30

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

10.      Convertible notes (continued)
 
Convertible Note 14 for $50,000 was issued on August 23, 2011 to Asher.  The loan is evidenced by a convertible promissory note and matures 270 days from the issuance date on May 25, 2012 (the “Asher Second Debenture”).  The Asher Second Debenture accrues interest at the rate of 8% per annum.  The Company can prepay the note and accrued interest (the “Amount Due”) in full during the first 180 days by paying a) the Amount Due multiplied by b) a prepayment premium which ranges from 120% (a 20% premium during the first 60 days) to 145% (a 45% premium between 151 to 180 days).  Following the 180th day (February 19, 2012) Asher can convert the note, in whole or in part, into common stock at a 40% discount to the average of the three (3) lowest closing bid prices during the ten trading days prior to their notice to convert (the “Conversion Price”); representing a beneficial conversion feature.  The beneficial conversion feature was calculated to be $33,333 at the time of issuance in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The note contains a reset provision to the Conversion Price if the Company issues equity securities at a price less than the Conversion Price in effect on the day of such issuance.  In addition, the note contains covenants requiring Asher’s written consent for certain activities not in existence or not committed to by the Company on the issue date, as follows: (i) dividend distributions in cash or shares; (ii) stock, warrant or option repurchases; (iii) borrowings; (iv) sale or disposal of assets; (v) certain advances and loans in excess of $100,000; and (vi) certain guarantees to third-party liabilities.  In the event of default, the amount of principal and interest not paid bear interest at the rate of 22% per annum and the note becomes immediately due and payable.  Should that occur, the Company is liable to pay Asher 150% of the then outstanding principal, interest and default interest.  On August 18, 2011, the Company issued a promissory note (see Term Note 34) which included a warrant for 1,300,000 restricted shares of the Company’s Common Stock exercisable at $0.10 per share (the “Galaxy 3rd. Loan”).  Accordingly, the new Conversion Price ceiling of the Asher Second Debenture is reduced to $0.10 per share consistent with the Galaxy 3rd. Loan.  The additional beneficial conversion feature was calculated to be zero on August 18, 2011 in accordance with Codification topic 470-20.  The Company has accrued interest of $660 at October 31, 2011.  As of October 31, 2011 the unamortized debt discount was $25,926.

11.      Term debt

The Company’s historical cash requirements have been funded under a revolving credit arrangement with Hi-Tek Private (the “Hi-Tek Revolver”) which previously was a related company.  Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director, and Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors, were the Chief Executive Officer and Chief Financial Officer of Hi-Tek Private, respectively, from October 2003 until their resignation August 8, 2007; neither held nor currently owns an equity position in Hi-Tek Private.
 
 
31

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

11.      Term debt (continued)

Starting in April 2002, Hi-Tek Private advanced funds to cover the Company’s operating costs and capital requirements under the Hi-Tek Revolver which accrues interest monthly at Ten Percent (10%) per annum with no fixed repayment terms.  Hi-Tek Private is under no obligation to advance funds in the future.  On February 12, 2010, Hi-Tek Private converted $85,000 of the debt into the in the March Debenture offered by the Company with a term of three years and convertible at $0.20 per share, which offering closed on March 12, 2010 (see Note 10).  On July 25, 2010, Hi-Tek Private instructed the Company to reduce the debt owed to Hi-Tek Private by $35,000 in satisfaction of the June 30, 2010 balance owed by Business.VN (see Note 4).  On May 12, 2011, Hi-Tek Private converted $225,000 of the debt into the an equity offering by the Company and received 900,000 restricted shares of the Company’s Common Stock and a two year warrant for the purchase of 2,250,000 restricted shares of the Company’s Common Stock at $0.25 per share.

Changes in the carrying amount of the Hi-Tek Revolver for the six months ended October 31, 2011 and the year ended April 30, 2011 are:

   
October 31,
   
April 30,
 
   
2011
   
2011
 
             
                                                                                    
 
 
   
 
 
Balance at beginning of year
  $ 1,012,172     $ 990,792  
Funds advanced
    -       77,531  
Repayments
    274,197       155,424  
Interest accrued
    36,226       99,273  
Balance at end of period
  $ 774,201     $ 1,012,172  
 
 
32

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

11.      Term debt (continued)

As of October 31 and April 30, 2011 term debt consists of the following:

   
October 31,
   
April 30,
 
   
2011
   
2011
 
                                                                                    
 
 
   
 
 
Hi-Tek Revolver
  $ 774,201     $ 1,012,172  
Term Note 1
    945,207       898,305  
Term Notes 2, 3 and 4
    1,070,157       1,017,056  
Term Notes 11
    160,163       150,294  
Term Notes 12
    318,863       300,382  
Term Notes 14
    101,500       100,500  
Term Notes 16, 23 and 28
    89,252       87,767  
Term Notes 17, 25, 26, 29 and 31
    165,388       135,089  
Term Note 18
    429,475       371,091  
Term Note 27
    23,033       21,905  
Term Notes 32, 33 and 34
    131,778       124,074  
      4,209,017       4,218,635  
Less short-term debt and current portion of
long-term debt:
               
Hi-Tek Revolver and notes 1, 2, 3, 4, 8, 9, 10,
13, 14, 15, 20, 30 and 34
    3,022,843       3,152,107  
Notes 11 classified as short-term
    160,163       150,294  
Current portion of notes 12
    97,029       99,372  
      3,280,035       3,401,773  
Less notes 16, 17, 18, 23, 24, 25, 26, 27, 28, 29
and 31 included in due to related  parties (see Note 12)
    707,148       615,852  
Long-term debt, net of current portion
  $ 221,834     $ 201,010  

Term Note 1 executed by the Company on May 1, 2007 with Hi-Tek Private, a former related party, for $600,000; the short-term note was due November 1, 2007 with interest at Ten Percent (10%)  per annum (the “Hi-Tek IDC Loan”).  Proceeds were used to fund general operations and the initial design services for the Internet data center (“IDC”) in Vietnam.  On April 30, 2008, the Hi-Tek IDC Loan was amended to extend the due date to September 1, 2008 with no other change to the terms.  On September 2, 2008, the Hi-Tek IDC Loan was amended to extend the due date to June 30, 2009 with no other change to the terms.  On June 25, 2009, the Hi-Tek IDC Loan was amended to extend the due date to December 31, 2009 with no other change to the terms.  On December 31, 2009, the Hi-Tek IDC Loan was amended to extend the due date to March 31, 2010 with no other change to the terms.  On March 30, 2010, the Hi-Tek IDC Loan was amended to extend the due date to September 30, 2010 with no other change to the terms.  On September 30, 2010, the Hi-Tek IDC Loan was amended to extend the due date to December 31, 2010 with no other change to the terms.  On December 13, 2010, the Hi-Tek IDC Loan was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Hi-Tek IDC Loan was further amended to extend the due date to March 31, 2012 with no other change to the terms.

 
33

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

11.      Term debt (continued)

Term Note 2 executed by the Company on September 14, 2007 with Vina Mex Capital, a California limited liability company, for $700,000; the  promissory note was due November 14, 2007.  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Vina Mex First Loan”).  Proceeds were used to fund general operations and the initial design services for the first IDC in Vietnam.  On April 30, 2008, the Vina Mex First Loan was amended to extend the due date to September 1, 2008 with no other change to the terms.  On September 2, 2008, the Vina Mex First Loan was amended to extend the due date to June 30, 2009 with no other change to the terms.  On February 3, 2009 Vina Mex Capital assigned, without recourse, the Vina Mex First Loan to IDCG SA de CV, a corporation established under the laws of the Country of Mexico (“IDCG SA”).  On June 25, 2009, the Vina Mex First Loan was amended to extend the due date to December 31, 2009 with no other change to the terms.  On December 31, 2009, the Vina Mex First Loan was amended to extend the due date to March 31, 2010 with no other change to the terms.  On February 26, 2010, $108,475.39 of accrued interest was cancelled and exchanged for a convertible debenture due in three years offered by the Company, which offering closed on March 12, 2010 (see Note 10).  On March 30, 2010, the Vina Mex First Loan was amended to extend the due date of the Vina Mex First Loan to September 30, 2010 with no other change to the terms.  On September 30, 2010, the Vina Mex First Loan was amended to extend the due date of the Vina Mex First Loan to December 31, 2010 with no other change to the terms.  On December 10, 2010, the Vina Mex First Loan was amended to extend the due date of the Vina Mex First Loan to September 30, 2011 with no other change to the terms of the note in exchange for a warrant for the purchase of 700,000 restricted shares of the Company’s common stock at $0.25 valid for a term of three years with an estimated fair value of $110,060 capitalized as a deferred charge associated with the loan extension.  The deferred charge is amortized on a straight-line basis over the nine month term of the debt extension with $61,144 and $48,916 expensed in the six months ended October 31, 2011 and the year ended April 30, 2011, respectively.  Additionally, on September 29, 2011, the Vina Mex First Loan was further amended to extend the due date of the Vina Mex First Loan to January 31, 2012 with no other change to the terms.

Term Note 3 executed by the Company on September 16, 2008 with Vina Mex Capital, for $200,000; the promissory note was due March 31, 2009.  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Vina Mex Second Loan”).  Proceeds were primarily used to fund the initial Dot VN Danang payment on the Land Sublease pursuant to which Dot VN Danang leases approximately 8,768 square meters of land in the Danang Industrial Zone in Danang City, Vietnam, for the express purpose of building an Internet data center and related uses, for a term of approximately 35-years.  On February 3, 2009 Vina Mex Capital assigned, without recourse, the Vina Mex Second Loan to IDCG SA.  On March 25, 2009, the Vina Mex Second Loan was amended to extend the due date to September 30, 2009 with no other change to the terms.  On October 8, 2009, the Vina Mex Second Loan was amended to extend the due date to December 31, 2009 with no other change to the terms.  On December 31, 2009, the Vina Mex Second Loan was amended to extend the due date to March 31, 2010 with no other change to the terms.  On March 30, 2010, the Vina Mex Second Loan was amended to extend the due date to September 30, 2010 with no other change to the terms.  On September 30, 2010, the Vina Mex Second Loan was amended to extend the due date to December 31, 2010 with no other change to the terms.  Additionally, on December 10, 2010, the Vina Mex Second Loan was further amended to extend the due date to September 30, 2011 with no other change to the terms of the note in exchange for a warrant for the purchase of 200,000 restricted shares of the Company’s common stock at $0.25 valid for a term of three years with an estimated fair value of $31,446 capitalized as a deferred charge associated with the loan extension.  The deferred charge is amortized on a straight-line basis over the nine month term of the debt extension with zero and $31,446 expensed in the six months ended October 31, 2011 and the year ended April 30, 2011, respectively.  On March 31, 2011, the Vina Mex Second Loan balance owed ($258,395) was cancelled in exchange for issue of 1,033,579 restricted shares of the Company’s Common Stock  and a warrant exercisable into 2,583,948 restricted shares of the Company’s Common Stock.  Also on March 31, 2011, the unamortized deferred charge of $20,964 was expensed.

Term Note 4 executed by the Company on October 17, 2008 with Vina Mex Capital, for $100,000; the promissory note was due September 17, 2009.  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Vina Mex Third Loan”).  Proceeds were used to fund general operations.  On February 3, 2009 Vina Mex Capital assigned, without recourse, the Vina Mex Third Loan to IDCG SA.  On October 8, 2009, the Vina Mex Third Loan was amended to extend the due date to December 31, 2009 with no other change to the terms.  On December 31, 2009, the Vina Mex Third Loan was amended to extend the due date to March 31, 2010 with no other change to the terms.  On March 30, 2010, the Vina Mex Third Loan was amended to extend the due date to September 30, 2010 with no other change to the terms.  On September 30, 2010, the Vina Mex Third Loan was amended to extend the due date to December 31, 2010 with no other change to the terms.  On December 10, 2010, the Vina Mex Third Loan was amended to extend the due date to September 30, 2011 with no other change to the terms of the note in exchange for a warrant for the purchase of 100,000 restricted shares of the Company’s common stock at $0.25 valid for a term of three years with an estimated fair value of $15,723 capitalized as a deferred charge associated with the loan extension.  The deferred charge is amortized on a straight-line basis over the nine month term of the debt extension with $8,735 and $6,988 expensed in the six months ended October 31, 2011 and the year ended April 30, 2011, respectively.  Additionally, on September 29, 2011, the Vina Mex Third Loan was further amended to extend the due date of the Vina Mex First Loan to January 31, 2012 with no other change to the terms.
 
 
34

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

11.      Term debt (continued)
 
On January 31 and February 9, 2007 the Company issued a set of convertible debentures with an aggregate face value of $949,500, net of conversions, which were due January 31, 2009 (the “February Debentures”).  On January 31, 2009, the February Debentures’ conversion feature expired.  The Company did not repay the $949,500 due the sixteen (16) February Investors (see Note 10) and is negotiating an extension of the due date and terms with the February Investors.  Thirteen (13) February Investors, aggregating $337,000, have agreed to extend the term of their February Debenture (the “Extended Notes”) (see Term Notes 11).  One February Investor of $500,000 has agreed to cancel the February Debenture in exchange for a three (3) year convertible debenture (see Note 10)  Two (2) February Investors, aggregating $112,500, have not extended the due date of their February Debenture (the “Defaulted Debentures”).  The Defaulted Debentures are classified as short-term debt as Term Notes 11.  The February Debentures were paid interest monthly at a rate of Ten Percent (10%) per annum from July 1, 2007 to January 31, 2009.  The Company offered to raise the interest rate to Twelve Percent (12%) per annum in part for an extension of the due date; effective February 1, 2009 the Company accrues interest on the Defaulted Debentures at the proposed rate of Twelve Percent (12%) per annum.

Term Notes 12 aggregate the obligations owed the thirteen (13) February Investors that agreed to extend the term of their (i) February Debentures ($337,000) then in default and (ii) accrued, but unpaid, liquidated damages ($29,205) (the “Extended February Debt”).  During March 2009, six (6) of the February Investors agreed to modify the terms of their February Debentures aggregating $125,000 as follows: (i) the February Debenture plus the unpaid liquidated damages ($10,125) are combined into an amortized term notes for each of the six (6) February Investors, (ii) interest accrues from February 1, 2009 at Twelve Percent (12%) per annum, (iii) a one-time Fifteen Percent (15%) principal payment was paid in March, and (iv) commencing April 1, 2009, the unpaid balance will be amortized over thirty-five (35) equal monthly payments.  On April 13, 2009, one (1) of the February Investors agreed to modify the terms of his $49,500 February Debentures as follows: (i) the February Debenture plus the unpaid liquidated damages ($4,455) are combined into a single amortized term note, (ii) interest accrues from February 1, 2009 at Twelve Percent (12%) per annum, (iii) a one-time Fifteen Percent (15%) principal payment was paid in April for March, and (iv) commencing April 1, 2009, the unpaid balance will be amortized over thirty-five (35) equal monthly payments.  During May 2009, three (3) of the February Investors agreed to modify the terms of their February Debentures aggregating $112,500 as follows: (i) the February Debenture plus the unpaid liquidated damages ($10,125) are combined into an amortized term notes for each of the three (3) February Investors, (ii) interest accrues from February 1, 2009 at Twelve Percent (12%) per annum, (iii) a one-time Fifteen Percent (15%) principal payment was paid in May, and (iv) commencing June 1, 2009, the unpaid balance will be amortized over thirty-six (36) equal monthly payments.  On August 25, 2009, three (3) of the February Investors agreed to modify the terms of their February Debentures aggregating $50,000 as follows: (i) the February Debenture plus the unpaid liquidated damages ($4,500) are combined into an amortized term notes for each of the three (3) February Investors, (ii) interest accrues from February 1, 2009 at Twelve Percent (12%) per annum, (iii) a one-time Fifteen Percent (15%) principal payment was paid in September, and (iv) commencing October 1, 2009, the unpaid balance will be amortized over thirty-nine (39) equal monthly payments.  In addition, warrants aggregating 36,623 restricted shares were issued to the thirteen (13) February Investors, upon agreeing to modify the terms of their February Debentures, with a $2 exercise price expiring on January 31, 2012.  The fair value ($10,754) of the warrants (see Note 16) was capitalized as a deferred charge associated with the issuance of these debt instruments.  The deferred charge is amortized on a straight-line basis over the approximate thirty-six month term of the debt (see Note 9).  The monthly amortized payments were last paid during June 2010.

Term Note 14 executed by the Dot VN Danang on May 5, 2009 with Mr. Diep Tai of Vietnam for $101,500; the promissory note is due on demand with thirty day written notice.  Interest accrues and is paid in arrears monthly at a rate of Twelve Percent (12%) per annum.  Proceeds were used to fund the second installment of the Land Sublease (see Note 4).

 
35

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

11.      Term debt (continued)

Term Note 16 executed by the Company on September 12, 2009 with Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors, for $18,000; the promissory note was due December 12, 2009.  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Thomas First Loan”).  Proceeds were used to fund general operations.  On December 3, 2009, the Thomas First Loan was amended to extend the December 12, 2009 due date to February 28, 2010 with no other change to the terms.  On February 25, 2010, the Thomas First Loan was amended to extend the due date to May 31, 2010 with no other change to the terms.  On May 29, 2010, the Thomas First Loan was amended to extend the due date to December 31, 2010 with no other change to the terms.  On December 13, 2010, the Thomas First Loan was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Thomas First Loan was further amended to extend the due date to March 31, 2012 with no other change to the terms.  On August 10, 2011, the Company made a partial payment of $1,500 on the Thomas First Loan applied to accrued interest.  On October 24, 2011, the Company made a partial payment of $1,500 on the Thomas First Loan applied to accrued interest.  On December 5, 2011, the Company made a partial payment of $1,000 on the Thomas First Loan applied to accrued interest.  On December 9, 2011, the Company made a payment of $1,793 on the Thomas First Loan with $412 applied to accrued interest and $1,381 applied as a partial repayment of principal.

Term Note 17 executed by the Company on September 18, 2009 with Ms. Ngoc Anh Ung, the Company’s Vice President of Operations and Business Development, Asia, for $10,000; the promissory note was due December 18, 2009.  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Ung First Loan”).  Proceeds were used to fund general operations.  On December 15, 2009, the Ung First Loan was amended to extend the December 18, 2009 due date to March 18, 2010 with no other change to the terms.  On February 12, 2010, the Ung First Loan was amended to extend the due date to June 18, 2010 with no other change to the terms.  On June 10, 2010, the Ung First Loan was amended to extend the due date to December 31, 2010 with no other change to the terms.  On December 13, 2010, the Ung First Loan was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Ung First Loan was further amended to extend the due date to March 31, 2012 with no other change to the terms.

Term Note 18 executed by the Company on October 29, 2009 with Ms. Hue Tran Johnson for $10,000; the revolving credit agreement was due January 29, 2010.  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Hue Revolver”).  Proceeds were used to fund general operations.  Ms. Johnson is the wife of Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director.  The Company borrowed an additional $5,000, $10,000, $30,000, $15,000, $5,000, $23,000, $10,000, $20,000, $15,000, $5,000, $30,000, $10,000, $10,000, $10,000, $15,000, $500, $25,000, $10,000, $10,000, $10,000, $10,000, $20,000, $2,500, $2,200, $8,000, $19,000 and $9,000 from Ms. Johnson under the Hue Revolver on November 16, November 17, December 2, 2009, January 8, January 28, April 14, July 19, July 20, July 27, August 9, August 30, September 14, September 16, 2010, January 3, January 4, January 18, January 27, February 9, March 4, April12, April 18, June 1, August 3, September 20, September 26, September 27 and September 28, 2011, respectively.  In addition, the Company borrowed additional funds advanced in Hanoi, Vietnam of 200,000,000đ (equivalent to $10,471), 700,000,000đ (equivalent to $36,083) and 400,000,000đ (equivalent to $19,512) on June 23, August 16, 2010, and April 5, 2011, respectively.  On January 27, April 19, May 16, August 9 and September 22, 2011, the Company repaid $500, $10,000, $22,200, $2,500 and $2,200 on the Hue Revolver.  On January 21, 2010, the Hue Revolver was amended to extend the January 29, 2010 due date to April 30, 2010 with no other change to the terms.  On April 29, 2010, the Hue Revolver was further amended to extend the due date to December 31, 2010 with no other change to the terms.  On December 13, 2010, the Hue Revolver was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Hue Revolver was further amended to extend the September 30, 2011 due date to March 31, 2012 with no other change to the terms.  Additionally, the Company borrowed an additional $2,500 and $3,000 under the Hue Revolver on November 10 and November 22, 2011, respectively.  Further, on November 23, 2011, the Company repaid $6,500 on the Hue Revolver.

 
36

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

11.      Term debt (continued)

Term Note 23 executed by the Company on November 30, 2009, with Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors, for $30,000; the promissory note was due February 28, 2010.  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Thomas Second Loan”).  Proceeds were used to fund general operations.  On February 25, 2010, the Thomas Second Loan was amended to extend the due date to May 31, 2010 with no other change to the terms.  On May 27, 2010, the Thomas Second Loan was amended to extend the due date to December 31, 2010 with no other change to the terms.  On December 13, 2010, the Thomas Second Loan was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Thomas Second Loan was further amended to extend the due date to March 31, 2012 with no other change to the terms.  On November 2, 2011, the Company made a partial payment of $2,500 on the Thomas Second Loan applied to accrued interest.  On November 4, 2011, the Company made a partial payment of $2,000 on the Thomas Second Loan applied to accrued interest.  On November 17, 2011, the Company made a partial payment of $2,000 on the Thomas Second Loan applied to accrued interest.  On December 9, 2011, the Company made a payment of $149 on the Thomas Second Loan applied to accrued interest.

Term Note 25 executed by the Company on January 19, 2010 with Ms. Ngoc Anh Ung, the Company’s Vice President of Operations and Business Development, Asia, for $24,000; the promissory note is due February 18, 2010.  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Ung Second Loan”).  Proceeds were used to fund general operations.  On January 25, 2010, an aggregate of $14,000 was repaid on the Ung Second Loan.  On February 10, 2010, an additional $10,000 was repaid on the Ung Second Loan.  At October 31, 2011, the Company owes $99 of accrued interest on the Ung Second Loan.

Term Note 26 executed by the Company on February 12, 2010 with Ms. Ngoc Anh Ung, the Company’s Vice President of Operations and Business Development, Asia, for $9,000; the promissory note is due March 12, 2010.  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Ung Third Loan”).  Proceeds were used to fund general operations.  On March 3, 2010, $9,000 was repaid on the Ung Third Loan.  At October 31, 2011, the Company owes $55 of accrued interest on the Ung Third Loan.

Term Note 27 executed by the Company on August 30, 2010 with Mr. Louis P. Huynh, formerly the Company’s General Counsel, Executive Vice President of Operations and Business Development, Corporate Secretary and a Director, for $20,500; the promissory note was due September 30, 2010 and interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Huynh Loan”).  Proceeds were used to fund general operations.  On September 30, 2010, the Huynh Loan was amended to extend the due date to December 31, 2010 with no other change to the terms.  On December 13, 2010, the Huynh Loan was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Huynh Loan was further amended to extend the due date to March 31, 2012 with no other change to the terms.

Term Note 28 executed by the Company on August 30, 2010 with Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors, for $30,000; the promissory note was due November 30, 2010 and interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Thomas Fourth Loan”).  Proceeds were used to fund general operations.  On November 10, 2010, the Thomas Fourth Loan was amended to extend the due date to December 31, 2010 with no other change to the terms.  On December 13, 2010, the Thomas Fourth Loan was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Thomas Fourth Loan was further amended to extend the due date to March 31, 2012 with no other change to the terms.  On November 23, 2011, the Company made a partial payment of $1,500 on the Thomas Fourth Loan applied to accrued interest.  On November 28, 2011, the Company made a partial payment of $1,500 on the Thomas Fourth Loan applied to accrued interest.  On December 5, 2011, the Company made a partial payment of $1,000 on the Thomas Fourth Loan applied to accrued interest.  On December 9, 2011, the Company made a payment of $57 on the Thomas Fourth Loan applied to accrued interest.

Term Note 29 executed by the Company on September 17, 2010 with Ms. Ngoc Anh Ung, the Company’s Vice President of Operations and Business Development, Asia, for $15,000; the promissory note was due December 17, 2010.  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Ung Fourth Loan”).  Proceeds were used to fund general operations.  On December 13, 2010, the Ung Fourth Loan was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Ung Fourth Loan was further amended to extend the due date to March 31, 2012 with no other change to the terms.
 
 
37

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

11.      Term debt (continued)

Term Note 30 executed by the Company on October 1, 2010 with IDCG SA for $25,000; the promissory note is due on demand with written notice and bears no interest (the “IDCG Fifth Loan”).  Proceeds were used to fund general operations.  The Company repaid $10,000, $5,000, and $10,000 on the IDCG Fifth Loan on December 3, December 14, 2010 and January 27, 2011, respectively.

Term Note 31 executed by the Company on November 3, 2010 with Ms. Ngoc Anh Ung, the Company’s Vice President of Operations and Business Development, Asia, for 288,008,000đ (equivalent to $14,800); the revolving credit agreement is due August 3, 2011.  Interest accrues monthly at a rate of Twelve Percent (12%) per annum (the “Ung Revolver”).  Proceeds were used to fund general operations in Vietnam.  The Company borrowed an additional 389,200,000đ (equivalent to $20,000), 583,800,000đ (equivalent to $30,000), 194,800,000đ (equivalent to $10,000), 194,800,000đ (equivalent to $10,000), 116,940,000đ (equivalent to $6,000), 200,000,000đ (equivalent to $10,257), 50,000,000đ (equivalent to $2,439), 100,000,000đ (equivalent to $4,878), 50,000,000đ (equivalent to $2,439), 100,000,000đ (equivalent to $4,878), 100,000,000đ (equivalent to $4,878), 200,00,000đ (equivalent to $9,756), 200,00,000đ (equivalent to $9,756), 100,00,000đ (equivalent to $4,878), 73,00,000đ (equivalent to $3,561) and 30,000,000đ (equivalent to $1,422) from Ms. Ung under the Ung Revolver on November 18, December 2, and December 22, 2010, January 7, January 17, January 27, March 7, April 7, April 9, April 14, April 19, April 20, June 27, July 5, July 14 and October 25, 2011 respectively.  In addition, the Company borrowed additional funds advanced in U.S. currency of $10,000, $1,000, $9,000, $9,000, $9,000 and $15,000 on January 4, January 18, January 26, May 10, July 15 and August 16, 2011, respectively.  An aggregate of $31,173 and $48,086 was repaid on the Ung Revolver in San Diego, California during the six months ended October 31, 2011 and the year ended April 30, 2011, respectively.  On September 29, 2011, the Ung Revolver was amended to extend the August 3, 2011 due date to March 31, 2012 with no other change to the terms.  Additionally, the Company borrowed an additional $5,000, 130,000,000đ (equivalent to $6,100), $9,000 and 63,000,000đ (equivalent to $3,000) under the Ung Revolver on November 1, November 4, December 14 and December 15, 2011, respectively.  Further, on November 23, December 12 and December 13, 2011, the Company repaid $5,000, $3,045 and $3,000 on the Ung Revolver, respectively.

Term Note 32 executed by the Company on November 18, 2010 with G.F. Galaxy Corporation for $100,000; the promissory note is due January 18, 2011.  Interest accrued monthly at a rate of Ten Percent (10%) per month based on a 30 day month.  Proceeds were used to fund general operations.  On January 18, 2011, the balance owed ($120,000) on the note was cancelled in exchange for a new promissory note (Term Note 33) due July 18, 2011 (the “Galaxy 2nd. Loan”) and a warrant for the purchase of 200,000 shares of the Company’s restricted common stock.  Interest on the new promissory note accrues monthly at a rate of Twelve Percent (12%) per annum.  The warrant has a $0.25 exercise price and a term of two years.  On July 18, 2011, the Galaxy Loan was amended to extend the due date of August 18, 2011 with no other change to the terms.  On August 18, 2011, the balance owed ($128,400) on the note was cancelled in exchange for a new promissory note (Term Note 34) due July 18, 2012 (the “Galaxy 3rd. Loan”), issuance of 100,000 restricted shares on the Company’s Common Stock recorded as a $12,000 deferred debt issuance costs based on the market close of $0.12 and a warrant for the purchase of 1,300,000 shares of the Company’s restricted common stock recorded a $127,327 deferred debt issuance costs.  Interest on the new promissory note accrues monthly at a rate of Twelve Percent (12%) per annum.  The warrant has a $0.10 exercise price and a term of two years.

 
38

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011


12.      Due to related parties

Due to related parties at October 31 and April 30, 2011 consisted of the following:

   
October 31,
   
April 30,
 
   
2011
   
2011
 
                                                                                    
 
 
   
 
 
TJ Notes, net of zero and zero discount at October 31
and April 30, 2011
  $ 713,804     $ 685,683  
LJ Notes, net of zero and zero discount at October 31
and April 30, 2011
    188,153       180,740  
Huynh Note, net of zero and zero discount at October 31
and April 30, 2011
    136,292       130,923  
Term Notes 16, 23, and 28, Thomas Johnson
    89,252       87,767  
Term Notes 17, 25, 26, 29 and 31
    165,388       135,089  
Term Note 18, Hue Tran Johnson
    429,475       371,091  
Term Note 27, Louis Huynh
    23,033       21,905  
March Officer Debenture (Thomas Johnson), net of
$83,067 and $92,263 discount at October 31
and April 30, 2011
    300,429       274,622  
March Officer Debenture (Lee Johnson), net of
$83,067 and $92,263 discount at October 31
and April 30, 2011
    300,429       274,622  
March Officer Debenture (Louis Huynh), net of
$2,431 and $2,701 discount at October 31
and April 30, 2011
    8,795       8,040  
March Officer Debenture (Tran Lee Johnson), net of
$1,303 and $1,486 discount at October 31
and April 30, 2011
    4,468       4,033  
March Officer Debenture (Lee Tran Johnson), net of
$1,304 and $1,486 discount at October 31
and April 30, 2011
    4,468       4,033  
Hi-Tek Trademark Loan One (Howard Johnson), net
of zero discount at April 30, 2011 and 2010
    201,713       201,644  
      2,565,699       2,380,192  
Less current portion
    1,947,110       1,814,842  
Due to related parties, long-term
  $ 618,589     $ 565,350  

 
39

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

12.      Due to related parties (continued)

On August 1, 2007, the Company executed a convertible note with Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors, in the amount of $1,989,066 in satisfaction of unpaid accrued salary, including interest, from January, 2003 through June, 2007 under his employment agreement with the Company (the “TJ First Note”).  The TJ First Note had a term of one year and accrued interest at a rate of Eight Percent (8%) per annum (see Note 10).  At the election of the holder, the amount due and owing pursuant to such note may be converted into restricted shares of the Company’s Common Stock at a per share price of $1.43 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into common stock) at a price below the Conversion Price, to a price equal to such issue price.  On August 14, 2008, the Company executed a convertible promissory note for $2,160,766 due February 15, 2009 plus accrued interest at Eight Percent (8%) per annum with Mr. Johnson (the “TJ Second Note”) in exchange for the unpaid balance owed under the TJ First Note which was cancelled (see Note 10).  The terms and conditions of the TJ Second Note are materially the same as the TJ First Note that expired August 1, 2008.  At the election of the holder, the amount due and owing pursuant to such note may be converted into restricted shares of the Company’s Common Stock at $1.43 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into common stock) at a price (the “Subsequent Price”) below the Conversion Price, to a price equal to such issue price.  On February 15, 2009, the TJ Second Note was amended to extend the due date to March 17, 2009 with no other change to the terms of the note or the conversion feature.  On March 17, 2009, the TJ Second Note was further amended to extend the due date to March 31, 2009 with no other change to the terms of the note or the conversion feature.  On April 20, 2009, the Company executed a convertible promissory note due October 16, 2009 plus accrued interest at Eight Percent (8%) per annum (the “TJ Third Note”) issued (i) in exchange for the unpaid balance owed under the TJ Second Note ($2,280,631) which was cancelled and (ii) in satisfaction of unpaid accrued salary and interest accruing since July 1, 2007 through January 31, 2009 under his employment agreements with the Company ($604,027) (see Note 10).  The terms and conditions of the TJ Third Note are materially the same as the TJ Second Note that expired March 31, 2009 except that in the TJ Third Note the adjusted Conversion Price is established as One Hundred Ten Percent (110%) of the Subsequent Price where previously the Subsequent Price became the adjusted Conversion Price   At the election of the holder, the amount due and owing pursuant to such note may be converted in restricted shares of the Company’s Common Stock at a per share price of $0.30 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into or exchangeable for common stock) at a price (the “Subsequent Price”) below the Conversion Price times Ninety Percent (90%), to a price equal to such Subsequent Price times One Hundred Ten Percent (110%) (the “Adjusted Conversion Price”).  On October 12, 2009, the TJ Third Note was amended to extend the due date to December 31, 2009 with no other change to the terms of the note or the conversion feature.  On November 17, 2009, the Company agreed to a 50% conversion of the outstanding balance ($1,510,489.50) at $0.30 per share and issued 5,034,965 restricted shares of the Company’s Common Stock and a $1,510,489.41 convertible note due June 30, 2010 plus accrued interest at Eight Percent (8%) per annum (the “TJ Fourth Note”) (see Note 10).  The terms and conditions of the TJ Fourth Note are materially the same as the TJ Third Note, except that in the new note the amount due and owing pursuant to such note may be converted in whole or any portion thereof, into restricted shares of the Company’s Common Stock.  At the election of the holder, the amount due and owing pursuant to such note, or any portion thereof, may be converted in restricted shares of the Company’s Common Stock at a per share price of $0.30 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into or exchangeable for common stock) at a price (the “Subsequent Price”) below the Conversion Price times Ninety Percent (90%), to a price equal to such Subsequent Price times One Hundred Ten Percent (110%) (the “Adjusted Conversion Price”).  The Company has accrued interest of $34,833 at October 31, 2011.  On June 29, 2010, the TJ Fourth Note was amended to extend the due date to December 31, 2010 with no other change to the terms of the note or the conversion feature.  On December 13, 2010, the TJ Fourth Note was amended to extend the due date to September 30, 2011 with no other change to the terms of the notes or the conversion feature.  Additionally, on September 29, 2011, the TJ Fourth Note was further amended to extend the due date to March 31, 2012 with no other change to the terms of the notes or the conversion feature.  In accordance with Codification topic 470-20, there is no beneficial conversion feature at the time of the three extensions.  On March 12, 2010, the Company closed an offering of convertible debentures (see Convertible Notes 10 and 11) which at the option of the holder converts into restricted shares of the Company’s Common Stock at $0.20 per share (the “March Debentures”).  Accordingly, the Adjusted Conversion Price of the TJ Fourth Note is reduced to $0.22 per share (the March Debentures conversion price of $0.20 times 110%).  The additional beneficial conversion feature was calculated to be $402,104 on March 12, 2010 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The additional beneficial conversion feature was amortized over the remaining term (June 30, 2011) of the TJ Fourth Note.  On August 18, 2011, the Company issued a promissory note (see Term Note 34) which included a warrant for 1,300,000 restricted shares of the Company’s Common Stock exercisable at $0.10 per share (the “Galaxy 3rd. Loan”).  Accordingly, the Adjusted Conversion Price of the TJ Fourth Note is reduced to $0.11 per share (the Galaxy 3rd. Loan warrant price of $0.10 times 110%); representing a beneficial conversion feature.  The additional beneficial conversion feature was calculated to be $420,251 on August 18, 2011 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The additional beneficial conversion feature was amortized over the remaining term (September 30, 2011) of the TJ Fourth Note.  As of October 31, 2011 the unamortized debt discount was zero.  On March 16, 2011, the Company issued 4,545,455 shares of the Company’s common stock to Mr. Thomas Johnson pursuant to the terms of the TJ Fourth Note; Mr. Thomas Johnson exercised his right to convert $1,000,000, a portion of the funds owed to him under the TJ Fourth Note, into common stock of the Company at $0.22 per share.  On December 5, 2011, pursuant to the terms of the Asher First Debenture the Company issued 333,333 shares of the Company’s Common Stock at a conversion price of $0.024 per share (the “Asher First Conversion”).  Accordingly, the Adjusted Conversion Price of the TJ Fourth Note is reduced to $0.0264 per share (the Asher First Conversion price of $0.024 times 110%); representing a beneficial conversion feature.  The additional beneficial conversion feature was calculated to be zero on December 5, 2011 in accordance with Codification topic 470-20.

 
40

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

12.      Due to related parties (continued)
 
On August 1, 2007, the Company executed a convertible note with Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director, in the amount of $1,989,066 in satisfaction of unpaid accrued salary, including interest, from January, 2003 through June, 2007 under his employment agreement with the Company (the “LJ First Note”).  The LJ First Note had a term of one year and accrued interest at a rate of Eight Percent (8%) per annum (see Note 10).  At the election of the holder, the amount due and owing pursuant to such note may be converted into restricted shares of the Company’s Common Stock at a per share price of $1.43 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into common stock) at a price below the Conversion Price, to a price equal to such issue price.  On August 14, 2008, the Company executed a convertible promissory note for $2,160,767 due February 15, 2009 plus accrued interest at Eight Percent (8%) per annum with Dr. Lee Johnson (the “LJ Second Note”) in exchange for the unpaid balance owed under the LJ First Note which was cancelled (see Note 10).  The terms and conditions of the LJ Second Note are materially the same as the LJ First Note that expired August 1, 2008.  At the election of the holder, the amount due and owing pursuant to such note may be converted into restricted shares of the Company’s Common Stock at $1.43 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into common stock) at a price (the “Subsequent Price”) below the Conversion Price, to a price equal to such issue price.  On February 15, 2009, the LJ Second Note was amended to extend the due date to March 17, 2009 with no other change to the terms of the note or the conversion feature.  On March 17, 2009, the LJ Second Note was further amended to extend the due date to March 31, 2009 with no other change to the terms of the note or the conversion feature.  On April 20, 2009, the Company executed a convertible promissory note due October 16, 2009 plus accrued interest at Eight Percent (8%) per annum (the “LJ Third Note”) issued (i) in exchange for the unpaid balance owed under the LJ Second Note ($2,280,631) which was cancelled and (ii) in satisfaction of unpaid accrued salary and interest accruing since July 1, 2007 through January 31, 2009 under his employment agreements with the Company ($604,027) (see Note 10).  The terms and conditions of the LJ Third Note are materially the same as the LJ Second Note that expired March 31, 2009 except that in the LJ Third Note the adjusted Conversion Price is established as One Hundred Ten Percent (110%) of the Subsequent Price where previously the Subsequent Price became the adjusted Conversion Price   At the election of the holder, the amount due and owing pursuant to such note may be converted in restricted shares of the Company’s Common Stock at a per share price of $0.30 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into or exchangeable for common stock) at a price (the “Subsequent Price”) below the Conversion Price times Ninety Percent (90%), to a price equal to such Subsequent Price times One Hundred Ten Percent (110%) (the “Adjusted Conversion Price”).  On October 12, 2009, the LJ Third Note was amended to extend the due date to December 31, 2009 with no other change to the terms of the note or the conversion feature.  On November 17, 2009, the Company agreed to a 50% conversion of the outstanding balance ($1,510,489.50) at $0.30 per share and issued 5,034,965 restricted shares of the Company’s Common Stock and a $1,510,489.41 convertible note due June 30, 2010 plus accrued interest at Eight Percent (8%) per annum (the “LJ Fourth Note”) (see Note 10).  The terms and conditions of the LJ Fourth Note are materially the same as the LJ Third Note, except that in the new note the amount due and owing pursuant to such note may be converted in whole or any portion thereof, into restricted shares of the Company’s Common Stock.  At the election of the holder, the amount due and owing pursuant to such note, or any portion thereof, may be converted in restricted shares of the Company’s Common Stock at a per share price of $0.30 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into or exchangeable for common stock) at a price (the “Subsequent Price”) below the Conversion Price times Ninety Percent (90%), to a price equal to such Subsequent Price times One Hundred Ten Percent (110%) (the “Adjusted Conversion Price”).  The Company has accrued interest of $9,182 at October 31, 2011.  On June 29, 2010, the LJ Fourth Note was amended to extend the due date to December 31, 2010 with no other change to the terms of the note or the conversion feature.  On December 13, 2010, the LJ Fourth Note was amended to extend the due date to September 30, 2011 with no other change to the terms of the notes or the conversion feature.  Additionally, on September 29, 2011, the LJ Fourth Note was further amended to extend the due date to March 31, 2012 with no other change to the terms of the notes or the conversion feature.  In accordance with Codification topic 470-20, there is no beneficial conversion feature at the time of the three extensions.  On March 12, 2010, the Company closed an offering of convertible debentures (see Convertible Notes 10 and 11) which at the option of the holder converts into restricted shares of the Company’s Common Stock at $0.20 per share (the “March Debentures”).  Accordingly, the Adjusted Conversion Price of the LJ Fourth Note is reduced to $0.22 per share (the March Debentures conversion price of $0.20 times 110%).  The additional beneficial conversion feature was calculated to be $402,104 on March 12, 2010 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The additional beneficial conversion feature was amortized over the remaining term (June 30, 2011) of the LJ Fourth Note.  On August 18, 2011, the Company issued a promissory note (see Term Note 34) which included a warrant for 1,300,000 restricted shares of the Company’s Common Stock exercisable at $0.10 per share (the “Galaxy 3rd. Loan”).  Accordingly, the Adjusted Conversion Price of the LJ Fourth Note is reduced to $0.11 per share (the Galaxy 3rd. Loan warrant price of $0.10 times 110%); representing a beneficial conversion feature.  The additional beneficial conversion feature was calculated to be $111,304 on August 18, 2011 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The additional beneficial conversion feature was amortized over the remaining term (September 30, 2011) of the LJ Fourth Note.  As of October 31, 2011 the unamortized debt discount was zero.  On March 16, 2011, the Company issued 6,818,182 shares of the Company’s common stock to Dr. Lee Johnson pursuant to the terms of the LJ Fourth Note; Dr. Lee Johnson exercised his right to convert $1,500,000, a portion of the funds owed to him under the LJ Fourth Note, into common stock of the Company at $0.22 per share.  On December 5, 2011, pursuant to the terms of the Asher First Debenture the Company issued 333,333 shares of the Company’s Common Stock at a conversion price of $0.024 per share (the “Asher First Conversion”).  Accordingly, the Adjusted Conversion Price of the LJ Fourth Note is reduced to $0.0264 per share (the Asher First Conversion price of $0.024 times 110%); representing a beneficial conversion feature.  The additional beneficial conversion feature was calculated to be zero on December 5, 2011 in accordance with Codification topic 470-20.

 
41

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

12.      Due to related parties (continued)
 
On July 6, 2009, the Company executed a convertible note with Mr. Louis P. Huynh, formerly the Company’s General Counsel, Executive Vice President of Operations and Business Development, Corporate Secretary and a Director, for $113,244 in satisfaction of unpaid accrued salary, including interest, from August 7, 2007 through July 6, 2009 under Mr. Huynh’s employment agreement with the Company (the “Huynh Note”) (see Note 10).  The note was due October 16, 2009 and accrues interest monthly at Eight Percent (8%) per annum.  The Company has accrued interest of 23,048 at October 31, 2011.  The beneficial conversion feature was calculated to be zero at the time of issuance in accordance with Codification topic 470-20.  At the election of the holder, the amount due and owing pursuant to such note may be converted in restricted shares of the Company’s Common Stock at a per share price of $0.46 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into or exchangeable for common stock) at a price (the “Subsequent Price”) below the Conversion Price times Ninety Percent (90%), to a price equal to such Subsequent Price times One Hundred Ten Percent (110%) (the “Adjusted Conversion Price”).  On October 12, 2009, the Huynh Note was amended to extend the due date to December 31, 2009 with no other change to the terms of the note or the conversion feature.  On December 29, 2009, the Huynh Note was amended to extend the due date to June 30, 2010 with no other change to the terms of the note or the conversion feature.  On June 29, 2010, the Huynh Note was amended to extend the due date to December 31, 2010 with no other change to the terms of the note or the conversion feature.  On December 13, 2010, the Huynh Note was amended to extend the due date to September 30, 2011 with no other change to the terms of the note or the conversion feature.  Additionally, on September 29, 2011, the Huynh Note was further amended to extend the due date to March 31, 2012 with no other change to the terms of the note or the conversion feature.  In accordance with Codification topic 470-20, there is no beneficial conversion feature at the time of the five extensions.  On January 14, 2010, the Company closed an offering of convertible debentures (see Note 10) which at the option of the holder converts into restricted shares of the Company’s Common Stock at $0.30 per share (the “December Debentures”).  Accordingly, the Adjusted Conversion Price of the Huynh Loan is reduced to $0.33 per share (December Debentures conversion price of $0.30 times 110%).  The additional beneficial conversion feature was calculated to be $40,732 on January 14, 2010 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The additional beneficial conversion feature was amortized over the remaining term (June 30, 2011) of the Huynh Note.  On March 12, 2010, the Company closed an offering of convertible debentures (see Note 10) which at the option of the holder converts into restricted shares of the Company’s Common Stock at $0.20 per share (the “March Debentures”).  Accordingly, the Conversion Price of the Huynh Loan is reduced to $0.22 per share (the March Debentures conversion price of $0.20 times 110%).  The additional beneficial conversion feature was calculated to be $56,622 on March 12, 2010 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The additional beneficial conversion feature was amortized over the remaining term (June 30, 2011) of the Huynh Note.  On August 18, 2011, the Company issued a promissory note (see Term Note 34) which included a warrant for 1,300,000 restricted shares of the Company’s Common Stock exercisable at $0.10 per share (the “Galaxy 3rd. Loan”).  Accordingly, the Adjusted Conversion Price of the Huynh Loan is reduced to $0.11 per share (the Galaxy 3rd. Loan warrant price of $0.10 times 110%); representing a beneficial conversion feature.  The additional beneficial conversion feature was calculated to be $15,890 on August 18, 2011 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The additional beneficial conversion feature was amortized over the remaining term (September 30, 2011) of the Huynh Note.  As of October 31, 2011 the unamortized debt discount was zero.  On December 5, 2011, pursuant to the terms of the Asher First Debenture the Company issued 333,333 shares of the Company’s Common Stock at a conversion price of $0.024 per share (the “Asher First Conversion”).  Accordingly, the Adjusted Conversion Price of the Huynh Loan is reduced to $0.0264 per share (the Asher First Conversion price of $0.024 times 110%); representing a beneficial conversion feature.  The additional beneficial conversion feature was calculated to be zero on December 5, 2011 in accordance with Codification topic 470-20.

 
42

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

12.      Due to related parties (continued)
 
On September 12, 2009, the Company executed a note with Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors, for $18,000; the promissory note was due December 12, 2009 (see Note 11).  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Thomas First Loan”).  Proceeds were used to fund general operations.  On December 3, 2009, the Thomas First Loan was amended to extend the December 12, 2009 due date to February 28, 2010 with no other change to the terms.  On February 25, 2010, the Thomas First Loan was amended to extend the due date to May 31, 2010 with no other change to the terms.  On May 29, 2010, the Thomas First Loan was amended to extend the due date to December 31, 2010 with no other change to the terms.  On December 13, 2010, the Thomas First Loan was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Thomas First Loan was further amended to extend the due date to March 31, 2012 with no other change to the terms.  On August 10, 2011, the Company made a partial payment of $1,500 on the Thomas First Loan applied to accrued interest.  On October 24, 2011, the Company made a partial payment of $1,500 on the Thomas First Loan applied to accrued interest.  On December 5, 2011, the Company made a partial payment of $1,000 on the Thomas First Loan applied to accrued interest.  On December 9, 2011, the Company made a payment of $1,793 on the Thomas First Loan with $412 applied to accrued interest and $1,381 applied as a partial repayment of principal.

On September 18, 2009, the Company executed a note with Ms. Ngoc Anh Ung, the Company’s Vice President of Operations and Business Development, Asia, for $10,000; the promissory note was due December 18, 2009 (see Note 11).  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Ung First Loan”).  Proceeds were used to fund general operations.  On December 15, 2009, the Ung First Loan was amended to extend the December 18, 2009 due date to March 18, 2010 with no other change to the terms.  On February 12, 2010, the Ung First Loan was amended to extend the due date to June 18, 2010 with no other change to the terms.  On June 10, 2010, the Ung First Loan was amended to extend the due date to December 31, 2010 with no other change to the terms.  On December 13, 2010, the Ung First Loan was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Ung First Loan was further amended to extend the due date to March 31, 2012 with no other change to the terms.

On October 29, 2009, the Company executed a promissory note with Ms. Hue Tran Johnson for $10,000; the revolving credit agreement was due January 29, 2010 (see Note 11).  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the  “Hue Revolver”).  Proceeds were used to fund general operations.  Ms. Johnson is the wife of Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director.  The Company borrowed an additional $5,000, $10,000, $30,000, $15,000, $5,000, $23,000, $10,000, $20,000, $15,000, $5,000, $30,000, $10,000, $10,000, $10,000, $15,000, $500, $25,000, $10,000, $10,000, $10,000, $10,000, $20,000, $2,500, $2,200, $8,000, $19,000 and $9,000 from Ms. Johnson under the Hue Revolver on November 16, November 17, December 2, 2009, January 8, January 28, April 14, July 19, July 20, July 27, August 9, August 30, September 14, September 16, 2010, January 3, January 4, January 18, January 27, February 9, March 4, April12, April 18, June 1, August 3, September 20, September 26, September 27 and September 28, 2011, respectively.  In addition, the Company borrowed additional funds advanced in Hanoi, Vietnam of 200,000,000đ (equivalent to $10,471), 700,000,000đ (equivalent to $36,083) and 400,000,000đ (equivalent to $19,512) on June 23, August 16, 2010, and April 5, 2011, respectively.  On January 27, April 19, May 16, August 9 and September 22, 2011, the Company repaid $500, $10,000, $22,200, $2,500 and $2,200 on the Hue Revolver.  On January 21, 2010, the Hue Revolver was amended to extend the January 29, 2010 due date to April 30, 2010 with no other change to the terms.  On April 29, 2010, the Hue Revolver was further amended to extend the due date to December 31, 2010 with no other change to the terms.  On December 13, 2010, the Hue Revolver was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Hue Revolver was further amended to extend the September 30, 2011 due date to March 31, 2012 with no other change to the terms.  Additionally, the Company borrowed an additional $2,500 and $3,000 under the Hue Revolver on November 10 and November 22, 2011, respectively.  Further, on November 23, 2011, the Company repaid $6,500 on the Hue Revolver.

 
43

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

12.      Due to related parties (continued)
 
On November 30, 2009, the Company executed a note with Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors, for $30,000; the promissory note was due February 28, 2010 (see Note 11).  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Thomas Second Loan”).  Proceeds were used to fund general operations.  On February 25, 2010, the Thomas Second Loan was amended to extend the due date to May 31, 2010 with no other change to the terms.  On May 29, 2010, the Thomas Second Loan was amended to extend the due date to December 31, 2010 with no other change to the terms.  On December 13, 2010, the Thomas Second Loan was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Thomas Second Loan was further amended to extend the due date to March 31, 2012 with no other change to the terms.  On November 2, 2011, the Company made a partial payment of $2,500 on the Thomas Second Loan applied to accrued interest.  On November 4, 2011, the Company made a partial payment of $2,000 on the Thomas Second Loan applied to accrued interest.  On November 17, 2011, the Company made a partial payment of $2,000 on the Thomas Second Loan applied to accrued interest.  On December 9, 2011, the Company made a payment of $149 on the Thomas Second Loan applied to accrued interest.

On January 19, 2010, the Company executed a note with Ms. Ngoc Anh Ung, the Company’s Vice President of Operations and Business Development, Asia, for $24,000; the promissory note is due February 18, 2010 (see Note 11).  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Ung Second Loan”).  Proceeds were used to fund general operations.  On January 25, 2010, an aggregate of $14,000 was repaid on the Ung Second Loan.  On February 10, 2010, an additional $10,000 was repaid on the Ung Second Loan.  At October 31, 2011, the Company owes $99 of accrued interest on the Ung Second Loan.

On February 12, 2010, the Company executed a note with Ms. Ngoc Anh Ung, the Company’s Vice President of Operations and Business Development, Asia, for $9,000; the promissory note is due March 12, 2010 (see Note 11).  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Ung Third Loan”).  Proceeds were used to fund general operations.  On March 3, 2010, $9,000 was repaid on the Ung Third Loan.  At October 31, 2011, the Company owes $55 of accrued interest on the Ung Third Loan.

On March 12, 2010, the Company converted an aggregate of $668,667 of unpaid salaries and accrued interest owed to its three officers into convertible debentures due in three years offered by the Company, which offering closed on March 12, 2010 (see Note 10).  The set of three (3) convertible debentures, with the same terms and conditions as the March Debentures, were issued in satisfaction of unpaid accrued salary and interest for (i) Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors from February 1, 2009 through December 12, 2009 ($329,510.48), (ii) Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director, from February 1, 2009 through December 12, 2009 ($329,510.48), and (iii) Mr. Louis P. Huynh, formerly the Company’s General Counsel, Executive Vice President of Operations and Business Development, Corporate Secretary and a Director from July 8, 2009 to January 9, 2010 ($9,645.97) under their respective employment agreements with the Company (the “March Officer Debentures”).  The convertible debentures have a three year term and are due March 12, 2013.  Interest accrues at Ten Percent (10%) per annum and is due quarterly.  The debentures convert, in whole or in part, at the option of each individual noteholder (the “March Officer Investors”) into restricted shares of the Company’s Common Stock at $0.20 per share; representing a beneficial conversion feature.  In addition, the March Officer Investor received a detachable warrant for restricted shares of the Company’s Common Stock; the number of shares of each warrant is equal to 100% of the number of shares issuable pursuant to conversion of the debenture for an aggregate of 3,346,336 restricted shares.  The detachable warrants have an exercise price of $0.30 per share, a term of three years from the date of issuance, and vest upon the conversion of the debenture with a partial debenture conversion vesting a proportional number of warrant shares.  In the event the Company issues common stock (or securities exercisable for or convertible into or exchangeable for common stock) at a price below the Conversion Price then the Conversion Price shall be subject to a BBWA adjustment, as defined.  The fair value of the beneficial conversion feature, calculated in accordance with Codification topic 470-20, is $300,900; excluding the unvested detachable warrants.  The beneficial conversion feature is recorded as debt discount with a corresponding credit to additional paid-in capital and is amortized over the life of the March Officer Debentures (three years).  On August 18, 2011, the Company issued a promissory note (see Term Note 34) which included a warrant for 1,300,000 restricted shares of the Company’s Common Stock exercisable at $0.10 per share (the “Galaxy 3rd. Loan”).  Accordingly, the Conversion Price of the March Officer Debentures is reduced to $0.19 per share, consistent with the BBWA, as defined.  The additional beneficial conversion feature was calculated to be $35,193 on August 18, 2011 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The Company has accrued interest, from inception, of $109,551 at October 31, 2011.  As of October 31, 2011 the unamortized debt discount was $168,566.  On December 5, 2011, pursuant to the terms of the Asher First Debenture the Company issued 333,333 shares of the Company’s Common Stock at a conversion price of $0.024 per share (the “Asher First Conversion”).  Accordingly, the Conversion Price of the March Debentures is reduced to $0.18 per share consistent with the BBWA, as defined.  The additional beneficial conversion feature was calculated to be $37,148 on December 5, 2011 in accordance with Codification topic 470-20.

 
44

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

12.      Due to related parties (continued)
 
On April 16, 2010, in a private assignment of a $50,000 March Debenture (see Convertible Notes 10) an aggregate of $10,000 was assigned to Ms. Tran Lee Johnson ($5,000) and Ms. Lee Tran Johnson ($5,000), both a related party (see Note 12).  Ms. Tran Lee Johnson and Ms. Lee Tran Johnson are the daughters of Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director.  The two $5,000 assigned March Debentures, unamortized debt discount and accrued interest have been reclassified as a related party obligation from Convertible Notes 10 and are included in Convertible Notes 11 (the “March Officer Debentures”).  On August 18, 2011, the Company issued a promissory note (see Term Note 34) which included a warrant for 1,300,000 restricted shares of the Company’s Common Stock exercisable at $0.10 per share (the “Galaxy 3rd. Loan”).  Accordingly, the Conversion Price of the March Officer Debentures is reduced to $0.19 per share, consistent with the BBWA, as defined.  The additional beneficial conversion feature was calculated to be $526 on August 18, 2011 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The Company has accrued interest, from inception, of $1,543 at October 31, 2011.  As of October 31, 2011 the unamortized debt discount was $2,606.  On December 5, 2011, pursuant to the terms of the Asher First Debenture the Company issued 333,333 shares of the Company’s Common Stock at a conversion price of $0.024 per share (the “Asher First Conversion”).  Accordingly, the Conversion Price of the March Debentures is reduced to $0.18 per share consistent with the BBWA, as defined.  The additional beneficial conversion feature was calculated to be $556 on December 5, 2011 in accordance with Codification topic 470-20.

On May 19, 2010, the Hi-Tek Trademark Loan was amended to extend the due date to December 31, 2010 and split the note in two separate convertible notes (see Note 10).  The first note for $200,000 includes a new provision for the monthly payment of interest effective July 1, 2010 in arrears, there were no other change to the terms of the original note or the conversion feature (“Hi-Tek Trademark Loan One”).  The second note for $314,968 did not change the interest accrual or payment terms; there were no other change to the terms of the original note or the conversion feature (“Hi-Tek Trademark Loan Two”).  Also on May 19, 2010, Hi-Tek Private assigned the Hi-Tek Trademark Loan One to Mr. Howard Johnson, a related party.  Mr. Johnson is the father of Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors and Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director.  On December 28, 2010, the Hi-Tek Trademark Loan One was amended to extend the due date to June 30, 2011, with no other change to the terms of the note or the conversion feature.  Additionally, on June 29, 2011, the Hi-Tek Trademark Loan One was further amended to extend the due date to December 31, 2011, with no other change to the terms of the note or the conversion feature.  In accordance with Codification topic 470-20, there is no beneficial conversion feature at the time of the extensions.  On August 18, 2011, the Company issued a promissory note (see Term Note 34) which included a warrant for 1,300,000 restricted shares of the Company’s Common Stock exercisable at $0.10 per share (the “Galaxy 3rd. Loan”).  Accordingly, the Conversion Price of the Hi-Tek Trademark Loan One is reduced to $0.10 per share consistent with the Galaxy 3rd. Loan.  The additional beneficial conversion feature was calculated to be zero on August 18, 2011 in accordance with Codification topic 470-20.  The Company has accrued interest of $1,713 and unamortized debt discount of zero on the Hi-Tek Trademark Loan One, held by Mr. Howard Johnson, as of October 31, 2011.  On December 5, 2011, pursuant to the terms of the Asher First Debenture the Company issued 333,333 shares of the Company’s Common Stock at a conversion price of $0.024 per share (the “Asher First Conversion”).  Accordingly, the Conversion Price of the Hi-Tek Trademark Loan One is reduced to $0.024 per share consistent with the Asher First Conversion.  The additional beneficial conversion feature was calculated to be zero on December 5, 2011 in accordance with Codification topic 470-20.

 
45

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

12.      Due to related parties (continued)
 
On August 30, 2010, the Company executed a note with Mr. Louis P. Huynh, formerly the Company’s General Counsel, Executive Vice President of Operations and Business Development, Corporate Secretary and a Director, for $20,500; the promissory note was due September 30, 2010 (see Note 11).  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Huynh Loan”).  Proceeds were used to fund general operations.  On September 30, 2010, the Huynh Loan was amended to extend the due date to December 31, 2010 with no other change to the terms.  On December 13, 2010, the Huynh Loan was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Huynh Loan was further amended to extend the due date to March 31, 2012 with no other change to the terms.

On August 30, 2010, the Company executed a note with Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors, for $30,000; the promissory note was due November 30, 2010 (see Note 11).  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Thomas Fourth Loan”).  Proceeds were used to fund general operations.  On November 10, 2010, the Thomas Fourth Loan was amended to extend the due date to December 31, 2010 with no other change to the terms.  On December 13, 2010, the Thomas Fourth Loan was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Thomas Fourth Loan was further amended to extend the due date to March 31, 2012 with no other change to the terms.  On November 23, 2011, the Company made a partial payment of $1,500 on the Thomas Fourth Loan applied to accrued interest.  On November 28, 2011, the Company made a partial payment of $1,500 on the Thomas Fourth Loan applied to accrued interest.  On December 5, 2011, the Company made a partial payment of $1,000 on the Thomas Fourth Loan applied to accrued interest.  On December 9, 2011, the Company made a payment of $57 on the Thomas Fourth Loan applied to accrued interest.

On September 17, 2010, the Company executed a note with Ms. Ngoc Anh Ung, the Company’s Vice President of Operations and Business Development, Asia, for $15,000; the promissory note was due December 17, 2010 (see Note 11).  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Ung Fourth Loan”).  Proceeds were used to fund general operations.  On December 13, 2010, the Ung Fourth Loan was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Ung Fourth Loan was further amended to extend the due date to March 31, 2012 with no other change to the terms.

On November 3, 2010, the Company executed a note with Ms. Ngoc Anh Ung, the Company’s Vice President of Operations and Business Development, Asia, for 288,008,000đ (equivalent to $14,800); the revolving credit agreement is due August 3, 2011 (see Note 11).  Interest accrues monthly at a rate of Twelve Percent (12%) per annum (the “Ung Revolver”).  Proceeds were used to fund general operations in Vietnam.  The Company borrowed an additional 389,200,000đ (equivalent to $20,000), 583,800,000đ (equivalent to $30,000), 194,800,000đ (equivalent to $10,000), 194,800,000đ (equivalent to $10,000), 116,940,000đ (equivalent to $6,000), 200,000,000đ (equivalent to $10,257), 50,000,000đ (equivalent to $2,439), 100,000,000đ (equivalent to $4,878), 50,000,000đ (equivalent to $2,439), 100,000,000đ (equivalent to $4,878), 100,000,000đ (equivalent to $4,878), 200,00,000đ (equivalent to $9,756), 200,00,000đ (equivalent to $9,756), 100,00,000đ (equivalent to $4,878), 73,00,000đ (equivalent to $3,561) and 30,000,000đ (equivalent to $1,422) from Ms. Ung under the Ung Revolver on November 18, December 2, and December 22, 2010, January 7, January 17, January 27, March 7, April 7, April 9, April 14, April 19, April 20, June 27, July 5, July 14 and October 25, 2011 respectively.  In addition, the Company borrowed additional funds advanced in U.S. currency of $10,000, $1,000, $9,000, $9,000, $9,000 and $15,000 on January 4, January 18, January 26, May 10, July 15 and August 16, 2011, respectively.  An aggregate of $31,173 and $48,086 was repaid on the Ung Revolver in San Diego, California during the six months ended October 31, 2011 and the year ended April 30, 2011, respectively.  On September 29, 2011, the Ung Revolver was amended to extend the August 3, 2011 due date to March 31, 2012 with no other change to the terms.  Additionally, the Company borrowed an additional $5,000, 130,000,000đ (equivalent to $6,100), $9,000 and 63,000,000đ (equivalent to $3,000) under the Ung Revolver on November 1, November 4, December 14 and December 15, 2011, respectively.  Further, on November 23, December 12 and December 13, 2011, the Company repaid $5,000, $3,045 and $3,000 on the Ung Revolver, respectively.

 
46

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

13.      Accrued and other liabilities

Accrued and other liabilities at October 31 and April 30, 2011 consisted of the following:

   
October 31,
   
April 30,
 
   
2011
   
2011
 
                                                                                    
 
 
   
 
 
Officer salaries
  $ 1,498,350     $ 1,061,040  
Other payroll accruals
    71,706       41,641  
Liquidated damages
    17,659       17,659  
Other accrued liabilities
    52,484       42,696  
Total accrued and other liabilities
  $ 1,640,199     $ 1,163,036  

As of October 31 and April 30, 2011, the Company has unpaid salaries and accrued interest owed to officers of $1,498,350 and $1,061,040, respectively.  The unpaid salaries bear interest at a rate of Ten Percent (10%) per annum.  As of October 31 and April 30, 2011, accrued interest on the salaries was $149,348 and $85,663, respectively.  On April 20, 2009, the Company executed convertible notes with Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors, and Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director, each in the amount of $604,027 in satisfaction of unpaid salary, including interest, accrued from July 1, 2007 through January 31, 2009 under their respective employment agreements with the Company (see Notes 10 and 12).  On July 6, 2009, the Company executed a convertible note for Mr. Louis P. Huynh, formerly the Company’s General Counsel, Executive Vice President of Operations and Business Development, Corporate Secretary and a Director in the amount of $113,244 in satisfaction of unpaid salary, including interest, accrued from August 7, 2007 through July 6, 2009 under his employment agreement with the Company (see Notes 10 and 12).  On March 12, 2010, the Company issued a set of three (3) convertible debentures with the same terms and conditions as the March Debentures (see Note 10 and 12) in satisfaction of unpaid accrued salary and interest for (i) Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors from February 1, 2009 through December 12, 2009 ($329,510.48), (ii) Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director, from February 1, 2009 through December 12, 2009 ($329,510.48), and (iii) Mr. Louis P. Huynh, formerly the Company’s General Counsel, Executive Vice President of Operations and Business Development, Corporate Secretary and a Director from July 8, 2009 to January 9, 2010 ($9,645.97) under their respective employment agreements with the Company (the “March Officer Debentures”).
 
 
47

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

13.      Accrued and other liabilities (continued)

On February 9, 2007, in connection with the February Financing, the Company executed an investor’s registration rights agreement (the “IRRA”) by and between the February Investors participating in the February Financing and the Company (see Note 10).  Pursuant to the terms of the IRRA as amended on August 10, 2007, the February Investors shall be entitled to liquidated damages equal to One Percent (1%) of the outstanding convertible debentures issued in the February Financing (the “Liquidated Damages”) for every thirty (30) day period that the registration statement is not declared effective by December 14, 2007 (the “Effectiveness Deadline”), limited to a total of ten such 30-day periods.  One such 30-day period was funded concurrent with the August 10, 2007 IRRA amendment and as of September, 2008 the remaining nine 30-day periods were owed to the February Investors.  On January 31, 2009, an aggregate of 15,300 restricted shares of the Company’s Common Stock was issued to four (4) February Investors in satisfaction of their Liquidated damages ($11,475).  Between March and August, 2009, an aggregate of thirteen (13) February Investors (see Notes 10 and 11) agreed to modify the terms of their February Debentures (the “Extended Notes”) to include their unpaid Liquidated Damages ($29,205).  On June 17, 2010 one (1) February Investors (see Note 10) agreed to modify the terms of their February Debenture (the “Vision Debenture”) to include their unpaid Liquidated Damages ($45,000).  As of October 31, 2011, Liquidated Damages are owed to the two (2) holders of the Defaulted Debentures ($10,125) and to three (3) February Investors who previously converted their February Debenture into common stock of the Company ($7,534) are owed for nine such 30-day periods.

14.      Major customer and segment information

The Company currently operates solely in one industry segment: the marketing and registration of domain names principally for the government of Vietnam.  The Company has operations within Vietnam in support its domain name registration business segment.  The Company’s revenue is concentrated on the Vietnamese ccTLD ’.vn‘, creating a risk of concentration associated with the revenue of a single service (see Note 2).  The loss of this single service could cause severe damage to our financial future.  The Company will operate in additional segments when it commences significant operation of online services to include Internet advertising; Internet data centers/micro-modular data centers; or wireless virtual fiber.

We sell the registration of domain names on our web site and through a network of resellers.  The individual registrants of the domain names we sell are worldwide and a reseller’s customers are generally not limited to the country within which they conduct their business, except for our reseller’s within Vietnam.  Our resellers in Vietnam principally only sell within the country and registrants within Vietnam primarily only purchase from a source within the country, not from outside of Vietnam.  The Company derived significant revenues from sales within Vietnam of 9.3% and 13.7% of consolidated revenues during the six months ended October 31, 2011 and 2010, respectively with the remaining revenue coming from international registrants.  Related accounts receivable within Vietnam from our two master resellers totaled 25.3% and 46.8% for the northern reseller and 47.3% and 37.0% for the southern reseller at October 31, 2011 and 2010, respectively.  Within our international registrants sales we derived significant revenues from two resellers of 11.7% and 11.9% for reseller A and 11.4% and 11.4% for reseller B of consolidated revenues during the six months ended October 31, 2011 and 2010, respectively.  Related customer deposits were 12.3% and 17.1% for reseller A and 48.5% and 41.8% for reseller B at October 31, 2011 and 2010, respectively.

15.      Related party transactions

Employment Agreements

On July 18, 2006, at the completion of the Malers Merger, Dr. Lee Johnson and Mr. Thomas Johnson were appointed to the Board of Directors of the Company.  In addition, Mr. Thomas Johnson was elected to serve as Chairman of the Board of Directors

On October 8, 2006, Dr. Lee Johnson’s executive employment agreement was approved by the Board of Directors under which he was appointed as the Company’s President, Chief Technical Officer, and Chief Financial Officer.  Pursuant to the terms of the executive employment agreement, Dr. Lee Johnson shall receive an annual salary of Three Hundred Sixty Thousand Dollars ($360,000) and shall receive stock options totaling in the aggregate 3,600,000 restricted shares; such shares are exercisable, at a per share price of $0.50, into shares of the Company’s Common Stock (the “LJ Employment Options”).  The LJ Employment Options shall vest one third at the date of grant and one third at the end of the first and second year from the date of grant and expire ten years from the date of vesting.  Dr. Johnson is also eligible to receive additional equity and cash bonuses in connection with the successful performance of his duties.

 
48

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

15.      Related party transactions (continued)

Employment Agreements (continued)
 
As President, CTO, and CFO, Dr. Lee Johnson shall serve as such until the earlier of (i) his resignation, (ii) appointment of his successor or (iii) his termination.  As a director of the Company, he shall serve until the earlier of (i) his resignation, (ii) election of his successor or (iii) his removal by the shareholders of the Company.

On October 9, 2006, Mr. Thomas Johnson’s executive employment agreement was approved by the Board of Directors under which he was appointed as the Company’s Chief Executive Officer.  Pursuant to the terms of the executive employment agreement, Mr. Johnson shall receive an annual salary of Three Hundred Sixty Thousand Dollars ($360,000) and shall receive stock options totaling in the aggregate 3,600,000 restricted shares; such shares are exercisable, at a per share price of $0.50, into shares of the Company’s Common Stock (the “TJ Employment Options”).  The TJ Employment Options shall vest one third at the date of grant and one third at the end of the first and second year from the date of grant and expire ten years from the date of vesting.  Mr. Johnson is also eligible to receive additional equity and cash bonuses in connection with the successful performance of his duties.

As CEO, Mr. Thomas Johnson shall serve as such until the earlier of (i) his resignation, (ii) appointment of his successor or (iii) his termination.  As a director of the Company, he shall serve until the earlier of (i) his resignation, (ii) election of his successor or (iii) his removal by the shareholders of the Company.

On October 9, 2006, Mr. Louis Huynh’s consulting agreement was amended to be an employment agreement under which he was appointed as the Company’s General Counsel.  Pursuant to the terms of the employment agreement, Mr. Huynh shall receive an annual salary of Sixty Thousand Dollars ($60,000) and shall receive stock options totaling in the aggregate 300,000 restricted shares; such shares are exercisable, at a per share price of $0.50, into shares of the Company’s Common Stock (the “Huynh Employment Options”).  The Huynh Employment Options shall vest one third at the date of grant and one third at the end of the first and second year from the date of grant and expire ten years from the date of vesting.  On November 20, 2006, Mr. Huynh was appointed to the Company’s Board of Directors.  On August 7, 2007, Mr. Huynh’s executive employment agreement was approved by the Board of Directors, making him the General Counsel and Secretary.  Pursuant to the terms of the executive employment agreement, Mr. Huynh shall receive an annual salary of One Hundred Twenty Thousand Dollars ($120,000), a grant of 19,445 restricted shares of the Company’s Common Stock and shall receive stock options totaling in the aggregate 200,000 restricted shares and are exercisable, at a per share price of $1.80, the Company’s market price on the date of grant, into shares of the Company’s Common Stock (the “Huynh 2nd. Employment Options”).  The Huynh 2nd. Employment Options shall vest one third at the date of grant and one third at the end of the first and second year from the date of grant and expire ten years from the date of vesting.  On June 10, 2008, Mr. Huynh was appointed the Company’s Executive Vice President, Operations and Business Development.  On October 4 2011, Mr. Huynh, the Company’s General Counsel, Executive Vice President of Operations and Business Development, Corporate Secretary and a Director notified management and the Board of Directors that he is resigning as the Company’s General Counsel, Executive Vice President of Operations and Business Development and Corporate Secretary to become a consultant for Dot VN providing Operations and Business Development Services.  On October 4, 2011, Mr. Huynh and the Company executed a consulting agreement (the “Huynh Consulting Agreement”) pursuant to which Mr. Huynh (the “Consultant”) will be entitled to a fee of $8,500 per month as well as any performance bonuses in cash and stock as may be approved by the Company from time to time.  Additionally, Company affirms and (to the extent necessary) extends the term of all vested stock options held by Consultant through the original expiration dates of such options.  The Huynh Consulting Agreement has a term of three (3) years.  Mr. Huynh will continue to serve on our Board of Directors.
 
On October 9, 2006, the Company entered into an employment agreement with Ms. Ngoc Anh Ung under which she was appointed as the Company’s Vice President of Operations and Business Development, Asia for a term of five years.  Pursuant to the terms of the employment agreement, Ms. Ung shall receive an annual salary of Eighteen Thousand Dollars ($18,000) and shall receive stock options totaling in the aggregate 150,000 restricted shares; such shares are exercisable, at a per share price of $0.50, into shares of the Company’s Common Stock (the “Ung Employment Options”).  The Ung Employment Options shall vest one third at the date of grant and one third at the end of the first and second year from the date of grant and expire ten years from the date of vesting.  Beginning in October of 2008, Ms. Ung’s salary was increased to Twenty Thousand, Four Hundred Dollars ($20,400) per year.  Beginning in May of 2010, Ms. Ung’s salary was increased to Forty-Eight Thousand Dollars ($48,000) per year.  In April of 2011, pursuant to her reassignment to the Company’s Headquarters in San Diego, Ms. Ung was paid a preliminary additional amount of Three Hundred Dollars ($300) per month.  After two months, beginning in June 2011,  Ms. Ung’s salary was increased by an additional Two Thousand Dollars ($2,000), resulting in an aggregate salary of Six Thousand, Three Hundred Dollars ($6,300) per month or an annual salary of Seventy-Five Thousand, Six Hundred Dollars ($75,600).
 
 
49

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

15.      Related party transactions (continued)
 
Other Agreements

On August 1, 2007, the Company executed a convertible note with Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors, in the amount of $1,989,066 in satisfaction of unpaid accrued salary, including interest, from January, 2003 through June, 2007 under his employment agreement with the Company (the “TJ First Note”).  The TJ First Note had a term of one year and accrued interest at a rate of Eight Percent (8%) per annum (see Note 10).  At the election of the holder, the amount due and owing pursuant to such note may be converted into restricted shares of the Company’s Common Stock at a per share price of $1.43 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into common stock) at a price below the Conversion Price, to a price equal to such issue price.  On August 14, 2008, the Company executed a convertible promissory note for $2,160,766 due February 15, 2009 plus accrued interest at Eight Percent (8%) per annum with Mr. Johnson (the “TJ Second Note”) in exchange for the unpaid balance owed under the TJ First Note which was cancelled (see Note 10).  The terms and conditions of the TJ Second Note are materially the same as the TJ First Note that expired August 1, 2008.  At the election of the holder, the amount due and owing pursuant to such note may be converted into restricted shares of the Company’s Common Stock at $1.43 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into common stock) at a price (the “Subsequent Price”) below the Conversion Price, to a price equal to such issue price.  On February 15, 2009, the TJ Second Note was amended to extend the due date to March 17, 2009 with no other change to the terms of the note or the conversion feature.  On March 17, 2009, the TJ Second Note was further amended to extend the due date to March 31, 2009 with no other change to the terms of the note or the conversion feature.  On April 20, 2009, the Company executed a convertible promissory note due October 16, 2009 plus accrued interest at Eight Percent (8%) per annum (the “TJ Third Note”) issued (i) in exchange for the unpaid balance owed under the TJ Second Note ($2,280,631) which was cancelled and (ii) in satisfaction of unpaid accrued salary and interest accruing since July 1, 2007 through January 31, 2009 under his employment agreements with the Company ($604,027) (see Note 10).  The terms and conditions of the TJ Third Note are materially the same as the TJ Second Note that expired March 31, 2009 except that in the TJ Third Note the adjusted Conversion Price is established as One Hundred Ten Percent (110%) of the Subsequent Price where previously the Subsequent Price became the adjusted Conversion Price   At the election of the holder, the amount due and owing pursuant to such note may be converted in restricted shares of the Company’s Common Stock at a per share price of $0.30 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into or exchangeable for common stock) at a price (the “Subsequent Price”) below the Conversion Price times Ninety Percent (90%), to a price equal to such Subsequent Price times One Hundred Ten Percent (110%) (the “Adjusted Conversion Price”).  On October 12, 2009, the TJ Third Note was amended to extend the due date to December 31, 2009 with no other change to the terms of the note or the conversion feature.  On November 17, 2009, the Company agreed to a 50% conversion of the outstanding balance ($1,510,489.50) at $0.30 per share and issued 5,034,965 restricted shares of the Company’s Common Stock and a $1,510,489.41 convertible note due June 30, 2010 plus accrued interest at Eight Percent (8%) per annum (the “TJ Fourth Note”) (see Note 10).  The terms and conditions of the TJ Fourth Note are materially the same as the TJ Third Note, except that in the new note the amount due and owing pursuant to such note may be converted in whole or any portion thereof, into restricted shares of the Company’s Common Stock.  At the election of the holder, the amount due and owing pursuant to such note, or any portion thereof, may be converted in restricted shares of the Company’s Common Stock at a per share price of $0.30 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into or exchangeable for common stock) at a price (the “Subsequent Price”) below the Conversion Price times Ninety Percent (90%), to a price equal to such Subsequent Price times One Hundred Ten Percent (110%) (the “Adjusted Conversion Price”).  The Company has accrued interest of $34,833 at October 31, 2011.  On June 29, 2010, the TJ Fourth Note was amended to extend the due date to December 31, 2010 with no other change to the terms of the note or the conversion feature.  On December 13, 2010, the TJ Fourth Note was amended to extend the due date to September 30, 2011 with no other change to the terms of the notes or the conversion feature.  Additionally, on September 29, 2011, the TJ Fourth Note was further amended to extend the due date to March 31, 2012 with no other change to the terms of the notes or the conversion feature.  In accordance with Codification topic 470-20, there is no beneficial conversion feature at the time of the three extensions.  On March 12, 2010, the Company closed an offering of convertible debentures (see Convertible Notes 10 and 11) which at the option of the holder converts into restricted shares of the Company’s Common Stock at $0.20 per share (the “March Debentures”).  Accordingly, the Adjusted Conversion Price of the TJ Fourth Note is reduced to $0.22 per share (the March Debentures conversion price of $0.20 times 110%).  The additional beneficial conversion feature was calculated to be $402,104 on March 12, 2010 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The additional beneficial conversion feature was amortized over the remaining term (June 30, 2011) of the TJ Fourth Note.  On August 18, 2011, the Company issued a promissory note (see Term Note 34) which included a warrant for 1,300,000 restricted shares of the Company’s Common Stock exercisable at $0.10 per share (the “Galaxy 3rd. Loan”).  Accordingly, the Adjusted Conversion Price of the TJ Fourth Note is reduced to $0.11 per share (the Galaxy 3rd. Loan warrant price of $0.10 times 110%); representing a beneficial conversion feature.  The additional beneficial conversion feature was calculated to be $420,251 on August 18, 2011 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The additional beneficial conversion feature was amortized over the remaining term (September 30, 2011) of the TJ Fourth Note.  As of October 31, 2011 the unamortized debt discount was zero.  On March 16, 2011, the Company issued 4,545,455 shares of the Company’s common stock to Mr. Thomas Johnson pursuant to the terms of the TJ Fourth Note; Mr. Thomas Johnson exercised his right to convert $1,000,000, a portion of the funds owed to him under the TJ Fourth Note, into common stock of the Company at $0.22 per share.  On December 5, 2011, pursuant to the terms of the Asher First Debenture the Company issued 333,333 shares of the Company’s Common Stock at a conversion price of $0.024 per share (the “Asher First Conversion”).  Accordingly, the Adjusted Conversion Price of the TJ Fourth Note is reduced to $0.0264 per share (the Asher First Conversion price of $0.024 times 110%); representing a beneficial conversion feature.  The additional beneficial conversion feature was calculated to be zero on December 5, 2011 in accordance with Codification topic 470-20.

 
50

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

15.      Related party transactions (continued)

Other Agreements (continued)
 
On August 1, 2007, the Company executed a convertible note with Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director, in the amount of $1,989,066 in satisfaction of unpaid accrued salary, including interest, from January, 2003 through June, 2007 under his employment agreement with the Company (the “LJ First Note”).  The LJ First Note had a term of one year and accrued interest at a rate of Eight Percent (8%) per annum (see Note 10).  At the election of the holder, the amount due and owing pursuant to such note may be converted into restricted shares of the Company’s Common Stock at a per share price of $1.43 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into common stock) at a price below the Conversion Price, to a price equal to such issue price.  On August 14, 2008, the Company executed a convertible promissory note for $2,160,767 due February 15, 2009 plus accrued interest at Eight Percent (8%) per annum with Dr. Lee Johnson (the “LJ Second Note”) in exchange for the unpaid balance owed under the LJ First Note which was cancelled (see Note 10).  The terms and conditions of the LJ Second Note are materially the same as the LJ First Note that expired August 1, 2008.  At the election of the holder, the amount due and owing pursuant to such note may be converted into restricted shares of the Company’s Common Stock at $1.43 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into common stock) at a price (the “Subsequent Price”) below the Conversion Price, to a price equal to such issue price.  On February 15, 2009, the LJ Second Note was amended to extend the due date to March 17, 2009 with no other change to the terms of the note or the conversion feature.  On March 17, 2009, the LJ Second Note was further amended to extend the due date to March 31, 2009 with no other change to the terms of the note or the conversion feature.  On April 20, 2009, the Company executed a convertible promissory note due October 16, 2009 plus accrued interest at Eight Percent (8%) per annum (the “LJ Third Note”) issued (i) in exchange for the unpaid balance owed under the LJ Second Note ($2,280,631) which was cancelled and (ii) in satisfaction of unpaid accrued salary and interest accruing since July 1, 2007 through January 31, 2009 under his employment agreements with the Company ($604,027) (see Note 10).  The terms and conditions of the LJ Third Note are materially the same as the LJ Second Note that expired March 31, 2009 except that in the LJ Third Note the adjusted Conversion Price is established as One Hundred Ten Percent (110%) of the Subsequent Price where previously the Subsequent Price became the adjusted Conversion Price   At the election of the holder, the amount due and owing pursuant to such note may be converted in restricted shares of the Company’s Common Stock at a per share price of $0.30 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into or exchangeable for common stock) at a price (the “Subsequent Price”) below the Conversion Price times Ninety Percent (90%), to a price equal to such Subsequent Price times One Hundred Ten Percent (110%) (the “Adjusted Conversion Price”).  On October 12, 2009, the LJ Third Note was amended to extend the due date to December 31, 2009 with no other change to the terms of the note or the conversion feature.  On November 17, 2009, the Company agreed to a 50% conversion of the outstanding balance ($1,510,489.50) at $0.30 per share and issued 5,034,965 restricted shares of the Company’s Common Stock and a $1,510,489.41 convertible note due June 30, 2010 plus accrued interest at Eight Percent (8%) per annum (the “LJ Fourth Note”) (see Note 10).  The terms and conditions of the LJ Fourth Note are materially the same as the LJ Third Note, except that in the new note the amount due and owing pursuant to such note may be converted in whole or any portion thereof, into restricted shares of the Company’s Common Stock.  At the election of the holder, the amount due and owing pursuant to such note, or any portion thereof, may be converted in restricted shares of the Company’s Common Stock at a per share price of $0.30 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into or exchangeable for common stock) at a price (the “Subsequent Price”) below the Conversion Price times Ninety Percent (90%), to a price equal to such Subsequent Price times One Hundred Ten Percent (110%) (the “Adjusted Conversion Price”).  The Company has accrued interest of $9,182 at October 31, 2011.  On June 29, 2010, the LJ Fourth Note was amended to extend the due date to December 31, 2010 with no other change to the terms of the note or the conversion feature.  On December 13, 2010, the TJ Fourth Note was amended to extend the due date to September 30, 2011 with no other change to the terms of the notes or the conversion feature.  Additionally, on September 29, 2011, the LJ Fourth Note was further amended to extend the due date to March 31, 2012 with no other change to the terms of the notes or the conversion feature.  In accordance with Codification topic 470-20, there is no beneficial conversion feature at the time of the three extensions.  On March 12, 2010, the Company closed an offering of convertible debentures (see Convertible Notes 10 and 11) which at the option of the holder converts into restricted shares of the Company’s Common Stock at $0.20 per share (the “March Debentures”).  Accordingly, the Adjusted Conversion Price of the LJ Fourth Note is reduced to $0.22 per share (the March Debentures conversion price of $0.20 times 110%).  The additional beneficial conversion feature was calculated to be $402,104 on March 12, 2010 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The additional beneficial conversion feature was amortized over the remaining term (June 30, 2011) of the LJ Fourth Note.  On August 18, 2011, the Company issued a promissory note (see Term Note 34) which included a warrant for 1,300,000 restricted shares of the Company’s Common Stock exercisable at $0.10 per share (the “Galaxy 3rd. Loan”).  Accordingly, the Adjusted Conversion Price of the LJ Fourth Note is reduced to $0.11 per share (the Galaxy 3rd. Loan warrant price of $0.10 times 110%); representing a beneficial conversion feature.  The additional beneficial conversion feature was calculated to be $111,304 on August 18, 2011 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The additional beneficial conversion feature was amortized over the remaining term (September 30, 2011) of the LJ Fourth Note.  As of October 31, 2011 the unamortized debt discount was zero.  On March 16, 2011, the Company issued 6,818,182 shares of the Company’s common stock to Dr. Lee Johnson pursuant to the terms of the LJ Fourth Note; Dr. Lee Johnson exercised his right to convert $1,500,000, a portion of the funds owed to him under the LJ Fourth Note, into common stock of the Company at $0.22 per share.  On December 5, 2011, pursuant to the terms of the Asher First Debenture the Company issued 333,333 shares of the Company’s Common Stock at a conversion price of $0.024 per share (the “Asher First Conversion”).  Accordingly, the Adjusted Conversion Price of the LJ Fourth Note is reduced to $0.0264 per share (the Asher First Conversion price of $0.024 times 110%); representing a beneficial conversion feature.  The additional beneficial conversion feature was calculated to be zero on December 5, 2011 in accordance with Codification topic 470-20.
 
 
51

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

15.      Related party transactions (continued)

Other Agreements (continued)
 
On July 6, 2009, the Company executed a convertible note with Mr. Louis P. Huynh, formerly the Company’s General Counsel, Executive Vice President of Operations and Business Development, Corporate Secretary and a Director, for $113,244 in satisfaction of unpaid accrued salary, including interest, from August 7, 2007 through July 6, 2009 under Mr. Huynh’s employment agreement with the Company (the “Huynh Note”) (see Note 10).  The note was due October 16, 2009 and accrues interest monthly at Eight Percent (8%) per annum.  The beneficial conversion feature was calculated to be zero at the time of issuance in accordance with Codification topic 470-20.  At the election of the holder, the amount due and owing pursuant to such note may be converted in restricted shares of the Company’s Common Stock at a per share price of $0.46 per share (the “Conversion Price”).  The Conversion Price shall be adjusted downward in the event Dot VN issues common stock (or securities exercisable for or convertible into or exchangeable for common stock) at a price (the “Subsequent Price”) below the Conversion Price times Ninety Percent (90%), to a price equal to such Subsequent Price times One Hundred Ten Percent (110%) (the “Adjusted Conversion Price”).  The Company has accrued interest of $23,048 at October 31, 2011.  On October 12, 2009, the Huynh Note was amended to extend the due date to December 31, 2009 with no other change to the terms of the note or the conversion feature.  On December 29, 2009, the Huynh Note was amended to extend the due date to June 30, 2010 with no other change to the terms of the note or the conversion feature.  On June 29, 2010, the Huynh Note was amended to extend the due date to December 31, 2010 with no other change to the terms of the note or the conversion feature.  On December 13, 2010, the Huynh Note was amended to extend the due date to September 30, 2011 with no other change to the terms of the note or the conversion feature.  Additionally, on September 29, 2011, the Huynh Note was further amended to extend the due date to March 31, 2012 with no other change to the terms of the note or the conversion feature.  In accordance with Codification topic 470-20, there is no beneficial conversion feature at the time of the five extensions.  On January 14, 2010, the Company closed an offering of convertible debentures (see Note 10) which at the option of the holder converts into restricted shares of the Company’s Common Stock at $0.30 per share (the “December Debentures”).  Accordingly, the Adjusted Conversion Price of the Huynh Loan is reduced to $0.33 per share (December Debentures conversion price of $0.30 times 110%).  The additional beneficial conversion feature was calculated to be $40,732 on January 14, 2010 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The additional beneficial conversion feature was amortized over the remaining term (June 30, 2011) of the Huynh Note.  On March 12, 2010, the Company closed an offering of convertible debentures (see Note 10) which at the option of the holder converts into restricted shares of the Company’s Common Stock at $0.20 per share (the “March Debentures”).  Accordingly, the Conversion Price of the Huynh Loan is reduced to $0.22 per share (the March Debentures conversion price of $0.20 times 110%).  The additional beneficial conversion feature was calculated to be $56,622 on March 12, 2010 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The additional beneficial conversion feature was amortized over the remaining term (June 30, 2011) of the Huynh Note.  On August 18, 2011, the Company issued a promissory note (see Term Note 34) which included a warrant for 1,300,000 restricted shares of the Company’s Common Stock exercisable at $0.10 per share (the “Galaxy 3rd. Loan”).  Accordingly, the Adjusted Conversion Price of the Huynh Loan is reduced to $0.11 per share (the Galaxy 3rd. Loan warrant price of $0.10 times 110%); representing a beneficial conversion feature.  The additional beneficial conversion feature was calculated to be $15,890 on August 18, 2011 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The additional beneficial conversion feature was amortized over the remaining term (September 30, 2011) of the Huynh Note.  As of October 31, 2011 the unamortized debt discount was zero.  On December 5, 2011, pursuant to the terms of the Asher First Debenture the Company issued 333,333 shares of the Company’s Common Stock at a conversion price of $0.024 per share (the “Asher First Conversion”).  Accordingly, the Adjusted Conversion Price of the Huynh Loan is reduced to $0.0264 per share (the Asher First Conversion price of $0.024 times 110%); representing a beneficial conversion feature.  The additional beneficial conversion feature was calculated to be zero on December 5, 2011 in accordance with Codification topic 470-20.

 
52

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

15.      Related party transactions (continued)

Other Agreements (continued)
 
On July 6, 2009, the Company granted, under the newly adopted Dot VN, Inc. 2009 Stock Option Plan, stock options to purchase an aggregate of 11,551,500 shares of the Company’s Common Stock to Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director (5,400,000 shares), Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors (5,400,000 shares), Mr. Louis P. Huynh, formerly the Company’s General Counsel, Executive Vice President of Operations and Business Development, Corporate Secretary and a Director (751,500 shares) and Ms. Ngoc Anh Ung, the Company’s Vice President of Operations and Business Development, Asia (225,000 shares).  The options have an exercise price of $0.46, a Ten Percent (10%) premium to the closing market price, vest one third at the date of grant and one third at the end of the first and second year from the date of grant.  An aggregate of 2,181,519 shares are issued as incentive stock options, as defined by U.S. treasury regulations and expire five years (1,304,346 shares) for 5% shareholders and ten years (877,173 shares) for all others from the date of grant for and an aggregate of 9,594,981 shares are issued as non-qualified stock options and expire ten years from the date of grant.  The Company has recorded Option bonus expense relating to these options of $134,771 and $1,095,792 for the six months ended October 31, 2011 and the year ended April 30, 2011, respectively, in accordance with Codification topic 718 (see Note 16).

On July 8, 2009, each of (i) Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors, (ii) Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer, and a Director and iii) Mr. Louis P. Huynh, formerly the Company’s General Counsel, Executive Vice President of Operations and Business Development, Corporate Secretary and a Director entered into a lock-up agreement with the Company pursuant to which each such person agreed that he will not offer, sell, contract to sell, grant an option to purchase, or otherwise dispose of any shares of the Company’s Common Stock owned, acquirable or vested as of the date of the lock-up agreement until July 8, 2010.

On September 12, 2009, the Company executed a note with Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors, for $18,000; the promissory note was due December 12, 2009 (see Note 11).  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Thomas First Loan”).  Proceeds were used to fund general operations.  On December 3, 2009, the Thomas First Loan was amended to extend the December 12, 2009 due date to February 28, 2010 with no other change to the terms.  On February 25, 2010, the Thomas First Loan was amended to extend the due date to May 31, 2010 with no other change to the terms.  On May 29, 2010, the Thomas First Loan was amended to extend the due date to December 31, 2010 with no other change to the terms.  On December 13, 2010, the Thomas First Loan was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Thomas First Loan was further amended to extend the due date to March 31, 2012 with no other change to the terms.  On August 10, 2011, the Company made a partial payment of $1,500 on the Thomas First Loan applied to accrued interest.  On October 24, 2011, the Company made a partial payment of $1,500 on the Thomas First Loan applied to accrued interest.  On December 5, 2011, the Company made a partial payment of $1,000 on the Thomas First Loan applied to accrued interest.  On December 9, 2011, the Company made a payment of $1,793 on the Thomas First Loan with $412 applied to accrued interest and $1,381 applied as a partial repayment of principal.

On September 18, 2009, the Company executed a note with Ms. Ngoc Anh Ung, the Company’s Vice President of Operations and Business Development, Asia, for $10,000; the promissory note was due December 18, 2009 (see Note 11).  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Ung First Loan”).  Proceeds were used to fund general operations.  On December 15, 2009, the Ung First Loan was amended to extend the December 18, 2009 due date to March 18, 2010 with no other change to the terms.  On February 12, 2010, the Ung First Loan was amended to extend the due date to June 18, 2010 with no other change to the terms.  On June 10, 2010, the Ung First Loan was amended to extend the due date to December 31, 2010 with no other change to the terms.  On December 13, 2010, the Ung First Loan was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Ung First Loan was further amended to extend the due date to March 31, 2012 with no other change to the terms.

 
53

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

15.      Related party transactions (continued)

Other Agreements (continued)
 
On October 29, 2009, the Company executed a promissory note with Ms. Hue Tran Johnson for $10,000; the revolving credit agreement was due January 29, 2010 (see Note 11).  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Hue Revolver”).  Proceeds were used to fund general operations.  Ms. Johnson is the wife of Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director.  The Company borrowed an additional $5,000, $10,000, $30,000, $15,000, $5,000, $23,000, $10,000, $20,000, $15,000, $5,000, $30,000, $10,000, $10,000, $10,000, $15,000, $500, $25,000, $10,000, $10,000, $10,000, $10,000, $20,000, $2,500, $2,200, $8,000, $19,000 and $9,000 from Ms. Johnson under the Hue Revolver on November 16, November 17, December 2, 2009, January 8, January 28, April 14, July 19, July 20, July 27, August 9, August 30, September 14, September 16, 2010, January 3, January 4, January 18, January 27, February 9, March 4, April12, April 18, June 1, August 3, September 20, September 26, September 27 and September 28, 2011, respectively.  In addition, the Company borrowed additional funds advanced in Hanoi, Vietnam of 200,000,000đ (equivalent to $10,471), 700,000,000đ (equivalent to $36,083) and 400,000,000đ (equivalent to $19,512) on June 23, August 16, 2010, and April 5, 2011, respectively.  On January 27, April 19, and May 16, August 9 and September 22, 2011, the Company repaid $500, $10,000, $22,200, $2,500 and $2,200 on the Hue Revolver.  On January 21, 2010, the Hue Revolver was amended to extend the January 29, 2010 due date to April 30, 2010 with no other change to the terms.  On April 29, 2010, the Hue Revolver was further amended to extend the due date to December 31, 2010 with no other change to the terms.  On December 13, 2010, the Hue Revolver was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Hue Revolver was further amended to extend the September 30, 2011 due date to March 31, 2012 with no other change to the terms.  Additionally, the Company borrowed an additional $2,500 and $3,000 under the Hue Revolver on November 10 and November 22, 2011, respectively.  Further, on November 23, 2011, the Company repaid $6,500 on the Hue Revolver.

On November 30, 2009, the Company executed a note with Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors, for $30,000; the promissory note was due February 28, 2010 (see Note 11).  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Thomas Second Loan”).  Proceeds were used to fund general operations.  On February 25, 2010, the Thomas Second Loan was amended to extend the due date to May 31, 2010 with no other change to the terms.  On May 29, 2010, the Thomas Second Loan was amended to extend the due date to December 31, 2010 with no other change to the terms.  On December 13, 2010, the Thomas Second Loan was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Thomas Second Loan was further amended to extend the due date to March 31, 2012 with no other change to the terms.  On November 2, 2011, the Company made a partial payment of $2,500 on the Thomas Second Loan applied to accrued interest.  On November 4, 2011, the Company made a partial payment of $2,000 on the Thomas Second Loan applied to accrued interest.  On November 17, 2011, the Company made a partial payment of $2,000 on the Thomas Second Loan applied to accrued interest.  On December 9, 2011, the Company made a payment of $149 on the Thomas Second Loan applied to accrued interest.

On January 19, 2010, the Company executed a note with Ms. Ngoc Anh Ung, the Company’s Vice President of Operations and Business Development, Asia, for $24,000; the promissory note is due February 18, 2010 (see Note 11).  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Ung Second Loan”).  Proceeds were used to fund general operations.  On January 25, 2010, an aggregate of $14,000 was repaid on the Ung Second Loan.  On February 10, 2010, an additional $10,000 was repaid on the Ung Second Loan.  At October 31, 2011, the Company owes $99 of accrued interest on the Ung Second Loan.

 
54

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

15.      Related party transactions (continued)

Other Agreements (continued)

On February 12, 2010, the Company executed a note with Ms. Ngoc Anh Ung, the Company’s Vice President of Operations and Business Development, Asia, for $9,000; the promissory note is due March 12, 2010 (see Note 11).  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Ung Third Loan”).  Proceeds were used to fund general operations.  On March 3, 2010, $9,000 was repaid on the Ung Third Loan.  At October 31, 2011, the Company owes $55 of accrued interest on the Ung Third Loan.

On March 12, 2010, the Company converted an aggregate of $668,667 of unpaid salaries and accrued interest owed to its three officers into convertible debentures due in three years offered by the Company, which offering closed on March 12, 2010 (see Note 10).  The set of three (3) convertible debentures, with the same terms and conditions as the March Debentures, were issued in satisfaction of unpaid accrued salary and interest for (i) Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors from February 1, 2009 through December 12, 2009 ($329,510.48), (ii) Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director, from February 1, 2009 through December 12, 2009 ($329,510.48), and (iii) Mr. Louis P. Huynh, formerly the Company’s General Counsel, Executive Vice President of Operations and Business Development, Corporate Secretary and a Director from July 8, 2009 to January 9, 2010 ($9,645.97) under their respective employment agreements with the Company (the “March Officer Debentures”).  The convertible debentures have a three year term and are due March 12, 2013.  Interest accrues at Ten Percent (10%) per annum and is due quarterly.  The debentures convert, in whole or in part, at the option of each individual noteholder (the “March Officer Investors”) into restricted shares of the Company’s Common Stock at $0.20 per share; representing a beneficial conversion feature.  In addition, the March Officer Investor received a detachable warrant for restricted shares of the Company’s Common Stock; the number of shares of each warrant is equal to 100% of the number of shares issuable pursuant to conversion of the debenture for an aggregate of 3,346,336 restricted shares.  The detachable warrants have an exercise price of $0.30 per share, a term of three years from the date of issuance, and vest upon the conversion of the debenture with a partial debenture conversion vesting a proportional number of warrant shares.  In the event the Company issues common stock (or securities exercisable for or convertible into or exchangeable for common stock) at a price below the Conversion Price then the Conversion Price shall be subject to a BBWA adjustment, as defined.  The fair value of the beneficial conversion feature, calculated in accordance with Codification topic 470-20, is $300,900; excluding the unvested detachable warrants.  The beneficial conversion feature is recorded as debt discount with a corresponding credit to additional paid-in capital and is amortized over the life of the March Officer Debentures (three years).  On August 18, 2011, the Company issued a promissory note (see Term Note 34) which included a warrant for 1,300,000 restricted shares of the Company’s Common Stock exercisable at $0.10 per share (the “Galaxy 3rd. Loan”).  Accordingly, the Conversion Price of the March Officer Debentures is reduced to $0.19 per share, consistent with the BBWA, as defined.  The additional beneficial conversion feature was calculated to be $35,193 on August 18, 2011 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The Company has accrued interest, from inception, of $109,551 at October 31, 2011.  As of October 31, 2011 the unamortized debt discount was $168,566.  On December 5, 2011, pursuant to the terms of the Asher First Debenture the Company issued 333,333 shares of the Company’s Common Stock at a conversion price of $0.024 per share (the “Asher First Conversion”).  Accordingly, the Conversion Price of the March Debentures is reduced to $0.18 per share consistent with the BBWA, as defined.  The additional beneficial conversion feature was calculated to be $37,148 on December 5, 2011 in accordance with Codification topic 470-20.

On April 16, 2010, in a private assignment of a $50,000 March Debenture (see Convertible Notes 10) an aggregate of $10,000 was assigned to Ms. Tran Lee Johnson ($5,000) and Ms. Lee Tran Johnson ($5,000), both a related party.  Ms. Tran Lee Johnson and Ms. Lee Tran Johnson are the daughters of Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director.  The two $5,000 assigned March Debentures, unamortized debt discount and accrued interest have been reclassified as a related party obligation from Convertible Notes 10 and are included in Convertible Notes 11 (the “March Officer Debentures”).  On August 18, 2011, the Company issued a promissory note (see Term Note 34) which included a warrant for 1,300,000 restricted shares of the Company’s Common Stock exercisable at $0.10 per share (the “Galaxy 3rd. Loan”).  Accordingly, the Conversion Price of the March Officer Debentures is reduced to $0.19 per share, consistent with the BBWA, as defined.  The additional beneficial conversion feature was calculated to be $526 on August 18, 2011 in accordance with Codification topic 470-20; the Company recorded this amount as debt discount with a corresponding credit to additional paid-in capital.  The Company has accrued interest, from inception, of $1,543 at October 31, 2011.  As of October 31, 2011 the unamortized debt discount was $2,606.  On December 5, 2011, pursuant to the terms of the Asher First Debenture the Company issued 333,333 shares of the Company’s Common Stock at a conversion price of $0.024 per share (the “Asher First Conversion”).  Accordingly, the Conversion Price of the March Debentures is reduced to $0.18 per share consistent with the BBWA, as defined.  The additional beneficial conversion feature was calculated to be $556 on December 5, 2011 in accordance with Codification topic 470-20.

 
55

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

15.      Related party transactions (continued)

Other Agreements (continued)
 
On May 19, 2010, the Hi-Tek Trademark Loan was amended to extend the due date to December 31, 2010 and split the note in two separate convertible notes (see Note 10).  The first note for $200,000 includes a new provision for the monthly payment of interest effective July 1, 2010 in arrears, there were no other change to the terms of the original note or the conversion feature (“Hi-Tek Trademark Loan One”).  The second note for $314,968 did not change the interest accrual or payment terms; there were no other change to the terms of the original note or the conversion feature (“Hi-Tek Trademark Loan Two”).  Also on May 19, 2010, Hi-Tek Private assigned the Hi-Tek Trademark Loan One to Mr. Howard Johnson, a related party.  Mr. Johnson is the father of Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors and Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director.  On December 28, 2010, the Hi-Tek Trademark Loan One was amended to extend the due date to June 30, 2011, with no other change to the terms of the note or the conversion feature.  Additionally, on June 29, 2011, the Hi-Tek Trademark Loan One was further amended to extend the due date to December 31, 2011, with no other change to the terms of the note or the conversion feature.  In accordance with Codification topic 470-20, there is no beneficial conversion feature at the time of the extensions.  On August 18, 2011, the Company issued a promissory note (see Term Note 34) which included a warrant for 1,300,000 restricted shares of the Company’s Common Stock exercisable at $0.10 per share (the “Galaxy 3rd. Loan”).  Accordingly, the Conversion Price of the Hi-Tek Trademark Loan One is reduced to $0.10 per share consistent with the Galaxy 3rd. Loan.  The additional beneficial conversion feature was calculated to be zero on August 18, 2011 in accordance with Codification topic 470-20.  The Company has accrued interest of $1,713 and unamortized debt discount was zero on the Hi-Tek Trademark Loan One, held by Mr. Howard Johnson, as of October 31, 2011.  On December 5, 2011, pursuant to the terms of the Asher First Debenture the Company issued 333,333 shares of the Company’s Common Stock at a conversion price of $0.024 per share (the “Asher First Conversion”).  Accordingly, the Conversion Price of the Hi-Tek Trademark Loan One is reduced to $0.024 per share consistent with the Asher First Conversion.  The additional beneficial conversion feature was calculated to be zero on December 5, 2011 in accordance with Codification topic 470-20.

On August 30, 2010, the Company executed a note with Mr. Louis P. Huynh, formerly the Company’s General Counsel, Executive Vice President of Operations and Business Development, Corporate Secretary and a Director, for $20,500; the promissory note was due September 30, 2010 (see Note 11).  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Huynh Loan”).  Proceeds were used to fund general operations.  On September 30, 2010, the Huynh Loan was amended to extend the due date to December 31, 2010 with no other change to the terms.  On December 13, 2010, the Huynh Loan was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Huynh Loan was further amended to extend the due date to March 31, 2012 with no other change to the terms.

On August 30, 2010, the Company executed a note with Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors, for $30,000; the promissory note was due November 30, 2010 (see Note 11).  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Thomas Fourth Loan”).  Proceeds were used to fund general operations.  On November 10, 2010, the Thomas Fourth Loan was amended to extend the due date to December 31, 2010 with no other change to the terms.  On December 13, 2010, the Thomas Fourth Loan was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Thomas Fourth Loan was further amended to extend the due date to March 31, 2012 with no other change to the terms.  On November 23, 2011, the Company made a partial payment of $1,500 on the Thomas Fourth Loan applied to accrued interest.  On November 28, 2011, the Company made a partial payment of $1,500 on the Thomas Fourth Loan applied to accrued interest.  On December 5, 2011, the Company made a partial payment of $1,000 on the Thomas Fourth Loan applied to accrued interest.  On December 9, 2011, the Company made a payment of $57 on the Thomas Fourth Loan applied to accrued interest.

 
56

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

15.      Related party transactions (continued)

Other Agreements (continued)
 
On September 17, 2010, the Company executed a note with Ms. Ngoc Anh Ung, the Company’s Vice President of Operations and Business Development, Asia, for $15,000; the promissory note was due December 17, 2010 (see Note 11).  Interest accrues monthly at a rate of Ten Percent (10%) per annum (the “Ung Fourth Loan”).  Proceeds were used to fund general operations.  On December 13, 2010, the Ung Fourth Loan was amended to extend the due date to September 30, 2011 with no other change to the terms.  Additionally, on September 29, 2011, the Ung Fourth Loan was further amended to extend the due date to March 31, 2012 with no other change to the terms.

On November 3, 2010, the Company executed a note with Ms. Ngoc Anh Ung, the Company’s Vice President of Operations and Business Development, Asia, for 288,008,000đ (equivalent to $14,800); the revolving credit agreement is due August 3, 2011 (see Note 11).  Interest accrues monthly at a rate of Twelve Percent (12%) per annum (the “Ung Revolver”).  Proceeds were used to fund general operations in Vietnam.  The Company borrowed an additional 389,200,000đ (equivalent to $20,000), 583,800,000đ (equivalent to $30,000), 194,800,000đ (equivalent to $10,000), 194,800,000đ (equivalent to $10,000), 116,940,000đ (equivalent to $6,000), 200,000,000đ (equivalent to $10,257), 50,000,000đ (equivalent to $2,439), 100,000,000đ (equivalent to $4,878), 50,000,000đ (equivalent to $2,439), 100,000,000đ (equivalent to $4,878), 100,000,000đ (equivalent to $4,878), 200,00,000đ (equivalent to $9,756), 200,00,000đ (equivalent to $9,756), 100,00,000đ (equivalent to $4,878), 73,00,000đ (equivalent to $3,561) and 30,000,000đ (equivalent to $1,422) from Ms. Ung under the Ung Revolver on November 18, December 2, and December 22, 2010, January 7, January 17, January 27, March 7, April 7, April 9, April 14, April 19, April 20, June 27, July 5, July 14 and October 25, 2011 respectively.  In addition, the Company borrowed additional funds advanced in U.S. currency of $10,000, $1,000, $9,000, $9,000, $9,000 and $15,000 on January 4, January 18, January 26, May 10, July 15 and August 16, 2011, respectively.  An aggregate of $31,173 and $48,086 was repaid on the Ung Revolver in San Diego, California during the six months ended October 31, 2011 and the year ended April 30, 2011, respectively.  Additionally, the Company borrowed an additional $5,000, 130,000,000đ (equivalent to $6,100), $9,000 and 63,000,000đ (equivalent to $3,000) under the Ung Revolver on November 1, November 4, December 14 and December 15, 2011, respectively.  Further, on November 23, December 12 and December 13, 2011, the Company repaid $5,000, $3,045 and $3,000 on the Ung Revolver, respectively.

On December 15, 2010, the Company issued to Mr. Louis P. Huynh, formerly the Company’s General Counsel, Executive Vice President of Operations and Business Development, Corporate Secretary and a Director, and to Ms. Ngoc Anh Ung, the Company’s Vice President of Operations and Business Development, Asia, 15,000 shares and 15,000 shares of the Company’s restricted common stock as a compensation for past services with a fair value of approximately $2,550 and $2,550, respectively.

On March 16, 2011, the Company issued 4,545,455 shares of the Company’s common stock to Mr. Thomas Johnson, the Company’s Chief Executive Officer and Chairman of the Board of Directors, pursuant to the terms of the TJ Fourth Note; Mr. Thomas Johnson exercised his right to convert $1,000,000, a portion of the funds owed to him under the TJ Fourth Note, into common stock of the Company at $0.22 per share.

Also on March 16, 2011, the Company issued 6,818,182 shares of the Company’s common stock to Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director, pursuant to the terms of the LJ Fourth Note; Dr. Lee Johnson exercised his right to convert $1,500,000, a portion of the funds owed to him under the LJ Fourth Note, into common stock of the Company at $0.22 per share.

 
57

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

15.      Related party transactions (continued)

Other Agreements (continued)

On October 4, 2011, Mr. Huynh, the Company’s General Counsel, Executive Vice President of Operations and Business Development, Corporate Secretary and a Director notified management and the Board of Directors that he is resigning as the Company’s General Counsel, Executive Vice President of Operations and Business Development and Corporate Secretary to become a consultant for Dot VN providing Operations and Business Development Services.  On October 4, 2011, Mr. Huynh and the Company executed a consulting agreement (the “Huynh Consulting Agreement”) pursuant to which Mr. Huynh (the “Consultant”) will be entitled to a fee of $8,500 per month as well as any performance bonuses in cash and stock as may be approved by the Company from time to time.  Additionally, Company affirms and (to the extent necessary) extends the term of all vested stock options held by Consultant through the original expiration dates of such options.  The Huynh Consulting Agreement has a term of three (3) years.  Mr. Huynh will continue to serve on our Board of Directors.

16.      Warrants, options and stock based compensation

On October 9, 2006, the Company issued options to purchase an aggregate of 7,650,000 restricted shares of the Company’s Common Stock with an estimated fair value of $19,886,786 to three officers (see Note 15) and an employee.  The options have an exercise price of $0.50 per share, vest one third at the date of grant and one third at the end of the first and second year from the date of grant and expire ten years the date of vesting.  As of October 31, 2011, 7,650,000 options have vested and no options were exercised.  Compensation cost, using the graded vesting attribute method in accordance with Codification topic 718, is recognized over the requisite service period during which each tranche (one third) of shares is earned (zero, one, and two years).  The value of each tranche is amortized on a straight-line basis; zero was expensed during the quarter ended October 31, 2011 and the year ended April 30, 2011.

The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 212.1%; risk-free interest rate of 4.70%; contractual life of ten years; and a closing market price of $2.60.  Expected volatility is calculated based on the historic Friday stock market closing price from the first week the Company was publically traded over the counter on the Pink Sheets to the date of grant, a seventy-three week period, in accordance with Codification topic 718 implementation guidance.

On January 31 and February 9, 2007, in connection with the February Financing (see Note 10), the Company issued detachable warrants to the investors exercisable into an aggregate of 344,465 restricted shares of the Company’s Common Stock at a per share price of $2.00, with an estimated fair value of $901,632.  The warrants have a term of five years from the date of issuance.  The combined fair value of the warrants and the associated beneficial conversation feature of the Convertible Debentures are limited to the proceeds of the debt; $259,954 was allocated to the warrants.  These warrants have been recorded as a discount against the Convertible Debentures and will be amortized to interest expense over the term of the debt (generally two years) or upon the earlier conversion of the debt; there is no unamortized balance at October 31, 2011.  As of October 31, 2011, no warrants were exercised.

Additionally, pursuant to its engagement of Pali Capital, Inc., the Company’s placement agent in the February Financing, the Company issued three series of warrants: (i) retainer warrants on January 31, 2007 totaling in the aggregate 250,000 restricted shares exercisable at a per share price of $0.001, with an estimated fair value of $712,404; (ii) placement warrants A on February 9, 2007  totaling in the aggregate 229,600 restricted shares exercisable at a per share price of $1.00, with an estimated fair value of $563,640; and (iii) placement warrants B on February 9, 2007 totaling in the aggregate 68,880 restricted shares exercisable at a per share price of $2.00, with an estimated fair value of $167,700 (collectively the “Placement Agent Warrants”).  The Placement Agent Warrants have a term of five years from the date of issuance.  The retainer warrants were expensed over the one year engagement term and the two placement warrants were expensed over the two year term of the February Financing or upon the earlier election to exercise; there is no unamortized balance of the retainer warrants or the two placement warrants at October 31, 2011.  As of October 31, 2011, an aggregate of 73,750 $0.001 Pali Retainer Warrants and 42,180 $1.00 Pali Placement Warrants A have been exercised.  In addition, the Company agreed to register the shares associated with the Placement Agent Warrants in the registration statement required in connection with the February Financing (see Notes 9 and 10).
 
 
58

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

16.      Warrants, options and stock based compensation (continued)

The fair value of these options was estimated at January 31 and February 9, 2007 (the dates of grant) using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 192.8% and 190.7%; risk-free interest rate of 4.82% and 4.78%; contractual life of five years; and a closing market price of $2.85 and $2.50; respectively.  Expected volatility is calculated based on the historic Friday stock market closing price of the preceding eighty-nine and ninety-one week periods (from Pink Sheet inception).

The Company issued a series of six monthly warrants exercisable into 40,000 restricted shares of the Company’s Common Stock on July 5, August 5, September 5, October 5, November 5, and December 5, 2007 for an aggregate of 240,000 restricted shares to Double Barrel, LLC for monthly performance of services, with an estimated fair value of $73,086, $58,021, $66,771, $77,954, $67,900, and $63,845 respectively.  Each warrant is exercisable at $1.50 per share and expires three years from the date of grant.  The warrants are earned in the month of grant and the fair value is expensed in the month.  The series of six warrants expired unexercised on July 5, August 5, September 5, and October 5, November 5, and December 5, 2010, respectively.  As of October 31, 2011, there are no warrants outstanding.

The fair value of these warrants were estimated at the dates of grant using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 188.7%, 184.7%, 181.7%, 179.5%; 176.1%, and 174.9%, risk-free interest rate of 5.00%, 4.45%, 4.05%, 4.16%, 3.71%, and 2.91%; contractual life of three years; and a closing market price of $1.99, $1.61, $1.85, $2.15, $1.90, and $1.80; respectively.  Expected volatility is calculated based on the historic Friday stock market closing price of the preceding 111 week, 116 week, 120 week, 125 week, 130 week, 133 week periods (from Pink Sheet inception).

On August 7, 2007, the Company issued options to purchase an aggregate of 350,000 restricted shares of the Company’s Common Stock with an estimated fair value of $628,847 to an officer (Louis P. Huynh) and an employee.  The options have an exercise price of $1.80 per share, vest one third at the date of grant and one third at the end of the first and second year from the date of grant and expire ten years the date of vesting.  On January 15, 2009, 150,000 options expired unexercised upon the employee’s termination.  As of October 31, 2011, 200,000 options have vested and no options were exercised.  Compensation cost, using the graded vesting attribute method in accordance with Codification topic 718, is recognized over the requisite service period during which each tranche (one third) of shares is earned (zero, one, and two years).  The value of each tranche is amortized on a straight-line basis; zero was expensed in the six months ended October 31, 2011 and the year ended April 30, 2011.

The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 184.7%; risk-free interest rate of 4.77%; contractual life of ten years; and a closing market price of $1.80.  Expected volatility is calculated based on the historic Friday stock market closing price of the preceding 116 week period (from Pink Sheet inception).

On September 7, 2007, the Company issued options to purchase 10,000 restricted shares of the Company’s Common Stock with an estimated fair value of $16,400 to an employee.  The options have an exercise price of $2.00 per share, vest at the date of grant and expired September 7, 2010, three years the grant date, unexercised.  Compensation cost, in accordance with Codification topic 718, was recognized over the requisite service period (date of grant).

The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 181.2%; risk-free interest rate of 4.38%; contractual life of three years; and a closing market price of $1.85.  Expected volatility is calculated based on the historic Friday stock market closing price of the preceding 121 week period (from Pink Sheet inception).

On September 18, 2007, the Company issued a 200,000 share warrant pursuant to the terms of a consulting agreement exercisable into restricted shares of the Company’s Common Stock with an estimated fair value of $275,312 to IR.VN LLC with a three year term and an exercise price of $2.00 per share.  The value of the warrants was expensed over the one year term of service.  On September 18, 2010 the warrants expired unexercised.

 
59

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

16.      Warrants, options and stock based compensation (continued)

The fair value of these warrants was estimated at the date of grant using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 181.5%; risk-free interest rate of 4.04%; contractual life of three years; and a closing market price of $1.57.  Expected volatility is calculated based on the historic Friday stock market closing price of the preceding 122 week period (from Pink Sheet inception).

On August 5, 2008, the Company issued options to purchase 75,000 restricted shares of the Company’s Common Stock with an estimated fair value of $75,561 to an employee.  The options have an exercise price of $1.80 per share, vest one third at the date of grant and one third on February 14, 2009 and 2010 and expire ten years from the date of vesting.  As of October 31, 2011, 75,000 options have vested and no options were exercised.  Compensation cost, using the graded vesting attribute method in accordance with Codification topic 718, is recognized over the requisite service period during which each tranche (one third) of shares is earned (zero, seven, and nineteen months).  The value of each tranche is amortized on a straight-line basis; zero was expensed during the six months ended October 31, 2011 and the year ended April 30, 2011.

The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 185.1%; risk-free interest rate of 4.04%; contractual life of ten years; and a closing market price of $1.01.  Expected volatility is calculated based on the historic Friday stock market closing price of the preceding one hundred and sixty-seven week period (from Pink Sheet inception).

Following the January 31, 2009 maturity of the February Debentures (see Note 10) the Company proposed an extension of the due date and a modification of the terms.  Thirteen (13) February Investors (the “Extended Notes”) have agreed to the Company’s proposal (see Note 10) regarding their (i) February Debentures and (ii) accrued, but unpaid, liquidated damages in exchange, in part, for a warrant equal to Twenty Percent (20%) of the combined amount due and owing on the same terms as the detachable warrants issued with the original February Debentures.  The series of thirteen (13) warrants expire January 31, 2012 and are exercisable into an aggregate of 36,623 restricted shares of the Company’s Common Stock at a per share price of $2.00, with an estimated fair value of $10,754 capitalized as a deferred charge associated with the issuance of these debt instruments (see Note 9).  The deferred charge is amortized on a straight-line basis over the approximate thirty-six month term of the term debt with $1,636 and $3,272 expensed in the six months ended October 31, 2011 and the year ended April 30, 2011, respectively.

The fair value of these warrants was estimated at March 10, March 13, March 15, March 16, March 18, March 25, April 13,May 4, May 7,and August 25 2009 (the dates of acceptance) using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 188.4%, 187.9%, 187.9%, 187.9%, 187.9%, 204.1%, 210.7%, 209.7%, 209.7%% and 204.5%; risk-free interest rate of 1.46%, 1.36%, 1.39%, 1.39%, 1.14%, 1.35%, 1.27%, 1.40%, 1.46% and 1.56%; contractual life of approximately three years; and a closing market price of $0.50, $0.50, $0.50, $0.50, $1.12, $0.24, $0.25, $0.35, $0.40 and $0.47; respectively.  Expected volatility is calculated based on the historic Friday stock market closing price of the preceding one hundred eighty-nine to two hundred twenty two week periods (from Pink Sheet inception).

On April 20 and April 21, 2009, pursuant to the terms of two stock subscription agreements, the Company issued two warrants exercisable into an aggregate of 166,668 restricted shares of the Company’s Common Stock at a per share price of $1.00 expiring two years from the date of issuance.  The warrants expired April 20 and April 21, 2011 unexercised.

On April 29, 2009, pursuant to the terms of a stock subscription agreement, the Company issued a warrant exercisable into 110,716 restricted shares of the Company’s Common Stock at a per share price of $1.50 expiring two years from the date of issuance.  The warrant expired April 29, 2011 unexercised.

On May 4 and May 15, 2009, pursuant to the terms of four stock subscription agreements, the Company issued four warrants exercisable into an aggregate of 173,278 restricted shares of the Company’s Common Stock at a per share price of $1.50 expiring two years from the date of issuance.  The warrants expired May 4 and May 15, 2011 unexercised.

 
60

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

16.      Warrants, options and stock based compensation (continued)

On June 5 and June 18, 2009, pursuant to the terms of two stock subscription agreements, the Company issued two warrants exercisable into an aggregate of 150,000 restricted shares of the Company’s Common Stock at a per share price of $1.00 expiring two years from the date of issuance.  The warrants expired June 5 and June 18, 2011 unexercised.

On July 6, 2009, the Company’s Board of Directors approved the Company’s 2009 Stock Option Plan (the “Option Plan”).  The Option Plan is administered by a two (2) or more persons committee appointed by the Board of Directors or the Board of Directors (the “Plan Administrator”) and provides for the issuance of up to twenty-five million shares of the Company’s Common Stock.  Under the Option Plan incentive stock options (“ISO”) may be granted to employees of the Company or its subsidiary companies and non-qualified stock options may be granted to employees and non-employees of the Company or its subsidiary companies.  Options are exercisable at such times and subject to such terms and conditions as the Plan Administrator determines at the time of grant, except in the case of an ISO for which the exercise price shall not be less than 100% of the fair market value per share at the date of grant or for options granted to a greater-than-ten percent shareholder 110% of the fair market value per share at the date of grant and for a term not to exceed five years.  Generally, options vest one third at the date of grant and one third at the end of the first and second year from the date of grant, expire ten years from the date of issue or upon the option holders termination of employment or contractual relationship with the Company or its subsidiary for unvested options and ninety-days for vested options except in the case of death or disability then vested options expire one year from termination.  Shares of common stock allocated to outstanding options unexercised which expire or are terminated may again be subject to an option grant.  On July 9, 2009, the Company filed a registration statement on form S-8 for the twenty-five million shares of the Company’s Common Stock allocated to the Option Plan.

On July 6, 2009, the Company granted under the newly adopted Option Plan stock options to purchase an aggregate of 12,460,500 shares of the Company’s Common Stock with an estimated fair value of $5,218,093 to four officers (11,776,500 shares with an estimated fair value of $4,931,065) and twelve employees (684,000 shares with an estimated fair value of $287,028).  The employee options, granted as incentive stock options (“ISO”), have an exercise price of $0.42 per share, generally vest one third at the date of grant and one third at the end of the first and second year from the date of grant and expire ten years the date of issue.  The officers options, granted as ISO (2,181,519 shares) and non-qualified stock options (9,594,981 shares), have an exercise price of $0.46 per share, a Ten Percent (10%) premium on the market closing price, vest one third at the date of grant and one third at the end of the first and second year from the date of grant and expire in ten years from the date of issue except for ISO grants to Mr. Johnson and Dr. Johnson which expire in five years from the date of issue (see Note 15).  Unvested options generally expire upon termination of employment and vested options expire 90 days after termination.  As of October 31, 2011, 12,216,500 options have vested and no options were exercised.  Compensation cost, using the graded vesting attribute method in accordance with Codification topic 718, is recognized over the requisite service period during which each tranche (one third) of shares is earned (zero, one, and two years).  The value of each tranche is amortized on a straight-line basis; $141,660 and $1,150,694 were expensed during the six months ended October 31, 2011 and the year ended April 30, 2011, respectively.  Amortization for the year ending April 30, 2012 is $141,660.  Upon termination of employment 156,000 and 84,000 options have terminated during the six months ended October 31, 2011 and the year ended April 30, 2011, respectively.  Prior to termination of the option agreement, $210 and $11,260 were expensed in the six months ended October 31, 2011 and the year ended April 30, 2011, respectively.  An aggregate of 300,000 options have terminated as of October 31, 2011.

The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 207.3%; risk-free interest rate of 3.52%; contractual life of ten years; and a closing market price of $0.42 except for the five year ISO grants which used a risk-free interest rate of 2.4%; contractual life of five years.  Expected volatility is calculated based on the historic Friday stock market closing price of the preceding 215 week period (from Pink Sheet inception).

On July 8, 2009, pursuant to the terms of a stock subscription agreement, the Company issued a warrant exercisable into 100,000 restricted shares of the Company’s Common Stock at a per share price of $1.50 expiring July 8, 2011.  The warrants expired July 8, 2011 unexercised.

 
61

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

16.      Warrants, options and stock based compensation (continued)

On August 5, August 14, and August 24, 2009, pursuant to the terms of four stock subscription agreements, the Company issued four warrants exercisable into an aggregate of 260,000 restricted shares of the Company’s Common Stock at a per share price of $1.50 expiring August 5, August 14, and August 24, 2011.  The warrants expired August 5, August 14, and August 24, 2011 unexercised.

On August 20, 2009, the Company issued a 10,000 share warrant pursuant to the terms of a consulting agreement exercisable into restricted shares of the Company’s Common Stock with an estimated fair value of $3,721 with a two year term and an exercise price of $1.00 per share.  The value of the warrant was expensed in the month of grant.  The warrant expired August 20, 2011 unexercised.

The fair value of the warrant was estimated at the date of grant using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 204.9%; risk-free interest rate of 1.03%; contractual life of two years; and a closing market price of $0.47.  Expected volatility is calculated based on the historic Friday stock market closing price of the preceding 221 week period (from Pink Sheet inception).

On September 25, 2009, pursuant to the terms of a stock subscription agreement, the Company issued a warrant exercisable into 100,000 restricted shares of the Company’s Common Stock at a per share price of $1.50 expiring September 25, 2011.  The warrant expired September 25, 2011 unexercised.

On October 7, 2009, pursuant to the terms of a stock subscription agreement, the Company issued a warrant exercisable into 110,000 restricted shares of the Company’s Common Stock at a per share price of $1.50 expiring October 7, 2011.  The warrant expired October 7, 2011 unexercised.

On December 1, 2009, the Company issued a 200,000 share warrant pursuant to the terms of a consulting agreement exercisable into restricted shares of the Company’s Common Stock with an estimated fair value of $57,119 with a two year term and an exercise price of $1.00 per share.  The value of the warrant was expensed in the month of grant; there is no unamortized balance at October 31, 2011.  As of October 31, 2011, no warrants were exercised.

The fair value of the warrant was estimated at the date of grant using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 198.7%; risk-free interest rate of 0.67%; contractual life of two years; and a closing market price of $0.38.  Expected volatility is calculated based on the historic Friday stock market closing price of the preceding 236 week period (from Pink Sheet inception).

On December 30, 2009, in connection with the December Debentures (see Note 10), the Company issued detachable warrants to the investors exercisable into an aggregate of 100,001 restricted shares of the Company’s Common Stock at a per share price of $0.80.  The warrants have a term of two years from the date of issuance and vests upon the conversion of the debenture with a partial debenture conversion vesting a proportional number of warrant shares.  The estimated gross fair value, contingent upon vesting of the warrant shares, allocated to the warrants at the date of grant is $26,669.  On June 10, 2010 one (1) December Investor exercised the conversion option on a $5,000 debenture thereby vesting the 16,667 share detachable warrant.  The fair value of the vested detachable warrant, calculated in accordance with Codification topic 470-20, is $4,167 and was recorded as debt discount, fully expensed when recorded, with a corresponding credit to additional paid-in capital.  On June 30, 2010, the remaining 83,334 warrant shares expired when the underlying debentures were not converted prior to their maturity.  As of October 31, 2011, 16,667 warrants were vested and unexercised.

The fair value of these warrants was estimated at December 30, 2009, the date of grant, using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 197.1%; risk-free interest rate of 1.08%; contractual life of two years; and a closing market price of $0.35.  Expected volatility is calculated based on the historic Friday stock market closing price of the preceding 240 week period (from Pink Sheet inception).

 
62

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

16.      Warrants, options and stock based compensation (continued)

On February 12, 2010, in connection with the March Debentures (see Note 10), the Company issued detachable warrants to the investors exercisable into an aggregate of 1,531,666 restricted shares of the Company’s Common Stock at a per share price of $0.30.  The warrants have a term of three years from the date of issuance and vests upon the conversion of the debenture with a partial debenture conversion vesting a proportional number of warrant shares.  The estimated gross fair value, contingent upon vesting of the warrant shares, allocated to the warrants at the date of grant is $418,064.  On December 13, 2010, one March Investor exercised the conversion option on an $85,000 debenture vesting the 425,000 share detachable warrant.  The fair value of the vested detachable warrant, calculated in accordance with Codification topic 470-20, is $42,500 and was recorded as debt discount, fully expensed when recorded, with a corresponding credit to additional paid-in capital.  As of October 31, 2011, 425,000 warrants are vested and no warrants were exercised.

The fair value of these warrants was estimated at February 12, 2010, the date of grant, using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 194.5%; risk-free interest rate of 1.38%; contractual life of three years; and a closing market price of $0.30.  Expected volatility is calculated based on the historic Friday stock market closing price of the preceding 247 week period (from Pink Sheet inception).

On February 26, 2010, in connection with the March Debentures (see Note 10), the Company issued detachable warrants to the investor exercisable into an aggregate of 2,500,000 restricted shares of the Company’s Common Stock at a per share price of $0.30.  The warrants have a term of three years from the date of issuance and vests upon the conversion of the debenture with a partial debenture conversion vesting a proportional number of warrant shares.  The estimated gross fair value, contingent upon vesting of the warrant shares, allocated to the warrants at the date of grant is $681,212.  On March 22, 2010, one (1) March Investor exercised the conversion option on $150,000 of principal, a portion of their March Debenture, vesting 750,000 share of the detachable warrant.  The fair value of the vested detachable warrant, calculated in accordance with Codification topic 470-20, is $71,395 and was recorded as debt discount, fully expensed when recorded, with a corresponding credit to additional paid-in capital.  On May 28, 2010 the same March Investor exercised the conversion option on $250,000 of principal, a portion of their March Debenture, vesting 1,250,000 share of the detachable warrant.  The fair value of the vested detachable warrant, calculated in accordance with Codification topic 470-20, is $128,605 and was recorded as debt discount, fully expensed when recorded, with a corresponding credit to additional paid-in capital.  As of October 31, 2011, 2,000,000 warrant shares are vested and no warrants were exercised.

The fair value of these warrants was estimated at February 26, 2010, the date of grant, using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 193.6%; risk-free interest rate of 1.36%; contractual life of three years; and a closing market price of $0.30.  Expected volatility is calculated based on the historic Friday stock market closing price of the preceding 249 week period (from Pink Sheet inception).

On March 12, 2010, in connection with the March Debentures (see Note 10), the Company issued detachable warrants to the investor exercisable into 2,625,000 restricted shares of the Company’s Common Stock at a per share price of $0.30.  The warrants have a term of three years from the date of issuance and vests upon the conversion of the debenture with a partial debenture conversion vesting a proportional number of warrant shares.  The estimated gross fair value, contingent upon vesting of the warrant shares, allocated to the warrants at the date of grant is $689,384.  On August 31, 2011 one (1) March Investor exercised the conversion option on two March Debentures aggregating $275,000 of principal vesting the detachable warrants aggregate 1,375,000 share.  The fair value of the vested detachable warrant, calculated in accordance with Codification topic 470-20, is $136,776 and was recorded as debt discount, fully expensed when recorded, with a corresponding credit to additional paid-in capital.  As of October 31, 2011, 1,375,000 warrants were vested.  On November 23, 2011 one (1) March Investor exercised the conversion option on a March Debentures ($25,000 of principal) vesting the detachable warrants aggregate 125,000 share.  The fair value of the vested detachable warrant, calculated in accordance with Codification topic 470-20, is $12,434 and was recorded as debt discount, fully expensed when recorded, with a corresponding credit to additional paid-in capital.

Also on March 12, 2010, in connection with the March Debentures (see Note 10), the Company issued detachable warrants to the three Company officers (see Notes 10 and 15) exercisable into 3,343,336 restricted shares of the Company’s Common Stock at a per share price of $0.30.  The warrants have a term of three years from the date of issuance and vests upon the conversion of the debenture with a partial debenture conversion vesting a proportional number of warrant shares.  The estimated gross fair value, contingent upon vesting of the warrant shares, allocated to the warrants at the date of grant is $878,035.  As of October 31, 2011, no warrants were vested.

 
63

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

16.      Warrants, options and stock based compensation (continued)
 
The fair value of these warrants was estimated at March 12, 2010, the date of grant, using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 192.8%; risk-free interest rate of 1.50%; contractual life of three years; and a closing market price of $0.29.  Expected volatility is calculated based on the historic Friday stock market closing price of the preceding 251 week period (from Pink Sheet inception).

On July 31, 2010, pursuant to the terms of two stock subscription agreements, the Company issued two warrants exercisable into an aggregate 303,715 restricted shares of the Company’s Common Stock at a per share price of $0.35 expiring July 31, 2013.  As of October 31, 2011, no warrants were exercised.

On December 10, 2010, pursuant to the terms of three promissory note extension agreements, the Company issued a series of three warrants exercisable into an aggregate 1,000,000 restricted shares of the Company’s Common Stock at a per share price of $0.25 expiring December 10, 2013 to IDCG SA de CV, a corporation established under the laws of the Country of Mexico (“IDCG SA”) as consideration to extend the individual note due dates from December 31, 2010 to September 30, 2011 (see Note 11).  The estimated aggregate fair value of $157,229 was capitalized as a deferred charge associated with the loan extensions and will be amortized on a straight-line basis over a nine month period (see Note 9).

The fair value of these options was estimated at December 10, 2010, the date of grant, using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 184.9%; risk-free interest rate of 1.03%; contractual life of three years; and a closing market price of $0.18.  Expected volatility is calculated based on the historic Friday stock market closing price of the preceding 290 week period (from Pink Sheet inception).

On January 18, 2011, pursuant to the terms of a new six month promissory note, the Company issued a warrant for the purchase of 200,000 shares of the Company’s restricted common stock at $0.25 valid for a term of two years to G.F. Galaxy Corporation.  The estimated fair value of $26,064 was capitalized as a deferred charge associated with the new promissory note and will be amortized on a straight-line basis over a six month period (see Note 9).

The fair value of these options was estimated at January 18, 2011, the date of grant, using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 183.3%; risk-free interest rate of 0.60%; contractual life of two years; and a closing market price of $0.17.  Expected volatility is calculated based on the historic Friday stock market closing price of the preceding 295 week period (from Pink Sheet inception).

On January 26, 2011, pursuant to the terms of two stock subscription agreements, the Company issued two warrants exercisable into an aggregate 1,000,000 restricted shares of the Company’s Common Stock at a per share price of $0.25 expiring January 26, 2013.  As of October 31, 2011, no warrants were exercised.

On February 28, 2011, the Company issued two 150,000 share warrants pursuant to the terms of two consulting agreements exercisable into restricted shares of the Company’s Common Stock with an estimated fair value of $33,250 with a three year term and an exercise price of $1.00 per share.  The value of the warrants was expensed in the month of grant; there is no unamortized balance at October 31, 2011.  As of October 31, 2011, no warrants were exercised.

The fair value of these warrants was estimated at the date of grant using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 181.6%; risk-free interest rate of 1.18%; contractual life of two years; and a closing market price of $0.15.  Expected volatility is calculated based on the historic Friday stock market closing price of the preceding 301 week period (from Pink Sheet inception).

 
64

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

16.      Warrants, options and stock based compensation (continued)

On March 31, 2011, pursuant to the terms of a stock subscription agreement, the Company issued a warrant exercisable into 2,583,948 restricted shares of the Company’s Common Stock at a per share price of $0.25 expiring March 31, 2013.  As of October 31, 2011, no warrants were exercised.

During April 2011, pursuant to the terms of four stock subscription agreements, the Company issued four warrants exercisable into an aggregate of 1,525,000 restricted shares of the Company’s Common Stock at a per share price of $0.25 expiring in April 2013.  As of October 31, 2011, no warrants were exercised.

On April 30, 2011, the Company issued a 100,000 share warrant pursuant to the terms of a strategic advisory board (“SAB”) agreement exercisable into restricted shares of the Company’s Common Stock with an estimated fair value of $30,693 with a three year term and an exercise price of $0.25 per share.  The value of the warrant is expensed over the SAB one year service period ending November 30, 2011 with $15,346 and $12,789 expensed in the six months ended October 31, 2011 and the year ended April 30, 2011, respectively.  The unamortized balance at October 31, 2011 is $2,558.  As of October 31, 2011, no warrants were exercised.

The fair value of these warrants was estimated at the date of grant using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 181.7%; risk-free interest rate of 1.01%; contractual life of three years; and a closing market price of $0.34.  Expected volatility is calculated based on the historic Friday stock market closing price of the preceding 310 week period (from Pink Sheet inception).

On May 12, 2011, pursuant to the terms of a stock subscription agreement, the Company issued a warrant exercisable into 2,250,000 restricted shares of the Company’s Common Stock at a per share price of $0.25 expiring May 12, 2013.  As of October 31, 2011, no warrants were exercised.

On August 18, 2011, pursuant to the terms of a new eleven month promissory note, the Company issued a warrant for the purchase of 1,300,000 shares of the Company’s restricted common stock at $0.10 valid for a term of two years to G.F. Galaxy Corporation.  The estimated fair value of $127,327 was capitalized as a deferred charge associated with the new promissory note and will be amortized on a straight-line basis over an eleven month period (see Note 9).

The fair value of these options was estimated at August 18, 2011, the date of grant, using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 180.4%; risk-free interest rate of 0.20%; contractual life of two years; and a closing market price of $0.12.  Expected volatility is calculated based on the historic Friday stock market closing price of the preceding 325 week period (from Pink Sheet inception).

On October 27, 2011, the Company issued a 250,000 share warrant pursuant to the terms of a consulting agreement exercisable into restricted shares of the Company’s Common Stock with an estimated fair value of $31,400 with a three year term and an exercise price of $0.30 per share.  The value of the warrants was expensed in the month of grant; there is no unamortized balance at October 31, 2011.  As of October 31, 2011, no warrants were exercised.

The fair value of these warrants was estimated at the date of grant using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 180.6%; risk-free interest rate of 0.53%; contractual life of three years; and a closing market price of $0.15.  Expected volatility is calculated based on the historic Friday stock market closing price of the preceding 335 week period (from Pink Sheet inception).

 
65

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

16.      Warrants, options and stock based compensation (continued)

A summary of the Company’s stock options as of October 31 and April 30, 2011 and changes during the periods is as follows:

   
Period ended
 
   
October 31, 2011
   
April 30, 2011
 
   
Options
   
Weighted
average
exercise
price
   
Weighted
average
intrinsic
value
per share
   
Options
   
Weighted
average
exercise
price
   
Weighted
average
intrinsic
value
per share
 
                                                             
 
 
   
 
   
 
   
 
   
 
   
 
 
Outstanding at the beginning of the period
    20,241,500     $ 0.492             20,335,500     $ 0.492        
Granted
    -     $ -             -     $ -        
Exercised
    -     $ -             -     $ -        
Cancelled
    156,000     $ 0.420             94,000     $ 0.588        
Outstanding at the end of the period
    20,085,500     $ 0.492     $ 0.800       20,241,500     $ 0.492     $ 0.794  
                                                 
Vested at the end of the period
    20,085,500                       16,160,000                  
Exercisable at the end of period
    20,085,500             $ 0.800       16,160,000             $ 0.994  
Weighted average fair value per share of
options granted during the period
          $ -                     $ -          

The following table summarizes information regarding employee stock options outstanding at October 31, 2011:

     
Options Outstanding
   
Options Exercisable
 
Exercise prices
   
Number
Outstanding
   
Weighted
average
remaining
contractual
life (years)
   
Weighted
average
exercise
price
   
Number
exercisable
   
Weighted
average
remaining
contractual
life (years)
   
Weighted
average
exercise
price
 
 
   
 
   
 
   
 
   
 
           
 
 
$ 0.42 to 0.46       12,160,500       7.7     $ 0.457       12,160,500             $ 0.457  
$ 0.50       7,650,000       5.7     $ 0.500       7,650,000             $ 0.500  
$ 1.80       275,000       6.7     $ 1.807       275,000             $ 1.807  
          20,085,500       6.9     $ 0.492       20,085,500       6.9     $ 0.492  
 
 
66

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

16.      Warrants, options and stock based compensation (continued)

The following table summarizes information regarding the 2009 Stock Option Plan, adopted July 6, 2009, for the six months ended October 31, 2011 and the year ended April 30, 2011:

   
October 31,
   
April 30,
 
   
2011
   
2011
 
             
Balance at beginning of year
    12,683,500       12,599,500  
Shares authorized for grant
    -       -  
Shares granted
    -       -  
Shares cancelled
    156,000       84,000  
Balance at end of period
    12,839,500       12,683,500  

A summary of the Company’s warrants as of October 31 and April 30, 2011 and changes during the periods is as follows:

   
Period ended
 
   
October 31, 2011
   
April 30, 2011
 
   
Warrants
   
Weighted
average
exercise
price
   
Warrants
   
Weighted
average
exercise
price
 
                                                                                       
 
 
   
 
   
 
   
 
 
Outstanding at the beginning of the period
    18,946,248     $ 0.385       12,734,303     $ 0.507  
Granted
    3,800,000     $ 0.078       7,012,663     $ 0.286  
Exercised
    -             $ -     $ -  
Cancelled
    903,278     $ 0.576       800,718     $ 1.448  
Outstanding at the end of the period
    21,842,970     $ 0.324       18,946,248     $ 0.385  
                                 
Vest and exercisable at the end of period
    15,642,968               11,371,246          
Weighted average fair value per share of warrants
granted during the period
          $ 0.049             $ 0.170  

The following table summarizes information regarding stock purchase warrants outstanding at October 31, 2011:

     
Warrants Outstanding
   
Warrants Exercisable
 
Exercise prices
   
Number
Outstanding
   
Weighted
average
remaining
contractual
life (years)
   
Weighted
average
exercise
price
   
Number
exercisable
   
Weighted
average
remaining
contractual
life (years)
   
Weighted
average
exercise
price
 
 
   
 
   
 
   
 
   
 
   
 
   
 
 
$ 0.001       176,250       0.3     $ 0.001       176,250             $ 0.001  
$ 0.25 to 0.35       19,212,665       1.6     $ 0.278       13,012,663             $ 0.268  
$ 0.800       16,667       0.2     $ 0.800       16,667             $ 0.800  
$ 1.000       687,420       1.1     $ 1.000       687,420             $ 1.000  
$ 2.000       449,968       0.3     $ 2.000       449,968             $ 2.000  
          21,842,970       1.5     $ 0.324       15,642,968       1.8     $ 0.333  
 
 
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Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

17.      Going concern

To date the Company has had limited revenues from the marketing and registration of ‘.vn’ domain names as it operates in this single industry segment.  Consequently, the Company has incurred recurring losses from operations.  In addition, the Company 1) has defaulted on the repayment of convertible debentures a) two (2) Defaulted Debentures aggregating $112,500 that were due January 31, 2009 (see Notes 10 and 11) and b) two (2) December Debentures aggregating $25,000 that were due June 30, 2010 (see Note 10) and currently has not negotiated new terms or an extension of the due date on these obligations; 2) is delinquent on the payment of w) thirteen (13) Extended February Debt monthly amortized payment, x) fifteen (15) March Debentures quarterly interest, y) five (5) March Officer Debentures quarterly interest and z) two (2) Vision Debentures monthly interest payment and currently has not negotiated a waiver or modified terms.  These factors, as well as the risks associated with raising capital through the issuance of equity and/or debt securities creates uncertainty as to the Company’s ability to continue as a going concern.

The Company’s plans to address its going concern issues include:
 
·  
Increasing revenues of its services, specifically within its domain names registration business segment through:
·  
the collection of service fees and value added services associated with both standard ccTLDs and IDNs
·  
through direct marketing to existing customers both online, via e-mail and direct mailings, and
·  
the commercialize of online advertising services on Dot VN online properties;
·  
Develop the INFO.VN web platform as a central hub for the best content the Vietnamese Internet has to offer and which will also serve as a platform through which we will launch a variety of new online services and web properties, to include Internet advertising;
·  
Completion and operation of the IDCs based on micro-modular data centers technology and revenue derived from the IDC services;
·  
Commercialization and deployment of certain new technologies:
·  
multi-gigabit capacity virtual fiber systems, a wireless point-to-point layer one solution, and
·  
micro-modular data centers solutions; and
·  
Raising capital through the sale of debt and/or equity securities.

There can be no assurance that the Company will be successful in its efforts to increase revenues, issue debt and/or equity securities for cash or as payment for outstanding obligations.  Capital raising efforts may be influenced by factors outside of the control of the Company, including, but not limited to, capital market conditions.

The Company is in various stages of finalizing implementation strategies on a number of services and is actively attempting to market its services nationally in Vietnam.  As a result of capital constraints it is uncertain when it will be able to initiate construction of the IDCs.

18.      Stock issuances

On May 12, 2011, pursuant to the terms of a stock subscription agreement, entered into with an accredited investor, the Company issued 900,000 restricted shares of the Company’s Common Stock at $0.25 per unit for cancellation of $225,000 of debt owed to Hi-Tek Private on the Hi-Tek Revolver (see Note 11).  Each subscription unit consists of one restricted share of the Company’s Common Stock and a warrant to purchase two and one-half restricted shares of the Company’s Common Stock at an exercise price of $0.25 expiring two years from the date of subscription.

On August 18, 2011, pursuant to the terms of an August 18, 2011 promissory note, the Company issued to G.F. Galaxy Corporation, a California corporation, an accredited investor, 100,000 restricted shares of the Company’s Common Stock for an eleven month extension of the promissory note recorded at the market closing price as a deferred debt issuance cost of $12,000.

On August 31, 2011, pursuant to the terms of two March Debentures, the Company issued an accredited investor an aggregate of 1,660 312 restricted shares of the Company’s Common Stock in exchange for the cancellation of an aggregate $275,000 March Debenture plus $40,459 of accrued interest.
 
 
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Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011


19.      Subsequent events

On November 1, 2011, the Company borrowed $5,000 under the Ung Revolver; proceeds were used to fund general operations in Vietnam.

On November 2, 2011, the Company made a partial payment of $2,500 on the Thomas Second Loan applied to accrued interest.

On November 4, 2011, the Company borrowed 130,000,000đ (approximately $6,100) under the Ung Revolver; proceeds were used to fund general operations.

On November 4, 2011, the Company made a partial payment of $2,000 on the Thomas Second Loan applied to accrued interest.

On November 10, 2011, the Company borrowed $2,500 under the Hue Revolver; proceeds were used to fund general operations.

On November 17, 2011, the Company made a partial payment of $2,000 on the Thomas Second Loan applied to accrued interest.

On November 22, 2011, the Company borrowed $3,000 under the Hue Revolver; proceeds were used to fund general operations.

On November 23, 2011, the Company repaid the $5,000 on the Ung Revolver.

Also on November 23, 2011, the Company repaid $6,500 on the Hue Revolver.

On November 23, 2011, the Company made a partial payment of $1,500 on the Thomas Fourth Loan applied to accrued interest.

On November 23, 2011, one (1) March Investor, pursuant to the terms of the March Debentures, exercised the option to convert the debentures and accrued interest ($29,301) and received 154,218 restricted shares of the Company’s Common Stock and the detachable warrant for 125,000 shares vested.  The fair value of the vested detachable warrant, calculated in accordance with Codification topic 470-20, is $12,434 and was recorded as debt discount, fully expensed when recorded, with a corresponding credit to additional paid-in capital.  Upon conversion, $5,921 of unamortized debt discount, from the beneficial conversion feature, was also expensed.

On November 28, 2011, the Company made a partial payment of $1,500 on the Thomas Fourth Loan applied to accrued interest.

On December 5, 2011, Asher exercised their option to convert $8,000 of the debenture into 333,333 non-restricted shares of the Company’s Common Stock at a Conversion Price of $0.024 based on a 40% discount applied to the average of the three (3) lowest closing bid prices during the ten trading days prior to their notice.

On December 5, 2011, the Company made an aggregate payment of $2,000 applied to accrued interest as a partial payment of $1,000 on the Thomas First Loan and $1,000 on the Thomas Fourth Loan.

On December 9, 2011, the Company made an aggregate payment of $2,000 applied to accrued interest of $919 (payment of $412 on the Thomas First Loan, $149 on the Thomas Second Loan and $57 on the Thomas Fourth Loan) and $1,381 applied as a partial repayment of principal on the Thomas First Loan.

On December 12, 2011, the Company repaid $3,045 on the Ung Revolver.

 
69

 

Dot VN, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 31, 2011

19.      Subsequent events (continued)

On December 13, 2011, the Company repaid $3,000 on the Ung Revolver.

On December 14, 2011, the Company borrowed $9,000 under the Ung Revolver; proceeds were used to fund general operations in Vietnam.

On December 15, 2011, the Company borrowed 63,000,000đ (equivalent to $3,000) under the Ung Revolver; proceeds were used to fund general operations in Vietnam.
 
 
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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following information should be read in conjunction with (i) the condensed consolidated financial statements of Dot VN, Inc. and the notes thereto appearing elsewhere in this Form 10-Q together and (ii) the more detailed business information and the April 30, 2011 and 2010 audited consolidated financial statements and related notes included in the Company’s most recent Form 10-K as filed with the Securities and Exchange Commission.  Statements in this section and elsewhere in this Form 10-Q that are not statements of historical or current fact are forward-looking statements, as that term is defined by the Private Securities Litigation Reform Act of 1995, including statements relating to our plans, objectives, expectations and intentions.  Although we believe that the expectations reflected in such forward-looking statements are reasonable, forward-looking statements are subject to risks and uncertainties that could cause actual results to differ from those projected.  We caution investors that any forward-looking statements made by us are not guarantees of future performance and that actual results may differ materially from those in the forward-looking statements.  Such risks and uncertainties include, without limitation: established competitors who have substantially greater financial resources and operating histories, regulatory delays or denials, ability to compete as a start-up company in a highly competitive market, and access to sources of capital.

OVERVIEW

Dot VN, Inc., its subsidiaries, and its predecessors (the “Company” or “Dot VN”), is a leading technology company deploying cutting edge infrastructure solutions and innovative online services and solutions focused on the Vietnamese and South East Asian markets.  Dot VN provides first class Internet related services including domain name registration, web hosting and Internet advertising through its INFO.VN platform and web portal.  Dot VN is also focused on commercializing cutting edge infrastructure technology in the South East Asian region.  Dot VN has signed agreements with industry leaders in the data center and wireless sectors to develop a market for their products in the region.

Dot VN was incorporated in the State of Delaware on May 27, 1998, under the name Trincomali Ltd. (“Trincomali”).  Over the course of its history, Trincomali underwent additional name changes until being renamed Malers, Inc. (“Malers”) on April 28, 2005.  On July 17, 2006, Malers completed an Agreement and Plan of Merger with Dot VN, Inc., a California corporation (“Dot VN CA”), the completion of which transaction resulted in Malers being renamed “Dot VN, Inc.” and Dot VN CA was renamed Hi-Tek Multimedia, Inc. becoming a wholly owned subsidiary of the Company.  Final state regulatory approval was received on August 17, 2006.  For accounting purposes, the acquisition has been treated as a recapitalization of Dot VN CA with Dot VN CA as the acquirer (reverse acquisition).  Dot VN CA was treated as the acquirer for accounting purposes because after the acquisition the shareholders of Dot VN CA controlled Malers and the officers and directors of Dot VN CA assumed the same positions at Malers; Malers is the surviving entity for legal purposes.  The historical financial statements prior to July 17, 2006 are those of Dot VN CA.

Dot VN has signed agreements with the Vietnamese Internet Network Information Center (“VNNIC”) to serve as the only domain name registrar empowered with independent authority to approve and register in real time, without VNNIC participation, Vietnamese domain names and we are the only registrar authorized to process all third level registrations online which provides Dot VN with a competitive advantage vis-à-vis other domain name registrars (the “VNNIC Registrars Agreement”).  The current VNNIC Registrars Agreement has no fixed term.  On May 25, 2009, the Company signed an exclusive rights agreement with VNNIC to promote and advertise the registration of the ‘.vn’ ccTLD with the commercialization of a pay-per-click (“PPC”) parking page program for ‘.vn’ domain registrations; VNNIC directs all Internet traffic requesting a non-existent or expired domain name to a web page managed by the Company which Dot VN will leverage towards developing industry leading online services and web portals.  On February 22, 2011, the Company signed an agreement with VNNIC which designates Dot VN as VNNIC’s sole partner in developing, promoting and managing the Vietnamese native language internationalized domain name (the “Vietnamese IDNs”) system.

In response to the continued development of Internet access and online services, the Company has expanded our business to encompass two additional sectors: (i) online services and (ii) infrastructure solutions.  In connection with this shift, we are beginning to offer content through our main web portal INFO.VN, and are developing products and services for consumers based on a “freemium” model, which offers users both free and paid premium services, in an effort to attract and engage a broader group of consumers and encourage adoption of our upgraded premium services.

Consistent with our focus on content, online services and generating online advertising revenues, we have begun executing a long term strategic plan to reinvigorate growth in our revenues and profits by taking advantage of the Vietnamese Market’s migration of commerce, information and advertising to the Internet.  Our strategy is to focus our resources on Dot VN’s core competitive strengths in web portals, consumer and business applications, while expanding the presence of our advertising and paid services, content, product and service offerings on multiple platforms and digital devices centered on Dot VN’s INFO.VN web portal.
 
 
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INFO.VN offerings include content produced through a large network of content providers, which includes established journalists and other writers aggregated into one convenient web portal “INFO.VN”.  Featured offerings will include the following: News & Information; Travel and Culture; Entertainment and Sports; and Marketplace Solutions (including Classified Ads and Business Directory Services).

In addition to online services, Dot VN is currently in the process of developing an Internet data center (“IDC” in the singular or “IDCs” in the plural) which will serve as an internal data and telecommunications network within the country of Vietnam for Dot VN’s Online Services.  The IDCs will provide web hosting, collocation, and disaster recovery services as well as serve as the basic infrastructure for additional Internet and data technologies such as virtual fiber connectivity, distance e-learning and e-government projects.  The Company has secured a 35-year lease, ending September 21, 2043, for approximately 8,768 square meters of land in the Danang Industrial Zone in Danang City, Vietnam upon which it intends to construct a dedicated IDC building.  The IDC developments are anticipated to occur in the mid-term.  In the long term, the Company intends to develop additional IDCs in the rest of the Country of Vietnam.

Dot VN has a signed agreement with E-Band Communications Corporation providing the Company the right to distribute E-Band’s multi-gigabit capacity virtual fiber systems and related E-Band technology and services (the “E-Band Products”) in Vietnam, as well as, the right to distribute E-Band Products in Cambodia, Thailand and Laos.

Dot VN has a signed agreement with Elliptical Mobile Solutions, LLC (“EMS”) providing the Company the exclusive right to distribute EMS’s micro-modular data centers (“MMDC”) solutions and related technology and services (the “EMS Products”) in Vietnam, and the non-exclusive right to distribute EMS Products in Asia.

Dot VN will continue to explore and test, and analyze, new and best of breed technologies and applications for deployment in Vietnamese and South East Asian markets.

Going Concern

To date the Company has had limited revenues from the marketing and registration of ‘.vn’ domain names as it operates in this single industry segment.  Consequently, the Company has incurred recurring losses from operations.  In addition, the Company 1) has defaulted on the repayment of convertible debentures a) two (2) Defaulted Debentures aggregating $112,500 that were due January 31, 2009 (see Notes 10 and 11) and b) two (2) December Debentures aggregating $25,000 that were due June 30, 2010 (see Note 10) and currently has not negotiated new terms or an extension of the due date on these obligations; 2) is delinquent on the payment of w) thirteen (13) Extended February Debt monthly amortized payment, x) fifteen (15) March Debentures quarterly interest, y) five (5) March Officer Debentures quarterly interest and z) two (2) Vision Debentures monthly interest payment and currently has not negotiated a waiver or modified terms.  These factors, as well as the risks associated with raising capital through the issuance of equity and/or debt securities creates uncertainty as to the Company’s ability to continue as a going concern.

The Company’s plans to address its going concern issues include:
 
·  
Increasing revenues of its services, specifically within its domain names registration business segment through:
·  
the collection of service fees and value added services associated with both standard ccTLDs and IDNs,
·  
through direct marketing to existing customers both online, via e-mail and direct mailings, and
·  
the commercialization of online advertising services on Dot VN online properties;
·  
Develop the INFO.VN web platform as a central hub for the best content the Vietnamese Internet has to offer and which will also serve as a platform through which we will launch a variety of new online services and web properties, to include Internet advertising;
·  
Completion and operation of the IDCs based on micro-modular data centers technology and revenue derived from the IDC services;
·  
Commercialization and deployment of certain new technologies:
·  
multi-gigabit capacity virtual fiber systems, a wireless point-to-point layer one solution, and
·  
micro-modular data centers solutions; and
·  
Raising capital through the sale of debt and/or equity securities.

There can be no assurance that the Company will be successful in its efforts to increase revenues, issue debt and/or equity securities for cash or as payment for outstanding obligations.  Capital raising efforts may be influenced by factors outside of the control of the Company, including, but not limited to, capital market conditions.
 
 
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The Company is in various stages of finalizing implementation strategies on a number of services and is actively attempting to market its services nationally in Vietnam.  As a result of capital constraints it is uncertain when it will be able to initiate construction of the IDCs.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).  The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.  We have identified the policies below as critical to our business operations and to the understanding of our financial results:

Basis of Presentation

The Company's consolidated financial statements are prepared using the accrual method of accounting and include the accounts of Dot VN, Inc. its wholly-owned subsidiaries and the variable interest entity for which the Company is the primary beneficiary, which conforms to generally accepted accounting principles in the United States of America (“U.S. GAAP”).  All significant intercompany accounts and transactions have been eliminated in consolidation.

Variable Interest Entity

Following is a description of our financial interests the variable interest entity that we consider significant and for which we are the primary beneficiary of the entity and, therefore, have consolidated the entity into our financial statements.

Công ty Cổ Phần Internet và Viễn thong Viễt Nam, a joint stock company, also known as Vietnam Telecommunications and Internet Joint Stock Company and doing business as IT.VN, jsc (“IT.VN”), existing under the laws of the country of Vietnam, was established to address the Company’s need for licenses and permits to operate certain projects in Vietnam as well as support development of the Company’s projects with the country of Vietnam including the management of the INFO.VN, a web portal which employs the Company’s unregistered domain name monetization rights.  The Company is the direct beneficiary of all economic and legal benefit derived from the ownership of IT.VN and IT.VN is managed by Dot VN staff at the direction of the Company’s officers and directors.  Under the arrangement, IT.VN will facilitate the sales of online advertising within Vietnam, manage and develop content for INFO.VN web portal and perform such other functions as may be required by the Company’s management from time to time.  Ownership of IT.VN is held by three (3) nominees of the Company, Dr. Lee Johnson, the Company’s President, Chief Technology Officer, Chief Financial Officer and a Director; Mr. Louis P. Huynh, formerly the Company’s General Counsel, Executive Vice President of Operations and Business Development, and Corporate Secretary and a Director; and Ms. Ngoc Anh Ung, the Company’s Vice President of Operations, Business Development, Asia.  The nominees have executed agreements with the Company which provide that (i) the nominees shall represent the Company in the management and operation of IT.VN, subject to the direction of the Company’s Board of Directors, until the earlier of his or her resignation, termination or replacement and (ii) all legal and economic benefit in IT.VN is irrevocably assigned to Dot VN by such nominees.  The arrangement involves nominee participation for the purpose of complying with Vietnam law and policy.  The definitive agreements memorializing the transactions were executed on December 14, 2010.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
 
 
73

 

Revenue Recognition

We recognize revenue in accordance with Security and Exchange Commission (“SEC”) Codification of Staff Accounting Bulletin (“CSAB”) topic 13 “Revenue Recognition” and Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification”) topic 605-45 “Principal Agent Considerations” (reporting revenue gross as a principal versus net as an agent).  Accordingly, we recognize revenue and the related costs when: (1) persuasive evidence of an arrangement exists; (2) delivery and acceptance has occurred or service has been rendered; (3) the fee is fixed or determinable; and (4) collectability of the resulting receivable is reasonably assured.

The Company principally generates revenues from the sale of ‘.vn ccTLD domain names for the government of Vietnam.  These revenues consist primarily of registration and renewal fees, which are recorded gross in accordance with Codification topic 605-45.

Amounts invoiced or collected in advance of delivery or providing service are recorded as a deferred revenue liability; revenue is recognized when the domain names are authorized and released to the customer.

Fair Value of Financial Instruments

Codification topic 825, “Financial Instruments”, requires disclosure of fair value information about financial instruments when it is practicable to estimate that value.  The carrying amounts of the Company’s financial instruments as of April 30, 2011 and 2010 approximate their respective fair values because of the short-term nature of these instruments.  Such instruments consist of cash, accounts receivable, accounts payable, due to related parties, short-term convertible and term debt, and accrued and other liabilities.

Foreign Currency Translation

The functional currency of the Company’s Vietnam subsidiaries is the applicable local currency.  The functional currency is translated into U.S. dollars for balance sheet accounts using current exchange rates in effect as of the balance sheet date and for revenue and expense accounts and cash flow items using a weighted-average exchange rate during the reporting period.  Adjustments resulting from translation are included in accumulated comprehensive income (loss), a separate component of shareholders’ equity (deficit).  Gains or losses resulting from transactions denominated in foreign currencies are included in other income and expense, net in the consolidated statements of operations.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, and is comprised of “net income (loss)” and “other comprehensive income (loss).”  The Company’s other comprehensive income is comprised exclusively of changes in the Company’s currency translation adjustment account.

Inventories

Inventories are stated at the lower of cost using the first-in first-out method or market.

Equipment

Equipment, leasehold improvements, and additions thereto, including capitalized interest, are carried at cost.  Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable property generally three to five years for assets purchased new and two to three years for assets purchased used.  Leasehold improvements are amortized over the shorter of the lease term or the estimated lives.  Management evaluates useful lives regularly in order to determine recoverability taking into consideration current technological conditions.  Maintenance and repairs are charged to expense as incurred; additions and betterments are capitalized.  Fully depreciated assets are retained in equipment and accumulated depreciation accounts until retirement or disposal.  Upon retirement or disposal of an asset, the cost and related accumulated depreciation are removed, and any resulting gain or loss, net of proceeds, is credited or charged to operations.

Interest on borrowings related to eligible capital expenditures is capitalized as part of the cost of the qualified asset and amortized over the estimated useful life of the asset in accordance with Codification topic 835-20 “Capitalization of Interest”.
 
 
74

 

Goodwill and Other Intangible Assets

Goodwill and acquired intangible assets determined to have an indefinite useful lives are not amortized, but instead are evaluated for impairment annually and if events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with Codification topic 350 “Intangible – Goodwill and Other”.  The impairment test consists of a comparison of the fair value of an intangible asset with its carrying amount.  If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.  After an impairment loss is recognized, the adjusted carrying amount of the intangible asset is its new accounting basis.  Subsequent reversal of a previously recognized impairment loss is prohibited.  Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with Codification topic 360.

Long-Lived Assets

Long-Lived assets, such as property and equipment and purchased intangibles with finite lives (subject to amortization), are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable in accordance with Codification topic 360 “Property, Plant, and Equipment”.  Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life.

Recoverability of assets is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by an asset.  If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized as the amount by which the carrying amount exceeds the estimated fair value of the asset.  The estimated fair value is determined using a discounted cash flow analysis.  Any impairment in value is recognized as an expense in the period when the impairment occurs.

Deferred Charges

The Company capitalizes costs associated with the issuance of debt instruments as a non-current asset.  These costs are amortized on a straight-line basis over the term of the debt instruments.

Convertible Debt

In accordance with Codifications topic 470-20 ”Debt with Conversion and Other Options” the Company evaluates debt securities (“Debt”) for beneficial conversion features.  A beneficial conversion feature is present when the conversion price per share is less than the market value of the common stock at the commitment date.  The intrinsic value of the feature is then measured as the difference between the conversion price and the market value (the “Spread”) multiplied by the number of shares into which the Debt is convertible and is recorded as debt discount with an offsetting amount increasing additional paid-in capital.  The debt discount is accreted to interest expense over the term of the Debt with any unamortized discount recognized as interest expense upon conversion of the Debt.  If a debt security contains terms that change upon the occurrence of a future event the incremental intrinsic value is measured as the additional number of issuable shares multiplied by the commitment date market value and is recognized as additional debt discount with an offsetting amount increasing additional paid-in capital upon the future event occurrence.  The total intrinsic value of the feature is limited to the proceeds allocated to the Debt instrument.

Income Taxes

Income taxes are provided in accordance with Codifications topic 740, “Income Taxes”, which requires an asset and liability approach for the financial accounting and reporting of income taxes.  Current income tax expense (benefit) is the amount of income taxes expected to be payable (receivable) for the current year.  A deferred tax asset and/or liability is computed for both the expected future impact of differences between the financial statement and tax bases of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carry forwards.  Deferred income tax expense is generally the net change during the year in the deferred income tax asset and liability.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be “more likely than not” realized in future tax returns.  Tax rate changes and changes in tax laws are reflected in income in the period such changes are enacted.

Uncertain Tax Positions

Codifications topic 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.  Accounting for uncertainty in income taxes is addressed by a two-step method of first evaluating whether a tax position has met a more-likely-than-not recognition threshold and second, measuring that tax position to determine the amount of benefit to be recognized in the financial statements.
 
 
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Guarantees of Others

Codifications topic 460, “Guarantees” requires an initial recognition and measurement of guarantees in which the guarantor obligation represents a liability, as defined.  Excluded from recognition are guarantees which may be settled in equity shares of the guarantor, at its option, and instead establishes minimum disclosure requirements.  The Company currently has no guarantees which require recognition of a liability.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods presented.  The Company is required to make judgments and estimates about the effect of matters that are inherently uncertain.  Although, we believe our judgments and estimates are appropriate, actual future results may be different; if different assumptions or conditions were to prevail, the results could be materially different from our reported results.

On an on-going basis, the Company evaluates our estimates, including, but not limited to, those related to the realizability of fixed assets and long-lived assets, income taxes, stock option and warrant valuation, and accounts receivable.  The Company bases our estimates on our limited historical experience and various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources and, where necessary, makes adjustments prospectively.

Stock-Based Compensation

Codifications topic 718 “Stock Compensation” requires that the cost resulting from all share-based transactions be recorded in the financial statements and establishes fair value as the measurement objective for share-based payment transactions with employees and acquired goods or services from non-employees.  Prior to the May 1, 2005 (fiscal year 2006) adoption of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), the Company applied SFAS 123 “Accounting for Stock-Based Compensation” (“SFAS 123”), which provided for the use of a fair value based method of accounting for stock-based compensation.  However, SFAS 123 allowed the measurement of compensation cost for stock options granted to employees using the intrinsic value method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB 25”), which only required charges to compensation expense for the excess, if any, of the fair value of the underlying stock at the date a stock option is granted (or at an appropriate subsequent measurement date) over the amount the employee must pay to acquire the stock.  Prior to fiscal year 2006, the Company had elected to account for employee stock options using the intrinsic value method under APB 25 and provided, as required by SFAS 123, pro forma footnote disclosures of net loss as if a fair value based method of accounting had been applied.

The Company adopted SFAS 123R in accordance with the modified retrospective application and has restated the consolidated financial statements from the beginning of fiscal year 2006 for the impact of SFAS 123R.  Under this transition method, stock-based compensation expense in fiscal year 2006 included stock-based compensation expense for all share-based payment awards granted prior to, but not yet vested as of May 1, 2005, based on the grant-date fair value estimated in accordance with the original provision of SFAS 123.  Stock-based compensation expense for all share-based payment awards granted after May 1, 2005 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R.  The Company recognizes these compensation costs using the graded vesting attribute method over the requisite service period during which each tranche of shares is earned (generally one third at zero, one, and two years) with the value of each tranche is amortized on a straight-line basis.

Segment Information

Codifications topic 280, “Segment Reporting” provides the requirements for companies to report financial and descriptive information about their reportable operating segments.  Operating segments, as defined, are components of an enterprise for which separate financial information is available and is evaluated regularly by a Company in deciding how to allocate resources and in assessing performance.  It also establishes standards for related disclosures about products and services, geographic areas and major customers.  The Company evaluated Codifications topic 280 and determined that the Company currently operates in one segment, domain name registration, and will operate in additional segments when it commences future operation of online services, micro-modular data centers, or wireless virtual fiber.
 
 
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Concentration of Risks

The Company derives the majority of its revenues from the registration of country code top level domain names (“ccTLD”) for the Vietnamese Ministry of Information and Communications under a contract with the Vietnam Internet Network Information Center (“VNNIC”).  The Company signed its first contract with VNNIC on September 18, 2003 which was renewed annually.  On January 3, 2006, the Company and VNNIC signed a new contract for registration of top level country domain names with no fixed term; on May 25, 2009, the Company and VNNIC signed an updated contract, with no fixed term, which revised the Company’s incentive goals effective January 2, 2009; on December 3, 2009, the Company and VNNIC signed an updated contract, with no fixed term, which revised the Company’s incentive goals for calendar year 2010.

On September 28, 2006, the Company and VNNIC signed a procedural agreement, with a profit sharing component, for the design, construction, and operation of an IDC in Hanoi, Vietnam with a fifty year term.  VNNIC will provide four finished floors (approximately 10,000 square feet) rent free for ten years within a facility under construction.  In exchange the Company will design and construct the IDC, acquire the equipment (hardware and software), and manage the operation.

On May 25, 2009, the Company signed an exclusive rights agreement with VNNIC to promote and advertise the registration of the ‘.vn’ ccTLD through the commercialization of a pay-per-click (“PPC”) parking page program for ‘.vn’ domain registrations.

On February 22, 2011, the Company signed an agreement with VNNIC which designates Dot VN as VNNIC’s sole partner in developing, promoting and managing the Vietnamese native language internationalized domain name (the “Vietnamese IDNs”) system.

In the event of a change in the business conditions within Vietnam; enactment, application or interpretation of any law in Vietnam the effect of which is to nationalize or expropriate or enforce disposal the Company’s assets within Vietnam; or a change in the Company’s contractual relationship with VNNIC the Company could be adversely affected.

On January 31 and February 9, 2007 the Company issued a series of convertible debentures for an aggregate of $1,148,212 due January 31, 2009 (the “February Financing”).  The debentures convert at the option of each individual noteholder (the “February Investors”) into restricted shares of the Company’s Common Stock at $1.00 per share.  The February Financing was funded in conjunction with a like amount of convertible debentures issued concurrently by Spot-On Networks, LLC (“Spot-On”) to the February Investors (the “Spot-On Debenture”).  The February Financing terms required that the convertible debentures issued by Spot-On be convertible into common stock of either membership units of Spot-On Networks, LLC or common stock of the Company, at the option of the February Investors.  Upon the February Investors’ election to convert a Spot-On Debenture into the Company’s common stock the Spot-On Debenture is assigned and transferred into the name of the Company (the “Assigned Spot-On Debentures”) at which time the Company issues the Common Stock and records a note receivable.  Future monthly interest payments, at 10% per annum, are accrued and on January 31, 2009, at maturity, the Assigned Spot-On Debentures principal and accrued interest was to be paid to the Company by Spot-On.

Spot-On participated in the February Debentures because, at the time, the Company and Spot-On contemplated consummating a business combination transaction, such as a merger, share exchange or acquisition, provided that the Company could obtain a larger amount of financing, contemplated by the parties to be approximately $10,000,000.  The Company never obtained a larger amount of financing and, as a consequence, terms and conditions of the contemplated business combination transaction by and between the Company and Spot-On were never negotiated.  The holders of the Spot-On Debentures are the same persons as the Company’s February Debentures.  No holder of a Spot-On Debenture, on an as-converted basis, is a beneficial holder of 5% or more of common stock of the Company.

Prior to the January 31, 2009 expiration of the Spot-On Debenture conversion right, a total of eight (8) February Investors’ election to convert their Spot-On Debentures, aggregating $236,213 into 236,213 restricted shares of the Company’s common stock.  The Company’s ability to collect the Assigned Spot-On Debentures principal and subsequent accrued interest is dependent on the cash reserves of Spot-On and/or their ability to raise additional financing.  On January 30, 2009, the Company received a request from Spot-On to (i) extend the maturity date of the Assigned Spot-On Debentures to March 31, 2009 and (ii) waive any defaults under the Assigned Spot-On Debentures or any of the related documents or events of default which are outstanding or have occurred (the “Spot-On Offer”).  The Company did not accept the Spot-On Offer and continues discussing options to receive the full amount due, with accrued interest.  To date the Company has not received any payment from Spot-On on the Assigned Spot-On Debentures and Spot-On is unable to provide the Company with a firm repayment date as they negotiated to raise funds to satisfy their obligation under the Spot-On Debentures.
 
 
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Basic and Diluted Net Loss Per Share

Net loss per share is calculated in accordance with Codifications topic 260, “Earnings Per Share” for the periods presented.  Basic net loss per share is computed using the weighted average number of common shares outstanding.  Diluted loss per share has not been presented because the assumed exercise of the Company’s outstanding options and warrants would be antidilutive during periods of net loss.  Diluted earnings loss per share is based on the assumption that all dilutive stock options, warrants, and convertible debt are converted or exercised by applying the treasury stock method.  Under this method, options and warrants are assumed exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.  Options and/or warrants will have a dilutive effect, during periods of net profit, only when the average market price of the common stock during the period exceeds the exercise price of the options and/or warrants.  There were options to purchase 20,241,500 shares of common stock and 18,946,248 warrants potentially issuable at April 30, 2011 which were not included in the computation of net loss per share.

Reclassifications

Certain reclassifications have been made to prior year amounts to conform to the current period presentation.  These reclassifications had no effect on operating results or stockholders’ equity (deficit).

RESULTS OF OPERATIONS

Three months ended October 31, 2011 compared to three months ended October 31, 2010.

REVENUES

Revenues of $225,374 for the three months ended October 31, 2011 (the “Current Quarter”) decreased 7.9% or $19,428 as compared to $244,802 for the three months ended October 31, 2010 (the “Prior Quarter”).  During the Current Quarter revenue from the registration of Vietnamese domain names was $201,074, a decrease of $17,938 or 8.2% compared to $219,012 for the Prior Quarter.  In the Current Quarter the volume of Vietnamese registration activity (transactions) from all sources (new, renewal, and registration changes) in the aggregate increased 7.0% from the Prior Quarter.  Revenue derived from IT.VN and our reseller network within Vietnam (“Domestic Market”) decreased $19,855 or 46.8%, our reseller network outside of Vietnam (“International Market”) increase $20,649 or 58.0% and our web site sales decrease $18,732 or 13.3%; resulting in a combined 8.2% decrease in revenue from Vietnamese domain name registration activities.  Effective January 10, 2011, VNNIC the government agency from which we purchase Vietnamese domain registrations services established a new multi-tier fee structure reducing our acquisition cost.  In the highly competitive domestic Vietnam market we generally made corresponding reductions to our prices; no similar reductions were made in our International Market or web pricing.  Subsequently, we implemented registration volume requirements in our Domestic Market to maintain the most favorable pricing levels and have increased prices to resellers with low annual volume; resulting in some domestic resellers transferring their business (clients registrations) to other registrars.  In addition, selective price reductions have been applied to resellers in our International Market.  The overall decrease in revenue is the result of the aforementioned price reductions and a 46.0% reduction in new domain name registrations during the Current Quarter (350) compared to the Prior Quarter (648); the registration of new domain names yield more revenue per unit than the renewal of domain names due to the initial year registration fee.  In addition, there was a 17.7% reduction in the renewal of domain names during the Current Quarter (2,017) compared to the Prior Quarter (2,338).  In the aggregate we processed 2,367 registration transactions (new and renewals) during the Current Quarter compared to 2,986 during the Prior Quarter, a decrease of 619 or 20.7%

In addition, the Company earns commissions from VNNIC based on contract benchmarks each calendar quarter for new registrations, renewals and registration changes.  The commission, calculated as a percentage the fees paid to VNNIC (acquisition cost), of $17,815 for the Current Quarter decreased $7,035 or 28.3% as compared to $24,850 for the Prior Quarter.  The decrease in commission revenue results from decrease in new domain name registration activity in the Current Quarter, as noted above and the January 10, 2011 reduction of the fees paid to VNNIC for registration services.  Total domain names under management during the Current Quarter increased 303 to 11,801 at October 31, 2011 compared to a Prior Quarter increase of 96 to 11,724 total domain names under management at October 31, 2010.
 
 
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On July 22, 2009, the Company commenced generating revenue under its first domain registry monetization initiative whereby an Internet user who types in a .vn domain name that does not exist or that has expired is redirected to a Company web page (the “Landing Page”) with targeted pay-per-click advertising links.  The Company has replaced the generic Landing Page used to generate revenue in the past with the web portal INFO.VN and is developing an advertising platform featuring specific advertising links for the Asian market to improve both the number of clicks (pay-per-click rate) and the resulting revenue.  During the Current Quarter, the INFO.VN web portal revenue was $749 compared to zero in the Prior Quarter.  In addition, the Company is offering domain parking services whereby a domain name that does not have a developed web site can receive advertising content with pay-per-click links (a “Parking Page”).  During the Current Quarter Parking Page revenue was $591 compared to $906 in the Prior Quarter.  Also during the Current Quarter, the Company assisting is the sale and purchase between two private parties of an existing domain name and received a fee of $2,800 to control the transfer of funds and the re-registration of the domain name compared to zero in the Prior Quarter.

The Company has partnered with Key-Systems GmbH, a German limited liability company (“Key-Systems”) for the purchase of non-Vietnamese domain names and to offer Vietnamese domain names to Key-Systems over 1,400 resellers.  During the Current Quarter Key-Systems purchased $6,767 of Vietnam registrations from the Company compared to $1,783 in the Prior Quarter.  Our Domestic Market sold $1,849 non-Vietnam registrations in the Current Quarter, which were purchased from Key-Systems, compared to $34 in the Prior Quarter.

COST OF REVENUES and GROSS PROFIT

For the three months ended October 31, 2011, cost of revenues decreased 25.5% to $80,199 compared to $107,664 for the three months ended October 31, 2010, a decrease of $27,465.  Gross profit was $145,175 or 64.4% (as a percentage of revenues) for the three months ended October 31, 2011 compared to $137,138 or 56.0% for the three months ended October 31, 2010; an increase of 5.9% or $8,037.  The increase in gross profit (8.4%), as a percentage of revenue, was principally due to increased volume in our International Market discussed above.

GENERAL AND ADMINISTRATIVE EXPENSES

For the three months ended October 31, 2011, general and administrative expenses, which includes consulting and professional fees, marketing and promotion, option bonus, bad debt expense, and other general and administrative, were $500,471 compared to $812,929 for the three months ended October 31, 2010, a decrease of $312,458 or 38.4%.  The decrease in total general and administrative expenses, a significant portion of which is noncash based, was primarily attributable to the following offsetting factors:

·  
Option Bonus expenses decreased to zero for the three months ended October 31, 2011, from $216,162 for the three months ended October 31, 2010, a decrease of $216,162 or 100%.  The decrease results from the Company’s application of the graded vesting attribute method, in accordance with Codification topic 718, to record compensation costs for stock options.  Under this method the Company records compensation costs for one third of the fair value at the first vesting date (generally the date of grant) an additional one third during the one year service period of the second vesting and the remaining third during the two year service period of the final vesting.  The decreased expense is the net result the following item:
o  
In July 2009, the Company issued options for an aggregate of 12,460,500 shares with an estimated fair value of $5,218,093; during the Current Quarter zero was expensed compared to $216,162 during the Prior Quarter, for a decrease of $216,162 in the Current Quarter.

·  
Consulting and professional fees increased to $92,305 for the three months ended October 31, 2011, from $22,856 for the three months ended October 31, 2010, an increase of $69,449 or 304%.  The expense increase is primarily attributable to the following items:
o  
Amortization of the fair value of stock warrants issued for SAB services for the period December 2010 through November 2011 during the Current Quarter of $7,673 compared to zero in the Prior Quarter.
o  
The fair value of stock warrants issued for business development, operations and strategic planning services during the Current Quarter of $31,400 compared to zero in the Prior Quarter.
o  
Amortization of common stock issued for business development, operations and strategic planning services for the period January 2011 through January 2012 during the Current Quarter of $25,500 compared to zero in the Prior Quarter.
o  
Operations and business development services provided under the Huynh Consulting Agreement during October 2011 of $8,500 compared to zero in the Prior Quarter.
 
 
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·  
Other general and administrative expenses decreased to $393,558 for the three months ended October 31, 2011 from $561,326 for the three months ended October 31, 2010, a decrease of $167,768 or 29.9%.  The decreased expense is the net result the following significant items:
o  
Employee wages and payroll taxes decreased to $274,317 for the Current Quarter from $345,061 for the Prior Quarter, a decrease of $70,744 or 20.5%.  Within the US costs decreased $82,556 or 24.7% to $251,290, as the Company continues to cut costs, offset by an increase within Vietnam of $11,812 or 105% to $23,027.
o  
Rent and land lease expense decreased to $33,327 for the Current Quarter from $34,673 for the Prior Quarter, a decrease of $1,346 or 3.9%.  The Current Quarter decrease in expense primarily results from rent savings in San Diego from the previous thirteen month rental extension.
o  
Investor relations and press release expense decreased to $929 for the Current Quarter from $18,507 for the Prior Quarter, a decrease of $17,578 or 95.0% as the Company eliminated the use of outside service providers.
o  
Travel and related expenses decreased to $6,548 for the Current Quarter from $23,652 for the Prior Quarter, a decrease of $17,104 or 72.3%; the Current Quarter included only two trips between San Diego and Vietnam compared to four trips in the Prior Quarter.
o  
Insurance expense for business coverage and employee medical decreased to $8,676 for the Current Quarter from $12,325 for the Prior Quarter, a decrease of $3,649 or 29.6% associated with US staff reductions.
o  
Costs associated with testing and introducing new products decreased to zero in the Current Quarter from $20,500 in the Prior Quarter when the Company provided E-band product demonstrations.
o  
Leased automobile, associated costs and mileage/gas reimbursements decreased to $702 in the Current Quarter from $5,545 in the Prior Quarter, a decrease of $4,843 or 87.3%; the Current Quarter costs reflect the elimination of two leased autos.
o  
Other general and administrative costs allocated to Business.VN, Inc. for shared services decreased to zero in the Current Quarter from a credit of $4,500 in the Prior Quarter, a decrease of $4,500 or 100%; on February 1, 2011 the monthly cost allocation was stopped when the services and office space provided to Business VN were terminated.
o  
All other general and administrative expenses decreased to $69,059 for the Current Quarter from $105,563 for the Prior Quarter, a decrease of $36,504 or 34.6%.

LOSS FROM OPERATIONS

We reported a loss from operations of $355,296 for the three months ended October 31, 2011 as compared to a loss from operations of $675,791 for the three months ended October 31, 2010, an improvement of $320,495 or 47.4%.  The improvement is primarily attributed to decreased option bonus expense ($216,162), other general and administrative expenses ($167,768) and increased gross profit ($8,037) offset by increased consulting and professional fees ($69,449).

OTHER INCOME AND EXPENSES

Total other income and expense increased to a net expense of $1,126,348 for three months ended October 31, 2011 as compared to a net expense of $321,544 for the three months ended October 31, 2010.  Included in this net expense increase of $804,804 or 250% are:

·  
Interest income was $92 for the Current Quarter as compared to interest income of $250 for the Prior Quarter; the decrease of $158 or 63.2% is attributable to a decrease in average cash balances predominately held by our Vietnamese companies.

·  
The finance expense was $193,155 for the Current Quarter as compared to finance expense of $3,777 for the Prior Quarter, an increase of $189,378 or 5014%.  The net increased expense is the result of the following significant items:
o  
Amortization of cash fees paid to obtain equity and/or debt financing for the Company in the Current Quarter was $4,459, an increase of $1,500 over the Prior Quarter expense of $2,958.
o  
The March Debenture included warrants which vest upon the conversion of the debenture into restricted shares of the Company’s Common Stock and upon vesting the warrant value is recognized and fully expensed.  During August 2011, a March Debenture conversion of $275,000 resulted in the recognition of $136,776 in finance expense in the Current Quarter compared to an expense of zero in the Prior Quarter.
o  
The fair value of the Extended February Debenture warrants ($10,754) is amortized over the approximate forty month average term of the new debt; the Current Quarter and Prior Quarter expense was $818.
o  
Amortization of the fair value ($127,327) of stock warrants issued to G.F. Galaxy Corporation to obtain an eleven month $128,400 promissory note was $23,150 in the Current Quarter compared to zero in the Prior Quarter.
o  
Amortization of the fair value ($157,229) of stock warrants issued to IDCG SA de CV to obtain a nine month extension of the due dates on three promissory notes was $27,952 in the Current Quarter compared to zero in the Prior Quarter.
 
 
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·  
Interest expense increased to $918,754 for the Current Quarter from $307,968 for the Prior Quarter, an increase of $610,786 or 198%.  The increased expense is the net result the following significant items:
o  
accretion of the debt discount associated with convertible notes increased to $716,280 for the Current Quarter from $69,037 for the Prior Quarter, an increase of $647,243 or 938%; the accretion of debt discount results from:
§  
The Company issued a series of convertible debentures in the aggregate amount of $2,000,000 which are convertible into 10,000,002 shares of the Company’s restricted Common Stock at a per share price of $0.20 which represented a beneficial conversion feature with an estimated fair value at inception of $940,317, which was recorded as a discount against the convertible debentures and is expensed over the thirty-six month term of the debt or upon conversion.  On August 18, 2011, the conversion price, as defined in the convertible debentures, was reduced to $0.19; additional debt discount for the revised beneficial conversion feature was calculated to be $79,737 and is expensed over the approximate eighteen month remaining term of the debt or upon conversion.  For the three months ended October 31, 2011, the Company expensed $58,245 for the beneficial conversion feature and $77,724 upon the conversion of two debentures for a total expense of $135,969 as compared to $61,693 for the beneficial conversion feature for the three months ended October 31, 2010, an increase of $74,276.
§  
The Company issued two convertible debentures in the aggregate amount of $622,390 which are convertible into 2,489,560 shares of the Company’s restricted Common Stock at a per share price of $0.25 which represented a beneficial conversion feature with an estimated fair value at inception of $88,121, which was recorded as a discount against the convertible debentures and is expensed over the thirty-six month term of the debt or upon conversion.  On August 18, 2011, the conversion price, as defined in the convertible debentures, was reduced to $0.10; additional debt discount for the revised beneficial conversion feature was calculated to be $34,269 and is expensed over the approximate twenty-two month remaining term of the debt or upon conversion.  For the three months ended October 31, 2011, the Company expensed $10,459 for the beneficial conversion feature as compared to $7,344 for the beneficial conversion feature for the three months ended October 31, 2010, an increase of $3,115.
§  
The Company issued two convertible debentures to Asher in the aggregate amount of $95,000 which are convertible into an aggregate of 1,024,638 shares of the Company’s restricted Common Stock, as defined, which represented a beneficial conversion feature with an estimated fair value at inception of $78,333, which was recorded as a discount against the convertible debentures and is expensed over the nine month term of each debenture or upon conversion.  For the three months ended October 31, 2011, the Company expensed $22,407 for the beneficial conversion feature as compared to zero for the beneficial conversion feature for the three months ended October 31, 2010, an increase of $22,407.
§  
On August 18, 2011, the conversion price, as defined, in Convertible Note 7 and Notes 8 with our three officers was reduced to $0.11; additional debt discount for the revised beneficial conversion feature was calculated to be $547,445 and was expensed over the remaining one month term of the debt.  For the three months ended October 31, 2011, the Company expensed $547,445 for the beneficial conversion feature as compared to zero for the three months ended October 31, 2010, an increase of $547,445.
o  
Interest expense on convertible debt decreased to $83,997 for the Current Quarter from $144,524 for the Prior Quarter, a decrease of $60,527 or 41.9% was primarily attributable to the following factors:
§  
Interest expense on Convertible Note 7 and Notes 8 with our three officers decreased to $20,657 for the three months ended October 31, 2011 from $67,358 for the three months ended October 31, 2010, a decrease of $46,701 or 69.3% as a result of the Convertible Notes 8 holder’s elections to convert a portion of the balance owed into Common Stock of the Company on March 16, 2011 ($2,500,000).
§  
Interest expense on Convertible Note 1 and Note 3 decreased to $5,069 for the three months ended October 31, 2011 from $15,649 for the three months ended October 31, 2010, a decrease of $10,580 or 67.6% as a result of the note holder’s December 13, 2010 elections to convert $333,365 (Convertible Note 1) and $121,674 (Convertible Note 3) into Common Stock of the Company.
§  
Interest expense on the December Debentures and March Debentures, including the officer debentures, decreased to $34,221 for the three months ended October 31, 2011 from $40,959 for the three months ended October 31, 2010, a decrease of $6,738 or 16.5% as a result of additional March Debenture conversions.
o  
Interest expense on unpaid officer wages increased to $34,601 for the Current Quarter from $13,974 for the Prior Quarter, an increase of $20,627 or 148% was attributable to a corresponding increase in the average monthly balance owed the three officers in the Current Quarter over the Prior Quarter.
o  
Other interest expense items increased to $83,876 for the Current Quarter from $80,433 for the Prior Quarter, an increase of $3,443 or 4.3%.

·  
Foreign exchange (loss) increased to $14,531 for the Current Quarter from $9,877 for the Prior Quarter, an increase of $4,654 or 47.1% from changes in the U.S. dollar to Vietnamese dong exchange rates.
 
 
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OVERALL

We reported a net loss for the three months ended October 31, 2011 of $1,481,644 compared to a net loss for the three months ended October 31, 2010 of $997,335, an increase of $484,309 or 48.6%.  This translates to an overall basic and diluted per-share loss available to shareholders of $0.02 for the three months ended October 31, 2011 and $0.02 for the three months ended October 31, 2010 based on 61,638,697 and 42,656,527 weighted average common shares outstanding, respectively.

Six months ended October 31, 2011 compared to six months ended October 31, 2010.

REVENUES

Revenues of $464,886 for the six months ended October 31, 2011 (the “Current Period”) decreased 19.6% or $113,424 as compared to $578,310 for the six months ended October 31, 2010 (the “Prior Period”).  During the Current Period revenue from the registration of Vietnamese domain names was $422,184, a decrease of $104,124 or 19.8% compared to $526,308 for the Prior Period.  In the Current Period the volume of Vietnamese registration activity (transactions) from all sources (new, renewal, and registration changes) in the aggregate decreased 1.8% from the Prior Period.  Revenue derived from our reseller network within Vietnam (“Domestic Market”) decreased $38,425 or 48.5%, our reseller network outside of Vietnam (“International Market”) decrease $13,736 or 10.0% and our web site sales decrease $51,963 or 16.8%; resulting in a combined 19.8% decrease in revenue from Vietnamese domain name registration activities.  Effective January 10, 2011, VNNIC the government agency from which we purchase Vietnamese domain registrations services established a new multi-tier fee structure reducing our acquisition cost.  In the highly competitive domestic Vietnam market (our Domestic Market) we generally made corresponding reductions to our prices; no similar reductions were made in our International Market or web pricing.  Subsequently, we have implemented registration volume requirements in our Domestic Market to maintain the most favorable pricing levels and have increased prices to resellers with low annual volume; resulting in some domestic resellers transferring their business (clients registrations) to other registrars.  In addition, selective price reductions have been applied to resellers in our International Market.  The overall decrease in revenue is the result of the aforementioned price reductions and a 36.6% reduction in new domain name registrations during the Current Period (803) compared to the Prior Period (1,267); the registration of new domain names yield more revenue per unit than the renewal of domain names due to the initial year registration fee.  In addition, there was a 9.5% reduction in the renewal of domain names during the Current Period (4,368) compared to the Prior Period (4,824).  In the aggregate we processed 5,171 registration transactions (new and renewals) during the Current Period compared to 6,091 during the Prior Period, a decrease of 920 or 15.1%

In addition, the Company earns commissions from VNNIC based on contract benchmarks each calendar quarter for new registrations, renewals and registration changes.  The commission, calculated as a percentage the fees paid to VNNIC (acquisition cost), of $33,986 for the Current Period decreased $16,372 or 32.5% as compared to $50,358 for the Prior Period.  The decrease in commission revenue results from decrease in new domain name registration activity in the Current Period, as noted above and the January 10, 2011 reduction of the fees paid to VNNIC for registration services.  Total domain names under management during the Current Period decreased 496 to 11,801 at October 31, 2011 compared to a Prior Period increase of 219 to 11,724 total domain names under management at October 31, 2010.

On July 22, 2009, the Company commenced generating revenue under its first domain registry monetization initiative whereby an Internet user who types in a .vn domain name that does not exist or that has expired is redirected to a Company web page (the “Landing Page”) with targeted pay-per-click advertising links.  The Company has replaced the generic Landing Page used to generate revenue in the past with the web portal INFO.VN and is developing an advertising platform featuring specific advertising links for the Asian market to improve both the number of clicks (pay-per-click rate) and the resulting revenue.  During the Current Period, the INFO.VN web portal revenue was $1,581 compared to zero in the Prior Period.  In addition, the Company is offering domain parking services whereby a domain name that does not have a developed web site can receive advertising content with pay-per-click links (a “Parking Page”).  During the Current Period Parking Page revenue was $1,379 compared to $1,595 in the Prior Period.  Also during the Current Period, the Company assisting is the sale and purchase between two private parties of an existing domain name and received a fee of $2,800 to control the transfer of funds and the re-registration of the domain name compared to zero in the Prior Period.
 
 
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The Company has partnered with Key-Systems GmbH, a German limited liability company (“Key-Systems”) for the purchase of non-Vietnamese domain names and to offer Vietnamese domain names to Key-Systems over 1,400 resellers.  During the Current Period Key-Systems purchased $10,763 of Vietnam registrations from the Company compared to $1,783 in the Prior Period.  Our Domestic Market sold $2,312 non-Vietnam registrations in the Current Period, which were purchased from Key-Systems, compared to $49 in the Prior Period.

COST OF REVENUES and GROSS PROFIT

For the six months ended October 31, 2011, cost of revenues decreased 25.6% to $165,448 compared to $222,499 for the six months ended October 31, 2010, a decrease of $57,051.  Gross profit was $299,438 or 64.4% (as a percentage of revenues) for the six months ended October 31, 2011 compared to $355,811 or 61.5% for the six months ended October 31, 2010; a decrease of 15.8% or $56,373.  The increase in gross profit (2.9%), as a percentage of revenue, was principally due to the percentage of our sales generated by our International Market in the Current Period (29.2%) compared to the Prior Period (26.0%) which yields a high margin as discussed above.

GENERAL AND ADMINISTRATIVE EXPENSES

For the six months ended October 31, 2011, general and administrative expenses, which includes consulting and professional fees, marketing and promotion, option bonus, bad debt expense, and other general and administrative, were $1,221,260 compared to $1,907,534 for the six months ended October 31, 2010, a decrease of $686,274 or 36.0%.  The decrease in total general and administrative expenses, a significant portion of which is noncash based, was primarily attributable to the following offsetting factors:

·  
Option Bonus expenses decreased to $141,660 for the six months ended October 31, 2011, from $720,539 for the six months ended October 31, 2010, a decrease of $578,879 or 80.3%.  The decrease results from the Company’s application of the graded vesting attribute method, in accordance with Codification topic 718, to record compensation costs for stock options.  Under this method the Company records compensation costs for one third of the fair value at the first vesting date (generally the date of grant) an additional one third during the one year service period of the second vesting and the remaining third during the two year service period of the final vesting.  The decreased expense is the net result the following item:
o  
In July 2009, the Company issued options for an aggregate of 12,460,500 shares with an estimated fair value of $5,218,093; during the Current Period $141,660 was expensed compared to $720,539 during the Prior Period, for a decrease of $578,879 in the Current Period.

·  
Consulting and professional fees increased to $191,874 for the six months ended October 31, 2011, from $77,079 for the six months ended October 31, 2010, an increase of $114,795 or 149%.  The expense increase is primarily attributable to the following items:
o  
Amortization of the fair value of stock warrants issued for SAB services for the period December 2010 through November 2011 during the Current Period of $15,346 compared to zero in the Prior Period.
o  
The fair value of stock warrants issued for business development, operations and strategic planning services during the Current Period of $31,400 compared to zero in the Prior Period.
o  
Amortization of common stock issued for business development, operations and strategic planning services for the period January 2011 through January 2012 during the Current Period of $51,000 compared to zero in the Prior Period.
o  
Payment for business development, operations and strategic planning services during the Current Period of $10,000 compared to zero in the Prior Period.
o  
Operations and business development services provided under the Huynh Consulting Agreement during October 2011 of $8,500 compared to zero in the Prior Period.
 
 
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·  
Other general and administrative expenses decreased to $860,717 for the six months ended October 31, 2011 from $1,082,044 for the six months ended October 31, 2010, a decrease of $221,327 or 20.5%.  The decreased expense is the net result the following significant items:
o  
Employee wages and payroll taxes decreased to $587,779 for the Current Period from $699,213 for the Prior Period, a decrease of $111,434 or 15.9%.  Within the US costs decreased $135,289 or 20.0% to $542,090, as the Company continues to cut costs, offset by an increase within Vietnam of $23,855 or 109% to $45,689.
o  
Rent and land lease expense decreased to $66,714 for the Current Period from $70,717 for the Prior Period, a decrease of $4,003 or 5.7%.  The Current Period decrease in expense primarily results from rent savings in San Diego from the previous thirteen month rental extension.
o  
Investor relations and press release expense decreased to $1,838 for the Current Period from $39,159 for the Prior Period, a decrease of $37,321 or 95.3% as the Company eliminated the use of outside service providers.
o  
Travel and related expenses decreased to $25,274 for the Current Period from $35,795 for the Prior Period, a decrease of $10,521 or 29.4%; the Current Period included only four trips between San Diego and Vietnam compared to five trips in the Prior Period offset by costs associated to host Key-System’s participation in meeting with VNNIC.
o  
Insurance expense for business coverage and employee medical decreased to $17,968 for the Current Period from $24,290 for the Prior Period, a decrease of $6,322 or 26.0% associated with US staff reductions.
o  
Costs associated with testing and introducing new products decreased to zero in the Current Period from $20,500 in the Prior Period when the Company provided E-band product demonstrations.
o  
Leased automobile, associated costs and mileage/gas reimbursements decreased to $3,058 in the Current Period from $12,470 in the Prior Period, a decrease of $9,412 or 75.5%; the Current Period costs reflect the elimination of two leased autos offset by increased reimbursements.
o  
Other general and administrative costs allocated to Business.VN, Inc. for shared services decreased to zero in the Current Period from a credit of $11,000 in the Prior Period, a decrease of $11,000 or 100%; on February 1, 2011 the monthly cost allocation was stopped when the services and office space provided to Business VN were terminated.
o  
All other general and administrative expenses decreased to $139,775 for the Current Period from $176,025 for the Prior Period, a decrease of $36,250 or 20.6%.

LOSS FROM OPERATIONS

We reported a loss from operations of $921,822 for the six months ended October 31, 2011 as compared to a loss from operations of $1,551,723 for the six months ended October 31, 2010, an improvement of $629,901 or 40.6%.  The improvement is primarily attributed to decreased option bonus expense ($578,879) and other general and administrative expenses ($221,327) offset by increased consulting and professional fees ($114,795) and reduced gross profit ($56,373).

OTHER INCOME AND EXPENSES

Total other income and expense increased to a net expense of $1,459,246 for six months ended October 31, 2011 as compared to a net expense of $1,405,753 for the six months ended October 31, 2010.  Included in this net expense increase of $53,493 or 3.8% are:

·  
Interest income was $192 for the Current Period as compared to interest income of $476 for the Prior Period; the decrease of $284 or 59.7% is attributable to a decrease in average cash balances predominately held by our Vietnamese companies.

·  
The finance expense was $250,709 for the Current Period as compared to finance expense of $141,324 for the Prior Period, an increase of $109,385 or 77.4%.  The net increased expense is the result of the following significant items:
o  
Amortization of cash fees paid to obtain equity and/or debt financing for the Company in the Current Period was $7,974, an increase of $1,057 over the Prior Period expense of $6,917.
o  
The December Debenture and the March Debenture included warrants which vest upon the conversion of the debenture into restricted shares of the Company’s Common Stock and upon vesting the warrant value is recognized and fully expensed.  During August 2011, a March Debenture conversion of $275,000 resulted in the recognition of $136,776 in finance expense in the Current Period compared to the Prior Period partial March Debenture conversion of $250,000 resulted in the recognition of $125,000 in finance expense and a June 2010, the conversion of a $5,000 December Debenture resulted in the recognition of $4,166 in finance expense totaling $129,166 an increase of $7,610.
o  
The fair value of the Extended February Debenture warrants ($10,754) is amortized over the approximate forty month average term of the new debt; the Current Period and Prior Period expense was $1,636.
o  
Amortization of the fair value ($26,064) of stock warrants issued to G.F. Galaxy Corporation to obtain a six month $120,000 promissory note was $11,294 in the Current Period compared to zero in the Prior Period.
o  
Amortization of the fair value ($127,327) of stock warrants issued to G.F. Galaxy Corporation to obtain an eleven month $128,400 promissory note was $23,150 in the Current Period compared to zero in the Prior Period.
o  
Amortization of the fair value ($157,229) of stock warrants issued to IDCG SA de CV to obtain a nine month extension of the due dates on three promissory notes was $69,879 in the Current Period compared to zero in the Prior Period.
 
 
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·  
Interest expense decreased to $1,195,956 for the Current Period from $1,250,759 for the Prior Period, a decrease of $54,803 or 4.4%.  The decreased expense is the net result the following significant items:
o  
accretion of the debt discount associated with convertible notes increased to $791,775 for the Current Period from $782,836 for the Prior Period, a decrease of $8,939 or 1.1%; the accretion of debt discount results from:
§  
The Company issued a series of convertible debentures in the aggregate amount of $30,000 which are convertible into 100,001 shares of the Company’s restricted Common Stock at a per share price of $0.30 (the “December Debentures”) which represented a beneficial conversion feature with an estimated fair value at inception of $5,000, which was recorded as a discount against the convertible debentures and is expensed over the six month term of the debt or upon conversion.  For the three months ended October 31, 2011, the Company expensed zero for the beneficial conversion feature as compared to $1,667 for the six months ended October 31, 2010, a decrease of $1,667.
§  
The Company issued a series of convertible debentures in the aggregate amount of $2,000,000 which are convertible into 10,000,002 shares of the Company’s restricted Common Stock at a per share price of $0.20 (the “March Debentures”) which represented a beneficial conversion feature with an estimated fair value at inception of $940,317, which was recorded as a discount against the convertible debentures and is expensed over the thirty-six month term of the debt or upon conversion.  On August 18, 2011, the conversion price, as defined in the convertible debentures, was reduced to $0.19; additional debt discount for the revised beneficial conversion feature was calculated to be $79,737 and is expensed over the approximate eighteen month remaining term of the debt or upon conversion.  For the three months ended October 31, 2011, the Company expensed $116,397 for the beneficial conversion feature and $77,724 upon the conversion of two debentures for a total expense of $194,121 as compared to $123,386 for the beneficial conversion feature and $117,604 upon the partial conversion of a debenture for a total expense of $240,990 for the six months ended October 31, 2010, a decrease of $46,869.
§  
When the December Debenture offering was completed (closed) in accordance with the terms of five (5) outstanding convertible notes the conversion price was reduced; additional debt discount for the revised beneficial conversion feature was calculated to be $93,208.  When the March Debenture offering was completed (closed) in accordance with the terms of six (6) outstanding convertible notes the conversion price was reduced; additional debt discount for the revised beneficial conversion feature was calculated to be $862,972.  For the three months ended October 31, 2011, the Company expensed zero for the beneficial conversion feature as compared to $527,940 for the six months ended October 31, 2010, a decrease of $527,940.
§  
The Company issued two convertible debentures in the aggregate amount of $622,390 which are convertible into 2,489,560 shares of the Company’s restricted Common Stock at a per share price of $0.25 which represented a beneficial conversion feature with an estimated fair value at inception of $88,121, which was recorded as a discount against the convertible debentures and is expensed over the thirty-six month term of the debt or upon conversion.  On August 18, 2011, the conversion price, as defined in the convertible debentures, was reduced to $0.10; additional debt discount for the revised beneficial conversion feature was calculated to be $34,269 and is expensed over the approximate twenty-two month remaining term of the debt or upon conversion.  For the three months ended October 31, 2011, the Company expensed $17,802 for the beneficial conversion feature as compared to $12,239 for the beneficial conversion feature for the six months ended October 31, 2010, an increase of $5,563.
§  
The Company issued two convertible debentures to Asher in the aggregate amount of $95,000 which are convertible into an aggregate of 1,024,638 shares of the Company’s restricted Common Stock, as defined, which represented a beneficial conversion feature with an estimated fair value at inception of $78,333, which was recorded as a discount against the convertible debentures and is expensed over the nine month term of each debenture or upon conversion.  For the three months ended October 31, 2011, the Company expensed $32,407 for the beneficial conversion feature as compared to zero for the beneficial conversion feature for the six months ended October 31, 2010, an increase of $32,407.
§  
On August 18, 2011, the conversion price, as defined, in Convertible Note 7 and Notes 8 with our three officers was reduced to $0.11; additional debt discount for the revised beneficial conversion feature was calculated to be $547,445 and was expensed over the remaining one month term of the debt.  For the three months ended October 31, 2011, the Company expensed $547,445 for the beneficial conversion feature as compared to zero for the six months ended October 31, 2010, an increase of $547,445.
o  
Interest expense on convertible debt decreased to $170,744 for the Current Period from $288,750 for the Prior Period, a decrease of $118,006 or 40.9% was primarily attributable to the following factors:
§  
Interest expense on Convertible Note 7 and Notes 8 with our three officers decreased to $40,904 for the six months ended October 31, 2011 from $133,395 for the six months ended October 31, 2010, a decrease of $92,491 or 69.3% as a result of the Convertible Notes 8 holder’s elections to convert a portion of the balance owed into Common Stock of the Company on March 16, 2011 ($2,500,000).
§  
Interest expense on Convertible Note 1 and Note 3 decreased to $10,110 for the six months ended October 31, 2011 from $31,030 for the six months ended October 31, 2010, a decrease of $20,920 or 67.4% as a result of the note holder’s December 13, 2010 elections to convert $333,365 (Convertible Note 1) and $121,674 (Convertible Note 3) into Common Stock of the Company.
§  
Interest expense on the December Debentures and March Debentures, including the officer debentures, decreased to $73,037 for the six months ended October 31, 2011 from $83,892 for the six months ended October 31, 2010, a decrease of $10,855 or 12.9% as a result of additional March Debenture conversions.
o  
Interest expense on unpaid officer wages increased to $63,685 for the Current Period from $23,364 for the Prior Period, an increase of $40,321 or 173% was attributable to a corresponding increase in the average monthly balance owed the three officers in the Current Period over the Prior Period.
o  
Interest expense on revolving credit agreements increased to $33,309 for the Current Period from $27,471 for the Prior Period, an increase of $5,838 or 21.3% due to net increase borrowings.
o  
Other interest expense items increased to $72,210 for the Current Period from $64,797 for the Prior Period, an increase of $7,413 or 11.4%.

·  
Foreign exchange (loss) decreased to $12,773 for the Current Period from $14,539 for the Prior Period, a decrease of $1,766 or 12.1% from changes in the U.S. dollar to Vietnamese dong exchange rates.
 
 
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OVERALL

We reported a net loss for the six months ended October 31, 2011 of $2,381,070 compared to a net loss for the six months ended October 31, 2010 of $2,957,476, an improvement of $576,406 or 19.5%.  This translates to an overall basic and diluted per-share loss available to shareholders of $0.04 for the six months ended October 31, 2011 and $0.07 for the six months ended October 31, 2010 based on 60,989,354 and 42,296,843 weighted average common shares outstanding, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations primarily through the deferral of salary by its two executive officers Thomas Johnson (the Company’s Chief Executive Officer) and Lee Johnson (the Company’s President, Chief Technology Officer, and Chief Financial Officer), the sale of equity securities, to include convertible debentures and notes, other private party loans, loans from the forenamed executive officers or their spouse, and previously by the advance of funds by a former related party (Hi-Tek, Inc. a privately held California corporation (“Hi-Tek Private”)).  Overall, our liquidity and access to capital is very limited; we have not received any commitment for additional financing and given the size of our company we may be limited to (i) additional loans from and the continued deferral of salaries by our officers, (ii) the sale of the Company’s Common Stock or the issuance of convertible notes, or (iii) other debt instruments.  The Company does not have a written agreement with Hi-Tek Private; funds of zero and zero were advanced and $49,198 and $15,561 were repaid in cash during the six months ended October 31, 2011 and October 31, 2010, respectively.  In addition, on May 12, 2011, Hi-Tek Private converted $225,000 of the debt into the an equity offering by the Company and received 900,000 restricted shares of the Company’s Common Stock and a two year warrant for the purchase of 2,250,000 restricted shares of the Company’s Common Stock at $0.25 per share.

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis.  During the six months ended October 31, 2011 and October 31, 2010 cash used in our operating activities was $194,241 and $440,935, and cash used in investing activities was $25,927 and $70,713, respectively.  We funded our operating activities and investing activities during the six months ended October 31, 2011 and October 31, 2010 with cash reserves in addition to the following resources:

   
For the Six months Ended
October 31,
 
   
2011
   
2010
 
                                                                                    
 
 
   
 
 
Proceeds from stock issuances
  $ -     $ 106,300  
Funds advanced by Hue Tran Johnson under revolving
    credit agreement dated October 29, 2009, net of
    $26,900 and zero repayments
    38,800       146,476  
Funds advanced by Ngoc Anh Ung under revolving credit
    agreement dated November 10, 2010, net of $31,173
    and zero repayments
    21,444       -  
Funds advanced under the Asher Debentures, net of
    $5,500 deferred debt issuance costs
    89,500       -  
Funds (repaid) advanced by Hi-Tek Private under revolving
    credit arrangement, net of zero and $77,531
    advances
    (49,198 )     56,653  
Funds (repaid) advanced by Thomas Johnson under term
    loans
    (3,000 )     30,000  
Funds advanced by Louis Huynh under a term loan
    -       20,500  
Funds advanced by IDCG SA de CV under a demand note
    -       25,000  
Funds advanced by Ngoc Anh Ung under a term loan
    -       15,000  
Principal payments on Extended Debentures, net of interest
    -       (5,316 )
Total
  $ 97,546     $ 394,613  
 
 
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At October 31, 2011, we had a cash balance of $19,572 compared to $132,627 at April 30, 2011, a decrease of $113,055.  At October 31, 2011, our working capital deficit was $7,076,131 as compared to $6,255,710 at April 30, 2011, an increase of $820,421.  Our current assets, other than cash, consist of $118,435 in accounts receivable, $2,033 in fees on deposit for domain registrations, $11,340 in other prepaid expenses (to include the prepaid Danang land lease and $21,250 based in common stock), and $33,742 in miscellaneous and VAT receivables, and $2,558 in prepaid warrant expense.

Our current liabilities consisted primarily of $1,719,408 due to Hi-Tek Private under two credit arrangements, $803,056 due Thomas Johnson (our CEO) under four notes, $188,153 due Lee Johnson (our President, CTO, and CFO) under one note, $159,325 due Louis Huynh (our former General Counsel, Executive Vice President of Operations and Business Development, and Corporate Secretary) under two notes, $165,388 due Ngoc Anh Ung (our Vice President of Operations and Business Development, Asia) under three credit agreements, $429,475 due Hue Tran Johnson (our President’s wife), $201,713 due Howard Johnson (the father of our CEO and President), $97,029 for the current portion due on the Extended Debentures, $28,966 convertible debenture due June 30, 2010, $160,163 due on the Defaulted Debentures, $1,070,157 due IDCG SA de CV under two term notes, $101,500 due Diep Tai, $131,778 due G.F. Galaxy, $51,253 due Asher (net of $45,926 discount) under two notes, $1,498,350 in accrued officer salaries, $71,706 in accrued employee wages, $17,659 in liquidated damages to the February Investors, and $314,292 in accounts payable.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”), which is included in the FASB Accounting Standards CodificationTM (the “ASC”) Topic 220 (Comprehensive Income).  ASU 2011-05 provides two options to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity.  ASU 2011-05 does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  ASU 2011-05 is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011.  ASU 2011-05 will become effective for the company beginning in the quarter ended January 31, 2012 and we are currently evaluating the impact of this standard on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” (“ASU 2011-04”), which is included in the ASC Topic 820 (Fair Value Measurement).  ASU 2011-04 amends U.S. GAAP to provide common fair value measurement and disclosure requirements with International Financial Reporting Standards.  ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements.  For many of the requirements, the FASB does not intend for the amendments in ASU 2011-04 to result in a change in the application of the requirements in Topic 820.  ASU 2011-04 is effective prospectively for interim and annual reporting periods beginning after December 15, 2011.  ASU 2011-04 will become effective for the company beginning in the quarter ended January 31, 2012 and we do not expect a significant impact on the Company’s consolidated financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.
 
 
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PLAN OF OPERATION

Our current operational strategy involves the implementation of a five-component plan that includes:
(i)  
promoting wide spread adoption of the Vietnamese IDNs;
(ii)  
the launch of new IDN related value added services such as our web site editor and communication tools;
(iii)  
the launch and commercialization of new INFO.VN services and related sites such as a vehicle listing site, social network, business directory and financial press release service;
(iv)  
continued expansion of our online advertising services both through a search marketing feed and through the launch of a branded advertising portal; and
(v)  
commercialization of the virtual fiber equipment, a wireless point-to-point layer one solution and the MMDC solution.

The plan provides revenue-generating opportunities throughout the development process, and leads to a complete operational demonstration of the technologies.

The plan includes:

PHASE I: CY Q3 2011 through CY Q2 2012 – This phase is in process.  During this period, the Company, will focus on expanding its INFO.VN and Vietnamese IDN product offerings, including a vehicle listing and informational site, an advertising site, social networking feature, consumer electronics and luxury goods commerce sites and an auction site.  Dot VN is also continuing to develop an Internet data center project in Danang City and Hanoi based on the EMS MMDC to support INFO.VN and the Vietnamese IDN related services.  Dot VN also expects to receive sales of the virtual fiber equipment and EMS MMDC.

PHASE II: CY Q2 through Q4 2012 – During this period the Company expects to begin collecting hosting fees for its IDN based web site editor.  The Company plans to offer additional value added services designed to provide users with and enhanced feature set such as e-commerce functionality and payment as well as security and booking.  Dot VN plans to initiate its development of the IDCs located in Danang City and Hanoi.

PHASE III: CY Q4 2012 through Q1 2013 – During this period the Company plans to launch an IDN based social network which we expect to feature communications tools, daily deal offers and coupons and social network games.

SUBSEQUENT EVENTS

On November 1, 2011, the Company borrowed $5,000 under the Ung Revolver; proceeds were used to fund general operations in Vietnam.

On November 2, 2011, the Company made a partial payment of $2,500 on the Thomas Second Loan applied to accrued interest.

On November 4, 2011, the Company borrowed 130,000,000đ (approximately $6,100) under the Ung Revolver; proceeds were used to fund general operations.

On November 4, 2011, the Company made a partial payment of $2,000 on the Thomas Second Loan applied to accrued interest.

On November 10, 2011, the Company borrowed $2,500 under the Hue Revolver; proceeds were used to fund general operations.

On November 17, 2011, the Company made a partial payment of $2,000 on the Thomas Second Loan applied to accrued interest.

On November 22, 2011, the Company borrowed $3,000 under the Hue Revolver; proceeds were used to fund general operations.

On November 23, 2011, the Company repaid the $5,000 on the Ung Revolver.

Also on November 23, 2011, the Company repaid $6,500 on the Hue Revolver.

On November 23, 2011, the Company made a partial payment of $1,500 on the Thomas Fourth Loan applied to accrued interest.
 
 
88

 

On November 23, 2011, one (1) March Investor, pursuant to the terms of the March Debentures, exercised the option to convert the debentures and accrued interest ($29,301) and received 154,218 restricted shares of the Company’s Common Stock and the detachable warrant for 125,000 shares vested.  The fair value of the vested detachable warrant, calculated in accordance with Codification topic 470-20, is $12,434 and was recorded as debt discount, fully expensed when recorded, with a corresponding credit to additional paid-in capital.  Upon conversion, $5,921 of unamortized debt discount, from the beneficial conversion feature, was also expensed.

On November 28, 2011, the Company made a partial payment of $1,500 on the Thomas Fourth Loan applied to accrued interest.

On December 5, 2011, Asher exercised their option to convert $8,000 of the debenture into 333,333 non-restricted shares of the Company’s Common Stock at a Conversion Price of $0.024 based on a 40% discount applied to the average of the three (3) lowest closing bid prices during the ten trading days prior to their notice.

On December 5, 2011, the Company made an aggregate payment of $2,000 applied to accrued interest as a partial payment of $1,000 on the Thomas First Loan and $1,000 on the Thomas Fourth Loan.

On December 9, 2011, the Company made an aggregate payment of $2,000 applied to accrued interest of $919 (payment of $412 on the Thomas First Loan, $149 on the Thomas Second Loan and $57 on the Thomas Fourth Loan) and $1,381 applied as a partial repayment of principal on the Thomas First Loan.

On December 12, 2011, the Company repaid $3,045 on the Ung Revolver.

On December 13, 2011, the Company repaid $3,000 on the Ung Revolver.

On December 14, 2011, the Company borrowed $9,000 under the Ung Revolver; proceeds were used to fund general operations in Vietnam.

On December 15, 2011, the Company borrowed 63,000,000đ (equivalent to $3,000) under the Ung Revolver; proceeds were used to fund general operations in Vietnam.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.
 
 
89

 

ITEM 4.   CONTROLS AND PROCEDURES.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of October 31, 2011, management assessed the effectiveness of our internal control over financial reporting.  The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.  Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the Company’s Chief Executive Officer and Chief Financial Officer (who also serves as our President) and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP in the United States of America and includes those policies and procedures that:

·  
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets;

·  
Provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

·  
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statement.

In evaluating the effectiveness of our internal control over financial reporting, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework.  Based on that evaluation, they concluded that, during the period covered by this report, such internal controls and procedures were not effective to detect the inappropriate application of US GAAP rules as more fully described below.

This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.

The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (2) inadequate segregation of duties consistent with control objectives; and (3) ineffective controls over period end financial disclosure and reporting processes.  The aforementioned material weaknesses were identified by our Chief Executive Officer and Chief Financial Officer in connection with the review of our financial statements as of October 31, 2011.

Management believes that the material weaknesses set forth in items (2) and (3) above did not have an effect on our financial results.  However, management believes that the lack of a functioning audit committee and the lack of a majority of outside directors on our board of directors results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future periods.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in the Company’s internal controls over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
 
 
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PART II.  OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS.

The Company is not currently subject to any legal proceedings.  From time to time, the Company may become subject to litigation or proceedings in connection with its business, as either a plaintiff or defendant.  There are no such pending legal proceedings to which the Company is a party that, in the opinion of management, is likely to have a material adverse effect on the Company’s business, financial condition or results of operations.

ITEM 1A.   RISK FACTORS

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

On May 12, 2011, pursuant to the terms of a stock subscription agreement, entered into with an accredited investor, the Company issued 900,000 restricted shares of the Company’s Common Stock at $0.25 per unit for cancellation of $225,000 of debt owed to Hi-Tek Private on the Hi-Tek Revolver.  Each subscription unit consists of one restricted share of the Company’s Common Stock and a warrant to purchase two and one-half restricted shares of the Company’s Common Stock at an exercise price of $0.25 expiring two years from the date of subscription.  The offer and sale was made, in a non-public offering, where each offeree had access to the kind of information that registration would disclose, in reliance on the exemption from registration afforded by Section 4(2), promulgated pursuant to the Securities Act and Rule 506 of Regulation D, promulgated thereunder.

On August 18, 2011, pursuant to the terms of an August 18, 2011 promissory note, the Company issued to G.F. Galaxy Corporation, a California corporation, an accredited investor, 100,000 restricted shares of the Company’s Common Stock for an eleven month extension of the promissory note recorded at the market closing price as a deferred debt issuance cost of $12,000.  The offer and sale was made, in a non-public offering, where each offeree had access to the kind of information that registration would disclose, in reliance on the exemption from registration afforded by Section 4(2), promulgated pursuant to the Securities Act and Rule 506 of Regulation D, promulgated thereunder.

On August 31, 2011, pursuant to the terms of two March Debentures, the Company issued an accredited investor an aggregate of 1,660 312 restricted shares of the Company’s Common Stock in exchange for the cancellation of an aggregate $275,000 March Debenture plus $40,459 of accrued interest.  The offer and sale was made, in a non-public offering, where each offeree had access to the kind of information that registration would disclose, in reliance on the exemption from registration afforded by Section 4(2), promulgated pursuant to the Securities Act and Rule 506 of Regulation D, promulgated thereunder.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.   (REMOVED AND RESERVED).

None.

ITEM 5.   OTHER INFORMATION.

None.
 
 
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ITEM 6.   EXHIBITS.

(a)  Exhibits required by Item 601 of Regulation SK.

Number
 
Description
2.1
 
Agreement and Plan of Merger dated July 17, 2006, by and among Malers, Inc., a Delaware corporation, Malers Acquisition Corp., a Washington corporation; and Dot VN, Inc., a California corporation**
3.1
 
Amended and Restated Articles of Incorporation*
3.2
 
Bylaws*
23.1
 
Auditor’s Consent
31.1
 
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
 
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
 
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
 
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
_______________
*
Incorporated by reference to the Company’s Registration Statement on Form SB-2 (File No. 333-146129), as amended on Form S-1, as filed with the Securities and Exchange Commission on September 17, 2007.
**
Incorporated by reference to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-146129), as filed with the Securities and Exchange Commission on March 12, 2008.

(b)  Exhibits required by Rule 405 of Regulation S-T.

101.INS ***
XBRL Instance Document
   
101.SCH ***
XBRL Taxonomy Extension Schema Document
   
101.CAL ***
XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF ***
XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB ***
XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE ***
XBRL Taxonomy Extension Presentation Linkbase Document
____________
***
XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
  DOT VN, INC.  
  (Name of Registrant)  
       
Date:  December 15, 2011
By:
/s/  Thomas M. Johnson  
  Name: Thomas M. Johnson,  
  Title: Chairman and CEO  
                                                                 

 
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EXHIBIT INDEX
 
Number
 
Description
2.1
 
Agreement and Plan of Merger dated July 17, 2006, by and among Malers, Inc., a Delaware corporation, Malers Acquisition Corp., a Washington corporation; and Dot VN, Inc., a California corporation**
3.1
 
Amended and Restated Articles of Incorporation*
3.2
 
Bylaws*
23.1
 
Auditor’s Consent
31.1
 
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
 
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
 
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
 
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
_______________
*
Incorporated by reference to the Company’s Registration Statement on Form SB-2 (File No. 333-146129), as amended on Form S-1, as filed with the Securities and Exchange Commission on September 17, 2007.
**
Incorporated by reference to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-146129), as filed with the Securities and Exchange Commission on March 12, 2008.

(b)  Exhibits required by Rule 405 of Regulation S-T.

101.INS ***
XBRL Instance Document
   
101.SCH ***
XBRL Taxonomy Extension Schema Document
   
101.CAL ***
XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF ***
XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB ***
XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE ***
XBRL Taxonomy Extension Presentation Linkbase Document
___________
***
XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
 
 
94