NET TALK.COM, INC.
Note 1 – Nature of operations and basis of presentation
Basis of presentation:
The accompanying unaudited condensed financial statements as of and for the three months ended December 31, 2009 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. Accordingly, they do not include all the information and footnotes required for complete financial statements. However, the unaudited condensed consolidated financial information includes all adjustments which are, in the opinion of management, necessary to fairly present the financial position and the results of operations for the interim periods presented. The operations for the three months ended December 31, 2009 are not necessarily indicative of the results for the year ending September 30, 2010. The unaudited condensed financial statements included in this report should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2009, filed with the Securities and Exchange Commission.
Going concern:
To alleviate the effects of our previously reported working capital deficits and negative cash flows from operations, we have succeeded in securing financing anticipated to close on or about February 17, 2010. The financing will provide working capital in the amount of $5,000,000.
Nature of Operations:
Net Talk.com, Inc. (“Nettalk” or the “Company”) was incorporated on May 1, 2006 under the laws of the State of Florida. We are a telephone company, who provides, sells and supplies commercial and residential telecommunication services, including services utilizing voice over internet protocol (“VoIP”) technology, session initiation protocol (“SIP”) technology, wireless fidelity technology, wireless maximum technology, marine satellite services technology and other similar type technologies. Our main product is the TK 6000, an analog telephone adapter that provides connectivity for analog telephones and faxes to home, home office or corporate local area networks (“LAN”). Our TK 6000 and its related services is a cost effective solution for individuals, small businesses and telecommuters connecting to any analog telephone, fax or private branch exchange (“PBX”). The TK 6000 provides one USB port, one Ethernet port and one analog telephone port. A full suite of internet protocol features is available to maximize universal connectivity. In addition, analog telephones attached to the TK 6000 are able to use advanced calling features such as call forwarding, caller ID, 3-way calling, call holding, call retrieval and call transfer.
Subsequent events
We have evaluated subsequent events that occurred after our three months ended December 31, 2009 through February 12, 2010.
Note 2 - Summary of Significant Accounting Policies:
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes. Significant estimates inherent in the preparation of our financial statements include developing fair value measurements upon which to base our accounting for acquisitions of intangible assets and issuances of financial instruments, including our common stock. Our estimates also include developing useful lives for our tangible and intangible assets and cash flow projections upon which we determine the existence of, or the measurements for, impairments. In all instances, estimates are made by competent employees under the supervision of management, based upon the current circumstances and the best information available. However, actual results could differ from those estimates.
Risk and Uncertainties
Our future results of operations and financial condition will be impacted by the following factors, among others: dependence on the worldwide telecommunication markets characterized by intense competition and rapidly changing technology, on third-party manufacturers and subcontractors, on third-party distributors in certain markets, on the successful development and marketing of new products in new and existing markets. Generally, we are unable to predict the future status of these areas of risk and uncertainty.
Revenue recognition
Operating revenue consist of customer equipment sales of our main product TK6000, telecommunication service revenues, and shipping and handling revenues.
Most all of our operating revenues are generated from the sale of customer equipment of our main product the TK6000. We also derive service revenues from per minute fees for international calls. Our operating revenue is fully recognized at the time of our customer equipment sale which includes credit card acceptance date and shipment date. The device provides for life time service (over the life of the device/equipment). Our equipment is able to operate within our network/platform or over any other network/platform. There is no need for income allocation between our device and life time service provided. The full intrinsic value of the sale is allocated to the device. Therefore, we recognized 100% of revenue at time of customer equipment sale and do not allocate any income to the life time service provided. Shipping and handling is also recognized at time of sale. International calls are billed as earned from our customers. International calls are prepaid and customers account is debited as minutes are used and earned.
Cash and Cash Equivalents
We consider all highly liquid cash balances and debt instruments with an original maturity of three months or less to be cash equivalents. We maintain cash balances only in domestic bank accounts, which at times, may exceed federally insured limits.
| | | December 31, | | | September 30, | |
| Inventory | | 2009 | | | 2009 | |
| | | | | | | |
| Productive material, work in process and supplies | | $ | 40,952 | | | $ | 43,538 | |
| Finished products | | | 155,209 | | | | 74,174 | |
| Total | | $ | 196,161 | | | $ | 117,712 | |
During the three months ended December 31, 2009 and 2008, in accordance with our lower of cost or market analyses we did not record lower of cost or market adjustments to our finished goods inventories.
Telecommunications Equipment and Other Property
Property, equipment and telecommunication equipment includes acquired assets which consist of network equipment, computer hardware, furniture and software. All of our equipment is stated at cost with depreciation calculated using the straight line method over the estimated useful lives of related assets, which ranges from three to five years. The cost associated with major improvements is capitalized while the cost of maintenance and repairs is charged to operating expenses.
Intangible Assets
Our intangible assets were acquired in connection with the asset acquisition, more fully described in Note 3. The intangible assets were recorded at our acquisition cost, which encompassed estimates of their respective and their relative fair values, as well as estimates of the fair value of consideration that we issued. We amortize our intangible assets using the straight-line method over lives that are predicated on contractual terms or over periods we believe the assets will have utility.
Impairments and Disposals
We evaluate our tangible and definite-lived intangible assets for impairment annually or more frequently in the presence of circumstances or trends that may be indicators of impairment. Our evaluation is a two step process. The first step is to compare our undiscounted cash flows, as projected over the remaining useful lives of the assets, to their respective carrying values. In the event that the carrying values are not recovered by future undiscounted cash flows, as a second step, we compare the carrying values to the related fair values and, if lower, record an impairment adjustment. For purposes of fair value, we generally use replacement costs for tangible fixed assets and discounted cash flows, using risk-adjusted discount rates for intangible assets.
Research and Development and Software Costs
We expense research and development costs, as these costs are incurred. We account for our offering-related software development costs as costs incurred internally in creating a computer software product and are charged to expense when incurred as research and development until technological feasibility has been established for the product. Technological feasibility is established upon completion of a detail program design or, in its absence, completion of a working model. Thereafter, all software production costs shall be capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized costs are amortized based on current and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product. At this time our main product TK6000 is being sold in the market place. Therefore, research and development cost reported in our financial statements relates to pre – marketing costs and are expensed accordingly.
| | | | December 31, | |
| Components of Research and Development: | | | 2009 | | | | 2008 | |
| Product development and engineering | | $ | 2,426 | | | $ | 51,839 | |
| Payroll and benefits | | | 43,859 | | | | - | |
| Total | | $ | 46,285 | | | $ | 51,839 | |
Reclassifications
Certain reclassifications have been made to prior years financial statements in order to conform to the current year’s presentation. The reclassification had no impact on net earnings previously reported.
Share-Based Payment Arrangements
In June 2008, the FASB issued authoritative guidance on the treatment of participating securities in the calculation of earnings per shares (“EPS”). This guidance addresses whether instruments granted in share – based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing EPS under the two - class method. This guidance was effective for fiscal years beginning on or after December 15, 2008. Adoption of this guidance did not have a material impact on our results of operations and financial position, or on basic or diluted EPS.
We apply the grant date fair value method to our share – based payment arrangements with employees and consultants. Share – based compensation cost to employees is measured at the grant date fair value based on the value of the award and is recognized over the service period. Share – based payments to non – employees are recorded at fair value on the measurement date and reflected in expense over the service period.
Financial Instruments
Financial instruments, as defined in the Accounting Standards Codification (“ASC”) 825 Financial Instruments, consist of cash, evidence of ownership in an entity, and contracts that both (i) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (ii) conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity, or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Accordingly, our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, secured convertible debentures, and derivative financial instruments.
We carry cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities at historical costs since their respective estimated fair values approximate carrying values due to their current nature. We also carry convertible debentures at historical cost. However, the fair values of debt instruments are estimated for disclosure purposes (below) based upon the present value of the estimated cash flows at market interest rates applicable to similar instruments.
As of December 31, 2009, estimated fair values and respective carrying values of our secured convertible debentures are as follows:
Financial Instrument | | Note | | | Fair Value | | | Carrying Value | |
| $ 1,000,000 12% Secured Convertible Debenture | | | 6 | | | $ | 1,168,321 | | | $ | 1,004,840 | |
| $ 500,000 12% Secured Convertible Debenture | | | 6 | | | | 584,161 | | | | 502,420 | |
| $ 600,000 12% Secured Convertible Debenture | | | 6 | | | | 677,953 | | | | 335,864 | |
| $ 500,000 12% Secured Convertible Debenture | | | 6 | | | | 564,961 | | | | 304,616 | |
| $ 500,000 12% Secured Convertible Debenture | | | 6 | | | | 530,027 | | | | 207,165 | |
| $ 1,100,000 12% Secured Convertible Debenture | | | 6 | | | | 1,144,616 | | | | 446,017 | |
| Total | | | | | | $ | 4,670,039 | | | $ | 2,800,922 | |
Derivative financial instruments, as defined in ASC 815-10-15-83 Derivatives and Hedging, consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.
We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we have entered into certain other financial instruments and contracts, such as our secured convertible debenture and warrant financing arrangements that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC 815, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements.
The fair value of our derivative liabilities consist of the following:
| Derivative Financial Instrument | | Indexed Shares | | | December 31, 2009 | | | September 30, 2009 | |
| Warrants: | | | | | | | | | |
| September 10, 2008 Series B warrants (Tranche 1) | | | 2,000,000 | | | $ | 315,400 | | | $ | 127,400 | |
| September 10, 2008 Series B warrants (Tranche 2) | | | 4,000,000 | | | | 630,800 | | | | 254,800 | |
| January 30, 2009 Series C-3 warrants | | | 2,400,000 | | | | 227,520 | | | | 167,040 | |
| January 30, 2009 Series BD warrants | | | 480,000 | | | | 62,616 | | | | 33,408 | |
| February 6, 2009 Series C-4 warrants | | | 2,000,000 | | | | 190,200 | | | | 139,400 | |
| February 6, 2009 Series BD warrants | | | 800,000 | | | | 104,600 | | | | 55,760 | |
| July 20, 2009 Series C-5 warrants | | | 2,000,000 | | | | 363,600 | | | | 146,600 | |
| September 25, 2009 Series C-6 warrants | | | 4,400,000 | | | | 485,760 | | | | 335,720 | |
| September 25, 2009 Series BD warrants | | | 880,000 | | | | 130,548 | | | | 67,144 | |
| | | | | | | | | | | | | |
| Compound Derivative Financial Instruments: | | | | | | | | | | | | |
| $1,000,000 Convertible Debenture, dated September 10, 2008 | | | n/a | | | | -- | | | | -- | |
| $500,000 Convertible Debenture, dated September 10, 2008 | | | n/a | | | | -- | | | | -- | |
| $600,000 Convertible Debenture, dated January 30, 2009 | | | n/a | | | | -- | | | | -- | |
| $500,000 Convertible Debenture, dated February 6, 2009 | | | n/a | | | | -- | | | | -- | |
| $500,000 Convertible Debenture, dated July 20, 2009 | | | n/a | | | | -- | | | | -- | |
| $1,100,000 Convertible Debenture, dated September 25, 2009 | | | n/a | | | | -- | | | | -- | |
| Total | | | 18,960,000 | | | $ | 2,511,044 | | | $ | 1,327,272 | |
| | | | | | | | | | | | | |
The following table summarizes the effects on our income (loss) associated with changes in the fair values of our derivative financial instruments:
| | | | Three months ended | |
| | | | December 31, 2009 | | | | December 31, 2008 | |
| | | | | | | �� | | |
| September 10, 2008 Series B warrants (Tranche 1) | | $ | (188,000 | ) | | $ | 20,400 | |
| September 10, 2008 Series B warrants (Tranche 2) | | | (376,000 | ) | | | 40,800 | |
| January 30, 2009 Series C-3 warrants | | | (60,480 | ) | | | -- | |
| January 30, 2009 Series BD warrants | | | (29,208 | ) | | | -- | |
| February 6, 2009 Series C-4 warrants | | | (50,800 | ) | | | -- | |
| February 6, 2009 Series BD warrants | | | (48,840 | ) | | | -- | |
| July 20, 2009 Series C-5 warrants | | | (217,000 | ) | | | -- | |
| September 25, 2009 Series C-6 warrants | | | (150,040 | ) | | | | |
| September 25, 2009 Series BD warrants | | | (63,404 | ) | | | -- | |
| Total | | $ | (1,183,772 | ) | | $ | 61,200 | |
Income Taxes
We record our income taxes using the asset and liability method. Under this method, the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis are reflected as tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences reverse. Changes in these deferred tax assets and liabilities are reflected in the provision for income taxes. However, we are required to evaluate the recoverability of net deferred tax assets. If it is more likely than not that some portion of a net deferred tax asset will not be realized, a valuation allowance is recognized with a charge to the provision for income taxes.
Net Loss per Common Share
Basic loss per common share represents our net loss divided by the weighted average number of common shares outstanding during the period. Diluted loss per common share gives effect to all potentially dilutive securities. We compute the effects on diluted loss per common share arising from warrants and options using the treasury stock method. We compute the effects on diluted loss per common share arising from convertible securities using the if-converted method. The effects, if anti - dilutive are excluded.
Recent accounting pronouncements
In June 2009, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update No. 2009-01, Generally Accepted Accounting Principles, which establishes FASB Accounting Standards Codification (“the Codification”) as the official single source of authoritative U. S, GAAP. All existing accounting standards are superseded. All other accounting guidance not included in the Codification will be considered non – authoritative. The Codification also includes all relevant SEC guidance organized using the same topical structure in separate sections within the Codification.
Following the Codification, the FASB will not issue standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead it will issue Accounting Standards Updates (“ASU”) which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.
The Codification is not intended to change GAAP, but it will change the way GAAP is organized and presented. The Codification is effective for our fiscal year ended September 30, 2009 financial statements and the principal impact on our financial statements is limited to disclosures, as all future references to authoritative accounting literature will be referenced in accordance with the Codification.
In December 2007, the FASB revised the authoritative guidance for business combinations. This guidance establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non – controlling interest in the acquiree. This guidance changes the accounting for business combinations in a number of areas, including the treatment of contingent consideration, preacquisition contingencies, transaction costs and restructuring costs. In addition , under the new guidance, changes in the acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. This guidance was effective for fiscal year beginning on or after December 15, 2008 and requires the immediate expensing of acquisition related costs associated with acquisitions completed after December 31, 2008. Adoption of this guidance on October 1, 2009 had no impact on our results of operations, and financial position. However, we expect this guidance will affect acquisitions made thereafter, though the impact will depend upon the size and nature of the acquisition.
In March 2008, the FASB issued authoritative guidance on disclosures about derivative instruments and hedging activities. This guidance addresses enhanced disclosure concerning (a) the manner in which an entity uses derivatives (and the reasons is uses them), (b) the manner in which derivatives and related hedged items are accounted for and (c) the effects that derivatives and related hedged items have on an entity’s financial position, financial performance, and cash flows. This guidance was effective for financial statements issued for fiscal years and interim periods beginning on or after November 15, 2008. Adoption of this guidance did not have a material impact on our financial position or results of operations.
In May 2009, the FASB issued authoritative guidance on subsequent events. This guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance is effective for interim or annual financial periods ending after June 15, 2009. Adoption of this guidance did not have an impact on our results of operations or financial position.
In August 2009, the FASB updated its authoritative guidance on fair value measurement and disclosures. This update provides amendments to reduce potential ambiguity in financial reporting when measuring the fair value of liabilities. Among other provisions, this update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the valuation techniques described in ASC Update 2009 – 05. ASC Update 2009 – 05 became effective for our period ended December 31, 2009. Adoption of this guidance did not have any impact on our results of operations or financial position.
Note 3 - Interlink Asset Group Acquisition:
On September 10, 2008, we acquired certain tangible and intangible assets, formerly owned by Interlink Global Corporation (“Interlink”), (the “Interlink Asset Group”) directly from Interlink’s creditor who had seized the assets pursuant to a Security and Collateral Agreement. Our purpose in acquiring these assets, which included employment rights to the executive management team of Interlink, was to advance the TK6000 VoIP Technology Program, which Interlink launched in July 2008. Accordingly, these assets substantially comprise our current business assets and the infrastructure for our operations. Contemporaneously with this purchase, we executed an assignment and intellectual property agreement with Interlink that served to perfect our ownership rights to the assets.
Consideration for the acquisition consisted of a face value $1,000,000 convertible debenture, plus warrants to purchase 4,000,000 shares of our common stock. On the date of the Interlink Asset Group acquisition, we also entered into a financing agreement with the creditor that provided for the issuance of a face value $500,000 convertible debenture, plus warrants to purchase 2,000,000 shares of our common stock for net cash consideration of $448,300. These financial instruments, and our accounting therefore, are further addressed in Note 6.
The transfer of the Interlink Asset Group required us to determine whether the group of assets constituted a business, or whether the group of assets did not constitute a business.
We accounted for the acquisition of the assets of Interlink Asset Group as an acquisition of productive assets and not as a business. In addition to our analysis that gave rise to the conclusion that the Interlink Asset Group did not constitute a business, we considered whether the two aforementioned financing arrangements should be combined for purposes of accounting for the acquisition. In reaching a conclusions that they should be combined we considered and gave substantial weight to the facts that (i) they were entered into contemporaneously and in contemplation of one another, (ii) they were executed with the same counterparty and the terms and conditions of the financial instruments and underlying contracts are substantially the same and (iii) there is otherwise no economic need nor substantive business purpose for structuring the transactions separately. Accordingly, for purposes of accounting for the Interlink Asset Group acquisition we have combined the financing arrangements associated with both the asset purchase and the cash financing arrangement. Accounting for the financial instruments arising from these arrangements is further discussed in Note 6.
Notwithstanding our conclusion that the Interlink Asset Group did not constitute a business, our measurement principles provide that, when consideration is not in the form of cash, measurement is based upon the fair value of the consideration given or the fair value of the assets acquired, whichever is more clearly and closely evident and, thus more reliably measureable. We have concluded that the value of the consideration given representing the financial instruments, is more clearly evident and reliable for this purpose because (i) the exchange resulted from exhaustive negotiations with the creditor, (ii) fair value measurements of our financial instruments are in part based upon market indicators and assumptions derived for active markets, and (iii) while ultimately reasonable, our fair value measurements of the significant tangible and intangible asset relies heavily on subjective estimates and prospective financial information. The following table reflects the components of the consideration paid to effect the acquisition:
| Financial Instrument or Cost: | | Amount | |
| Convertible debentures: | | | |
| $1,000,000 face value, 12% convertible debentures | | $ | 1,014,002 | |
| $500,000 face value, 12% convertible debentures | | | 507,000 | |
| Class B warrants, indexed to 6,000,000 shares of common stock | | | 555,600 | |
| Direct costs | | | 39,200 | |
| | | $ | 2,115,802 | |
We have evaluated the substance of the exchange for purposes of identifying all assets acquired. The recognition of goodwill is not contemplated in an exchange that is not a business or accounted for as a business combination.
The following table reflects the acquisition date fair values and the final allocation of the consideration to the assets acquired. The allocation was performed under the assumption that an excess in consideration over the fair values of the assets acquired is allocated to the assets subject to depreciation and amortization, based upon their relative fair values, and not to those assets with indefinite lives. A difference in the recognized basis in the value of the consideration between book and income tax gives rise to the deferred income taxes. Our analysis did not result in impairment, but we are required to continue to perform this analysis as provided in our impairments and disposals policy (see Note 2).
| Asset or Account | | Fair Value | | | Allocation | |
| | | | | | | |
| Cash | | $ | 487,500 | | | $ | 487,500 | |
| Deferred finance costs | | | 24,398 | | | | 24,398 | |
| Telecommunications equipment and other property | | | 411,203 | | | | 756,171 | |
| Intangible assets: | | | | | | | | |
| Knowhow of specialized employees | | | 212,254 | | | | 212,254 | |
| Trademarks | | | 180,925 | | | | 332,708 | |
| Employment arrangements | | | 122,400 | | | | 225,084 | |
| Workforce | | | 54,000 | | | | 54,000 | |
| Telephony license | | | 5,000 | | | | 9,195 | |
| Domain names | | | 4,200 | | | | 7,723 | |
| Deferred income taxes | | | -- | | | | (8,033 | ) |
| Interest expense (finance costs allocated to warrants) | | | 14,802 | | | | 14,802 | |
| Total | | $ | 1,516,682 | | | $ | 2,115,802 | |
In connection with the above allocation, we evaluated the presence of in-process research and development that may require recognition (and immediate write-off). We concluded that in-process research and development was de minimus since development is planned to be outsourced subsequent to the acquisition and, in fact, no substantive effort and/or costs were found in the records of Interlink. Research and development will be expensed as it is incurred.
As more fully discussed in Note 7, we issued 6,000,000 shares of common stock to our new management team in connection with the Interlink Asset Group acquisition. These shares are compensatory in nature and are fully vested. We have valued the shares at $1,500,000, consistent with fair value measurements used elsewhere in our accounting, and recognized the expense in compensation for the period.
Note 4 - Telecommunications Equipment and Other Property:
| Telecommunications equipment and other property consist of the following: | | | | | | | December 31, | | | | September 30, | |
| | | | Life | | | | 2009 | | | | 2009 | |
| | | | | | | | | | | | | |
| Telecommunication equipment | | | 7 | | | $ | 650,804 | | | $ | 650,804 | |
| Computer equipment | | | 5 | | | | 106,577 | | | | 106,577 | |
| Office equipment and furnishing | | | 7 | | | | 23,760 | | | | 23,760 | |
| Purchased software | | | 3 | | | | 10,554 | | | | 10,041 | |
| Sub – total | | | | | | | 791,695 | | | | 791,182 | |
| Less: accumulated depreciation | | | | | | | (156,624 | ) | | | (125,867 | ) |
| Total | | | | | | $ | 635,071 | | | $ | 665,315 | |
Our telecommunications equipment is deployed in our Network Operations Center (“NOC”) as is most of the computer equipment. Other computer and office equipment and furnishings are deployed at our corporate offices, which we lease under an operating lease.
Depreciation of the above assets amounted to $30,757 during the three months ended December 31, 2009 and $29,217 during December 31, 2008.
Note 5 - Intangible Assets:
| Intangible assets consist of following: | | | | | | | December 31, | | | | September 30, | |
| | | | Life | | | | 2009 | | | | 2008 | |
| | | | | | | | | | | | | |
| Trademarks National and International | | | 5 | | | $ | 332,708 | | | $ | 332,708 | |
| Employment agreements | | | 3 | | | | 225,084 | | | | 225,084 | |
| Knowhow and specialty skills | | | 3 | | | | 212,254 | | | | 212,254 | |
| Workforce | | | 3 | | | | 54,000 | | | | 54,000 | |
| Telephony licenses | | | 2 | | | | 9,195 | | | | 9,195 | |
| Patents | | | 20 | | | | 11,024 | | | | 11,024 | |
| Domain names | | | 2 | | | | 7,723 | | | | 7,723 | |
| | | | | | | | 851,988 | | | | 851,988 | |
| Less accumulated amortization | | | | | | | (306,834 | ) | | | (247,001 | ) |
| | | | | | | $ | 545,154 | | | $ | 604,987 | |
Amortization of the above intangible assets amounted to $59,833 and$37,507for the three months ended December 31, 2009 and 2008, respectively. The weighted average amortization period for the amortizable intangible assets is 2.7 years.
Estimated future amortization of intangible assets, is as follows:
| September 30, | | | |
| 2010 | | $ | 187,000 | |
| 2011 | | | 225,910 | |
| 2012 | | | 70,238 | |
| 2013 | | | 62,006 | |
| Total | | $ | 545,154 | |
| | | | | |
Note 6 - Secured Convertible Debentures and Warrant Financing Arrangements:
The carrying values of our 12% secured convertible debentures consist of the following:
| | | December 31 2009 | | | September 30 2009 | |
| | | | | | | |
| $1,000,000 face value convertible debenture, due September 10, 2010 | | $ | 1,004,840 | | | $ | 1,006,588 | |
| $500,000 face value convertible debenture, due September 10, 2010 | | | 502,420 | | | | 503,293 | |
| $600,000 face value convertible debenture, due January 30, 2011 | | | 335,864 | | | | 293,726 | |
| $500,000 face value convertible debenture, due January 30, 2011 | | | 304,616 | | | | 271,741 | |
| $500,000 face value convertible debenture, due July 20, 2011 | | | 207,165 | | | | 179,778 | |
| $1,100,000 face value convertible debenture, due September 25, 2011 | | | 446,017 | | | | 391,630 | |
| Total | | $ | 2,800,922 | | | $ | 2,646,756 | |
2008 Convertible Debenture Financing
On September 10, 2008, we issued a $1,000,000 face value, 12% secured convertible debenture (T-1), due September 10, 2010 and Series B warrants indexed to 4,000,000 shares of our common stock in exchange for the Interlink Asset Group, discussed in Note 3. Also on September 10, 2008, we issued a $500,000 face value 12% secured convertible debenture (T-2), due September 10, 2010 and Series B warrants indexed to 2,000,000 shares of our common stock for net cash proceeds of $472,800. The warrants have a term of five years. These financial instruments were issued to the same creditor under contracts that are substantially similar, unless otherwise mentioned in the following discussion.
The principal amount of the debentures is payable on September 10, 2010 and the interest is payable quarterly, on a calendar quarter basis. While the debenture is outstanding, the investor has the option to convert the principal balance, and not the interest, into shares of our common stock at a conversion price of $0.25 per common share. The terms of the conversion option provide for anti-dilution protections for traditional restructurings of our equity, such as stock-splits and reorganizations, if any, and for sales of our common stock, or issuances of common-indexed financial instruments, at amounts below the otherwise fixed conversion price. Further, the terms of the convertible debenture provide for certain redemption features. If, in the event of certain defaults on the terms of the debentures, some of which are indexed to equity risks, we are required at the investors option to pay the higher of (i) 110% of the principal balance, plus accrued interest or (ii) the if-converted value of the underlying common stock, using the 110% default amount, plus accrued interest. If this default redemption is not exercised by the investor, we would incur a default interest rate of 18% and the investor would have rights to our assets under the related Security Agreement. We may redeem the convertible debentures at anytime at 110% of the principal amount, plus accrued interest.
Because the two hybrid debt contracts were issued as compensation for the Interlink Asset Group and as further discussed in Note 3 we concluded that they should be combined for accounting purposes, the accounting resulted in no beneficial conversion feature.
2009 Convertible Debenture Financings
We entered into several Securities Purchase Agreements with Debt Opportunity Fund, LLP (“DOF”) during the year ended September 30, 2009.
| - | On January 30, 2009 we issued (a) 12% Senior Secured Convertible Debentures in the aggregate principal amount of $600,000 with a maturity date of January 30, 2011, convertible into shares of common stock at a conversion price of $0.25; and (b) Series C Warrants to purchase 2,400,000 shares of our common stock at an exercise price of $0.50 for net cash proceeds of $507,900. The warrants have a term of five years. |
| - | On February 6, 2009 we issued (a) 12% Senior Secured Convertible Debentures in the aggregate principal amount of $500,000 with a maturity date of January 30, 2011, convertible into shares of common stock at a conversion price of $0.25; and (b) Series C Warrants to purchase 2,000,000 shares of our common stock at an exercise price of $0.50 for net cash proceeds of $443,250. The warrants have a term of five years. |
| - | On July 20, 2009, we issued (a) 12% Senior Secured Convertible Debentures in the aggregate principal amount of $500,000 with a maturity date of July 20, 2011, convertible into shares of common stock at a conversion price of $0.25; and (b) Series C Warrants to purchase 2,000,000 shares of our common stock at an exercise price of $0.50 for net cash proceeds of $446,250. The warrants have a term of five years. |
| - | On September 25, 2009, we issued (a) 12% Senior Secured Convertible Debentures in the aggregate principal amount of $1,100,000 with a maturity date of July 20, 2011, convertible into shares of common stock at a conversion price of $0.25; and (b) Series C Warrants to purchase 4,400,000 shares of our common stock at an exercise price of $0.25 for net cash proceeds of $1,000,000. The warrants have a term of five years. |
Each debenture bears interest at a rate of 12% per annum from the date of issuance until paid in full. Interest is calculated on the basis of a 360-day year and paid for the actual number of days elapsed, and accrues and is payable quarterly or upon conversion (as to the principal amount then being converted). The debentures convert into shares of our common stock at the option of the holder at $0.25 per share (which conversion price is subject to adjustment under certain circumstances). The debentures are secured by a lien in all of the assets of the Company. Further, the terms of the convertible debentures provide for default redemption features similar to those described above.
Midtown Partners & Co., LLC (“Midtown Partners”), an NASD registered broker dealer, acted as the placement agent for the Company in connection with the January 30, July 20, and September 25, 2009 Convertible Debt Offerings (“2009 Convertible Debt Offerings”). We paid Midtown Partners cash commissions equal to $198,000 and we issued Series BD Common Stock Purchase Warrants to Midtown Partners entitling Midtown Partners to purchase 1,720,000 shares of the Company’s common stock at an initial exercise price of $0.50 per share and 440,000 shares of the Company’s common stock at an initial exercise price $0.25 per share. Since the Series BD warrants offered full ratchet anti-dilution protection, any previously issued and outstanding warrants with a conversion price greater than $0.25 automatically had their conversion price ratchet down to $0.25 as subsequent issuances were made with a conversion price of $0.25.
On September 22, 2009 we voided and reissued warrants in connection with our financing transactions. The cancellation and reissuance of warrants was treated as a modification under ASC 470-50 Modifications and Extinguishments although the change in cash flow was less than 10% so extinguishment accounting was not applicable.
Cancelled and re-issued warrants were as follows:
Original Warrants | Indexed Shares | Strike Price | | Reissued Warrants | Indexed Shares | Strike Price |
| C-1 warrants | 2,400,000 | $0.50 | | C-3 warrants | 2,400,000 | $0.50 |
| C-2 warrants | 2,000,000 | $0.50 | | C-4 warrants | 2,000,000 | $0.50 |
| BD-1 warrants | 480,000 | $0.50 | | BD-4 warrants | 240,000 | $0.25 |
| | | | | BD-5 warrants | 240,000 | $0.50 |
| BD-2 warrants | 400,000 | $0.50 | | BD-6 warrants | 200,000 | $0.25 |
| | | | | BD-7 warrants | 200,000 | $0.50 |
| BD-3 warrants | 200,000 | $0.50 | | BD-8 warrants | 200,000 | $0.25 |
| BD-4 warrants | 200,000 | $0.50 | | BD-9 warrants | 200,000 | $0.50 |
Accounting for the Financing Arrangements:
We have evaluated the terms and conditions of the secured convertible debentures under the guidance of ASC 815, Derivatives and Hedging. We have determined that, while the anti-dilution protections preclude treatment of the embedded conversion option as conventional, the conversion option is exempt from classification as a derivative because it otherwise achieves the conditions for equity classification (if freestanding) provided in ASC 815. We have further determined that the default redemption features described above are not exempt for treatment as derivative financial instruments, because they are not clearly and closely related in terms of risk to the host debt agreement. On the inception date of the arrangements through December 31, 2009, we determined that the fair value of these compound derivatives is de minus. However, we are required to re-evaluate this value at each reporting date and record changes in its fair value, if any, in income. For purposes of determining the fair value of the compound derivative, we have evaluated multiple, probability-weighted cash flow scenarios. These cash flow scenarios include, and will continue to include fair value information about our common stock. Accordingly, fluctuations in our common stock value will significantly influence the future outcomes from applying this technique.
As discussed above, the embedded conversion options did not require treatment as derivative financial instruments; however we were required to evaluate the feature as embodying a beneficial conversion feature under ASC 470-20, Debt with Conversion and Other Options. A beneficial conversion feature (“BCF”) is present when the fair value of the underlying common share exceeds the effective conversion price of the conversion option. The effective conversion price is calculated as the basis in the financing arrangement allocated to the hybrid convertible debt agreement, divided by the number of shares into which the instrument is indexed. Because the two hybrid debt contracts dated September 10, 2008 were issued as compensation for the Interlink Asset Group and as further discussed in Note 3 we concluded that they should be combined for accounting purposes and the accounting resulted in no beneficial conversion feature. The financings issued in 2009 were found to have a BCF which gives effect to the (i) the trading market price on the contract dates and (ii) the effective conversion price of each issuance after allocation of proceeds to all financial instruments sold based upon their relative fair values. Notwithstanding, the BCF was limited to the value ascribed to the remaining hybrid contract (using the relative fair value approach). Accordingly, the BCF allocated to paid-in capital from the 2009 financings amounted to $872,320 for the year ended September 30, 2009.
We evaluated the terms and conditions of the Series B, Series C and Series BD warrants under the guidance of ASC 480, Distinguishing Liabilities from Equity (“ASC 480”). The warrants embody a fundamental change-in-control redemption privilege wherein the holder may redeem the warrants in the event of a change in control for a share of assets or consideration received in such a contingent event. This redemption feature places the warrants within the scope of ASC 480-10, as put warrants and, accordingly, they are classified in liabilities and measured at inception and on an ongoing basis at fair value. Fair value of the warrants was measured using the Black-Scholes-Merton valuation technique and in applying this technique we were required to develop certain subjective assumptions which are listed in more detail below.
Premiums on the secured convertible debentures arose from initial recognition at fair value, which is higher than face value. Discounts arose from initial recognition at fair value, which is lower than face value. Premiums and discounts are amortized through credits and debits to interest expense over the term of the debt agreement. Amortization of debt (discount) premiums amounts to $(43,405) and $2,640 for the three months ended December 30, 2009 and 2008, respectively.
Direct financing costs were allocated to the financial instruments issued (hybrid debt and warrants) based upon their relative fair values. Amounts related to the hybrid debt are recorded as deferred finance costs and amortized through charges to interest expense over the term of the arrangement using the effective interest method. Amounts related to the warrants were charged directly to income because the warrants were classified in liabilities, rather than equity, as described above. Direct financing costs are amortized through charges to interest expense over the term of the debt agreement.
On September 24, 2009, we obtained an extension of the interest payments due June 30, 2009 and September 30, 2009 to June 30, 2010 and September 30, 2010, respectively. The change in cash flow from this modification was analyzed to determine if it was greater than 10% which would give rise to extinguishment accounting. In each case, the change in cash flows was less than 10% so extinguishment accounting was not applicable.
Fair Value Considerations
We adopted the provisions of ASC 820 Fair Value Measurements and Disclosures (“ASC 820”) with respect to our financial instruments. As required by of ASC 820, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. Our derivative financial instruments which are required to be measured at fair value on a recurring basis under of ASC 815 as of December 31, 2009 are all measured at fair value using Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following represents a reconciliation of the changes in fair value of financial instruments measured at fair value:
| Balance at September 30, 2009 | | $ | 1,327,272 | |
| Fair value adjustments | | | 1,183,772 | |
| Balance at December 31, 2009 | | $ | 2,511,044 | |
The warrants are valued using the Black-Scholes-Merton (“BSM”) valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions underlying the BSM calculations are as follows as of December 31, 2009 and September 30, 2009:
| December 31, 2009 | | Series B Warrants | | | Series C-3 Warrants | | | Series C-4 Warrants | | | Series C-5 Warrants | | | Series C-6 Warrants | | | Series BD Warrants | |
| Adjusted Strike price | | $ | 0.25 | | | $ | 0.50 | | | $ | 0.50 | | | $ | 0.25 | | | $ | 0.50 | | | $ | 0.25-$0.50 | |
| Volatility | | | 97 | % | | | 94 | % | | | 94 | % | | | 92 | % | | | 91 | % | | | 91%-94 | % |
| Expected term (years) | | | 3.69 | | | | 4.08 | | | | 4.10 | | | | 4.55 | | | | 4.75 | | | | 4.08-4.75 | |
| Risk-free rate | | | 1.70 | % | | | 1.70 | % | | | 1.70 | % | | | 2.69 | % | | | 2.69 | % | | | 1.70-2.69 | % |
| Dividends | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
September 30, 2009 | | Series B Warrants | | | Series C-3 Warrants | | | Series C-4 Warrants | | | Series C-5 Warrants | | | Series C-6 Warrants | | | Series BD Warrants | |
| Adjusted Strike price | | $ | 0.25 | | | $ | 0.25 | | | $ | 0.25 | | | $ | 0.25 | | | $ | 0.25 | | | $ | 0.25 | |
| Volatility | | | 93 | % | | | 92 | % | | | 92 | % | | | 89 | % | | | 89 | % | | | 89%-93 | % |
| Expected term (years) | | | 3.95 | | | | 4.34 | | | | 4.36 | | | | 4.81 | | | | 5.00 | | | | 3.95-5.00 | |
| Risk-free rate | | | 2.31 | % | | | 2.31 | % | | | 2.31 | % | | | 2.31 | % | | | 2.31 | % | | | 2.31 | % |
| Dividends | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
We did not have a historical trading history sufficient to develop an internal volatility rate for use in BSM. As a result, we have used a peer approach wherein the historical trading volatilities of certain companies with similar characteristics as ours and who had a sufficient trading history were used as an estimate of our volatility. In developing this model, no one company was weighted more heavily. The remaining term of our warrants is used as our term input and for purposes of our risk-free rate, we have used the publicly-available yields on zero-coupon Treasury securities with remaining terms to maturity consistent with the remaining contractual term of the warrants. Until December 2009, when our stock became listed on the OTC Bulletin Board, we valued the underlying common shares at $0.25 which was representative of our best estimates of our enterprise value.
Note 7 - Stockholders’ Deficit:
Share-based payments (employees):
On September 10, 2008, we issued 6,000,000 shares of common stock to our new management team in connection with the Interlink Asset Group acquisition (see Note 3). These shares are compensatory in nature and are fully vested. We have valued the shares at $0.25, consistent with fair value measurements used elsewhere in our accounting.
| Officer | | Shares | | | Expense | |
| | | | | | | |
| Anastasios Kyriakides, CEO | | | 2,100,000 | | | $ | 525,000 | |
| Nicholas Kyriakides | | | 600,000 | | | | 150,000 | |
| Kenneth Hosfeld, EVP | | | 1,100,000 | | | | 275,000 | |
| Leo Manzewitsch, CTO | | | 1,100,000 | | | | 275,000 | |
| Guillermo Rodriguez, CFO | | | 1,100,000 | | | | 275,000 | |
| | | | 6,000,000 | | | $ | 1,500,000 | |
On July 9, 2009, we issued 1,000,000 shares of our common stock to non-employees for goods and services.
| Consultant/Provider | | Shares | | | Expense | |
| Omni Reliant | | | 1,000,000 | | | $ | 250,000 | |
Warrants to purchase common stock:
On September 25, 2009, we issued Series C warrants to purchase 4,400,000 shares of our common stock in connection with financing transactions discussed in Note 6. These warrants have a strike price of $0.50 and expire five years from issuance.
On July 20, 2009, we issued Series C warrants to purchase 2,000,000 shares of our common stock in connection with financing transactions discussed in Note 6. These warrants have a strike price of $0.25 and expire five years from issuance.
On February 6, 2009, we issued Series C warrants to purchase 2,000,000 shares of our common stock in connection with financing transactions discussed in Note 6. These warrants have a strike price of $0.50 and expire five years from issuance.
On January 30, 2009, we issued Series C warrants to purchase 2,400,000 shares of our common stock in connection with financing transactions discussed in Note 6. These warrants have a strike price of $0.50 and expire five years from issuance.
We also issued Series BD warrants to purchase 1,080,000 shares of our common stock in connections with financing transactions discussed in Note 6. These warrants have a strike price of $0.50 and expire in five years from issuance.
We also issued Series BD warrants to purchase 1,080,000 shares of our common stock in connections with financing transactions discussed in Note 6. These warrants have a strike price of $0.25 and expire in five years from issuance.
On September 10, 2008, we issued Class B warrants to purchase 4,000,000 shares of our common stock in connection with financing transactions discussed in Note 6. These warrants have a strike price of $0.25 and expire five years from issuance.
On September 10, 2008, we issued Class B warrants to purchase 2,000,000 shares of our common stock in connection with financing transactions discussed in Note 6. These warrants have a strike price of $0.25 and expire five years from issuance.
On January 17, 2007, we issued Class A warrants to purchase 3,099,712 shares of our common stock in connection with a sale of common stock. These warrants have a strike price of $0.25 and expire five years from issuance.
| | | Indexed Shares | | | Weighted Strike | |
| October 1, 2006 | | | | | | |
| ��Issued | | | 3,262,912 | | | $ | 1.00 | |
| Exercised | | | - | | | | - | |
| Expired | | | - | | | | - | |
| September 30, 2007 | | | 3,262,912 | | | $ | 1.00 | |
| Issued | | | 6,000,000 | | | $ | 0.50 | |
| Exercised | | | - | | | | - | |
| Expired | | | - | | | | - | |
| September 30, 2008 | | | 9,262,912 | | | $ | 0.67 | |
| Issued | | | 12,960,000 | | | $ | 0.50 | |
| Exercised | | | - | | | | - | |
| Expired/cancelled | | | (163,200 | ) | | | 0.25 | |
| September 30, 2009 | | | 22,059,712 | | | $ | 0.57 | |
| Issued | | | - | | | | - | |
| Expired | | | - | | | | - | |
| December 31, 2009 | | | 22,059,712 | | | | $0.50 | |
The weighted average remaining life of the aggregate warrants is 3.5 years.
Refer to Note 2 for income associated with the classification of warrants liabilities at the three months ended December 31, 2009.
Note 8 - Commitment and Contingencies:
Leases
We lease our principal office space under an arrangement that is an operating lease. Rent and associated occupancy expenses for the three months ended December 31, 2009 and 2008 was $43,156 and $41,260 respectively.
Minimum non-cancellable future lease payments as of December 31, 2009, were as follows: 2010 - $71,800.
Employment arrangements
We have entered into an employment agreement with our Chief Executive Officer, Anastasios Kyriakides and in consideration of his services to us, we have agreed to pay him a base salary of $150,000 plus certain bonuses and awards if the Company achieves certain profitability levels and adopts certain incentive compensation plans. As of December 31, 2009, none of these incentive arrangements and plans had been realized. The agreement is effective through September 30, 2013.
Note 9 - Related Parties:
Effective December 30, 2007, we sold all of the assets associated with our advertising business as a going concern to Robert H. Blank, who was then our President and Chief Operating Officer. The purchase price for the assets was $185,000. Mr. Blank paid the purchase price by assuming a convertible debenture issued by us to Mr. Robin C. Hoover in the amount of $185,000. The convertible debenture constituted substantially all of our liabilities at the time of the acquisition. In addition, Mr. Hoover and Mr. Blank tendered 208 and 200 shares of common stock, respectively, to the Company. These shares had been issued to Mr. Blank and Mr. Hoover as “founders” shares.
Effective September 10, 2008, we issued 1,000,000 shares to Apogee Financial Investments, Inc. in connection with certain consulting services rendered to us. Mr. Richard Diamond is president of Apogee Financial Investments, Inc. and served as a member of our board of directors until his resignation on November 23, 2009. On the date of the issuance, Mr. Diamond was not a member of our board of directors.
Midtown Partners & Co., LLC (“Midtown Partners”), an FINRA registered broker dealer, acted as the placement agent in connection with multiple Convertible Debt Offerings. In connection with these offerings, we paid Midtown Partners a cash commission equal to $198,000; issued Series BD Common Stock Purchase Warrant to Midtown Partners entitling Midtown Partners to purchase 1,080,000 shares of our common stock at an initial exercise price of $0.50 per share; and issued Series BD Common Stock Purchase Warrant to Midtown Partners entitling Midtown Partners to purchase 1,080,000 shares of our common stock at an initial exercise price of $0.25 per share. Midtown Partners is a wholly-owned subsidiary of Apogee Financial Investments, Inc.
A company owned or controlled by a major shareholder of NetTalk.com, Inc., provided services to us, as follows:
In June 2009, we incurred advertising expense for the creation of an infomercial. The infomercial is presently running weekly in some US markets. The advertising expense incurred, was as follows:
| Items | | Amount | |
| | | | |
| Cash payment | | $ | 100,000 | |
| Share-based payment (1,000,000 common shares) | | | 250,000 | |
| Total | | $ | 350,000 | |
| | | | | |
| Accounts payable to Omni Reliant at December 31, 2009 | | $ | 111,178 | |
| | | | | |
Our Management’s Discussion and Analysis should be read in conjunction with our financial statements included in this report.
Forward Looking Statements
Certain statements contained in this report on Form 10-Q and other written material and oral statements made from time to time by us do not relate to historical or current facts. As such, they are referred to as “forward-looking statements,” which are intended to convey our expectations or predictions regarding the occurrence of possible future events or the existence of trends and factors that may impact our future plans and operating results. These forward-looking statements are derived, in part, from various assumptions and analyses we have made in the context of our current business plan and information currently available to us and in light of our experience and perceptions of historical trends, current conditions and expected future developments and other factors we believe to be appropriate in the circumstances. You can generally identify forward-looking statements through words and phrases such as “ seek, ” “ anticipate, ” “ believe, ” “ estimate, ” “ expect, ” “ intend, ” “ plan, ” “ budget, ” “ project, ” “ may be, ” “ may continue, ” “ may likely result, ” and similar expressions. When reading any forward looking statement, you should remain mindful that actual results or developments may vary substantially from those expected as expressed in or implied by that statement for a number of reasons or factors, such as those relating to:
| · | whether or not a market for our products and services develop and, if a market develops, the pace at which it develops; |
| · | our ability to successfully sell our products and services if a market develops; |
| · | our ability to attract the qualified personnel to implement our growth strategies; |
| · | our ability to develop sales and marketing capabilities; |
| · | the accuracy of our estimates and projections; |
| · | our ability to fund our short-term and long-term financing needs; |
| · | changes in our business plan and corporate strategies; and other risks and uncertainties discussed in greater detail in the sections of this prospectus, including the section captioned “Plan of Operation”. |
Each forward-looking statement should be read in context with, and with an understanding of, the various other disclosures concerning our Company and our business made elsewhere in this prospectus, as well as other public reports filed with the SEC. You should not place undue reliance on any forward-looking statement as a prediction of actual results or developments. We are not obligated to update or revise any forward-looking statement contained in this report to reflect new events or circumstances unless and to the extent required by applicable law.
Background
Company and Business
We are a telephone company, who provides, sells and supplies commercial and residential telecommunication services, including services utilizing voice over internet protocol (“VoIP”) technology, session initiation protocol (“SIP”) technology, wireless fidelity technology, wireless maximum technology, marine satellite services technology and other similar type technologies. Our main product is the TK 6000, an analog telephone adapter that provides connectivity for analog telephones and faxes to home, home office or corporate local area networks (“LAN”).
Our TK 6000 and its related services is a cost effective solution for individuals, small businesses and telecommuters connecting to any analog telephone, fax or private branch exchange (“PBX”). The TK 6000 provides one USB port, one Ethernet port and one analog telephone port. A full suite of internet protocol features is available to maximize universal connectivity. In addition, analog telephones attached to the TK 6000 are able to use advanced calling features such as call forwarding, caller ID, 3-way calling, call holding, call retrieval and call transfer.
History and Overview
We are a Florida corporation, incorporated on May 1, 2006 under the name Discover Screens, Inc. (“Discover Screens”).
Prior to September 10, 2008, we were known as Discover Screens, a development-stage company, dedicated to providing advertising through interactive, audiovisual, information and advertising portals located in high-traffic indoor venues. Our name and business operations changed in a series of transactions beginning in December of 2007. Pursuant to an asset purchase agreement dated December 30, 2007, we sold all of the assets associated with the advertising business as a going concern to Robert H. Blank, who was then our President and Chief Operating Officer. Following that transaction, we ceased all existing operations, and from December 30, 2007 to September 9, 2008, we owned nominal assets and generated no revenue. In February of 2008, Mr. Blank resigned as officer and director.
On September 9, 2008, Robin C. Hoover, our sole remaining officer and director, appointed four new members to the Board of Directors, Anastasios Kyriakides, Kenneth Hosfeld, Guillermo Rodriguez and Leo Manzewitsch. Mr. Hoover then resigned as an officer and director. Mr. Richard Diamond was appointed by the Board of Directors to fill the vacancy left by Mr. Hoover’s resignation. Mr. Diamond resigned as a director of the Company, effective November 23, 2009.
On September 10, 2008, we changed our name from Discover Screens, Inc. to Net Talk.com, Inc. On September 10, 2008, we entered into a Contribution Agreement with Vicis Capital Master Fund (“Vicis”) by which Vicis contributed certain operating assets to the Company in exchange for (a) a 12% Senior Secured Convertible Debenture in the principal amount of $1,000,000; and (b) a Series B Warrant to purchase 4,000,000 shares of common stock of the Company. Also on September 10, 2008, the Company entered into a Securities Purchase Agreement with Debt Opportunity Fund, LLP (“DOF”) by which DOF purchased (a) a 12% Senior Secured Convertible Debenture in the principal amount of $500,000; and (b) a Series B Warrant to purchase 2,000,000 shares of Common Stock of the Company.
On September 10, 2008, we acquired certain tangible and intangible assets, formerly owned by Interlink Global Corporation (“Interlink”), (the “Interlink Asset Group”) directly from Interlink’s creditor who had seized the assets pursuant to a Security and Collateral Agreement. Our purpose in acquiring these assets, which included employment rights to the executive management team of Interlink who now currently serve as our officers, was to advance the TK 6000 VoIP Technology Program, which Interlink launched in July 2008. Accordingly, these assets substantially comprise our current business assets and the infrastructure for our future operations. Contemporaneously with this purchase, we executed an assignment and intellectual property agreement with Interlink that served to perfect our ownership rights to the assets.
Consideration for the acquisition consisted of a face value $1,000,000 convertible debenture, plus warrants to purchase 4,000,000 shares of our common stock. On the date of the Interlink Asset Group acquisition, we also entered into a financing agreement with DOF (as described above) that provided for the issuance of a face value $500,000 convertible debenture, plus warrants to purchase 2,000,000 shares of our common stock for net cash consideration of $448,300. In connection with this acquisition, we issued 6,000,000 shares of common stock to our new management team in connection with the Interlink Asset Group acquisition.
We continue to improve and enhance the following factors in building and expanding our customer base:
| · | Deployment and distribution of our main product TK 6000 device. |
| · | Attractive and innovative value proposition. We offer our customers an attractive and innovative value proposition: a portable telephone replacement with multiple and unique features that differentiates our services from the competition. |
| · | Innovative, high technology and low cost technology platform. We believe our innovative software and network technology platform provides us with a competitive advantage over our competition and allows us to maintain a low cost infrastructure relative to our competitors. |
Plan of Operation
We provide, sell and supply commercial and residential telecommunication services, including services utilizing voice over internet protocol (“VoIP”) technology, session initiation protocol (“SIP”) technology, wireless fidelity technology, wireless maximum technology, marine satellite services technology and other similar type technologies. We are developing our business infrastructure and new products and services.
Our Product
At this time, our main product is the “TK 6000”. The TK 6000 is designed to provide specifications unique to each customer’s existing equipment. It allows the customer full mobile flexibility by being able to take internet interface anywhere the customer has an internet connection. The TK 6000 has the following features:
| | | | A Universal Serial Bus (“USB”) connection allowing the interconnection of the TK 6000 to any computer. The USB connection results in shared power between the TK 6000 and the host computer. |
| | | | |
| | | | In addition to the USB power source option, the TK 6000 will also have an external power supply allowing the phone to independently power itself when not connected to a host computer; |
| | | | Unlike most VoIP telephone systems, the TK 6000 has a standalone feature allowing it to be plugged directly into a standard internet connection. |
| | | | The TK 6000 is a compact, space-efficient product. |
The TK 6000 has an interface component so that the customer can purchase multiple units that can communicate with each other allowing simultaneous ringing from multiple locations.
Our product is portable and allows our customers to make and receive phone calls with a telephone anywhere broadband internet connection is available. We transmit the calls using Voice over Internet Protocol “VOIP” technology, which converts voice signals into digital data transmissions over the internet.
Our Services
Our business is to provide products and services that utilize Voice Over Internet Protocol, which we refer to as “VoIP.” VoIP is a technology that allows the consumer to make telephone calls over a broadband internet connection instead of using a regular (or analog) telephone line. VoIP works by converting the user’s voice into a digital signal that travels over the internet until it reaches its destination. If the user is calling a regular telephone line number, the signal is converted back into a voice signal once it reaches the end user. Our business model is to develop and commercialize software technology solutions for cost effective, real-time communications over the internet and related services.
Results of Operations
Three months ended December 31, 2009 compared to three months ended December 31, 2008
Revenues: Our revenues amounted to $184,193and $0 for the three months ended December 31, 2009, and 2008, respectively. The increase in revenues relates to establishing our operating architecture and commencing revenue producing activities.
Cost of sales: Our cost of sales amounted to $332,316 and $0 for the three months ended December 31, 2009, and 2008, respectively. The increase in cost of sales relates to establishing our operating architectural and commencing revenue producing activities.
Gross margin: Our gross margin and new allocations amounted to $(148,123) for the three months ended December 31, 2009 and $0, respectively. This is due to allocating additional expenses to technical support and telecommunication expenses.
Advertising: Our advertising expenses amounted to $72,930 and $0 for the three months ended December 31, 2009 and 2008, respectively. The breakdown of our advertising expense is as follows:
| | | | December 31, | |
| | | | 2009 | | | | 2008 | |
| Infomercial/production time | | $ | 18,500 | | | $ | - | |
| Media and others | | | 54,430 | | | | - | |
| Total | | $ | 72,930 | | | $ | - | |
Compensation and Benefits: Our compensation and benefits expense amounted to$102,063 and $89,000 for the three months ended December 31, 2009 and 2008, respectively. This amount represents normal salaries and wages paid to management members and employees including marketing and administrative functions.
Professional Fees: Our professional fees amounted to $50,109 and $116,367 for the three months ended December 31, 2009 and 2008, respectively. This amount includes normal payments and accruals for legal, accounting and other professional services. Our costs associated with legal and accounting fees will remain higher than historical amounts because, as a reporting company, we are required to comply with the reporting requirements of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). This involves the preparation and filing of the quarterly and annual reports required under the Exchange Act as well as other reporting requirements under the Exchange Act.
We will also incur additional expenses associated with the services provided by our transfer agent. In addition, to the work we are presently doing, we will need to focus our time and energy to complying with the Exchange Act. This will detract from our ability and efforts to develop and market our products and services. We anticipate incurring these additional expenses related to being a public company without receiving a substantial increase in revenues associated with this undertaking.
Depreciation and Amortization: Depreciation and amortization amounted to $90,589 and $66,724 for the three months ended December 31, 2009 and 2008, respectively. These amounts represent amortization of our long-lived tangible and intangible assets using straight-line methods and lives commensurate with the assets’ remaining utility. Our long-lived assets, both tangible and intangible, are subject to annual impairment review, or more frequently if circumstances so warrant. During the three months ended December 31, 2009, we did not calculate or record impairment charges. However, negative trends in our business and our inability to meet our projected future results could give rise to impairment charges in future periods. Why decrease between periods?
Research and Development and Software Costs
We expense research and development expenses, as these costs are incurred. We account for our offering-related software development costs as costs incurred internally in creating a computer software product and are charged to expense when incurred as research and development until technological feasibility has been established for the product. Technological feasibility is established upon completion of a detail program design or, in its absence, completion of a working model. At this time our main product TK6000 is being sold in the market place. Therefore, research and development cost reported in our financial statements relates to pre – marketing cost and are expensed accordingly.
| Components of research and development: | | December 31, | |
| | | 2009 | | | 2008 | |
| Product development and engineering | | $ | 2,250 | | | $ | 88,127 | |
| Payroll and benefits | | | 43,859 | | | | - | |
| Total | | $ | 46,285 | | | $ | 88,127 | |
General and Administrative Expenses. General and administrative expenses amounted to $123,738 and $64,691for the three months ended December 31, 2009 and 2008, respectively, and consisted of general corporate expenses and certain other start up expenses. General corporate expenses included $43,156 in occupancy costs for the three months ended December 31, 2009 and $41,260 for comparable period ended September 30, 2008. Our increase costs are associated with our efforts of being a public company.
Our general and administrative expenses are made up of the following accounts:
| | | | For the three months ended December 31, | |
| | | | 2009 | | | | 2008 | |
| Rent and occupancy | | $ | 43,156 | | | $ | 41,260 | |
| Insurance | | | 18,588 | | | | 1,375 | |
| Taxes and licenses | | | 4,398 | | | | 11,465 | |
| Telephone | | | 2,890 | | | | 2,413 | |
| Travel | | | 28,539 | | | | 1,744 | |
| Bad debt expense | | | 8,193 | | | | - | |
| Other | | | 17,974 | | | | 6,434 | |
| Total | | $ | 123,738 | | | $ | 64,691 | |
Interest Expense: Interest expense amounted to $326,191 and $47,195 for the three months ended December 31, 2009 and 2008, respectively. Such amount represented (i) stipulated interest under our aggregate $4,200,000 face value convertible debentures, (ii) the related amortization of premiums and discounts (iii) the amortization of deferred finance costs. Aggregate premiums continue to be credited to interest expense over the term of the debentures using the effective interest method.
Derivative Income : Derivative income (expense) amounted to $(1,183,772) and $61,200 for the three months ended December 31, 2009 and 2008, respectively. Such amount represents the change in fair value of liability-classified warrants. Derivative financial instruments are carried as liabilities, at fair value, in our financial statements with changes reflected in income. In addition to the liability-classified warrants, we also have certain compound derivative financial instruments related to our $4,200,000 face value convertible debentures that had de minimus values. We are required to adjust our warrant and compound derivatives to fair value at each reporting period. The fair value of our warrant derivative is largely based upon fluctuations in the fair value of our common stock. The fair value of our compound derivative is largely based upon estimates of cash flow arising from the derivative and credit-risk adjusted interest rates. Accordingly, the volatility in these underlying valuation assumptions will have future effects on our earnings.
Net Loss. The net loss amounted to $2,140,225 and $408,579 for the three months ended December 31, 2009 and 2008, respectively. The increase in net loss is primarily due to start up expenses associated with new enterprise and compliance with regulatory requirements under the Exchange Act. The net loss also included derivative expense associated with valuation of debentures and warrants, negative gross margin and increase in travel expenses.
Net Loss Per Common Share: Basic loss per common share represents our net loss divided by the weighted average number of common shares outstanding during the period. Diluted loss per common share gives effect to all potentially dilutive securities. We compute the effects on diluted loss per common share arising from warrants and options using the treasury stock method. Applying this method, 22,059,712 shares indexed to warrants were excluded from our computation because the effect was anti-dilutive. We computed the effects on diluted loss per common share arising from convertible securities using the if-converted method. The effects, if anti-dilutive are excluded. Applying this method, 16,800,000 shares indexed to our convertible debentures were excluded from our computation because the effect was anti-dilutive.
Liquidity and Capital Resources
We had a net loss for the three months ended December 31, 2009 of $2,140,225, net cash used in operations for the three months ended December 31, 2009 of $564,709, and negative working capital of $1,260,653 at December 31, 2009. However, we are expecting to close on a $5,000,000 financing on or about February 17, 2010, which will provide sufficient working capital to operate through December 31, 2010 and therefore any risk of not being able to operate as a going concern is alleviated at least through December 31, 2010.
| Statement of cash flow data: | | | December 31, | |
| | | | 2009 | | | | 2008 | |
| Net cash provided (used) in operating activities | | $ | (564,709 | ) | | $ | (293,102 | ) |
| Net cash provided (used) in investing activities | | | (513 | ) | | | - | |
| Net cash provided (used) in financing activities | | | (56,300 | ) | | | - | |
Net cash provided by operating activities of $(564,709) was primarily due to operating expenses and negative gross margin.
Net cash provided by investing activities of $(513) was primarily due to acquistion of equipment.
Net cash of $(56,300) used in financing activities was due to loan repayment.
As of December 31, 2009, we had cash on hand of $377,931.
Our largest operating expenditures currently consist of the following items: $14,500 per month on leasing our corporate office space and network operational center (NOC) and includes our base rent and associated utility expenses and $62,000 per month on payroll. We do not anticipate that our leasing costs will change during the next 12 months.
Our current long term business plan contemplates acquiring the ongoing business of related companies, either through asset acquisitions, consolidations or mergers.
We currently have the following outstanding warrants:
| · | Series A Common Stock Purchase Warrants outstanding entitling the holders to purchase up to an aggregate of 3,099,712 shares of our common stock at an exercise price of $0.25 per share; |
| · | Series B Common Stock Purchase Warrants outstanding entitling the holders to purchase up to an aggregate of 6,000,000 shares of our common stock at an exercise price of $0.50 per share; |
| · | Series C Common Stock Purchase Warrants entitling the holders to purchase up to an aggregate of 10,800,000 shares of our common stock at an exercise price of $0.25 per share; |
| · | Series BD Common Stock Purchase Warrants entitling the holders to purchase up to an aggregate of 1,080,000 shares of our common stock at an exercise price of $0.50 per share; and |
| · | Series BD Common Stock Purchase Warrants entitling the holders to purchase up to an aggregate of 1,080,000 shares of our common stock at an exercise price of $0.25 per share. |
If ��the holders of our Series A, B, C and BD Common Stock Purchase Warrants exercise these warrants, we will receive aggregate proceeds of $12,574,036. However, we cannot provide any assurance that the Series A Common Stock Purchase Warrants, the Series B Common Stock Purchase Warrants, Series C Common Stock Purchase Warrants or Series BD Common Stock Purchase Warrants will be exercised. [not sure I would put this in the liquidity section since it is a contingent event. Consider moving down just past the borrowing arrangement section]
Borrowing Arrangements
12% Senior Secured Convertible Debentures
We issued a series of 12% Senior Secured Convertible Debentures in the aggregate principal amount of $4,200,000, all of which are currently held by Vicis Capital Master Fund, as follows:
| · | $1,000,000 is due on September 10, 2010, |
| · | $ 500,000 is due on September 10, 2010, |
| · | $ 600,000 is due on January 30, 2011, |
| · | $ 500,000 is due on January 30, 2011, |
| · | $ 500,000 is due on July 20, 2011,and |
| · | $1,100,000 is due on September 25, 2011. |
Each debenture bears interest on the principal amount outstanding and unpaid from time to time at a rate of 12% per annum from the date of issuance until paid in full. The debentures convert into shares of our common stock at the option of the holder at $0.25 per share. The debentures are secured by a lien on all our assets.
The following constitute events of default under the secured debentures held by Vicis Capital Master Fund: (i) failure to pay any interest or principal payment when due; (ii) failure to observe any covenant contained in the secured debenture or the purchase agreement that we executed in connection with the issuance of the secured debenture; (iii) the occurrence of an event of default by us under any other material agreement or lease; (iv) entry of a judgment against us in excess of $150,000; and (v) the appointment of a receiver, the filing of bankruptcy by us, or if we otherwise become insolvent. Additionally, if we seek to prepay the secured debentures, we must pay a prepayment penalty equal to 110% of the then outstanding principal, plus all other amounts due.
The debentures contain full ratchet anti-dilution price protection. The secured debentures contain negative covenants that prohibit us from taking certain corporate actions without the prior written consent of the holder of the secured debentures, Vicis Capital Master Fund. We cannot take the following actions without Vicis Capital Master Funds’ consent while the secured debentures remain outstanding: (i) incur any additional indebtedness or allow any lien to be filed against our assets, except in certain limited instances; (ii) amend our articles of incorporation or bylaws in a manner that adversely effects the holder of our secured debentures; (iii) repay, repurchase or otherwise acquire more than a de minimis number of shares of our common stock or common stock equivalents from any security holder, except in certain limited instances; (iv) enter into any transactions with our executive officers, directors or affiliates; (v) increase our executive officers’ salary or bonus more than 15% from what was paid in the previous year; or (vi) pay cash dividends or distributions on any of our equity security. We are currently in compliance with all restrictive covenants.
Off-Balance Sheet Arrangements
None
Critical Accounting Policies and estimates
Our accounting policies are discussed and summarized in Note 2 to our financial statements. The following describes our critical accounting policies and estimates.
Critical Accounting Policies
The financial information contained in our comparative results of operations and liquidity disclosures has been derived from our financial statements. The preparation of those financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes. The following significant estimates were made in the preparation of our financial statements and should be considered when reading our Management’s Discussion and Analysis:
| · | Impairment of Long-lived Assets: Our telecommunications equipment, other property and intangible assets are material to our financial statements. Further, they are subject to the potential negative effects arising from technological obsolescence. We evaluate our tangible and definite-lived intangible assets for impairment annually or more frequently in the presence of circumstances or trends that may be indicators of impairment. Our evaluation is a two step process. The first step is to compare our undiscounted cash flows, as projected over the remaining useful lives of the assets, to their respective carrying values. In the event that the carrying values are not recovered by future undiscounted cash flows, as a second step, we compare the carrying values to the related fair values and, if lower, record an impairment adjustment. For purposes of fair value, we generally use replacement costs for tangible fixed assets and discounted cash flows, using risk-adjusted discount rates, for intangible assets. These estimates are made by competent employees, using the best available information, under the direct supervision of our management. |
| · | Intangible assets: Our intangible assets require us to make subjective estimates about our future operations and cash flows so that we can evaluate the recoverability of such assets. These estimates consider available information and market indicators including our operational history, our expected contract performance, and changes in the industries that we serve. |
| · | Share-based payment arrangements: We currently intend to issue share-indexed payments in future periods to employees and non-employees. There are many valuation techniques, such as Black-Scholes-Merton valuation model that we may use to value share-indexed contracts, such as warrants and options. All such techniques will require certain assumptions that require us to develop forward-looking information as well as historical trends. For purposes of historical trends, we may need to look to peer groups of companies and the selection of such groups of companies is highly subjective. |
| · | Common stock valuation: Estimating the fair value of our common stock is necessary in the preparation of computations related to acquisition, share-based payment and financing transactions. We believe that the most appropriate and reliable basis for common stock value is trading market prices in an active market. |
| · | Derivative Financial Instruments: We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we have entered into certain other financial instruments and contracts, such as our secured convertible debenture and warrant financing arrangements that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. We are required to carried as derivative liabilities, at fair value, in our financial statements. The fair value of share-indexed derivatives will be significantly influenced by the fair value of our common stock (see Common Stock Valuation, above). Certain other elements of forward-type derivatives are significantly influenced by credit-adjusted interest rates used in cash-flow analysis. Since we are required to carry derivative financial instruments at fair value and make adjustments through earnings, our future profitability will reflect the influences arising from changes in our stock price, changes in interest rates, and changes in our credit standing. |
Revenue recognition
Operating revenue consist of customer equipment sales of our main product TK6000, telecommunication service revenues, shipping and handling revenues.
Most all of our operating revenues are generated from the sale of customer equipment of our main product the TK6000. We also derive service revenues from per minute fees for international calls. Our operating revenue is fully recognized at the time of our customer equipment sale which includes credit card acceptance date and shipment date. The device provides for life time service (over the life of the device/equipment). Our equipment is able to operate within our network/platform or over any other network/platform. There is no need for income allocation between our device and life time service provided. The full intrinsic value of the sale is allocated to the device. Therefore, we recognized 100% of revenue at time of customer equipment sale and do not allocate any income to the life time service provided. Shipping and handling is also recognized at time of sale. International calls are billed as earned from our customers. International calls are prepaid and customers account is debited as minutes are used and earned.
Recent accounting pronouncements
In June 2009, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update No. 2009-01, Generally Accepted Accounting Principles, which establishes FASB Accounting Standards Codification (“the Codification”) as the official single source of authoritative U. S, GAAP. All existing accounting standards are superseded. All other accounting guidance not included in the Codification will be considered non – authoritative. The Codification also includes all relevant SEC guidance organized using the same topical structure in separate sections within the Codification.
Following the Codification, the FASB will not issue standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead it will issue Accounting Standards Updates (“ASU”) which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.
The Codification is not intended to change GAAP, but it will change the way GAAP is organized and presented. The Codification is effective for our fiscal year ended September 30, 2009 financial statements and the principal impact on our financial statements is limited to disclosures, as all future references to authoritative accounting literature will be referenced in accordance with the Codification.
In December 2007, the FASB revised the authoritative guidance for business combinations. This guidance establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non – controlling interest in the acquiree. This guidance changes the accounting for business combinations in a number of areas, including the treatment of contingent consideration, preacquisition contingencies, transaction costs and restructuring costs. In addition , under the new guidance, changes in the acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. This guidance was effective for fiscal year beginning on or after December 15, 2008 and requires the immediate expensing of acquisition related costs associated with acquisitions completed after December 31, 2008. Adoption of this guidance on October 1, 2009 had no impact on our results of operations, and financial position. However, we expect this guidance will affect acquisitions made thereafter, though the impact will depend upon the size and nature of the acquisition.
In March 2008, the FASB issued authoritative guidance on disclosures about derivative instruments and hedging activities. This guidance addresses enhanced disclosure concerning (a) the manner in which an entity uses derivatives (and the reasons is uses them), (b) the manner in which derivatives and related hedged items are accounted for and (c) the effects that derivatives and related hedged items have on an entity’s financial position, financial performance, and cash flows. This guidance was effective for financial statements issued for fiscal years and interim periods beginning on or after November 15, 2008. Adoption of this guidance did not have a material impact on our financial position or results of operations.
In May 2009, the FASB issued authoritative guidance on subsequent events. This guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance is effective for interim or annual financial periods ending after June 15, 2009. Adoption of this guidance did not have an impact on our results of operations or financial position.
In August 2009, the FASB updated its authoritative guidance on fair value measurement and disclosures. This update provides amendments to reduce potential ambiguity in financial reporting when measuring the fair value of liabilities. Among other provisions, this update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the valuation techniques described in ASC Update 2009 – 05. ASC Update 2009 – 05 became effective for our period ended December 31, 2009. Adoption of this guidance did not have any impact on our results of operations or financial position.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide the information under this item.
Disclosure controls
We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
As of December 31, 2009, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective in ensuring that information required to be disclosed by us in our periodic reports is recorded, processed, summarized and reported, within the time periods specified for each report and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
In connection with the assessment described above, management identified the following control deficiencies that represent material weaknesses at December 31, 2009:
| | · | Due to the Company’s limited resources, the Company has insufficient personnel resources and technical accounting and reporting expertise to properly address all of the accounting matters inherent in the Company’s financial transactions. The Company does not have a formal audit committee, and the Board does not have a financial expert, thus the Company lacks the board oversight role within the financial reporting process. |
| | · | The Company’s small size and “one-person” office prohibits the segregation of duties and the timely review of accounts payable, expense reporting and inventory management and banking information. |
Our Chief Executive Officer and Chief Financial Officer are in the process of determining how best to change our current system and implement a more effective system to insure that information required to be disclosed in our quarterly and annual reports has been recorded, processed, summarized and reported accurately. Our management acknowledges the existence of this problem, and intends to developed procedures to address them to the extent possible given limitations in financial and manpower resources. While management is working on a plan, no assurance can be made at this point that the implementation of such controls and procedures will be completed in a timely manner or that they will be adequate once implemented.
Changes in Internal Controls.
During the three months ended December 31, 2009, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (f) of Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide the information under this item.
None.
None.
None.
None.
| Item 6 | |
| | |
| Exhibit No. | Description |
| | |
| 31.1(1) | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated July 30, 2009. |
| 31.2(1) | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated July 30, 2009. |
| 32.1(1) | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated July 30, 2009. |
| 32.2(1) | Certification of Acting Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated July30, 2009. |
(1) Filed herewith.
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.
| | NET TALK.COM, INC. |
| | |
| Date: February 12, 2010 | By: /s/ Anastasios Kyriakides |
| | Anastasios Kyriakides |
| | Chief Executive Officer (Principal Executive Officer) |
| | |
| Date: February 12, 2010 | By: /s/ Guillermo Rodriguez |
| | Guillermo Rodriguez |
| | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
