The carrying values of our 12% secured convertible debentures consist of the following as of June 30, 2010 and September 30, 2009:
Our convertible debentures as of June 30, 2010 were issued on February 24, 2010 in connection with an exchange agreement with our creditors that provided for, among other things, the consolidation of our previous secured convertible debt instruments, with maturities listed in the table above, and included the capitalization of $798,773 of accrued interest. The newly issued convertible debentures bear interest at 12%, which is payable at the earlier of the maturity date or the date that the debentures are converted, if ever. Such interest is payable at the Company’s option in cash or common stock at $0.25 per common share. The principal amount of the debentures is convertible into common stock at $0.25. Accordingly, the convertible debentures are indexed to 19,995,092 shares of our common stock. Each of the principal and debt conversion rates are subject to adjustment for recapitalization events or sales of equity or equity-linked contracts with a price or conversion price less than the contractual conversion price. The convertible debentures are secured by substantially all of our assets and are either callable or subject to a default interest rate, at the creditor’s option, if we default on the debentures. The significant events that could trigger a default include our failure to service the debentures, bankruptcy and the filing of significant judgments against us. The debentures also preclude merger and similar transactions, incurring additional debt, our payment of dividends on our equity securities and limit the compensation that we may pay to our officers.
Our accounting for the aforementioned exchange transaction required us to consider whether the exchange resulted in a substantial modification to the original convertible debentures based upon either cash flows or the fair value of the embedded conversion feature, wherein substantial is generally defined as a change greater than 10%. In all instances our calculations indicated that the exchange of convertible debentures resulted in changes that were substantial to either cash flows, the embedded conversion option, or both. As a result, we were required to extinguish the prior debt instruments and reestablish the new convertible debentures, at fair value, with the change reflected in our expenses. The following table reflects the components of our extinguishment calculations on February 24, 2010:
The fair values of the Secured Convertible Debentures were determined based upon their respective discounted cash flow, using observable market rates, plus the fair value of the embedded conversion options. Observable market rates ranged from 7.91% for one-year and 8.47% for two years and were derived from publicly available surveys of corporate bond curves for issuers with similar risk characteristics as ours. The fair value of our compound embedded derivatives were determined using the Monte Carlo Simulations model. See Note 8. The compound embedded derivatives were adjusted to fair value on the exchange date, immediately before the exchange transaction, which amount is included in our derivative income (expense).
The fair value of the new convertible debentures was allocated to the debt balance, the compound embedded derivative and paid-in capital. Paid-in capital arises in this transaction, because the allocation resulted in premiums which, under accounting principles, are considered equity components. The following table summarizes the allocation on the exchange date:
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. Also on September 30, 2008, we issued a $500,000 face value 12% secured convertible debenture (T-2), due September 10, 2010 and Series B warrants indexed to 2,000,000 shares of our common stock for net cash proceeds of $472,800. The warrants have a term of five years. These financial instruments were issued to the same creditor under contracts that are substantially similar, unless otherwise mentioned in the following discussion.
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 t o 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 we concluded that they should be combined for accounting purposes, the accounting resulted in no beneficial conversion feature.
We entered into several Securities Purchase Agreements with Debt Opportunity Fund, LLP (“DOF”) during the year ended September 30, 2009.
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 automatica lly had their conversion price ratchet down to $0.25 as subsequent issuances were made with a conversion price of $0.25.
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 June 30, 2010, 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.
Since, 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 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 su bjective 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 $479,403 and $2,640 for the nine months ended June 30, 2010 and 2009, 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.
On February 24, 2010, we exchanged the convertible debentures for newly issued convertible debentures as discussed in the beginning of this footnote.
Note 6 – Redeemable Preferred Stock
On February 24, 2010, we designated 500 shares of our authorized preferred stock as Series A Convertible Preferred Stock; par value $0.001 per share, stated value $10,000 per share (“Preferred Stock”). The Preferred Stock is redeemable for cash on June 30, 2011at the stated value, plus accrued and unpaid dividends. Dividends accrue, whether or not declared, at a rate of 12% of the stated value. The Preferred Stock is convertible into common stock at the holder’s option at $0.25 based upon the stated value. Such conversion rate is subject to adjustment for traditional reorganizations and recapitalization and in the event that we sell common stock or other equity-linked instruments below the conversion price. Holders of the Preferred Stock are entitled to a preference equal to the stated value, pl us accrued and unpaid dividends. While the Preferred Stock is outstanding, holders vote the number of indexed common shares.
Our accounting for the Preferred Stock and warrant financing transaction required us to evaluate the classification of the embedded conversion feature and the warrants. As a prerequisite to establishing the classification of the embedded conversion option, we were required to determine the nature of the hybrid Preferred Stock contract based upon its risks as either a debt-type or equity-type contract. The presence of the mandatory cash redemption and the requirement to accrue dividends were persuasive evidence that the Preferred Stock was more akin to a debt than an equity contract, with insufficient evidence to the contrary (e.g. voting privilege). Given that the embedded conversion feature, when evaluated as embodied in a debt-type contract, did not meet the definition for an instrument indexed to a company’s o wn stock, the embedded conversion feature required bifurcation and classification in liabilities,at fair value. Similarly, the warrants did not meet the definition for an instrument indexed to a company’s own stock, resulting in their classification in liabilities, at fair value.
The following table reflects the allocation of the purchase price on the financing date:
| Allocation: | | Amount | |
| Preferred Stock | | $ | -- | |
| Warrants | | | 5,062,800 | |
| Compound embedded derivative | | | 4,260,000 | |
| Derivative loss, included in derivative income (expense) | | | (6,322,800 | ) |
| | | $ | 3,000,000 | |
Warrants were valued using the Black-Scholes-Merton valuation technique. Significant assumptions were as follows: Market value of underlying, using the trading market of $0.58; expected term, using the contractual term of 5.0 years; market volatility, using a peer group of 90.20%; and, risk free rate, using the yield on zero coupon government instruments of 2.40%.
The compound embedded derivative was valued using the Monte Carlo Simulations (“MCS”) technique. The MSC technique is a generally accepted valuation technique for valuing embedded conversion features in hybrid convertible notes, because it is an open-ended valuation model that embodies all significant assumption types, and ranges of assumption inputs that management of the Company believe would likely be considered in connection with the arms-length negotiation related to the transference of the instrument by market participants. However, there may be other circumstances or considerations, other than those addressed herein, that relate to both internal and external factors that would be considered by market participants as it relates specifically to the Company and the subject financial instruments.
Given its redeemable nature, we are required to classify our Preferred Stock outside of stockholders’ equity. Further, the inception date carrying value is subject to accretion to its ultimate redemption value over the term to redemption, using the effective method. During the period from its issuance to June 30, 2010, we accreted $94,868, which was reflected as a charge to paid-in capital in the absence of accumulated earnings. We also accrued $126,000 during the same period which amount represents the cumulative dividends that we are required to pay whether or not declared.
Note 7 – Derivative Financial Instruments
The components of our derivative liabilities consisted of the following at June 30, 2010 and September 30, 2009:
| | | June 30, 2010 | | | | |
| Derivative Financial Instrument | | Indexed Shares | | | Fair Value | | | September 30, 2009 | |
| Compound Derivative Financial Instruments: | | | | | | | | | |
February 24, 2010 Secured Convertible Debentures | | | 19,995,092 | | | $ | 1,402,515 | | | $ | -- | |
February 24, 2010 Series A Convertible Preferred Stock | | | 12,000,000 | | | | 828,000 | | | | -- | |
| Warrants (dates correspond to financing): | | | | | | | | | | | | |
February 24, 2010 Series D warrants, issued with the preferred financing (Note 6) | | | 12,000,000 | | | | 1,246,800 | | | | -- | |
February 24, 2010 Series D warrants, issued with the exchange (Note 7) | | | 16,800,000 | | | | 1,745,520 | | | | -- | |
| September 10, 2008 Series B warrants | | | -- | | | | -- | | | | 382,200 | |
| January 30, 2009 Series C warrants | | | -- | | | | -- | | | | 167,040 | |
| February 6, 2009 Series C warrants | | | -- | | | | -- | | | | 139,400 | |
| July 20, 2009 Series C warrants | | | -- | | | | -- | | | | 146,600 | |
| September 25, 2009 Series C warrants | | | -- | | | | -- | | | | 335,720 | |
| Financing warrants issued to brokers | | | 2,160,000 | | | | 235,860 | | | | 156,312 | |
| | | | | | | | | | | | | |
| Total | | | 62,955,092 | | | $ | 5,458,695 | | | $ | 1,327,272 | |
The following table reflects the activity in our derivative liability balances from September 30, 2009 to June 30, 2010:
| | | Compound | | | Warrants | | | Total | |
| Balances at September 30, 2009 | | $ | -- | | | $ | 1,327,272 | | | $ | 1,327,272 | |
| Change in accounting | | | 1,865,600 | | | | -- | | | | 1,865,600 | |
| Effect of the exchange transaction | | | 1,158,382 | | | | -- | | | | 1,158,382 | |
Issued in the Preferred Stock and Warrant financing Transaction | | | 4,260,000 | | | | 5,062,800 | | | | 9,322,800 | |
| Unrealized derivative (gains) losses | | | (5,053,467 | ) | | | (3,161,892 | ) | | | (8,215,359 | ) |
| Balances at June 30, 2010 | | $ | 2,230,515 | | | $ | 3,228,180 | | | $ | 5,458,695 | |
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 | |
| | | June 30, 2010 | | | June 30, 2009 | |
Compound Derivative Financial Instruments: | | | | | | |
February 24, 2010 Secured Convertible Debentures | | $ | 2,054,100 | | | $ | -- | |
February 24, 2010 Series A Convertible Preferred Stock | | | 1,248,000 | | | | -- | |
Warrants (dates correspond to financing): | | | | | | | | |
February 24, 2010 Series D warrants, issued with the preferred financing (Note 6) | | | 1,513,200 | | | | -- | |
February 24, 2010 Series D warrants, issued with the exchange (Note 7) | | | 2,118,400 | | | | -- | |
| Other warrants | | | 306,156 | | | | (73,944 | ) |
| | | $ | 7,239,856 | | | $ | (73,944 | ) |
| | | Nine months ended | |
| | | June 30, 2010 | | | June 30, 2009 | |
Compound Derivative Financial Instruments: | | | | | | |
February 24, 2010 Secured Convertible Debentures | | $ | 5,861,467 | | | $ | -- | |
Pre-exchange Secured Convertible Debentures (amount through the exchange date of February 24, 2010) | | | (4,240,000 | ) | | | -- | |
February 24, 2010 Series A Convertible Preferred Stock | | | 3,432,000 | | | | -- | |
Warrants (dates correspond to financing): | | | | | | | | |
February 24, 2010 Series D warrants, issued with the preferred financing (Note 6) | | | 3,816,000 | | | | -- | |
February 24, 2010 Series D warrants, issued with the exchange (Note 7) | | | 467,760 | | | | -- | |
| Other warrants | | | (1,121,868 | ) | | | (90,970 | ) |
| Total fair value adjustments | | | 8,215,359 | | | | (90,970 | ) |
Day-one derivative expense, resulting from the Series A Preferred Stock Financing (Note 6) | | | (6,322,800 | ) | | | -- | |
| Day-one derivative expense from prior financings | | | -- | | | | -- | |
| | | $ | 1,892,559 | | | $ | (90,970 | ) |
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 June 30, 2010 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 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 were as follows as of June 30, 2010:
June 30, 2010 | | Series D Warrants | | | BD Warrants | | | BD Warrants | |
| Adjusted Strike price | | $ | 0.50 | | | $ | 0.25 | | | $ | 0.50 | |
| Volatility | | | 96.86 | % | | | 99.5%--105.2 | % | | | 99.50%--105.2 | % |
| Expected term (years) | | | 4.65 | | | | 3.59—4.25 | | | | 3.59—4.25 | |
| Risk-free rate | | | 1.79 | % | | | 1.40 | % | | | 1.40 | % |
| Dividends | | | -- | | | | -- | | | | -- | |
Assumptions at September 30, 2009 related to warrants by class were as follows:
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 effect of changes in our trading market price on the fair values of our derivative liabilities is significant because all techniques that we employ consider the intrinsic values of the equity-linked contracts. Accordingly, increases in our trading market price will have the effect of increasing the derivative value and decreases will have the effect of decreasing the derivative value. However, the techniques embody other assumptions that may have an incremental or an offsetting effect. Since changes in the fair value of derivative financial instruments are recorded in income, our operations will reflect the expense or income over all periods that the contracts are outstanding. These effects could be material.
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 and six months ended June 30, 2010 and 2009 were as follows:
| | | Three months ended | | | Nine months ended | |
| | | June 30, | | | June 30, | |
| | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| | | | | | | | | | | | | |
| Occupancy expense | | $ | 43,384 | | | $ | 41,760 | | | $ | 129,774 | | | $ | 124,279 | |
Minimum non-cancellable future lease payments as of June 30, 2010, were as follows: 2010 - $44,875.
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 March 31, 2010, none of these incentive arrangements and plans had been realized. The agreement is effective through September 30, 2013.
Item 2 – Management Discussion and Analysis of Financial Conditions and Results of Operations
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 circum stances. 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.
On July 14, 2010 we revealed our newest product the netTALK DUO (“DUO”).
The DUO offers our customers free nationwide calls to any landline or mobile phone in the U.S. and Canada from anywhere in the world, as well as low-cost international rates. It’s also a versatile digital phone service with no monthly fees, no contracts and no computer required.
We are presently working on other new products and anticipate future deployment over the next year.
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 own ership 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. |
On July 14, 2010 we revealed our newest creation the netTALK DUO (“DUO”).
The DUO offers our customers free nationwide calls to any landline or mobile phone in the U.S. and Canada from anywhere in the world, as well as low-cost international rates. It’s also a versatile digital phone service with no monthly fees, no contracts and no computer required.
We are presently working on other new products and anticipate future deployment over the next year.
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 without the need of a computer. |
| | | | 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.
On July 14, 2010 we revealed our newest creation the netTALK DUO (“DUO”).
The DUO offers our customers free nationwide calls to any landline or mobile phone in the U.S. and Canada from anywhere in the world, as well as low-cost international rates. It’s also a versatile digital phone service with no monthly fees, no contracts and no computer required.
The DUO is flexible enough to connect directly to your Internet connection through the router/modem, there is also a convenient option with the DUO to connect to your computer. The sleek design is small enough to fit in the palm of your hand, making it a portable device.
The DUO reduces the wear and tear on your home or office computer and reduces energy costs, resulting in money savings. The fax-friendly DUO, offers fax (incoming and outgoing), a unique feature not offered by similar digital phone services.
The portability of this small device is also great for international travelers who want to place free nationwide calls to the U.S. and Canada, or who are looking for a low-cost solution for international rates. Calls to other netTALK customers are always free.
We are presently working on other new products and anticipate future deployment the later part of this year and over the next year.
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.
Patents – Domestic and International:
Our products are currently under US patent pending as well as International patent pending in over 123 countries.
Results of Operations
Three months ended June 30, 2010 compared to three months ended June 30, 2009
Revenues: Our revenues amounted to $167,820 and $0 for the three months ended June 30, 2010, and 2009, 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 $363,921 and $0 for the three months ended June 30, 2010, and 2009, 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 $(196,101) and $0 for the three months ended June 30, 2010 and 2009, respectively. This is due to allocating additional expenses to technical support and telecommunication expenses.
Advertising: Our advertising expenses amounted to $59,151 and $0 for the three months ended June 30, 2010 and 2009, respectively. The breakdown of our advertising expense is as follows:
| | | June 30, | |
| | | 2010 | | | 2009 | |
| Infomercial/production time | | $ | - | | | $ | - | |
| Media and others | | | 59,151 | | | | - | |
| Total | | $ | 59,151 | | | $ | - | |
