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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 0-49648
CONTINAN COMMUNICATIONS, INC.
-----------------------------
(Exact Name of Company as Specified in its Charter)
Nevada 73-1554122
------------------------------ -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4640 Admiralty Way-Suite 500, Marina del Rey, California 90292
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(Address of Principal Executive Offices)
(310) 496-5747
----------------------------
(Company's Telephone Number)
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(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) been subject to such filing
requirements for the past 90 days. Yes _X_ No ___.
Indicate by check mark whether the Company is a shell company (as defined
in Rule 12b-2 of the Exchange Act): Yes _X__ No __.
As of April 1, 2007, the Company had _43,213,539_shares of common stock
issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED BALANCE SHEETS AS OF
MARCH 31, 2008 AND DECEMBER 31, 2007.............................4
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 2008 AND MARCH 31, 2007.............5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2007........................6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
THREE MONTHS ENDED MARCH 31, 2008 AND MARCH 31, 2007.............7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................23
ITEM 4. CONTROLS AND PROCEDURES.........................................30
ITEM 4T. CONTROLS AND PROCEDURES.........................................31
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...............................................31
ITEM 1A. RISK FACTORS....................................................31
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS.................................................31
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............32
ITEM 5. OTHER INFORMATION...............................................32
ITEM 6. EXHIBITS........................................................32
SIGNATURES....................................................................
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FORWARD LOOKING STATEMENTS.
Information in this Form 10-Q contains "forward looking statements" within
the meaning of Rule 175 of the Securities Act of 1933, as amended, and Rule 3b-6
of the Securities Exchange Act of 1934, as amended. When used in this Form 10-Q,
the words "expects," "anticipates," "believes," "plans," "will" and similar
expressions are intended to identify forward-looking statements. These are
statements that relate to future periods and include, but are not limited to,
statements regarding adequacy of cash, expectations regarding net losses and
cash flow, statements regarding growth, need for future financing, dependence on
personnel and operating expenses.
Forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those projected. These
risks and uncertainties include, but are not limited to, those discussed below,
as well as risks related to the Company's ability to obtain future financing.
These forward-looking statements speak only as of the date hereof. The Company
expressly disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statements contained herein to
reflect any change in its expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based.
NOTE CONCERNING RECENT DEVELOPMENTS:
The Company's financial statements as at March 31, 2008 and the
description and comparison of the Company's business for the periods March 31,
2008 and March 31, 2007 set forth below under Item 2 "Management's Discussion
and Analysis of Financial Condition and Results of Operations" is for historical
purposes only. Effective March 31, 2008 the Company was no longer engaged in any
active business, either directly, or through its wholly-owned subsidiary,
Vocalenvision, Inc. ("Vocalenvision"). On March 31, 2008, the Company's Board of
Directors approved the Company's execution and delivery of an agreement to sell
substantially all the assets of Vocalenvision to Tourizoom, Inc., a Nevada
corporation (the "Buyer" or "Tourizoom"). See the Company's Report on Form 8-K
filed with the Securities and Exchange Commission ("SEC") on April 4, 2008 and
the exhibits thereto, and the Company's Report on Form 10-KSB filed with the SEC
on April 15, 2008 and the exhibits thereto.
Currently, the Company is not engaged in any active business. Instead, the
Company will pursue other business activities with a company not yet selected in
an industry or business area not yet identified by the Company. There can be no
assurance that the Company will be successful in this effort. Furthermore, under
SEC Rule 12b-2 under the Securities Act of 1933, as amended (the "Securities
Act"), the Company will be deemed a "shell company," because it has no or
nominal assets (other than cash) and no or nominal operations. Under recent SEC
releases and rule amendments, any new transaction will be subject to more
stringent reporting and compliance conditions for shell companies.
Cuurently, the Company has no full-time employees and owns no real estate
and virtually no personal property. The Company will pursue a business
combination, but has made no efforts to identify a possible business
combination. As a result, the Company has not conducted negotiations or entered
into a letter of intent concerning any target business. The business purpose of
the Company will be to seek the acquisition of or merger with an existing
company. There can be no assurance the Company will succeed in this purpose. See
"Risk Factors" in the Company's Form 10-KSB filed with the SEC on April 15,
2008.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCAL STATEMENTS.
CONTINAN COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS MARCH 31, DECEMBER 31,
2008 2007
----------- -----------
CURRENT ASSETS:
Cash $ 2,361 $ --
----------- -----------
Total current assets 2,361 --
----------- -----------
FURNITURE AND EQUIPMENT, net 17,911 21,922
----------- -----------
OTHER ASSETS:
Intangible assets, net 54,431 55,534
Developed software, net 488,483 498,382
Security deposit 3,595 3,595
Total other assets 546,509 557,511
----------- -----------
Total assets $ 566,781 $ 579,433
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Accounts payable $ 399,963 $ 343,462
Accrued liabilities 127,462 128,262
Accrued interest on notes payable - related party 54,054 47,780
Accrued interest on notes payable 130,283 126,058
Accrued management fees 321,731 285,732
Current portion of capital leases 4,541 5,420
Notes payable - related party 307,642 284,223
Notes payable 995,488 978,543
Income tax payable 800 800
----------- -----------
Total current liabilities 2,341,964 2,200,280
----------- -----------
Long term liabilities:
Capital leases, net of current portion 1,100 1,585
----------- -----------
Shareholders' deficit:
Preferred stock, par value of $0.001
10,000,000 shares authorized
150 issued and outstanding -- --
----------- -----------
Common stock; par value of $0.001;
100,000,000 shares authorized
43,213,522 issued and outstanding 43,214 43,214
Additional paid in capital 6,377,651 6,377,651
Deficit accumulated during the development stage (8,197,148) (8,043,297)
----------- -----------
Total shareholders' deficit (1,776,283) (1,622,432)
----------- -----------
Total liabilities and shareholders' deficit $ 566,781 $ 579,433
=========== ===========
See Accompanying Notes to Consolidated Financial Statements
4
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CONTINAN COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
PERIOD FROM
FOR THE THREE FOR THE THREE SEPTEMBER 16, 2002
MONTHS ENDED MONTHS ENDED (INCEPTION) TO
MARCH 31, 2008 MARCH 31, 2007 MARCH 31, 2008
------------ ------------ ------------
Revenues $ -- $ 1,242 $ 154,239
Expenses:
Direct costs -- 1,212 402,081
Selling expenses -- 11,533 1,850,354
Depreciation and amortization 15,013 16,720 218,747
General and administrative expenses 121,028 262,608 4,569,435
------------ ------------ ------------
Total Expenses 136,041 292,073 7,040,617
Other income (expenses), net:
Interest expense (10,960) (15,868) (329,650)
Other expense -- 411 (954)
Loss on derivative instruments -- -- (841,821)
Other income -- -- (134,345)
------------ ------------ ------------
Total other income (expenses), net (10,960) (16,279) (1,306,770)
------------ ------------ ------------
Loss before provision for income taxes (147,001) (307,110) (8,193,148)
Provision for income taxes -- 800 4,000
------------ ------------ ------------
Net Loss $ (147,001) $ (307,110) $ (8,197,148)
============ ============ ============
Net loss per common share - basic and diluted $ (0.00) $ (0.01) $ --
============ ============ ============
Basic and diluted weighted average
common shares outstanding (1) 43,213,522 25,727,116 2,208,689
============ ============ ============
(1) Adjusted for a 1 for 20 reverse split effective on December 1, 2006.
See Accompanying Notes to Consolidated Financial Statements
5
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CONTINAN COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM SEPTEMBER 16, 2002 (INCEPTION) TO MARCH 31, 2008
(UNAUDITED)
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE TOTAL
PREFERRED STOCK COMMON STOCK PAID IN DEVELOPMENT SHAREHOLDERS
---------------------- ----------------------- CAPITAL STAGE EQUITY
SHARES AMOUNT SHARES AMOUNT (RESTATED) (RESTATED) (DEFICIT)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2004 3,000,000 $ 3,000 -- $ -- $ 2,123,608 $ (958,325) $ 1,168,283
Net loss -- -- -- -- -- (1,053,248) (1,053,248)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 2005 3,000,000 3,000 -- -- 2,123,608 (2,011,573) 115,035
Net loss (305,880) (305,880)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2005 3,000,000 3,000 -- -- 2,123,608 (2,317,453) (190,845)
Reverse acquisition, May 2006 -- -- 1,699,108(1) 1,699 971,820 -- 973,519
Stock options granted for
consulting services -- -- -- -- 40,343 -- 40,343
Stock options granted to employees -- -- -- -- 33,619 -- 33,619
Stock options granted to management -- -- -- -- 58,273 -- 58,273
Stock options granted for finders fee -- -- -- -- 37,737 -- 37,737
Fees on reverse acquisition -- -- -- -- (37,737) -- (37,737)
Issue of common stock
upon exercise of warrants -- -- 290,000 290 (290) -- --
Issue of common stock
for consulting service -- -- 249,500 250 548,750 -- 549,000
Conversion of preferred stock
to common stock (3,000,000) (3,000) 20,250,000 20,250 (17,250) -- --
Conversion of notes payable to
common stock - Rackgear Inc. -- -- 210,914 211 63,063 -- 63,274
Conversion of accounts payable in the
amount of $12,698 to common stock -- -- 22,650 23 12,675 -- 12,698
Conversion of notes payable to
preferred stock - First Bridge Ban 5,510 6 -- -- 550,951 -- 550,957
Conversion of notes payable to
common stock - Kurt Hiete -- -- 200,000 200 60,326 -- 60,526
Conversion of accounts payable in th
amount of $34,865 to common stock -- -- 35,000 35 34,830 -- 34,865
Issue of common stock for
consulting services -- -- 2,710,000 2,710 1,623,290 -- 1,626,000
Stock options granted for
consulting services -- -- -- -- 48,846 -- 48,846
Stock options granted for
consulting services -- -- -- -- 215,748 -- 215,748
Stock options granted to employees -- -- -- -- 93,236 - -- 93,236
Transfer to derivative liability -- -- -- -- (307,516) -- (307,516)
Net loss -- -- -- -- -- (4,336,029) (4,336,029)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2006 5,510 6 25,667,172 25,668 6,154,322 (6,653,482) (473,486)
Conversion of note payable to
preferred stock 150 -- -- -- 15,000 -- 15,000
Stock issued for consulting services -- -- 804,000 804 80,326 -- 81,130
Cancellation of conversion of
A/P in the amount of $12,698 to
common stock -- -- (22,650) (23) (12,675) -- (12,698)
Conversion of A/P and management fees -- -- 16,700,000 16,700 658,544 -- 675,244
Cancellation of Conversion of note
payable and accrued Interest to
preferred stock - First Bridge
Capital (5,510) (6) -- -- (550,951) -- (550,957)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss -- -- -- -- -- (1,396,665) (1,396,665)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2007 150 $ 0 43,213,522 $ 43,214 $ 6,377,651 $(8,050,147) $(1,629,282)
Net loss -- -- -- -- -- (147,001) (147,001)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Bslance at March 31, 2008 5,660 $ 0 43,213,522 $ 43,214 $ 6,277,907 $(8,197,148) $ (657,746)
=========== =========== =========== =========== =========== =========== ===========
(1) Adjusted for a 1 for 20 reverse split effective on December 1, 2006.
See Accompanying Notes to Consolidated Financial Statements
6
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CONTINAN COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
PERIOD FROM
FOR THE THREE FOR THE THREE SEPTEMBER 16, 2002
MONTHS ENDED MONTHS ENDED (INCEPTION) TO
MARCH 31, 2008 MARCH 31, 2007 MARCH 31, 2008
----------- ----------- -----------
Cash flows from operating activities:
Net loss $ (147,001) $ (307,910) $(8,190,298)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 15,013 16,720 218,746
Stock compensation for consulting services and
options granted to management and employees -- 108,650 3,114,329
Loss on Settlement of debt -- -- 127,557
(Increase) decrease in assets:
Write-off accounts payable -- -- (3059)
Accounts receivable -- -- --
Other receivables -- -- (1,758)
Security deposit -- -- 3,595
Prepaid expenses -- 500 --
Increase (decrease) in liabilities:
Accounts payable 48,850 (82,182) 727,218
Income tax payable -- 800 --
Accrued liabilities -- (79,247) 177,450
Accrued interest on notes payable - related party 6,275 128 79,700
Accrued interest on notes payable 4,225 6,189 133,225
Accrued management fees 36,000 (1,763) 479,536
----------- ----------- -----------
Net cash used in operating activities (36,638) (338,115) (3,133,073)
Cash flows from investing activities:
Payment for intangible assets -- -- (101,369)
Payment for software development costs -- -- (428,987)
Purchase of equipment -- (2,759) (24,123)
----------- ----------- -----------
Net cash used in investing activities -- (2,759) (554,479)
Cash flows from financing activities:
Sale of common stock -- -- 247,500
Borrowings on convertible note payable -- 15,000 --
Liability for derivative instruments -- -- --
Payments on note payable-related party -- (1,176} (2,734)
Payments on notes payable -- -- (7,400)
Borrowings on notes payable - related party 23,417 -- 2,760,405
Borrowings on notes payable 16,945 320,000 717,931
Payments on capital lease obligations (1,363) (1,660) (25,789)
----------- ----------- -----------
Net cash provided by financing activities 38,999 332,164 3,689,913
(Decrease) increase in cash 2,361 (8,710) 2,361
Cash, beginning of the period -- 8,710 --
----------- ----------- -----------
Cash, end of the period $ 2,361 $ -- $ 2,361
=========== =========== ===========
Supplemental disclosures of cash flow information:
Interest paid $ -- $ -- $ --
=========== =========== ===========
Income taxes paid $ 800 $ 800 $ 4,000
=========== =========== ===========
Supplemental disclosures of non-cash investing
and financing activities:
Furniture and equipment acquired through
exchange of stock $ -- $ -- $ 30,250
=========== =========== ===========
Developed software acquired through exchange
of stock $ -- $ -- $ 165,000
=========== =========== ===========
Conversion of note payable to preferred stock $ -- $ -- $ 565,957
=========== =========== ===========
Conversion of notes payable and accrued interest
into common stock $ -- $ -- $ 2,281,515
=========== =========== ===========
Conversion of accounts payable into common stock $ -- $ -- $ 47,563
=========== =========== ===========
Purchase of equipment through capital leases $ -- $ -- $ 29,843
=========== =========== ===========
Stock issued for consulting services $ -- $ -- $ 80,000
=========== =========== ===========
Issue of common stock upon exercise of warrants $ -- $ -- $ 5,800
=========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements
7
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CONTINAN COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION
Texxon, Inc. ("Texxon") was incorporated on October 6, 1998, under the laws of
the state of Oklahoma. Since inception, the Company's primary focus was raising
capital and paying for the exclusive licenses. Pursuant to the Company's Share
Agreement with TelePlus, Inc., a California corporation ("TelePlus"), the
Company's focus is now centered on the development and marketing of wireless
networks and specific services for international travelers. The initial focus of
the Company will be to test market their product and work to obtain customers
through trials in smaller test markets and to find partners to aid in the cross
promotion of their products primarily in Europe, US, and Japan.
In May 2006, Texxon and the shareholders of TelePlus completed a Share Exchange
Agreement whereas the Company acquired all of the outstanding capital stock of
TelePlus from the TelePlus shareholders in exchange for 3,000,000 shares of
voting convertible preferred stock convertible into 81,000,000 shares of Company
common stock. This transaction constituted a change of control of the Company
whereby the majority of the shares of Texxon are now owed by the shareholders of
TelePlus. The accounting for this transaction is identical to that resulting
from a reverse-acquisition, except that no goodwill or other intangible assets
is recorded. As a result, the transaction was treated for accounting purposes as
a recapitalization by the accounting acquirer TelePlus. The historical financial
statements will be those of TelePlus. On November 22, 2006, Texxon, the Oklahoma
corporation, for the sole purpose of re-domestication in Nevada, filed Articles
of Merger with the Secretaries of state of the states of Oklahoma and Nevada
pursuant to which Texxon, the Oklahoma corporation, was merged with and into
Texxon, Inc., a Nevada corporation, with the Nevada corporation remaining as the
surviving entity. Immediately following the merger, the Nevada company changed
its name to Continan Communications, Inc. ("Company") and its articles of
incorporation were amended such that the number of common stock and preferred
stock is increased from 45,000,000 to 100,000,000 and from 5,000,000 to
10,000,000, respectively. On December 1, 2006, the Company executed a 1 for 20
reverse stock split of all its issued and outstanding shares of common stock.
Additionally, all convertible preferred stocks were converted into 20,250,000
shares of common stock.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION.
As a result of the Share Exchange Agreement, the Company acquired 100% of the
stock of TelePlus, Inc. and TelePlus has become a wholly owned subsidiary of the
Company. The consolidated financial statements include the accounts of the
parent and its subsidiary. All significant intercompany transactions have been
eliminated in the consolidation. TelePlus was incorporated in the State of
California on September 16, 2002.
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The Company is in the development stage, as defined in Statement of Financial
Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development
Stage Enterprises", with its principal activity being to leverage its
proprietary content management software to deliver life enhancing, language
specific, contents and services via a cellular phone.
CASH AND CASH EQUIVALENTS.
The Company defines cash and cash equivalents as short-term investments in
highly liquid debt instruments with original maturities of three months or less,
which are readily convertible to known amounts of cash.
USE OF ESTIMATES.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS.
Financial accounting standards require disclosure of the fair value of financial
instruments held by the Company. Fair value of financial instruments is
considered the amount at which the instrument could be exchanged in a current
transaction between willing parties. The carrying amount of receivables,
accounts payable, and other liabilities included on the accompanying balance
sheet approximate their fair value due to their short-term nature.
FURNITURE AND EQUIPMENT.
Furniture and equipment are carried at cost and depreciation is computed over
the estimated useful lives of the individual assets ranging from 3 to 15 years.
The Company uses the straight-line method of depreciation.
The related cost and accumulated depreciation of assets retired or otherwise
disposed of are removed from the accounts and the resultant gain or loss is
reflected in earnings. Maintenance and repairs are expensed currently while
major renewals and betterments are capitalized.
INTANGIBLE ASSETS.
Intangible assets consist of patent application costs that relate to the
Company's U.S. patent application and consist primarily of legal fees, the
underlying test market studies and other direct fees. The recoverability of the
patent application costs is dependent upon, among other factors, the success of
the underlying technology.
DEVELOPED SOFTWARE.
Developed software is carried at the cost of development and amortization is
computed over the estimated useful life of the software that is currently 15
years. The Company uses the straight-line method of amortization.
IMPAIRMENT OF LONG-TERM ASSETS.
Long-term assets of the Company are reviewed annually as to whether their
carrying value has become impaired. Management considers assets to be impaired
if the carrying value exceeds the future projected cash flows from related
operations. Management also re-evaluates the periods of amortization to
determine whether subsequent events and circumstances warrant revised estimates
of useful lives.
INCOME TAXES.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets, including tax loss and credit carryforwards, and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred income tax expense represents the change during the
period in the deferred tax assets and deferred tax liabilities. The components
of the deferred tax assets and liabilities are individually classified as
current and non-current based on their characteristics. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.
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REVENUE RECOGNITION.
The Company recognizes revenues when it receives confirmation of the order and
the customer credit card has been debited and confirmed that customers have used
cellular phone minutes.
CAPITAL LEASES.
Assets held under capital leases are recorded at the lower of the net present
value of the minimum lease payments or the fair value of the leased asset at the
inception of the lease. Amortization expense is computed using the straight-line
method over the shorter of the estimated useful lives of the assets or the
period of the related lease.
STOCK BASED COMPENSATION.
The Company adopted SFAS No. 123 (Revised 2004), Share Based Payment ("SFAS No.
123R"). SFAS No. 123R requires companies to measure and recognize the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value. SFAS No. 123R eliminates the ability to account
for the award of these instruments under the intrinsic value method prescribed
by Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees, and allowed under the original provisions of SFAS No. 123.
EARNINGS PER SHARE.
SFAS No. 128, "Earnings Per Share," requires presentation of basic earnings per
share ("Basic EPS") and diluted earnings per share ("Diluted EPS"). The
computation of basic earnings per share is computed by dividing income available
to common stockholders by the weighted-average number of outstanding common
shares during the period. Diluted earnings per share gives effect to all
dilutive potential common shares outstanding during the period. The computation
of diluted earnings per share does not assume conversion, exercise or contingent
exercise of securities that would have an anti-dilutive effect on losses. As all
dilutive securities have an antidilutive effect on 2008 and 2007 earnings per
share, the securities have been excluded from the earnings per share
calculation.
ACCOUNTING FOR OPTIONS AND WARRANTS.
During the period ended December 31, 2006, the Company issued warrants and
options to numerous consultants and investors for services and to raise capital.
During the period up until the recapitalization performed on December 1, 2006
(Note 1), the Company did not have sufficient authorized shares in order to
issue these options should they be exercised. Because of the lack of authorized
shares, the Company therefore needed to follow derivative accounting rules for
its accounting of options and warrants.
The Company accounted for options and warrants issued in connection with
financing arrangements in accordance with Emerging Issues Task Force ("EITF")
Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock." Pursuant to EITF 00-19, the
Company was to recognize a liability for derivative instruments on the balance
sheet to reflect the insufficient amounts of shares authorized, which would have
otherwise been classified into equity. An evaluation of specifically identified
conditions was then made to determine whether the fair value of warrants or
options issued was required to be classified as a derivative liability. The fair
value of warrants and options classified as derivative liabilities was adjusted
for changes in fair value at each reporting period, and the corresponding
non-cash gain or loss was recorded in the corresponding period earnings.
In December 2006, the Company completed a reincorporation by merger with
Texxon-Nevada, which, therefore, allowed the Company to increase its authorized
preferred and common shares from 5,000,000 to 10,000,000 shares and from
45,000,000 to 100,000,000 shares, respectively.
At the date of reincorporation, the Company recalculated the value of its
options and warrants at the current fair value, and recorded an increase to
equity and a decrease to derivative liabilities for the fair value of the
options and warrants. The difference between the liability and the recalculated
fair value was recorded as a gain or loss.
10
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RECENT ACCOUNTING PRONOUNCEMENTS.
In February 2007, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities-Including an amendment of FASB Statement No. 115." SFAS No. 159
permits companies to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at fair
value. The objective of SFAS No. 159 is to provide opportunities to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply hedge accounting provisions.
SFAS No. 159 also establishes presentation and disclosure requirements designed
to facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. SFAS No. 159 will be
effective in the first quarter of fiscal 2008. The Company is currently
evaluating the impact that this statement will have on its financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which addresses the measurement of fair value by companies when they are
required to use a fair value measure for recognition or disclosure purposes
under GAAP. SFAS No. 157 provides a common definition of fair value to be used
throughout GAAP that is intended to make the measurement of fair value more
consistent and comparable and improve disclosures about those measures. SFAS No.
157 will be effective for an entity's financial statements issued for fiscal
years beginning after November 15, 2007. The Company is currently evaluating the
effect SFAS No. 157 will have on its consolidated financial position, liquidity,
or results of operations.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments," an amendment of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities"), and SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
In this context, a hybrid financial instrument refers to certain derivatives
embedded in other financial instruments. Among other things, SFAS No. 155
permits fair value re-measurement of any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation under
SFAS No. 133. In addition, SFAS No. 155 establishes a requirement to evaluate
interests in securitized financial assets in order to identify interests that
are either freestanding derivatives or "hybrids" which contain an embedded
derivative requiring bifurcation. SFAS No. 155 also clarifies which
interest/principal strips are subject to SFAS No. 133, and provides that
concentrations of credit risk in the form of subordination are not embedded
derivatives. Lastly, SFAS No. 155 amends SFAS No. 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative. When SFAS No. 155 is adopted, any difference between the total
carrying amount of the components of a bifurcated hybrid financial instrument
and the fair value of the combined "hybrid" must be recognized as a
cumulative-effect adjustment of beginning deficit/retained earnings. SFAS No.
155 is effective for all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15, 2006.
Earlier adoption is permitted only as of the beginning of a fiscal year,
provided that the entity has not yet issued any annual or interim financial
statements for such year. Restatement of prior periods is prohibited. Management
does not believe this pronouncement will have a significant impact on its future
financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
No. 154 requires retrospective application to prior periods' financial
statements for changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 also requires that retrospective application of a change in
accounting principle be limited to the direct effects of the change. Indirect
effects of a change in accounting principle, such as a change in
non-discretionary profit-sharing payments resulting from an accounting change,
should be recognized in the period of the accounting change. SFAS No. 154 also
requires that a change in depreciation, amortization, or depletion method for
long-lived, non-financial assets be accounted for as a change in accounting
estimate affected by a change in accounting principle. SFAS No. 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. The adoption of this Statement did not have a material
impact on its financial position, results of operations or cash flows.
In July 2006, the FASB issued FASB Interpretation ("FIN") No. 48, "Accounting
for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109".
FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized
in a company's financial statements in accordance with SFAS No. 109, "Accounting
for Income Taxes". FIN No. 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN No. 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. The requirements of FIN No. 48 are
effective for fiscal year beginning January 1, 2007; the Company does not expect
adoption of this new interpretation to have a material impact on its financial
position, results of operations or cash flows.
11
<page>
RECLASSIFICATIONS
Certain reclassifications have been made to the financial statements for the
three months ended March 31, 2006 to conform to the financial statement
presentation for the three months ended March 31, 2007. These reclassifications
had no effect on net loss as previously reported.
NOTE 3 - GOING CONCERN
The Company has no significant operating history and, from (inception) to March
31, 2008, has generated a net loss of $8,193,148. The accompanying financial
statements for the period ended March 31, 2008 have been prepared assuming the
Company will continue as a going concern. During the year 2006, management
completed a reverse merger with Texxon Inc. and intended to raise equity through
a private placement.
The accompanying financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classifications of liabilities that may result from the
possible inability of the Company to continue as a going concern.
NOTE 4 - FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following as of March 31, 2008 and
December 31, 2007
2008 2007
-------- --------
Furniture and fixtures $ 12,272 $ 12,272
Computers and equipment 66,211 66,211
-------- --------
Total 78,483 78,483
Less: accumulated depreciation (60,572) (56,451)
-------- --------
Machinery and equipment, net $ 17,911 $ 21,922
======== ========
Depreciation expense amounted to $4,011 for the period ended March 31, 2008 and
$15,965 for the year ended December 31, 2007.
NOTE 5 - CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank deposit accounts and the balances may
exceed federally insured limits from time to time. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant risks on its cash in bank deposit accounts. As of March 31, 2008,
the Company did not have deposits in excess of federally insured limits.
NOTE 6 - DEVELOPED SOFTWARE
The Company has developed internal use software for the purpose of managing its
wireless network and specific services. The total capitalized cost of this
software at March 31, 2008 and December 31, 2007 was $593,986. Accumulated
amortization amounted to $105,504 and $95,605 as of March 31, 2008 and December
31, 2007, respectively. Amortization expense amounted to $9,899 and $9,583 for
the periods ended March 31, 2008 and March 31, 2007.
NOTE 7 - INTANGIBLE ASSETS
Intangible assets consisted of the following at March 31, 2008 and December 31,
2007:
2008 2007
--------- ---------
Patent application costs $ 60,982 $ 60,982
Website development costs 40,908 40,908
Network interconnection 5,300 5,300
--------- ---------
Total 107,190 107,190
Less: accumulated amortization (52,758) (51,656)
--------- ---------
Intangible assets, net $ 54,431 $ 55,534
========= =========
12
<page>
Amortization expense amounted to $1,103 for the three months ended March 31,
2008 and $3,210 for the three months ended March 31, 2007.
NOTE 8 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial statement
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at March 31, 2008 are as
follows:
Deferred tax asset
Federal net operating loss $ 1,634,492
State net operating loss 414,527
-----------
Total deferred tax asset 2,049,019
Less valuation allowance (2,049,019)
-----------
Deferred tax asset, net $ --
===========
At March 31, 2008 and December 31, 2007, the Company had federal and state net
operating loss ("NOL") carryforwards of approximately $5,4014,539 and
$4,873,839, respectively. Federal NOLs could, if unused, expire in 2024. State
NOLs, if unused, could expire in 2014.
The Company has provided a 100% valuation allowance on the deferred tax assets
at March 31, 2008 and December 31, 2007 to reduce such asset to zero, since
there is no assurance that the Company will generate future taxable income to
utilize such asset. Management will review this valuation allowance requirement
periodically and make adjustments as warranted.
The reconciliation of the effective income tax rate to the federal statutory
rate for the periods ended March 31, 2008 and December 31, 2007 are as follows:
2007 2006
------ ------
U. S. Federal Statutory rate 34.0% 34.0%
State tax rate, net of federal benefit 6.0 6.0
Less valuation allowance (40.0) (40.0)
------ ------
Effective income tax rate -- % -- %
====== ======
13
<page>
NOTE 9 - RELATED PARTY TRANSACTIONS
NOTES PAYABLE.
The Company has received loans from related parties. These related parties
consist of various members of management who are also shareholders. The related
parties also consist of an employee, a relative of the CEO, and a shareholder of
the Company. As of March 31, 2008 and December 31, 2007, the Company had loans
due to related parties of $307,640 and $284,223, respectively. Loans due to
related parties consisted of the following:
2008 2007
------------- -------------
Promissory note issued to Claude Buchert, CEO
and major shareholder, on December 30, 2004
with interest of 10%. Principal along with
accrued interest are due on or before June
30, 2005. $ 76,845 $ 57,428
Promissory note issued to Edward Shirley,
relative of Vice President, on February 23,
2004 with interest of 10% and principal
installments of $340 to be made monthly,
beginning July 1, 2004 with the remaining
principal balance and accrued interest due on
December 31, 2004. 30,000 30,000
Promissory notes issued to Humax West, Inc.,
shareholder, on various dates between January
26, 2006 and February 16, 2006 with interest
of 10%. Principal along with accrued interest
are payable on the maturity date March 30,
2006. The amount due in 2005 contain options
for the Holder to receive shares of the
Company stock in lieu of repayment of
principal and was converted in 2006. The 2006
loan is non-convertible. 30,000 30,000
Promissory note issued to Stephanie Buchert,
relative of CEO, on May 1, 2004. Interest of
10% and principal installments of $200 to be
made monthly, beginning July 1, 2004 with the
outstanding principal balance and accrued
interest due on December 31, 2004. 9,093 9,093
Promissory note issued to Celine Coicaud,
employee, on December 31, 2003. Interest of
10% and principal instalments $50 to be made
monthly, beginning July 1, 2004 with an
additional payment of $9,900 due August 10,
2004 and the remaining principal balance and
accrued interest due on December 31, 2004. -- --
Promissory note issued to Helene Legendre,
Vice President and shareholder, on June 30,
2004 with interest of 10% and payments of
$877 to be made monthly, beginning July 1,
2004 with the remaining principal balance and
accrued interest due on December 31, 2004. 161,702 157,702
-------------- --------------
Totals notes payable - related $ 307,640 $ 284,223
============== ==============
Total interest expense for the periods ended March 31, 2008 and March 31, 2007
for related parties amounted to $6,275 and $8,661, respectively. The Company is
currently in default on various notes payable and is in the process of
negotiating settlements or payments. All notes are included in current
liabilities.
MANAGEMENT FEES.
The Company has employment agreements with two members of management through
March 2008. These agreements are cancelable at any time by the Company or member
of management. As of March 31, 2008 and December 31, 2007, the Company had
$321,732 and $280,910, respectively, payable to management in arrears under
these agreements. Expenses related to these agreements are recorded in general
and administrative expense and amounted to $36,000 and $16,237 for the periods
ended March 31, 2008 and March 31, 2007, respectively.
14
<page>
NOTE 10 - LEASES
The Company leases its office facility under a month-to-month lease.
CAPITAL LEASES.
The Company leases certain computers under agreements that are classified as
capital leases. The cost of equipment under capital leases is included in the
balance sheets as furniture and equipment and amounted to $31,095 at March 31,
2008. Accumulated amortization of the leased equipment at March 31, 2008 was
$18,579. Amortization of assets under capital leases is included in depreciation
expense.
The future minimum lease payments required under the capital leases and the
present value of the net minimum lease payments as of March 31, 2008 are as
follows:
Three Months
Ending
March 31, Amount
------------ ----------
2008 $ 4,552
2009 1,466
2010 242
Thereafter --
----------
Total minimum lease payments 4,552
Less: amount representing interest (619)
----------
Present value of net minimum lease payments 5,641
Less: current maturities of capital lease
obligations (4,641)
----------
Long-term capital lease obligations $ 1,100
==========
NOTE 11 - NOTES PAYABLE
As of March 31, 2008 and December 31, 2007, the Company had notes payable of
$995,488 and $978,543, respectively.
2008 2007
-------------- --------------
Promissory note issued to James Bell on May
26, 2004 in the amount or $25,000 with
interest of 10%. There are no monthly
payments and the principal along with the
accrued interest is due on or before December
31, 2005 or the date the Company received
proceeds from the public offering of its
shares, whichever is earlier. The promissory
note contains an option for the holder to
receive 1% of the outstanding shares in lieu
of repayment of principal. $ 25,000 $ 25,000
Promissory notes issued to ARABIA Corporation
on various dates between September 18, 2003
and May 18, 2004 with interest of 10%.
Principal along with accrued interest is
payable on the maturity dates between
September 18, 2004 and December 31, 2004. 55,000 55,000
Promissory note issued to Sax Public
Relations, Inc. December 1, 2005 with
interest accruing from September 1, 2005 at
10%. Payments of $1,000 to be made monthly
beginning February 1, 2006 through March
2007. 7,586 7,586
Promissory note issued to First Bridge Capital
Inc,et al on January 20,2007, with interest
accruing at 10%. There are no monthly payments
and the principal along with the accrued interest
is due on or before December 31,2007 or the date
the Company received proceeds from the public
offering of its shares, whichever is earlier 907,902 890,957
-------------- --------------
Total notes payable $ 995,488 $ 978,543
============== ==============
The Company is currently in default on various notes payable and is in the
process of negotiating settlements or payments. All notes payable are included
in current liabilities.
NOTE 12 - STOCKHOLDERS' EQUITY
Following the completion of the reverse merger, the Company had two classes of
stock.
PREFERRED STOCK.
An investor has subscribed to 150 shares of preferred stock, which was not yet
designated. The Company still has not designated the preferred stock and is
holding the subscription.
15
<page>
COMMON STOCK.
The Company has one class of common stock with a par value of $0.001. The
Company had 45,000,000 shares authorized and 44,772,159 issued and outstanding
just prior to December 1, 2006 in connection with the Company's re-domestication
(see Note 1). On December 1, 2006, the Company implemented a 1 for 20 reverse
stock split of all its issued and outstanding shares. After the reverse stock
split, there were 2,238,608 shares of common stock issued and outstanding. At
the date of the reverse split, the Company had 3,000,000 shares of convertible
preferred stock issued and outstanding. All preferred shares were converted into
20,250,000 shares of post reverse split common stock.
Prior to the reverse split, the Company had made promises to issue more common
stock, but was unable to due to a lack of authorized shares. Before the merger
completed in November 2006, the Company was in the process of attempting to
increase the number of authorized common stock shares. Accordingly all promises
to issue common stock were classified as a liability. See descriptions of
transactions below.
(a) In December 2006, accounts payable to a consulting company in the amount
of $12,698 was converted into 22,650 common shares with a par value of $0.001
per share. The Company recorded common stock in the amount of $23 and additional
paid in capital ("APIC") in the amount of $12,675. As of March 31, 2007, this
agreement was finalized. However, stock certificates were not issued until
subsequent to year-end. As of March 31, 2008, 2007, the shares were considered
outstanding.
(b) In December 2006, accounts payable to a consulting company in the amount
of $34,830 was converted into 35,000 common shares with a par value of $0.001
per share. The Company recorded common stock in the amount of $35 and APIC in
the amount of $34,795. As of March 31, 2007, this agreement was finalized.
However, stock certificates were not issued until subsequent to year-end. As of
March 31, 2007, the shares were considered outstanding.
(c) In August 2006, the Company entered into a funding agreement with First
Bridge Capital Incorporated for working capital purposes. First Bridge Capital
will make serial investments in the maximum amount of $1,000,000 for a future
exchange of the Company's convertible preferred stock. Before re-domestication,
the Company had received $538,500 in advance payments from First Bridge Capital.
However, after the re-domestication was completed, all advance payment of
$538,500 and related accrued interests of $12,456 were converted into 5,510
shares of preferred stock at year end, on the basis of 1 preferred share issued
for each $100 owed. As of March 31, 2007, this agreement was finalized. However,
stock certificates were not issued until subsequent to year-end. As of March 31,
2007, the shares were considered outstanding.
In January 2007, First Capital issued a note in the amount of $15,000 to the
Company. After the inception of the note, the Company entered into an agreement
with First Bridge Capital and converted the note into 150 shares of preferred
stock on the basis of 1 preferred share issued for each $100 owed. At the date
of conversion, the market price of preferred stock was $0.51. The company
recorded $0.15 of preferred stock account and $14,999.85 of additional paid in
capital.
In connection with the funding agreement, the Company issued First Bridge
Capital 50,000 (1,000,000 pre reverse split) common stock warrants. These
warrants were valued at $20,000 as that was the cash payment equivalent of the
value of services. The Company accounted for these warrants as a liability for
derivative instruments as they didn't have enough authorized shares to issue
stock for these warrants. The Company valued these warrants at September 30,
2006 using the Black-Scholes model and determined that the value as of September
30, 2006 was $4,965. Accordingly the Company recognized a gain on the change in
fair value of derivative instruments in the amount of $15,035 and reduced their
initial $20,000 liability to $4,965. The factors used for the Black Scholes
model were a market price of $0.05 per share; volatility of 150%; risk free
interest rate of 6%; exercise price of $0.001 per share; and an estimated life
of 4.8 years.
As a result of recapitalization in November 2006, the Company had more shares
authorized to be issued. Therefore, the derivative liability in the amount of
$4,965 arisen due to a lack of authorized shares had to be eliminated and
accounted for as equity. The value for the derivative liability needed to be
re-calculated using the Black Scholes model as of December 1, 2006 (the date of
the reverse split). The recalculated value of the derivative liability was
$14,836, which became an addition to APIC. The remaining value of $9,871, after
eliminating derivative liability, was recognized as a loss on derivative. The
factors used for the Black Scholes model were a market price of $0.30 per share;
volatility of 178%; risk free interest rate of 4.39%; exercise price of $.02 per
share; and an estimated life of 4.55 years.
16
<page>
(d) In January 2007, the Company issued 65,000 shares of common stock with a
par value of $0.001 to Karen Dix for consulting services provided to the
Company. At the date of issuance, the market price of the Company's common stock
was $0.51 per share. The Company recorded $65 in common stock and $33,085 in
additional paid in capital.
(e) In 2006, a third party exercised 290,000 (5,800,000 pre reverse-split)
warrants pursuant to a settlement agreement executed on December 31, 2005. The
Company issued 290,000 shares of its common stock related to the transaction and
the value was recorded as paid in capital.
(f) In July 2006, a settlement agreement was agreed upon between the Company
and a consulting group for financial public relations services that was
performed. The Company was to issue 7,700,000 shares of common stock for
compensation for the services performed by the consulting group. The value of
the shares on the date of issuance was based on the fair market value of the
common shares on the date of settlement. The Company had recorded this expense
as public relations services expense in the amount of $847,000. However, the
Company did not have sufficient common shares authorized and did not have
sufficient un-issued shares available to settle this contract at the time of
settlement. Therefore, 4,990,000 (249,500 post split) common shares were issued
to the consulting group as of September 30, 2006. The Company still owed
2,710,000 shares to complete this settlement. A liability to issue the remaining
shares was recorded based on the market price at the time of the settlement of
$0.11 per share.
As of September 3, 2006, the stock price had fallen to $0.05 per share.
Accordingly the Company recognized a gain on the change in fair value of
derivative instruments of $162,600 for the three months ending September 30,
2006. The remaining liability of $135,400 was included on the balance sheet as a
liability for derivative instruments. Following the company's recapitalization,
2.71 million shares of common stock were issued to the consulting group on
December 11, 2006. Per the settlement, these shares were not adjusted for the
reverse split. Therefore, the derivative liability in the amount of $135,400
arisen due to a lack of authorized shares had to be eliminated and accounted for
as equity. In addition, due to changes in market value for common stock, the
value for the derivative liability needed to be adjusted before any changes were
made as of December 11, 2006. The recalculated value for the derivative
liability was $1,626,000, of which $54,200 was recognized as common stock and
$1,571,800 was recognized as APIC. The remaining value after offsetting
derivative liability in the amount of $1,626,000 was recognized as a loss on
derivative after elimination of the derivative liability. The adjusted value of
the derivative was calculated by number of shares to be issued multiplied by the
market price per share at the time of issuance.
(g) In 2006, the Company contracted with a third party to perform public
relations services that amounted to $24,000. The Company agreed to pay for these
services in common stock based upon the average 30 day trading price at a
specified time during the year. The average trading price determined was $0.29
per share, resulting in the need to issue 4,137 (82,759 pre reverse split)
shares of stock. The Company did not have sufficient authorized common shares
available to settle this contract. Therefore a liability was accrued for the
service expense incurred of $24,000. As of September 30, 2006, the price of the
stock had dropped to $0.05 per share. Accordingly, the company recognized a gain
on the change in fair value of derivative instruments of $19,862 for the three
months ended September 30, 2006. The remaining liability of $4,138 was included
on the balance sheet as a liability. As of December 31, 2006,the market value of
derivative liability was $2,152, which was calculated by multiplying 4,137
shares with market price on December 31, 2006 of $0.52. The difference of $1,986
was, then, recognized as gain on derivative, accordingly.
The following schedule summarizes the total liability originally recognized, the
gain (loss) during the last fiscal year, the amount transferred to equity upon
recapitalization and the remaining liability at March 31, 2007:
Original Gain/(Loss) Liability as of
Liability Recognized Equity December 31, 2006
----------- ------------ ------------ -----------------
Promise to issue convertible
preferred stock $ 481,382 $ -- $ 481,382 $ --
Settlement of 2,710,000 common
shares due 298,000 (1,328,000) 1,626,000 --
82,579 shares due to public
relations firm 24,000 21,848 -- 2,152
Common stock warrants to First
Bridge Capital 20,000 5,164 14,836 --
Non-employee stock option and
warrants (Note 13) 581,157 459,166 121,991 --
----------- ------------ ------------ -----------------
Total 923,000 (841,822) 1,762,827 2,152
Grand Total $1,404,539 $ (841,822) $ 2,244,209 $ 2,152
=========== ============ ============ =================
17
<page>
NOTE 13 - STOCK OPTIONS AND WARRANTS
(a) In January 2004, the Company granted an option to purchase 152,813
(3,056,250 pre reverse split) restricted shares of common stock, exercisable at
$1.00 ($0.05 pre split) per share, to a non-employee; this option vested in
April 2004. This option expires in January 2010 and was not valued at grant
date. Because the Company did not have sufficient shares authorized to issue if
the option was exercised, this amount was recorded as a derivative and
classified on the balance sheet as a liability for derivative instruments. The
Company revalued this option at September 30, 2006 using the Black-Scholes model
and determined that the value of this option was $136,431. Accordingly, the
Company recognized a loss on the change in fair value of derivative instruments
of $136,431 and increased the liability due as of September 30, 2006 to
$136,431. The factors used for the Black Scholes model were a market price of
$0.05 per share; volatility of 150%; risk free interest rate of 6%; exercise
price of $0.05 per share; and an estimated life of 4.25 years.
As a result of completed recapitalization in November 2006, the Company had more
shares authorized to be issued. Therefore, the derivative liability in the
amount of $136,431 arisen due to a lack of authorized shares had to be
eliminated and accounted for as equity. In addition, due to changes in market
value for the common stock, the value for the derivative liability had to be
recalculated using the Black-Scholes model as of December 1, 2006 (the date of
reverse split). The recalculated value for the derivative liability was $40,250,
which became an addition to APIC. The remaining difference of $96,181, after
eliminating derivative liability, was recognized as a gain on derivative. The
factors used for the Black-Scholes model were a market price of $0.30 per share;
volatility of 178%; risk free interest rate of 4.39%; exercise price of $1.00
per share; and an estimated life of 4 years.
(b) In September 2005, the Company granted an option to purchase 40,750
(815,000 pre reverse split) restricted shares of common stock (TelePlus stock
options), exercisable at $1.00 ($0.05 pre reverse split) per share, to an
employee that vests and expires on January 15, 2010. This option was exchanged
for an option to purchase 45,000 restricted shares of common stock (the
equivalent of a 366,750 shares Texxon stock option) issued in May 2006 and an
option to purchase 30,000 restricted shares of common stock (the equivalent of a
244,500 Texxon stock option). Due to the fact that the Company has been
generating recurring losses and also not having an active market to trade its
shares, the value of these options was determined to be zero and accordingly, no
expense or paid in capital has been recorded. The performance-based option
issued to this employee was a part of a performance based stock options issuance
transaction that involved other employees (see subsequent paragraph on
performance based stock options issued in May for more details on this
transaction).
(c) In September 2005, the Company granted an option to purchase 40,750
(815,000 pre reverse split) restricted shares of common stock, exercisable at
$0.02 ($0.001 pre reverse split) per share, to a non-employee; this option
expires on January 15, 2010. The option was granted in exchange for consulting
services valued at $40,000. The Company has recorded consulting expense in this
amount to reflect the value of these options for the year ended December 31,
2005. Because the Company did not have sufficient shares authorized to issue if
the option was exercised, this amount was recorded as a derivative and
classified on the balance sheet as a liability for derivative instruments. The
Company revalued this option at September 30, 2006 using the Black-Scholes model
and determined that the value of this option was $38,305. Accordingly, the
Company recognized a gain on the change in fair value of derivative instruments
of $1,695 and reduced their liability due as of September 30, 2006 to $38,305.
The factors used for the Black-Scholes model were a market price of $0.05 per
share; volatility of 150%; risk free interest rate of 6%; exercise price of
$0.001 per share; and an estimated life of 3.5 years.
As a result of the recapitalization in November 2006, the Company had more
shares authorized to be issued. Therefore, the derivative liability in the
amount of $38,305 due to a lack of authorized shares had to be eliminated and
accounted for as equity. In addition, due to changes in market value for the
common stock, the value for the derivative liability had to be recalculated
using the Black-Scholes model as of December 1, 2006 (the date of reverse
split). The recalculated value for the derivative liability was $11,980, which
became an addition to APIC. The remaining difference after eliminating
derivative liability in the amount of $26,325 was recognized as a gain on
derivative. The factors used for the Black-Scholes model were a market price of
$0.30 per share; volatility of 178%; risk free interest rate of 4.43%; exercise
price of $0.02 per share; and an estimated life of 3.25 years.
18
<page>
(d) In February 2006, the Company granted an option to purchase 65,000
(1,300,000 pre reverse split) restricted shares of common stock, exercisable at
$0.02 ($0.001 pre reverse split) per share, to a consultant for assistance in
the share exchange between Texxon and TelePlus. This option was valued at $0.10
per share. The value of the option was calculated using the Black-Scholes model
with the following assumptions: exercise price of $0.001; share price of $0.10;
risk free interest rate of 6.0%; expected life of 5 years; and estimated
volatility of 150%. The Company recorded the expense and additional paid in
capital in the amount of $130,000 to reflect the finder's fees expense involved
in the reverse merger acquisition process. Because the Company did not have
enough shares authorized to issue if the option was exercised, this amount was
recorded as a derivative and classified on the balance sheet as a liability for
derivative instruments. The Company revalued this option at September 30, 2006
using the Black-Scholes model and determined that the value of this option was
$64,493. Accordingly, the Company recognized a gain on the change in fair value
of derivative instruments of $65,507 and reduced the liability due as of
September 30, 2006 to $64,493. The factors used for the Black-Scholes model were
a market price of $0.05 per share; volatility of 150%; risk free interest rate
of 6%; exercise price of $0.001 per share; and an estimated life of 4.5 years.
As a result of the recapitalization in November 2006, the Company had more
shares authorized to be issued. Therefore, the derivative liability in the
amount of $64,493 due to a lack of authorized shares had to be eliminated and
accounted for as equity. In addition, due to changes in market value for the
common stock, the value for the derivative liability had to be recalculated
using the Black-Scholes model as of December 1, 2006 (the date of reverse
split). The recalculated value for the derivative liability was $19,255, which
became an addition to APIC. The remaining difference after offsetting derivative
liability in the amount of $45,238 was recognized as a gain on derivative after
elimination of the derivative liability. The factors used for the Black-Scholes
model were a market price of $0.30 per share; volatility of 178%; risk free
interest rate of 4.39%; exercise price of $0.02 per share; and an estimated life
of 4.25 years.
(e) In February 2006, the Company issued common stock warrants to two members
of the Company's then current management, and to a public relations firm. These
warrants were for purchase of 125,000 (2,500,000 pre split) restricted shares of
common stock, exercisable at $2.20 ($0.11 pre reverse split) per share. These
warrants were the only options/warrants from pre-merger Texxon to survive the
completion of the share exchange agreement (see Note 1); all other Texxon
warrants were cancelled. These warrants have been valued at $275,973 ($0.1104
per share). The value of the warrants was calculated as of February 1, 2006
using the Black-Scholes model with the following assumptions: exercise price of
$0.11; share price of $0.12; risk free interest rate of 4.4%; expected life of 5
years; and estimated volatility of 150%. These warrants were valued by Texxon
prior to the merger and the effect of their issuance is included in the
additional paid in capital as a result of the merger.
(f) In April 2006, the Company granted an option to purchase 36,675 (733,500
pre reverse split) restricted shares of common stock, exercisable at $0.02
($0.001 pre reverse split) per share, to a consultant in exchange for consulting
services valued at its fair market value for the services performed at $40,343.
Because the Company did not have sufficient shares authorized to issue if the
options were exercised, this amount was recorded as a derivative and classified
on the balance sheet as a liability for derivative instruments. The Company
revalued this option at September 30, 2006 using the Black-Scholes model and
determined that the value of this option was $36,287. Accordingly, the Company
recognized a gain on the change in fair value of derivative instruments of
$4,056 and reduced their liability due as of September 30, 2006 to $36,287. The
factors used for the Black-Scholes model were a market price of $0.05 per share;
volatility of 150%; risk free interest rate of 6%; exercise price of $0.001 per
share; and an estimated life of 3.5 years.
As a result of the recapitalization in November 2006, the Company had more
shares authorized to be issued. Therefore, the derivative liability in the
amount of $36,287 due to a lack of authorized shares had to be eliminated and
accounted for as equity. In addition, due to changes in market value for the
common stock, the value for the derivative liability had to be recalculated
using the Black-Scholes model as of December 1, 2006 (the date of reverse
split). The recalculated value for the derivative liability was $10,782, which
became an addition to APIC. The remaining difference after eliminating
derivative liability in the amount of $25,505 was recognized as a gain on
derivative. The factors used for the Black-Scholes model were a market price of
$0.30 per share; volatility of 178%; risk free interest rate of 4.43%; exercise
price of $0.02 per share; and an estimated life of 3.25 years.
(g) In April 2006, the Company granted an option to purchase 6,113 (122,250
pre reverse split) restricted shares of common stock, exercisable at $0.02
($0.001 pre reverse split) per share, each to two employees (total of 12,225
(244,500 pre reverse split) shares of common stock). The option was valued at
$13,448 ($0.11 per share). The value of the option was calculated using the
Black-Scholes model with the following assumptions: exercise price of $0.001;
share price of $0.12; risk free interest rate of 6.0%; expected life of 4 years;
and estimated volatility of 150%. The Company recorded payroll expense and
additional paid in capital in the amount of $13,448 to reflect the value of
these options for the period ended September 30, 2006.
(
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h) In April 2006, the Company granted an option to purchase 75,000 (1,500,000
pre reverse split) restricted shares of common stock, exercisable at $3.40
($0.17 pre reverse split) per share, to an investment banking and financial
advisory organization as partial compensation for assistance in identifying
suitable acquisition targets and long term funding. This option was valued at
$0.156 per share. The value of the option was calculated using the Black-Scholes
option pricing model with the following assumptions: exercise price of $0.17;
share price of $0.17; risk free interest rate of 6.0%; expected life of 5 years;
and estimated volatility of 150%. The Company recorded an increase and decrease
to additional paid in capital in the amount of $234,000 to reflect the finder's
fees expense involved in the reverse merger acquisition process. Because the
Company did not have enough shares authorized to issue if the option was
exercised, this amount was recorded as a derivative and classified on the
balance sheet as a liability for derivative instruments. The Company revalued
this option at September 30, 2006 using the Black-Scholes model and determined
that the value of this option was $61,917. Accordingly, the Company recognized a
gain on the change in fair value of derivative instruments of $172,611 and
reduced the liability due as of September 30, 2006 to $61,917. The factors used
for the Black-Scholes model were a market price of $0.05 per share; volatility
of 150%; risk free interest rate of 6%; exercise price of $0.17 per share; and
an estimated life of 4.5 years.
As a result of the recapitalization in November 2006, the Company had more
shares authorized to be issued. Therefore, the derivative liability in the
amount of $61,917 due to a lack of authorized shares had to be eliminated and
accounted for as equity. In addition, due to changes in market value for the
common stock, the value for the derivative liability had to be recalculated
using the Black-Scholes model as of December 1, 2006 (the date of reverse
split). The recalculated value for the derivative liability was $18,482, which
became an addition to APIC. The remaining difference after eliminating
derivative liability in the amount of $43,435 was recognized as a gain on
derivative. The factors used for the Black-Scholes model were a market price of
$0.30 per share; volatility of 178%; risk free interest rate of 4.39%; exercise
price of $3.40 per share; and an estimated life of 4.25 years.
(i) In May 2006, the Company granted an option to purchase 26,488 (529,750 pre
reverse split) restricted shares of common stock, exercisable at $0.02 ($0.001
pre reverse split) per share, each to two members of management (total of 52,975
(1,059,500 pre reverse split) shares of common stock). Each option was valued at
$58,273 ($0.11 per share). The value of the option was calculated using the
Black-Scholes option pricing model with the following assumptions: exercise
price of $0.001; share price of $0.12; risk free interest rate of 6.0%; expected
life of 4 years; and estimated volatility of 150%. The Company recorded the
payroll expense and additional paid in capital in the amount of $58,273 to
reflect the value of these options for the period ended September 30, 2006.
(j) In May 2006, the Company granted an option to purchase 18,338 (366,750 pre
reverse split) restricted shares of common stock, exercisable at $0.02 ($0.001
pre reverse split) per share, to one employee. The option was valued at $0.12
per share. The value of the option was calculated using the Black-Scholes model
with the following assumptions: exercise price of $0.001; share price of $0.12;
risk free interest rate of 6.0%; expected life of 4 years; and estimated
volatility of 150%. The Company recorded payroll expense and additional paid in
capital in the amount of $20,171 to reflect the value of this option for the
period ended September 30, 2006.
(k) The Company granted options to purchase 176,875 (3,537,500 pre reverse
split) restricted shares of common stock to employees on May 25, 2006 (based on
performance), exercisable at $0.02 ($0.001 pre reverse split), that vest
immediately. At the time of grant, the Company was unable to determine whether
the Company would meet the requirement needed in order to grant the options. Due
to these facts, no expense or paid in capital has been recorded.
(l) In July 2006, the Company contracted with a third party to perform public
relations services. The total value of the services to be provided was $500,000;
the term of the contract was one year. The Company granted a warrant to purchase
192,308 (3,846,154 pre reverse split) restricted shares of common stock,
exercisable at $0.02 ($0.001 pre reverse split) per share. Because of the
one-year term of the contract, the Company only recognized the grant of a
warrant to purchase 961,538 shares at an expense of $125,000. The Company
accounted for this warrant as a liability for derivative instruments as the
Company did not have sufficient authorized shares to issue if the warrant was
exercised. The Company valued this warrant at September 30, 2006 using the
Black-Scholes model and determined that the value was $47,736. Accordingly, the
Company recognized a gain on the change in fair value of derivative instruments
in the amount of $120,226 and reduced the initial $125,000 liability to $47,736.
The factors used for the Black-Scholes model were a market price of $0.05 per
share; volatility of 150%; risk free interest rate of 6%; exercise price of
$0.001 per share; and an estimated life of 4.8 years.
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As a result of recapitalization in November 2006, the Company had more shares
authorized to be issued. Therefore, the derivative liability in the amount of
$47,736 due to a lack of authorized shares had to be eliminated and accounted
for as equity. In addition, due to changes in market value for the common stock,
the value for the derivative liability had to be recalculated using the
Black-Scholes model as of December 1, 2006 (the date of reverse split). The
recalculated value for the derivative liability was $14,266, which became an
addition to APIC. The remaining difference after offsetting derivative liability
in the amount of $33,470 was recognized as a gain on derivative after
elimination of the derivative liability. The factors used for the Black-Scholes
model were a market price of $0.30 per share; volatility of 178%; risk free
interest rate of 4.39%; exercise price of $0.02 per share; and an estimated life
of 4.55 years.
In 2007, an additional 96,154 warrants were issued under this contract. The
Company used the Black-Scholes model to value these options. The factors used
were a market price of $0.79 per share; volatility of 178%; risk free interest
rate of 6%; exercise price of $0.02 per share; and an estimated life of 4.3
years. This resulted in $75,500 of additional paid in capital.
(m) In October 2006, the Company granted an option to purchase 10,000 (200,000
pre reverse split) restricted shares of common stock, exercisable at $0.01 per
share, to a non-employee; this option will expire on October 15, 2011. This
option was granted in exchange for consulting services, valued at $11,814 using
the Black-Scholes model. Because the Company did not have enough shares
authorized to issue if this option was exercised, this amount was recorded as a
derivative and are classified on the balance sheet as a liability for derivative
instruments. The factors used for the Black-Scholes model were a market price of
$0.06 per share; volatility of 178%; risk free interest rate of 4.39%; exercise
price of $0.01 per share; and an estimated life of 5 years.
As a result of recapitalization in November 2006, the Company had more shares
authorized to be issued. Therefore, the derivative liability in the amount of
$11,814 due to a lack of authorized shares had to be eliminated and accounted
for as equity. In addition, due to changes in market value for the common stock,
the value for the derivative liability had to be recalculated using the
Black-Scholes model as of December 1, 2006 (the date of reverse split). The
recalculated value for the derivative liability was $6,976, which became an
addition to APIC. The remaining difference of $4,838 after elimination of
derivative liability was recognized as a gain on derivative. The factors used
for the Black-Scholes model were a market price of $0.70 per share; volatility
of 178%; risk free interest rate of 4.39%; exercise price of $0.01 per share;
and an estimated life of 4.75 years.
(n) In December 2006, the Company granted an option to purchase 70,000
restricted shares of common stock, exercisable at $0.01 per share, to a
non-employee; this option will expire on December 31, 2011. This option was
granted in exchange for consulting services, valued at $48,846 using the
Black-Scholes model. The Company recorded consulting expense and additional
paid-in-capital in this amount. The factors used for Black-Scholes model were a
market price of $0.70 per share; volatility of 178%; risk free interest rate of
4.39%; exercise price of $0.01; and a estimated lift of 5.00 years.
(o) In December 2006, the Company granted options to purchase 414,900
restricted shares of common stock, exercisable at $0.01 per shares, for
consultants (one of which is James Gibson, the Company's vice president business
development); these options will expire on December 31, 2011. These options were
valued at $215,748 using the Black-Scholes model. The Company recorded
consulting expense and additional paid-in-capital in this amount. The factors
used for Black-Scholes model were a market price of $0.52 per share; volatility
of 178%; risk free interest rate of 4.39%; exercise price of $0.01; and a
estimated life of 5.00 years.
(p) In December 2006, the Company granted options to purchase 179,300
restricted shares of common stock, exercisable at $0.01 per share, to various
employees (one of which is Ross Nordin, the Company's chief financial officer);
these options will expire on December 31, 2011. These options were valued at
$93,236 using Black-Scholes model. The company recorded consulting expense and
additional paid-in-capital in this amount. The factors used for Black-Scholes
model were a market price of $0.52 per share; volatility of 178%; risk free
interest rate of 4.39%; exercise price of $0.01; and an estimated life of 5.00
years.
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A summary of the status of, and changes in, the Company's stock warrant and
option grants of and for the three months ended March 31, 2007 is presented
below for all warrants and options granted to employees and non-employees:
March 31, 2007
--------------------------------------------------
Common Stock Common Stock Weighted Average
Warrants Options Exercise Price
-------------- -------------- ----------------
Outstanding at Beginning of Year 367,308 1,304,851 $ 0.68
Granted 96,154 -- --
Forfeited -- -- --
------------- ------------- ---------------
Outstanding at End of Period 463,462 1,304,851 $ 0.68
============= ============= ===============
Exercisable at End of Period 367,308 1,127,976
============= =============
NOTE 14-Subsequent Developments
On March 31, 2008, the Company's Board of Directors approved the Company's
execution and delivery of an agreement to sell substantially all the assets of
Vocalenvision to Tourizoom, Inc., a Nevada corporation (the "Buyer" or
"Tourizoom"). After the closing of the asset sale, the Company will deposit the
sale proceeds and other assets in a partial liquidating trust created in
connection with the sale. Upon the closing of the asset sale, the Company will
no longer be engaged in any active business. The Company sold the business and
assets of Vocalenvision to its original shareholders, to the extent that they
have remained shareholders of this Company, in exchange for (i) their shares of
the Company, (ii) a percentage of all equity financings received by the Buyer,
and (iii) a ten (10) year royalty of seven percent (7%). As consideration for
the business and assets, Tourizoom will pay (i) $200,000 from a proposed Rule
504 offering and twenty (20%) of all other future equity financings received by
Tourizoom during the next ten (10) years (until the ceiling is met in terms of
the payments made which is not calculable at this time), and (ii) a ten (10)
year royalty of seven percent (7%) calculated as 7% of Tourizoom's consolidated
gross revenues including the gross revenues of the French subsidiary and all
future subsidiaries, joint ventures, licensing agreements, and other indirect
revenue sources. The Company also quitclaimed all of its right, title and
interest in and to those assets in exchange for delivery to it of the shares of
the Company's Common Stock owned by the original shareholders of Vocalenvision
(then named TelePlus), to the extent that they still own such shares and to the
extent that they contribute such shares to Tourizoom in exchange for shares of
Tourizoom.
In order to provide that the purchase price, as received from time to time, will
be applied, first, to the creditors of Vocalenvision and the Company, and
secondarily, to the minority shareholders of this Company, the Board of
Directors approved the establishment of a Partial Liquidating Trust. The
beneficiaries of the Partial Liquidating Trust will be, in the order in which
distributions will be made, the creditors of Vocalenvision and Continan, and
then the minority shareholders of the Company. The term "minority shareholders"
is intended to exclude certain shareholders who have loaned funds to the Company
and who will likely have a continuing interest in this Company. The term is
intended to include all shareholders who purchased shares of the Company
following the acquisition of TelePlus and who therefore presumably have a
continuing interest in the technology. The trustee of the Partial Liquidating
Trust is MBDL LLC, a Florida limited liability company with principal offices
located at 20869 Pinar Trail, Boca Raton, Florida 33433.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
NOTE CONCERNING RECENT DEVELOPMENTS: The Company's financial statements as at
March 31, 2008 and the description and comparison of the Company's business for
the periods March 31, 2008 and March 31, 2007 set forth below under Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" are for historical purposes only. Effective March 31, 2008 the
Company was no longer engaged in any active business, either directly, or
through its wholly-owned subsidiary, Vocalenvision, Inc. ("Vocalenvision"). On
March 31, 2008, the Company's Board of Directors approved the Company's
execution and delivery of an agreement to sell substantially all the assets of
Vocalenvision to Tourizoom, Inc., a Nevada corporation (the "Buyer" or
"Tourizoom"). See the Company's Report on Form 8-K filed with the Securities and
Exchange Commission ("SEC") on April 4, 2008 and the exhibits thereto, and the
Company's Report on Form 10-KSB filed with the SEC on April 15, 2008 and the
exhibits thereto.
Currently, the Company is not engaged in any active business. Instead, the
Company will pursue other business activities with a company not yet selected in
an industry or business area not yet identified by the Company. There can be no
assurance that the Company will be successful in this effort. Furthermore, under
SEC Rule 12b-2 under the Securities Act of 1933, as amended (the "Securities
Act"), the Company will be deemed a "shell company," because it has no or
nominal assets (other than cash) and no or nominal operations. Under recent SEC
releases and rule amendments, any new transaction will be subject to more
stringent reporting and compliance conditions for shell companies.
Cuurently, the Company has no full-time employees and owns no real estate and
virtually no personal property. The Company will pursue a business combination,
but has made no efforts to identify a possible business combination. As a
result, the Company has not conducted negotiations or entered into a letter of
intent concerning any target business. The business purpose of the Company will
be to seek the acquisition of or merger with an existing company. There can be
no assurance the Company will succeed in this purpose. See "Risk Factors" in the
Company's Form 10-KSB filed with the SEC on April 15, 2008.
The following management's discussion and analysis of financial condition and
results of operations is based upon, and should be read in conjunction with, our
unaudited financial statements and related notes included elsewhere in this Form
10-Q, which have been prepared in accordance with accounting principles
generally accepted in the United States.
COMPANY BUSINESS.
NOTE: THE DESCRIPTION OF THE COMPANY'S BUSINESS SET FORTH IMMEDIATELY BELOW
BECAME EFFECTIVE MARCH 31, 2008, WHEN THE COMPANY COMPLETED THE SALE OF THE
ASSETS OF ITS WHOLLY-OWNED SUBSIDIARY, VOCALENVISION, INC. A DESCRIPTION OF THE
COMPANY'S BUSINESS THROUGH THE DATE OF SALE IS PROVIDED BELOW UNDER THE HEADING
"OVERVIEW" FOR HISTORICAL PURPOSES ONLY AS PART OF THE MANAGEMENT DISCUSSION AND
ANALYSIS. THE DESCRIPTION NO LONGER APPLIES AFTER MARCH 31, 2008 WHEN THE SALE
OF ASSETS TRANSACTION CLOSED.
COMPANY BUSINESS AFTER THE CLOSING. After the Closing of the sale of
Vocalenvision's assets, the Company will have no full-time employees and will
own no real estate and virtually no personal property. The Company will pursue a
business combination, but has made no efforts to identify a possible business
combination. As a result, the Company has not conducted negotiations or entered
into a letter of intent concerning any target business. The business purpose of
the Company will be to seek the acquisition of or merger with an existing
company.
POTENTIAL TARGET COMPANIES. A business entity, if any, which may be interested
in a business combination with the Company may include the following:
o a company for which a primary purpose of becoming public is
the use of its securities for the acquisition of assets or
businesses;
o a company which is unable to find an underwriter of its
securities or is unable to find an underwriter of securities
on terms acceptable to it; or a company which wishes to become
public with less dilution of its common stock than would occur
upon an underwriting;
o a company which believes that it will be able to obtain
investment capital on more favorable terms after it has become
public;
o a foreign company which may wish an initial entry into the
United States securities market;
o a special situation company, such as a company seeking a
public market to satisfy redemption requirements under a
qualified Employee Stock Option Plan; and
o a company seeking one or more of the other perceived benefits
of becoming a public company.
The analysis of new business opportunities will be undertaken by or
under the supervision of the Company's officers and directors. The Company has
unrestricted flexibility in seeking, analyzing and participating in potential
business opportunities. In its efforts to analyze potential acquisition targets,
the Company will consider the following kinds of factors:
o Potential for growth, indicated by new technology, anticipated
market expansion or new products;
o Competitive position as compared to other firms of similar
size and experience within the industry segment as well as
within the industry as a whole;
o Strength and diersity of management, either in place or
scheduled for recruitment;
o Capital requirements and anticipated availability of required
funds, to be provided by the Company or from operations,
through the sale of additional securities, through joint
ventures or similar arrangements or from other sources;
o The cost of participation by the Company as compared to the
perceived tangible and intangible values and potentials;
o The extent to which the business opportunity can be advanced;
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o The accessibility of required management expertise, personnel,
raw materials, services, professional assistance and other
required items; and
o Other relevant factors.
In applying the foregoing criteria, no one of which will be
controlling, management will attempt to analyze all factors and circumstances
and make a determination based upon reasonable investigative measures and
available data. Potentially available business opportunities may occur in many
different industries, and at various stages of development, all of which will
make the task of comparative investigation and analysis of such business
opportunities extremely difficult and complex. Due to the Company's limited
capital available for investigation, the Company may not discover or adequately
evaluate adverse facts about the opportunity to be acquired.
No assurances can be given that the Company will be able to enter into
a business combination, as to the terms of a business combination, or as to the
nature of the target company.
FORM OF ACQUISITION. The manner in which the Company participates in an
opportunity will depend upon the nature of the opportunity, the respective needs
and desires of the Company and the promoters of the opportunity, and the
relative negotiating strength of the Company and such promoters.
It is likely that the Company will acquire its participation in a
business opportunity through the issuance of common stock or other securities of
the Company. Although the terms of any such transaction cannot be predicted, it
should be noted that in certain circumstances the criteria for determining
whether or not an acquisition is a so-called "tax free" reorganization under
Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code"),
depends upon whether the owners of the acquired business own 80% or more of the
voting stock of the surviving entity. If a transaction were structured to take
advantage of these provisions rather than other "tax free" provisions provided
under the Code, all prior stockholders would in such circumstances retain 20% or
less of the total issued and outstanding shares. Under other circumstances,
depending upon the relative negotiating strength of the parties, prior
stockholders may retain substantially less than 20% of the total issued and
outstanding shares of the surviving entity. This could result in substantial
additional dilution to the equity of those who were stockholders of the Company
prior to such reorganization.
The present stockholders of the Company will likely not have control of
a majority of the voting shares of the Company following a reorganization
transaction. As part of such a transaction, all or a majority of the Company's
directors may resign and new directors may be appointed without any vote by
stockholders.
In the case of an acquisition, the transaction may be accomplished upon
the sole determination of management without any vote or approval by
stockholders. In the case of a statutory merger or consolidation directly
involving the Company, it will likely be necessary to call a stockholders'
meeting and obtain the approval of the holders of a majority of the outstanding
shares. The necessity to obtain such stockholder approval may result in delay
and additional expense in the consummation of any proposed transaction and will
also give rise to certain appraisal rights to dissenting stockholders. Most
likely, management will seek to structure any such transaction so as not to
require stockholder approval.
It is anticipated that the investigation of specific business
opportunities and the negotiation, drafting and execution of relevant
agreements, disclosure documents and other instruments will require substantial
management time and attention and substantial cost for accountants, attorneys
and others. If a decision is made not to participate in a specific business
opportunity, the costs theretofore incurred in the related investigation would
not be recoverable. Furthermore, even if an agreement is reached for the
participation in a specific business opportunity, the failure to consummate that
transaction may result in the loss to the Registrant of the related costs
incurred.
We presently have no employees apart from our management. Our sole
officer and our sole director are each engaged in outside business activities
and anticipate they will devote to our business very limited time until the
acquisition of a successful business opportunity has been identified. We expect
no significant changes in the number of our employees other than such changes,
if any, incident to a business combination.
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As a result of the sale of assets transaction described above in Item 1 "Note
Concerning Recent Developments", the Company will not be currently engaged in
any business activities that provide cash flow. The Company has resumed its
status as a "shell" corporation, and will attempt to investigate acquiring a
target company or business seeking the perceived advantages of being a publicly
held corporation. Our principal business objective for the next 12 months and
beyond such time will be to achieve long-term growth potential through a
combination with a business rather than immediate, short-term earnings. The
Company will not restrict our potential candidate target companies to any
specific business, industry or geographical location and, thus, may acquire any
type of business.
The costs of investigating and analyzing business combinations for the
next 12 months and beyond such time will be paid with money in our treasury, if
any, or with additional money contributed by one or more of our stockholders, or
another source.
During the next 12 months we anticipate incurring costs related to:
(i) filing of Exchange Act reports, and
(ii) costs relating to consummating an acquisition.
We believe we will be able to meet these costs through use of funds to
be loaned to or invested in us by our stockholders, management or other
investors.
The Company may consider a business which has recently commenced
operations, is a developing company in need of additional funds for expansion
into new products or markets, is seeking to develop a new product or service, or
is an established business which may be experiencing financial or operating
difficulties and is in need of additional capital. In the alternative, a
business combination may involve the acquisition of, or merger with, a company
which does not need substantial additional capital, but which desires to
establish a public trading market for its shares, while avoiding, among other
things, the time delays, significant expense, and loss of voting control which
may occur in a public offering.
Our sole officer and our sole director have not had any preliminary
contact or discussions with any representative of any other entity regarding a
business combination with us. Any target business that is selected may be a
financially unstable company or an entity in its early stages of development or
growth, including entities without established records of sales or earnings. In
that event, we will be subject to numerous risks inherent in the business and
operations of financially unstable and early stage or potential emerging growth
companies. In addition, we may effect a business combination with an entity in
an industry characterized by a high level of risk, and, although our management
will endeavor to evaluate the risks inherent in a particular target business,
there can be no assurance that we will properly ascertain or assess all
significant risks.
Our management anticipates that it will likely be able to effect only
one business combination, due primarily to our limited financing, and the
dilution of interest for present and prospective stockholders, which is likely
to occur as a result of our management's plan to offer a controlling interest to
a target business in order to achieve a tax-free reorganization. This lack of
diversification should be considered a substantial risk in investing in us,
because it will not permit us to offset potential losses from one venture
against gains from another.
The Company anticipates that the selection of a business combination
will be complex and extremely risky. Because of general economic conditions,
rapid technological advances being made in some industries and shortages of
available capital, our management believes that there are numerous firms seeking
even the limited additional capital that we may have and/or the perceived
benefits of becoming a publicly traded corporation. Such perceived benefits of
becoming a publicly traded corporation include, among other things, facilitating
or improving the terms on which additional equity financing may be obtained,
providing liquidity for the principals of and investors in a business, creating
a means for providing incentive stock options or similar benefits to key
employees, and offering greater flexibility in structuring acquisitions, joint
ventures and the like through the issuance of stock. Potentially available
business combinations may occur in many different industries and at various
stages of development, all of which will make the task of comparative
investigation and analysis of such business opportunities extremely difficult
and complex.
NOTE: THE DESCRIPTION OF THE COMPANY'S BUSINESS SET FORTH BELOW UNDER THE
HEADING "OVERVIEW" IS FOR HISTORICAL PURPOSES ONLY. EFFECTIVE MARCH 31, 2008 THE
COMPANY IS NO LONGER ENGAGED IN ANY ACTIVE BUSINESS, EITHER DIRECTLY, OR THROUGH
ITS WHOLLY-OWNED SUBSIDIARY, VOCALENVISION, AS A RESULT OF THE COMPANY'S SALE OF
THE ASSETS OF VOVALENVISION, A TRANSACTION THAT CLOSED ON MARCH 31, 2008.
THEREFORE, ALTHOUGH THERE ARE NUMEROUS REFERENCES IN THE DESCRIPTION BELOW TO
THE COMPANY'S PERSONAL MOBILE PHONE BUSINESS, THESE REFERENCES NO LONGER APPLY
TO THE COMPANY AFTER MARCH 31, 2008.
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OVERVIEW.
The Company, through its subsidiary Vocalenvision, is a provider of
multiple assistance services to international travelers in the traveler language
through their personal mobile phone and is located in Marina del Rey,
California. The Company has built platform, server and call centers to provide a
wide array of services to mobile phone users. The Company has strategic
relationships with several service networks in the United States and Europe.
Until March 31, 2008, the Company was the parent company of
Vocalenvision, a pioneer in the field of wireless communications. The Company's
main role is that of a research and development incubator that endeavors to
create new opportunities for its subsidiary for the continually evolving
convergence of international GSM wireless, that create the vehicles that
consistently deliver its innovative "native-language" contents and services to
the end-user customer.
Through its Vocalenvision subsidiary, the Company offers proprietary
products and services that help customers communicate effectively while
travelling abroad. The Company's wireless service has market potential, boasting
amongst its features a "teleconcierge," who is a live operator trained to
provide a variety of business-related and travel-related services directly to a
customer's mobile phone.
Vocalenvision has to date expended much of its efforts and funds on
development of proprietary software, Beta tests in Japan and United States, as
well as its WikiTouri search engine to deliver multilingual travel assistance
services to the traveler and the initiation of its sales and marketing efforts.
It is uncertain about the market acceptance of its products and services that
include auxiliary services offered through its software-based platform and
delivered to the customer's cellular phone. The Company has contracted with
large European international wireless provider to deliver its Multilingual
Travel Assistance services as value added content to its customers while they
roam in foreign countries.
The Company is focused on the continued development and implementation
of a proprietary layered communications architecture that operates in unison
with conventional wireless networks in order to deliver "native-language"
services to its end customers.
The Company operates many of its own "in-network" platforms as an
independent unit while using existing operator networks from the leading
international cellular service providers to transport the customer's calls as
well as deliver users "native-language" content. The Company supplies enhanced
services and on-demand information to its customers via wireless.
Vocalenvision, Inc. is highly dependent upon the efforts and abilities
of its management. The loss of the services of any of them could have a
substantial adverse effect on it. Vocalenvision, Inc. has not purchased
"Key-Man" insurance policies on any of them.
To date, Vocalenvision, Inc. has not yet had substantial sales. It
expects initial growth in its sales to come primarily from the private labeling
of its Multilingual Travel Assistance services product which includes traveler's
assistance, teleconcierge products, native in-language interpretation and
emergency coverage through international wireless providers' existing customer
channels. These incumbent wireless carriers view the Company's services as a
value added to their own existing wireless content and services, while
maximizing the security and convenience offer to their wireless users while
traveling abroad.
Although sales were anticipated to start in November 2007 in France,
Italy, Spain and Great Britain through a major provider of wireless services
that is making the Vocalenvision services available to all of its wireless
users, those sales have not yet begun. It is anticipated that the services will
provide income to the Company but not sufficient to cover all operational
expenses during the following 12 months.
The Company should be able to capture a large portion of the travel
market by providing its core services to a highly untapped market. By forming
synergistic relationships with various service providers and content providers,
the Company will also be able to continue to grow revenues significantly by
offering the travelers a wide array of services and content in their native
languages.
An additional application of the Vocalenvision service offering
includes a complete "Travel Kit" product, which includes a wireless telephone
and SIM card. The Travel Kit will be marketed to travelers prior to trip
departure and will work in selected international countries. In this model, the
Company is required to supply customers with temporary mobile telephones as well
as proprietary SIM cards. Vocalenvision must purchase mobile phones and SIM
cards in advance and will require payment from customer prior to shipment. Thus,
Vocalenvision's development of the Travel Kit product is dependent on the number
of telephones and SIM cards which it can freely distribute and that, in turn, is
dependent upon Vocalenvision's available capital for the purchase of the
hardware and cards.
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However, a third application of Vocalenvison's existing technology
envisions the distribution only of its proprietary SIM Cards. The Vocalyz(TM)
SIM cards work on many major wireless networks in the USA and Europe. The SIM
card technology will transport the international travelers calls as well as
deliver users "native-language" translation assistance and teleconcierge. For
the sales of this service, Vocalenvision will be dependent upon travel agents,
brokers, retail stores and web-based e-commerce.
Because of the Company's proprietary platform technology, unique
service offering, development saving cost benefits, innovative content and sales
management experience, the Company believes its current business focus towards
this highly specific travel related niche allows it to position itself as a
sustainable business that will result in the Company realizing positive cash
flow by the fourth quarter of 2008.
The Company has historically experienced operating losses and negative
cash flow. The Company expects that these operating losses and negative cash
flows may continue through additional periods. Until recently, the Company has
had a limited record of revenue-producing operations but with the modified and
highly realistic product deployment strategy, the Company now believes it has a
predictable, scalable revenue and business model that will be able to achieve
its business plans.
(A) REVENUES.
Revenues were $-0- for the three months ended March 31, 2008 compared
to $1,242 for the three months ended March 31, 2007, a decrease of $1,242 or
approximately 1000%. The decline in revenues was largely due to the fact that we
are still a development stage company, and the Company's focus has been on
raising capital that is necessary to fund its operations. Revenues for the
period from September 2, 2002 (inception) through March 31, 2007 were $154,239.
(B) GENERAL AND ADMINISTRATIVE EXPENSES.
General and administrative expenses were $121,028 for the three months
ended March 31, 2008 compared to $262,208 for the three months ended March 31,
2007, a decrease of $141,180 or approximately 54%. The decrease in expenses was
largely due to decreased consulting expenses and elimination of certain product
testing.
(C) OTHER INCOME (EXPENSE).
Total other expenses were $10,960 for the three months ended March 31,
2008 compared to $15,868 for the three months ended March 31, 2007, a decrease
of $4,908 or approximately 40%.
(D) NET LOSS.
The net loss was $147,001 for the three months ended March 31, 2008
compared to $307,110 for the three months ended March 31, 2007, a decrease of
$160,109 or approximately 52%. Overall expenses declined because the Company did
not pursue its test marketing activities and terminated certain consulting
relationships.
OPERATING ACTIVITIES.
Net cash used in operating activities was $36,638 for the three months
ended March 31, 2008 compared to $338,115 for the three months ended March 31,
2007, a decrease of $301,477 or approximately 89%. The primary reason the
Company used less cash was the lack of funds due to inability to raise capital
from private investors.
The principal components of the net cash used in operations for the
three months ended March 31, 2007 was a net loss of $307,910, offset by the
stock compensat ion for consulting services and options granted to management
and employees in the amount of $108,650, a decrease in accounts payable of
$82,182, and a decrease in accrued liabilities of $79,247. Net cash used in
operating activities was $3,133,073 for the period from September 2, 2002
(inception) through March 31, 2008.
INVESTING ACTIVITIES.
Net cash used in investing activities was $-0- for the three months
ended March 31, 2008 compared to $2,759 for the three months ended March 31,
2007. Net cash used in investing activities was $554,479 for the period from
September 2, 2002 (inception) through March 31, 2008.
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LIQUIDITY AND CAPITAL RESOURCES.
As of March 31, 2008, the Company had total current assets of $2,361
and total current liabilities of $2,341,964, resulting in a working capital
deficit of $2,339,603. At March 31, 2008, the Company's assets consisted solely
of cash. As a development stage company that began operations in 2002, the
Company has incurred $8,193,148 in cumulative total losses from inception
through March 31, 2008.
The above factors raise substantial doubt as to the Company's ability
to continue as a going concern. The Company's independent registered public
accounting firm's audit report included in the Company's Form 10-KSB included
explanatory paragraphs regarding the Company's ability to continue as a going
concern.
The accompanying consolidated financial statements have been prepared
assuming that the Company continues as a going concern and contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The ability of the Company to continue as a going concern on a
long-term basis will be dependent upon its ability to generate sufficient cash
flows from operations to meet its obligations on a timely basis, to obtain
additional financing and to ultimately attain profitability.
The Company's current cash flow from operations will not be sufficient
to maintain its capital requirements for the year. Therefore, the Company's
continued operations, as well as the implementation of its business plan, will
depend upon its ability to raise additional funds through bank borrowings and
equity or debt financing in a currently indeterminate amount during the year
ending December 31, 2008.
By contrast with the first quarter of 2007, the Company has not been
measurably successful in obtaining the required cash resources by issuing stock
and notes payable, including related party notes payable, to service the
Company's operations through the first quarter of 2008. Net cash provided by
financing activities was $38,999 for the three months ended March 31, 2008
compared to $332,164 for the three months ended March 31, 2007, a decrease of
$293,165 or approximately 88%. This decrease was primarily the result of the
precariousness of the Company's financial position coupled with the Company's
inability to implement the next stages in its business plan for the continued
refinement and testing of the product, the expansion of the licensee base and
the ability to purchase inventory for sale or lease. Net cash used in financing
activities was $3,689,913 for the period from September 2, 2002 (inception)
through March 31, 2008.
Whereas the Company has been successful in the past in raising capital,
no assurance can be given that sources of financing will continue to be
available and/or that demand for its equity/debt instruments will be sufficient
to meet its capital needs, or that financing will be available on terms
favorable to the Company. The consolidated financial statements do not include
any adjustments relating to the recoverability and classification of assets and
liabilities that might be necessary should the Company be unable to continue as
a going concern.
If funding is insufficient at any time in the future, the Company may
not be able to take advantage of business opportunities or respond to
competitive pressures or may be required to reduce the scope of the Company's
planned product development and marketing efforts, any of which could have a
negative impact on business and operating results. In addition, insufficient
funding may have a material adverse effect on the Company's financial condition,
which could require the Company to:
o curtail operations significantly;
o sell significant assets;
o seek arrangements with strategic partners or other parties that may
require the Company to relinquish significant rights to products,
technologies or markets; or
o explore other strategic alternatives including a merger or sale of the
Company.
To the extent that the Company raises additional capital through the sale
of equity or convertible debt securities, dilution of the interests of existing
stockholders may occur. If additional funds are raised through the issuance of
debt securities, these securities may have rights, preferences and privileges
senior to holders of common stock and the terms of such debt could impose
restrictions on the Company's operations. Regardless of whether the Company's
assets prove to be inadequate to meet its operational needs, the Company may
seek to compensate providers of services by issuance of stock in lieu of cash,
which may also result in dilution to existing shareholders.
CONTRACTUAL OBLIGATIONS.
(A) CAPITAL LEASE.
The Company leases certain computers under agreements that are classified
as capital leases. The cost of equipment under capital leases is included in the
balance sheets as furniture and equipment and amounted to $17,911 at March 31,
2008. Accumulated amortization of the leased equipment at March 31, 2008 was
$18,579. Amortization of assets under capital leases is included in depreciation
expense.
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(B) OPERATING LEASES.
The principal executive offices for the Company currently consist of
approximately 1,048 square feet of office space, which are located at 4684
Admiralty Way-Suite 500, Marina del Rey, California 90292. The Company leases
this property on a month-to-month basis at the current monthly rent of $3,245 as
of March 31, 2007.
(C) INDEMNITIES AND GUARANTEES.
During the normal course of business, the Company has made certain
indemnities and guarantees under which it may be required to make payments in
relation to certain transactions. These indemnities include certain agreements
with the Company's officers under which the Company may be required to indemnify
such persons for liabilities arising out of their employment relationship, lease
agreements. The duration of these indemnities and guarantees varies, and in
certain cases, is indefinite.
OFF BALANCE SHEET ARRANGEMENTS.
Other than operating leases, the Company does not engage in any off
balance sheet arrangements that are reasonably likely to have a current or
future effect on its financial condition, revenues, results of operations,
liquidity or capital expenditures.
INFLATION.
The impact of inflation on the costs of the Company and the ability to
pass on cost increases to its customers over time is dependent upon market
conditions. The Company is not aware of any inflationary pressures that have had
any significant impact on the Company's operations over the past year and the
Company does not anticipate that inflationary factors will have a significant
impact on future operations.
CRITICAL ACCOUNTING POLICIES.
The SEC has issued Financial Reporting Release No. 60, "Cautionary Advice
Regarding Disclosure About Critical Accounting Policies" ("FRR 60"), suggesting
companies provide additional disclosure and commentary on their most critical
accounting policies. In FRR 60, the SEC has defined the most critical accounting
policies as the ones that are most important to the portrayal of a company's
financial condition and operating results and require management to make its
most difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based on this definition,
the Company's most critical accounting policies include: (a) valuation of
stock-based compensation arrangements; (b) revenue recognition; and (c)
derivative liabilities. The methods, estimates and judgments the Company uses in
applying these most critical accounting policies have a significant impact on
the results the Company reports in its consolidated financial statements.
(A) VALUATION OF STOCK-BASED COMPENSATION ARRANGEMENTS.
The Company has issued, and intends to continue to issue, shares of common
stock and options to purchase shares of its common stock to various individuals
and entities for management, legal, consulting and marketing services. The
Company adopted SFAS No. 123 (Revised 2004), "Share Based Payment" ("SFAS No.
123R"). SFAS No. 123R requires companies to measure and recognize the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value. SFAS No. 123R eliminates the ability to account
for the award of these instruments under the intrinsic value method prescribed
by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and allowed under the original provisions of SFAS No. 123.
These transactions are reflected as a component of selling, general and
administrative expenses in the accompanying statement of operations.
(B) REVENUE RECOGNITION.
The Company recognizes revenues when it receives confirmation of the
order and the customer credit card has been debited and confirmed that customers
have used cellular phone minutes.
(C) DERIVATIVE LIABILITIES.
During the year ended December 31, 2006, the Company issued warrants
and options to numerous consultants and investors for services and to raise
capital. During the period up until the recapitalization performed on December
1, 2006 (Note 1), the Company did not have sufficient authorized shares in order
to issue these options should they be exercised. Because of the lack of
authorized shares, the Company therefore needed to follow derivative accounting
rules for its accounting of options and warrants.
The Company evaluates the conversion feature of options and warrant
indexed to its common stock to properly classify such instruments within equity
or as liabilities in its financial statements, pursuant to the requirements of
the EITF No. 00-19, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock," EITF No. 01-06, "The Meaning
of Indexed to a Company's Own Stock," and SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended.
Pursuant to EITF 00-19, the Company was to recognize a liability for
derivative instruments on the balance sheet to reflect the insufficient amounts
of shares authorized, which would have otherwise been classified into equity. An
evaluation of specifically identified conditions was then made to determine
whether the fair value of warrants or options issued was required to be
classified as a derivative liability. The fair value of warrants and options
classified as derivative liabilities was adjusted for changes in fair value at
each reporting period, and the corresponding non-cash gain or loss was recorded
in the corresponding period earnings.
In December 2006, the Company completed a reincorporation by merger
with Texxon-Nevada, which, therefore, allowed the Company to increase its
authorized preferred and common shares from 5,000,000 to 10,000,000 shares and
from 45,000,000 to 100,000,000 shares, respectively.
At the date of recapitalization, the Company recalculated the value of
its options and warrants at the current fair value, and recorded an increase to
equity and a decrease to derivative liabilities for the fair value of the
options and warrants. The difference between the liability and the recalculated
fair value was recorded as a gain or loss.
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ITEM 4. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
The Company maintains disclosure controls and procedures (as defined in
Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as
amended) that are designed to ensure that information required to be disclosed
in the Company's periodic reports filed under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to management, including the Company's principal executive officer and principal
financial officer, to allow timely decisions regarding required disclosures.
In the Company's Form 10-QSB for the period ended on March 31, 2007,
the Company disclosed certain deficiencies that existed in the design or
operation of the Company's internal control over financial reporting. However,
the Company incorrectly disclosed that it has such controls. In reality, the
Company does not currently have such controls. Under SEC Rules that affect the
Company, the Company is required to provide management's report on internal
control over financial reporting for its first fiscal year ending on or after
December 15, 2007. The Company has prepared management's report as required and
delivered a copy to its auditors. The Company is not required to file the
auditor's attestation report on internal control over financial reporting until
it files an annual report for its first fiscal year ending on or after December
15, 2008.
As of the end of the period covered by this report, management carried
out an evaluation, under the supervision and with the participation of the
Company's principal executive officer and principal financial officer, of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and
Rule 15d-15(e) of the Exchange Act). Based upon the evaluation, the Company's
principal executive officer and principal financial officer concluded that its
disclosure controls and procedures were effective at a reasonable assurance
level to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. In addition, the Company's principal executive officer and principal
financial officer concluded that its disclosure controls and procedures were
effective at a reasonable assurance level to ensure that information required to
be disclosed by the Company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the Company's management,
including its principal executive officer and principal financial officer, to
allow timely decisions regarding required disclosure.
Because of the inherent limitations in all internal control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, will be or have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people and/or by management override of
controls. The design of any system of controls 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. Over time, controls may become inadequate because
of changes in conditions, and/or the degree of compliance with the policies and
procedures may deteriorate. Because of the inherent limitations in a
cost-effective internal control system, misstatements due to error or fraud may
occur and not be detected.
CHANGES IN DISCLOSURE CONTROLS AND PROCEDURES.
There were no changes in the Company's disclosure controls and procedures,
or in factors that could significantly affect those controls and procedures,
since its most recent evaluation.
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ITEM 4T. CONTROLS AND PROCEDURES.
The management of Continan Communications, Inc. is responsible for
establishing and maintaining adequate internal control over financial reporting.
The Company's internal control over financial reporting is designed to provide
reasonable assurance as to the reliability of the Company's financial reporting
and the preparation of financial statements in accordance with generally
accepted accounting principles.
All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.
Management conducted an evaluation of the effectiveness of the
Company's internal control over financial reporting as of December 31, 2007. In
making this assessment, it used the criteria set forth in INTERNAL
CONTROL--INTEGRATED FRAMEWORK issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We identified the following material weakness in our internal control
over financial reporting- we did not have adequately segregation of duties, in
that we only had one person performing all accounting-related on-site duties.
Because of the "barebones" level of relevant personnel, however, certain
deficiencies which are cured by separation of duties cannot be cured, but only a
monitored as a weakness.
Our independent registered public accounting firm, Sutton Robinson
Freeman & Co., P.C., has reviewed our management's assessment of our internal
controls over the financial reporting and will issue their report in 2008 per
SEC rules for non-accelerated filers.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
There were no unregistered sales of the Company's equity securities
during the three months ended on March 31, 2008 that have not previously been
reported. There were no purchases of the Company's common stock by the Company's
affiliates or by it during the three months ended March 31, 2008.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
As of March 31, 2008, the Company was in default in the payment of
$1,303,130 in principal amount of various notes payable (related and non-related
parties, as discussed in Notes 9 and 11 to the financial statements, but
excluding the note payable to First Bridge Capital) and in the payment of
$184,337 of accrued interest. The Company is in the process of negotiating
settlements or payments. All notes are included in current liabilities. The
Company is negotiating with the lenders to secure a conversion of the debt to a
proposed series of convertible preferred stock; pending the resolution of this
matter, the lenders are exercising forbearance.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
Exhibits included or incorporated by reference in this document are set
forth in the Exhibit Index.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CONTINAN COMMUNICATIONS, INC.
Dated: May 20, 2008
By: /s/ Geoffrey A. Fox
------------------------------------
Geoffrey A. Fox,
Chief Executive Officer
and Chief Financial Officer
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EXHIBIT INDEX
NUMBER DESCRIPTION
3.1 Articles of Incorporation, dated March 13, 2006 (incorporated by
reference to Exhibit 3.1 of the Form 10-KSB filed on May 9, 2007).
3.2 Articles of Merger, dated November 22, 2006 (incorporated by
reference to Exhibit 99.1 of the Form 8-K filed on December 7,
2006).
3.3 By-Laws, dated October 6, 1998 (incorporated by reference to
Exhibit 3.2 of the Form 10-SB filed on February 28, 2002).
4.1 1998 Incentive Stock Option Plan, dated November 1, 1998
(incorporated by reference to Exhibit 10.1 of the Form 10-SB filed
on February 28, 2002)
4.2 2002 Non-Qualified Stock Option Plan, dated October 1, 2002
(incorporated by reference to Exhibit 4 of the Form S-8 filed on
January 27, 2003)
4.3 Share Exchange Agreement between the Texxon, Inc., TelePlus, Inc.,
and the Shareholders of TelePlus, Inc., dated March 2, 2006
(incorporated by reference to Exhibit 2 of the Form 10-QSB filed
on May 22, 2006).
4.4 Certificate of Designation of TelePlus Acquisition Series of
Preferred Stock, dated May 8, 2006 (incorporated by reference to
Exhibit 4.1 of the Form 8-K filed on June 7, 2006).
10.1 Employment Agreement between TelePlus, Inc. and Claude Buchert,
dated January 1, 2004 (incorporated by reference to Exhibit 10.1
of the Form 10-KSB filed on May 9, 2007).
10.2 Employment Agreement between TelePlus, Inc. and Helene Legendre,
dated January 1, 2004 (incorporated by reference to Exhibit 10.2
of the Form 10-KSB filed on May 9, 2007).
10.3 Addendum to Employment Agreement between TelePlus, Inc. and Claude
Buchert, dated February 1, 2004 (incorporated by reference to
Exhibit 10.3 of the Form 10-KSB filed on May 9, 2007).
10.4 Letter of Engagement between TelePlus, Inc. and Ross Nordin, dated
April 18, 2006 (incorporated by reference to Exhibit 10.4 of the
Form 10-KSB filed on May 9, 2007).
10.5 Settlement Agreement between Wall Street PR, Inc. and Texxon,
Inc., dated July 26, 2006 (incorporated by reference to Exhibit
10.5 of the Form 10-KSB filed on May 9, 2007).
10.6 Agreement for VOIP Services between TelePlus Inc. and Digitrad
France SARL, dated July 27, 2006 (incorporated by reference to
Exhibit 99 of the Form 8-K filed on August 14, 2006).
10.7 Funding Agreement between Texxon, Inc. and First Bridge Capital,
Inc., dated August 14, 2006 (incorporated by reference to Exhibit
10.7 of the Form 10-KSB filed on May 9, 2007).
10.8 Settlement Agreement between Continan Communications, Inc., First
Bridge Capital, Inc., and Wall Street PR, Inc., dated December 28,
2006 (incorporated by reference to Exhibit 10.8 of the Form 10-KSB
filed on May 9, 2007).
21 Subsidiaries of the Company (incorporated by reference to Exhibit
21 of the Form 10-KSB filed on May 9, 2007).
31.1 Rule 13a-14(a)/15d-14(a) Certification of Claude C. Buchert (filed
herewith).
31.2 Rule 13a-14(a)/15d-14(a) Certification of Ross A. Nordin (filed
herewith).
32 Section 1350 Certification of Claude C. Buchert and Ross A. Nordin
(filed herewith).
99 Provisional Patent Application, dated September 20, 2004
(incorporated by reference to Exhibit 99 of the Form 10-KSB filed
on May 9, 2007).
33