ITEM 1. BUSINESS
Overview
We were incorporated in the State of Nevada on March 2, 1999 under the name “OSK Capital II Corp.” to serve as a vehicle to effect a merger, exchange of capital stock, asset acquisition or other business combination with a domestic or foreign private business. Effective April 28, 2005, we achieved our objective with the reverse merger and reorganization with Teliphone Inc., a Canadian company. As a result, we became a telecommunications company providing broadband telephony services to residential and business customers principally in Canada. Teliphone Inc. became our wholly owned subsidiary and we became a majority owned subsidiary of Teliphone Inc.’s parent company, United American Corporation.
Effective August 1, 2006, we entered into a transaction with 3901823 Canada Inc. (“3901823”) and issued to 3901823 shares of Teliphone Inc. common stock, which was equal to a 25% ownership interest at the time, in exchange for access to 3901823’s operating company Intelco Communications Inc. (“Intelco”) global distribution channels, cost reduction through usage of Intelco’s network and data center. Subsequently on September 30, 2008, Teliphone Inc. issued additional stock to us representing the conversion into equity of cash advances made between August 1, 2006 to September 30, 2008. As a result, we increased own ownership interest in the outstanding capital stock of Teliphone Inc. from 75% to 87.1%.
On August 21, 2006, we changed our name from OSK Capital II Corp. to Teliphone Corp. to more accurately represent our business focus in telecommunications. On October 23, 2006, we were spun off from United American Corporation.
Effective February 15, 2008, we acquired certain assets and liabilities of the business operating as “Dialek Telecom” and complemented the offering of voice services over our own network with the resale of voice and data services over the networks of major providers. As a result of this transaction, we increased our customers for telecommunications services in Canada.
In June 2008, we commenced trading of our common stock on the OTC Bulletin Board and our common stock is currently quoted on the OTC Markets Group Inc.’s OTC:Pink (“OTC pink sheets”) electronic quotation system under the trading symbol TLPH.
On May 7, 2009, we entered into a customer assignment agreement with the owners of Orion Communications Inc. As a result of this transaction, we acquired an additional 580 business customers for telecommunications services in Canada.
On April 1, 2011, we merged the operations of the Company and our majority-owned subsidiary, Teliphone Inc., through an assignment of assets and liabilities. On May 31, 2011, we sold our entire equity interest in Teliphone Inc., along with some early-stage mobile call processing technology and various supplier liabilities, to YEURB Investments for $1.
Acquisition of Assets from New York Telecom Exchange, Inc.
On January 5, 2012, we announced that we had entered into an asset purchase agreement (the "Agreement") with New York Telecom Exchange Inc., a New York corporation ("NYTEX"), pursuant to which we acquired all operations, assets, liabilities and intellectual property of NYTEX in an all stock transaction. The Agreement was dated December 31, 2011, and pursuant to which we assumed all ongoing operations of NYTEX which we will run as a separate division under our wholesale department.
The Agreement contains rescission rights for NYTEX based on either abandonment or insolvency by us. Should we abandon operation of NYTEX within 24 months of the Agreement, NYTEX will have the right to reassume NYTEX operations and all intellectual property in exchange for the return of the 20 million shares we issued as consideration for the transaction. Furthermore, should we become insolvent, declare bankruptcy invoke
creditor protection actions, cease to do business or declare any situation which can be reasonably be construed as a serious risk to our viability within 24 months of execution of this Agreement, we will forfeit all rights to the NYTEX intellectual property including all software, trade names, client lists, domain names, goodwill, and any improvements and additions that may have been made after execution of this agreement and all such rights would revert back to NYTEX. At closing, we delivered to NYTEX a total of 20,000,000 shares of our common stock.
Acquisition of Assets from Navigata Communications 2009 Inc.
On December 11, 2012, Teliphone Corp. (the "Company") completed the acquisition of the core assets and network (the "Navigata Acquired Businesses") of Navigata Communications 2009 Inc. (the "Seller"). The acquisition was effected pursuant to a two-step process involving a Purchase Agreement, dated as of November 30, 2012, among 9191-4200 Quebec Inc., a corporation incorporated under the laws of the Province of Quebec, Canada ("Quebec"), the Seller and certain affiliates of Quebec (the "Asset Purchase Agreement"); and a Share Exchange Agreement, dated as of December 11, 2012, by and between the Company and Fiducie Residence JAAM, a family trust registered in the Province of Quebec, Canada ("JAAM").
On November 30, 2012, pursuant to the Asset Purchase Agreement, Quebec acquired from Seller selected assets and liabilities related to the business of providing telecommunications services, including voice, data and internet services, to service providers and end users, using its national MPLS-enabled data backbone, microwave backhaul network in British Columbia, and carrier points of interconnection in Vancouver, Toronto, Seattle, LA, and New York (the "Asset Purchase"). As consideration for the Asset Purchase, Quebec paid an aggregate consideration of CD$6,440,000, along with the assumption of certain limited current liabilities of the Seller, as follows: (i) CD$500,000 paid in cash by wire transfer at closing of the Asset Purchase; (ii) $940,000 to be paid in cash by certified check, wire transfer or other immediately available funds on December 14, 2012; and (iii) a total of CD$5,000,000 to be paid in cash in five separate, equal instalments of CD$1,000,000 each due on December 15 of each of 2013, 2014, 2015, 2016 and 2017 (the "Deferred Consideration"). Interest will accrue on the Deferred Consideration at a rate of 6.5% per annum. In addition, under a Temporary Service Agreement, an additional CD$386,629 was agreed to be added to the purchase price for employees and Cascade Directors services, bringing the total purchase price to CD$6,826,630. On December 28, 2012, JAAM assumed the $5,000,000 debt from the Company in exchange for 11,416,667 warrants for common shares of the Company. The warrants are based on a vesting schedule of 5 tranches with each tranche exercisable for 3 years of the date of vesting as follows:
Tranche
Vesting Date
Number
Purchase Price
Expiry of Warrant
of Warrant
of Warrants
per share(USD)
December 15, 2013
5,000,000
$0.20
December 15, 2016
December 15, 2014
2,500,000
$0.40
December 15, 2017
December 15, 2015
1,666,667
$0.60
December 15, 2018
December 15, 2016
1,250,000
$0.80
December 15, 2019
December 15, 2017
1,000,000
$1.00
December 15, 2020
On December 11, 2012, the Company completed the acquisition from JAMM of 100% of the outstanding stock of Quebec (the "Stock Acquisition"). The Stock Acquisition was effected pursuant to a Share Exchange Agreement in which the Company acquired all of Quebec’s outstanding shares in exchange for tendering 61,500,00 shares of the Company, valued at US$13,530,000, to JAMM. Quebec was subsequently re-named Teliphone Navigata-Westel.
Liability Assumption Agreement
On December 28, 2012 the Company entered in to an agreement with The New York Telecom Exchange Inc., a New York Company (“NYTEX”) under which NYTEX unconditionally assumed all responsibility and liability for $992,958 of liabilities relating to invoices from three suppliers that are currently shown as ”Accounts Payable” on the books of the Company. No consideration is payable by the Company in this transaction. As a result of this transaction, the Company decreased the goodwill purchased in the transaction with NYTEX one year earlier.
Acquisitions of Titan Communications Inc.& Cloud-Phone Inc.
On February 8, 2013 the Company completed the acquisition of 100% of the outstanding stock of Titan Communications Inc. The acquisition was effected through a two stage process. Firstly, pursuant to a Share Purchase Agreement (the “SPA”) effective February 8, 2013, Fiducie Familiale M.A.A. ("MAA"), a related party to the Company, acquired all of Titans outstanding shares in exchange for a total consideration of $1,696,600. The consideration is payable in accordance with the following schedule: i) $349,300 paid at closing; ii) $34,930 paid 30 days from closing; iii) $34,930 paid 60 days from closing; and iv) the balance ($1,277,440) to be paid in 36 equal monthly payments ($35,484 each) beginning 90 days from closing. Additional consideration equal to, 10% of the aggregate revenue generated by Titan above $1,663,267 in the first 12 months beginning 30 days from closing and 10% of the aggregate revenue generated by Cloud-Phone Inc above $540,000 in the first 12 months beginning 30 days from closing, may also be payable if the revenue thresholds are surpassed. Secondly, also on February 8, 2013 the Company acquired from MAA all share capital, assets and liabilities of Titan in return for assuming all liabilities due to the former shareholders of Titan under the SPA plus the payment of $1.
On February 8, 2013 the Company completed the acquisition of 100% of the outstanding stock of Cloud-Phone Inc. The acquisition was effected pursuant through a two stage process. Firstly, pursuant to a Share Purchase Agreement (the “SPA”) effective February 8, 2013, Fiducie Familiale M.A.A. ("MAA"), a related party to the Companyacquired all of Cloud-Phones outstanding shares in exchange for the assumption of certain liabilities of Cloud Phone totaling $99,800. The consideration is payable in accordance with the following schedule: i) $19,960 payable at closing; ii) the balance ($79,840) to be paid in 20 equal monthly payments ($3,992 each) beginning 30 days after closing. Secondly, also on February 8, 2013 the Company acquired from MAA all share capital, assets and liabilities of Cloud-Phone in return for assuming all liabilities due under the SPA plus the payment of $1.
Principal Products and Services and Markets
We are a telecommunications company engaged in the business of providing broadband telephone services utilizing our innovative Voice over Internet Protocol, (“VoIP”) technology platform as well as re-selling traditional voice and data services of Tier-1 telecommunications providers to our customers. We offer communications services to our customers with many features at favourable prices, thus providing them what we believe is an experience similar to traditional telephone services at a reduced cost. Our main geographic focus is within the target market of Canada.
We have invested in the research and development of our VoIP telecommunications technology, which permits the control, forwarding, storing and billing of phone calls made or received by our customers. Our technology consists of proprietary software programming and specific hardware configurations; however, we have no specific legal entitlement that would prohibit a third party from utilizing the same base software languages and same hardware in order to produce similar telephony service offerings, which could adversely impact our business.
Base software languages are the language building blocks used by programmers to translate the desired logic sequences into a message that the computer can understand and execute. An example of a logic sequence is “if the user dials “011” before the number, the software should then treat this as an international call and invoice the client accordingly”. The combination and use of these building blocks is known as “software code”, and hence this combination, created by our programmers, along with “off-the-shelf” computer and telecommunications hardware (i.e. equipment that is readily available by computer, networking and telecommunications companies) is collectively referred to as “our technology and trade secrets”.
Examples of “off-the-shelf” hardware utilized include the desktop phones and handsets, computer servers used to store such things as account information and voice mail, and telecommunications hardware that permit the routing of telephone voice calls between various points across the internet and the world’s Public Switched Telephone Network (PSTN), the global wired and wireless connections between every land and mobile phone.
We offer the following products and services to customers utilizing our VoIP technology platform:
Residential voice, data and television service. Customers purchase various equipment based on the services they require to be delivered. The offering of services occurs over a combination of telecommunications platforms. For example, the data connection provided is rented by us from a Tier-1 provider who has network access in the geographical area of the customer. We then offer Voice and Television services utilizing our technology over this data connection. The customer sees one invoice for all communications services delivered to their location, and see one provider for these services. Residential voice, data and television service accounts for approximately 10% of the revenue we generated during the year ended September 30, 2012.
Business voice and data services. Similar to the residential product and service offering, business customers generally purchase larger volume and more robust, commercial grade equipment that when coupled with our multiple services offering, complete the needs of our Business Customers who likewise receive one invoice from us for all of their monthly services consumption. Business voice and data service accounts for approximately 40% of the revenue we generated during the year ended September 30, 2012.
Colocation Services. Colocation provides business clients with a secure, climate-controlled environment with direct network access to house mission-critical servers or interconnect to carrier access points. These facilities are shared by a number of clients which benefit from economies of scale where only a small portion of a colocation facility is required.
Carrier Services. Carrier services consist of a suite of products which support domestic and international voice traffic. This includes provision of local and international phone numbers (DIDs), toll-free origination, North American Termination, International Termination, Pre-paid and Post-paid calling cards and rebilling solutions for voice resellers.
Commodity Exchange. With the acquisition of the New York Telecom Exchange (NYTEX), Teliphone offers web based commodity exchange for international traffic termination. Buyers and sellers can trade international termination minutes online anonymously. NYTEX acts as a financial and technical clearinghouse.
Subsequently, with the acquisition of Navigata Communications 2009 Inc., the Company has expanded both the nature and scope of its offerings to include more paid technical services, microwave communications, wholesale data services and tower/site colocation.
Distribution Methods
Teliphone Voice and Data Products:
Internet Sales. We distribute our products through the sale of hardware on our website, www.teliphone.ca. The customer purchases the necessary hardware from our on-line catalogue. Upon receipt of the hardware from us, the customer returns to our website to activate their services.
Wholesale Sales. We distribute our products and services through wholesalers. A wholesaler is a business partner who purchases our products and services “unbranded” or on a private label basis and re-bills the services to their end-user customers. In the case of a sale to our wholesalers, we do not sell the hardware below cost. The agreements between our wholesalers and our customers are similar to those that we have with our retail customers. The wholesalers provide monthly calling services to their customers and invoice them on a monthly basis on their usage. Our form of general conditions for use of our telecommunications products and services is the agreement that we hold with our wholesalers. While product and professional liability cannot be entirely eliminated, the conditions set forth in terms and conditions of sale serve to forewarn wholesalers that should a stoppage of service occur, we cannot be held liable. Since we do not currently hold product and professional liability insurance coverage, this disclaimer does not protect us from potential litigation. Subsequently, as of January 1, 2013, the Company acquired a comprehensive product and professional liability insurance policy.
Direct Sales. We distribute our products and services directly to customers via our own sales force. We currently employ 2 people in this capacity, providing sales solutions directly to larger business clients throughout Canada. Subsequently, with the acquisition of Navigata Communications 2009 Inc. we had 8 people in sales.
Retail Sales. We developed a network of over 40 retail points of sale via retail reseller relationships until 2009. We abandoned this sales channel by 2010 as it did not provide the sales that we were anticipating relative to the cost of commissions and overhead required to support the sales. The Company does not have any retail points of sale nor do they sell their products and services in any retail establishments at this time.
New York Telecom Exchange Wholesale Traffic. Wholesale traffic is transacted business to business whereby sellers of voice termination, sell capacity to carriers which need to terminate voice calls in a particular market. These are typically high level transactions between individuals whose sole function is to buy or sell on behalf of their business. Companies often undertake both buying and selling of voice termination. Sales are therefore generated primarily as a result of established relationships between the parties. Teliphone relies heavily on personnel with such relationships supplemented by presence at major wholesale traffic trade shows such as the International Telecoms Week. Wholesale traffic accounted for approximately 50% of the revenue we generated for the year ending September 30, 2012.
Status of New Products or Services
teliPhone Residential IP-Television services. We have launched an Internet-based television service for residential clients that includes traditional cable television and network media, as well as a full suite of pay-per-view listings. The service is currently being offered to selected customers in the Province of Quebec, Canada and we have completed the necessary upgrades to our network in order to accommodate these new services. We are utilizing our existing distribution channels to provide these services to the residential market.
Competitive Business Conditions
VoIP technology is presently used in the backbone of many traditional telephone networks. VoIP services are offered to residential and business users by a wide array of service providers, including established telephone service providers. These VoIP providers include traditional local and long distance phone companies, established cable companies, Internet service providers and alternative voice communications providers such as our company.
While all of these companies provide residential VoIP communications services, each group provides those services over a different type of network, resulting in important differences in the characteristics and features of the VoIP communications services that they offer. Traditional wireline telephone companies offering VoIP services to consumers do so using their existing broadband DSL networks. Similarly, cable companies offering VoIP communications services use their existing cable broadband networks. Because these companies own and control the broadband network over which the VoIP traffic is carried between the customer and public switched telephone network, they have the advantage of controlling a substantial portion of the call path and therefore being better able to control call quality. In addition, many of these providers are able to offer their customers additional bandwidth dedicated solely to the customer’s VoIP service, further enhancing call quality and preserving the customer’s existing bandwidth for other uses. However, these companies typically have high capital expenditures and operating costs in connection with their networks. In addition, depending on the structure of their VoIP networks, the VoIP services provided by some of these companies can only be used from the location at which the broadband line they provide is connected.
Like traditional telephone companies and cable companies offering VoIP services, we also connect our VoIP traffic to the public switched telephone network so that our customers can make and receive calls to and from non-VoIP users. Unlike traditional telephone companies and cable companies, alternative voice communications providers such as our company do not own or operate a private broadband network. Instead, the VoIP services offered by these providers use the customer’s existing broadband connection to carry call traffic from the customer to their VoIP networks. These companies do not control the “last mile” of the broadband connection, and, as a result, they have less control over call quality than traditional telephone or cable companies do. However, these companies have the operating advantage of low capital expenditure requirements and operating costs.
Internet service providers generally offer or have announced intentions to offer VoIP services principally on a PC-to-PC basis. These providers generally carry their VoIP traffic for the most part over the public Internet, with the result that VoIP services are often offered for free, but can only be used with other users of that provider’s services. Many of these providers offer a premium service that allows customers to dial directly into a public
switched telephone network. In addition, while no special adapters or gateways are required, often customers must use special handsets, headsets or embedded microphones through their computers, rather than traditional telephone handsets.
Competition
The telecommunications industry is highly competitive, rapidly evolving and subject to constant technological change and to intense marketing by different providers of functionally similar services. Since there are few, if any, substantial barriers to entry, we expect that new competitors are likely to enter our markets. Most, if not all, of our competitors are significantly larger and have substantially greater market presence and longer operating history as well as greater financial, technical, operational, marketing, personnel and other resources than we do.
Competition in the Residential Market
The Company’s main competitors in the residential market come from local competitors such as Bell Canada, Rogers and Videotron, who offer similar “quadruple-play” (voice, data, mobile and Television services bundled together). The Company is able to compete by offering a service offering at a substantially lower price than those of the major competitors.
Computer-to-Computer based calling services such as “Skype” and “Magic Jack” are competitors to the Company as it pertains to offering reduced cost long distances services to the residential market. The Company provides fully integrated services that coincide with the customer’s existing telephony and television equipment, and therefore does not see these kinds of services affecting the Company’s business on a significant scale.
Competition in the Business Market
The Company competes against other telecommunications resellers as well as from the Tier-1 Carriers themselves in this market segment. The Telecommunications Tier-1 Carriers have wholesale divisions (the company’s suppliers) and have retail divisions as well. The Company therefore purchases at a discount from the Carrier’s wholesale division and resells, competing directly with the Carrier’s retail division for the same end-user business client. The Company experiences significant bulk discount pricing from the wholesale division and hence profits from the spread of the retail market price for services and the price provided by the wholesale divisions. The Company is able to be competitive through offering lower pricing combined with improved customer service and wider product and service offering due to the Company’s ability to offer their own services compared with those of all of the Carrier’s that it has wholesale supply agreements with.
Dependence on Customers
We are not dependent on a few major customers.
Intellectual Property
We do not currently hold any patents, trademarks, licences, franchises, concessions or royalty agreements.
Existing and Probable Governmental Regulation
The Company has reviewed all current laws and regulations in its principal markets and is compliant with its requirements as a telecommunications service provider with both the Canadian Radio-Television Commission (CRTC) and the Federal Communications Commission (FCC). There are no other existing governmental regulations other than VoIP E-911 matters listed below.
VoIP E-911 Matters
On June 3, 2005, the FCC released an order and notice of proposed rulemaking concerning VoIP emergency services. The order set forth two primary requirements for providers of "interconnected VoIP services" such as ours, meaning VoIP services that can be used to send or receive calls to or from users on the public switched
telephone network.
First, the order required us to notify our customers of the differences between the emergency services available through us and those available through traditional telephony providers. We also must receive affirmative acknowledgment from all of our customers that they understand the nature of the emergency services available through our service. Second, the order required us to provide enhanced emergency dialing capabilities, or E-911, to all of our customers by November 28, 2005. Under the terms of the order, we are required to use the dedicated wireline E-911 network to transmit customers' 911 calls, callback number and customer-provided location information to the emergency authority serving the customer's specified location.
In July of 2005, the CRTC required us to offer enhanced emergency calling services, or E-911. The FCC followed suit with a deadline of November 28, 2005. The requirement meant that we had to offer enhanced emergency calling services, or E-911, to all of our customers located in areas where E-911 service is available from their traditional wireline telephone company. E-911 service allows emergency calls from our customers to be routed directly to an emergency dispatcher in a customer's registered location and gives the dispatcher automatic access to the customer's telephone number and registered location information. We complied with both these requirements through our agreement with Northern Communications Inc., which calls for Northern Communications to provide and operate a 9-1-1 dispatch center for caller address verification and call transfer to the emergency services department closest to the customer's location on our behalf.
We believe that we are currently in compliance with all of these FCC requirements.
On April 4, 2005, the CRTC released a ruling requiring certain providers of VoIP services, like us, to provide interim access to emergency services at a level comparable to traditional basic 911 services by July 3, 2005 or such later date as the CRTC may approve on application by a service provider. Under the interim solution adopted by the regulator for the provision of VoIP 911 services, customers of local VoIP services who dial 911 will generally be routed to a call center, where agents answer the call, verbally determine the location of the caller, and transfer the call to the appropriate emergency services agency. VoIP service providers are also required to notify their customers about any limitations on their ability to provide 911 services in a manner to be determined.
Since July 2005, we believe we have complied with these regulations by partnering with a PSAP (Primary Service Access Point) which serves to verify the customer location and forward the call to the respective Municipal 9-1-1 center for assistance. This service therefore permits our customers to have access to 9-1-1 services irrespective of their physical location, anywhere in the Continental US & Canada. This service is of significance as VoIP permits customers to utilize their phone anywhere a high-speed internet connection exists and can therefore be located outside of their local city when requiring 9-1-1 services.
We believe that we are currently in compliance with all of these FCC requirements.
Canadian Radio and Television Commission (CRTC) Ruling on IPTV
On October 5, 2011 the Canadian broadcast regulator the CRTC, decided against regulating online content streaming companies or as they refer to the method as "OTT" or over the top services. This decision was reached after months of consultations as to whether content delivery such as movies and television over the Internet should be treated as traditional broadcasters and hence be subject to the same or similar rules. Such rules would include mandatory Canadian content levels. The ruling means that our IPTV operation will remain unregulated by the body.
In a months long industry consultation the CRTC examined whether the introduction of currently unregulated Internet-delivered content was negatively affecting the broadcast industry. Their conclusion was that there was not any clear evidence that this type of delivery was negatively impacting the broadcast system and that there was also no evidence that Canadians were reducing or cancelling cable/satellite subscriptions in favour of the new exempt services. The CRTC did acknowledge that there was growing activity among consumers watching content online.
The CRTC stated that it will be watching trends closely and that it planned another fact finding mission in May 2012 and would continue to consult both traditional and Internet based streaming content industries. There is
no way at this point in time to predict when or if the CRTC will regulate OTT and if so, what conditions it would put on such services. Management believes that given the history of the CRTC in dealing with new technologies such as our VoIP services, any potential regulation of OTT would only occur if OTT were assessed as being a significant component of the broadcast industry and any resulting regulations would be incremental with timing that would allow OTT companies to adapt to any such regulations.
Research and Development
We incurred $0 in research and development expenditures in the year ended September 30, 2012. We spent $0 in the same period in 2011.
Compliance with Environmental Laws
We did not incur any costs in connection with the compliance with any federal, state, or local environmental laws.
Employees
As of September 30, 2012, we had 22 full time employees. We utilize the services of various consultants who provide, among other things, accounting services, technological development services and sales services to us. Subsequently, after the purchase of the Navigata assets, we have 80 employees, the majority of which are located in the Vancouver office.
Corporate Offices
The mailing address of our principal executive office is 300-1550 Alberni, Vancouver BC V4G 1A5 Canada. Our telephone number is (514) 313-6000 and our fax number is (514) 313-6001. Our e-mail address is info@teliphone.ca and our company website is www.teliphone.ca. Our operational offices are located in both in Vancouver BC, Toronto, Ontario and Montreal, Quebec and our data and collocation centers are located in Vancouver BC, Calgary Alberta, Toronto, Ontario, Montreal, Quebec and London UK.
ITEM 1A.
ITEM 1A. RISK FACTORS
You should carefully consider the following risk factors in evaluating our business and us. The factors listed below represent certain important factors that we believe could cause our business results to differ. These factors are not intended to represent a complete list of the general or specific risks that may affect us. It should be recognized that other risks may be significant, presently or in the future, and the risks set forth below may affect us to a greater extent than indicated. If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected. You should also consider the other information included in this Annual Report and subsequent quarterly reports filed with the SEC.
Risks Related To Our Financial Condition
Our independent registered public accounting firm has raised substantial doubt with respect to our ability to continue as a going concern.
As noted in our financial statements, we incurred a net loss of $2,782,104 before amortization and interest for the year ended September 30, 2012 and had a working capital deficit of $2,335,225 as of September 30, 2012. The working capital deficiency, low levels of cash required to support the business and an absence of an operating line of credit to support its cash needs continues to raise substantial doubt about the Company’s ability to continue as a going concern. This is a significant risk that we may not be able to generate or raise enough capital to remain operational for an indefinite period of time.
The success of our business operations depends upon our ability to generate increased sales and obtain further financing in order to attain recurring and sustaining profitable operations. It is not possible at this time for us
to predict with assurance the outcome of these matters. If we are not able to attain sustainable profitable operations, then we may be required to discontinue our operations.
We Require Additional Financing to Grow Our Operations.
We require additional financing to grow our operations and in acquiring such additional financing new investors and current shareholders may suffer substantial consequences such as dilution or a loss of seniority in preferences and privileges. There can be no assurance that any additional funds will be available to us upon terms acceptable to us or at all. Because of our past significant losses and our limited tangible assets, we do not fit traditional credit lending criteria, which, in particular, could make it difficult for us to obtain loans or to access the capital markets. If we are unable to obtain additional financing we might be required to delay, scale back, or eliminate certain aspects of our research and product development programs or operations. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive, the consequences would be a material adverse effect on our business, operating results, financial condition and prospects. The value of our common shares would therefore be affected, and our shareholders could even lose their entire investment.
We may accrue a liability due to the sale and subsequent creditor protection filing of our former subsidiary, Teliphone Inc.
Teliphone Inc., our former majority-owned subsidiary, filed for Creditor Protection on May 10, 2011 and we sold our equity interests in Teliphone Inc. on May 31, 2011. During this process, we made agreements with all of the same suppliers that were suppliers of Teliphone Inc. as part of the creditor proposal (the “Creditor Proposal”). While the Creditor Proposal was approved by a majority of Creditors in August, 2011, the period as to which Teliphone Inc. was required to meet its obligations as part of a payment plan ran until August 2012. Teliphone Inc. did not made any payments. Creditors and guarantors may pursue us, utilizing their current supply agreements as leverage but to date no demand has been made to the Company and all current supplier agreements are being honored. While management believes that legally there is no obligation to the Company for any of Teliphone Inc.’s prior debts, this may be challenged and together with the advent of legal fees would result in an increase our operating expenses which would negatively impact our profitability and cash resources.
Risks Related To Our Business
Decreasing market prices for our products and services may cause us to lower our prices to remain competitive, which could adversely impact our results of operations.
Currently, we believe our prices are lower than those of many of our competitors for comparable services. However, market prices for local calling and international long distance calling have decreased significantly over the last few years, and we anticipate that prices will continue to decrease. This information is based on the experience of our management working in the telecommunications industry. Users who select our service offerings to take advantage of our prices may switch to another service provider as the difference between prices diminishes or disappears. In this instance, we may be unable to use our price as a distinguishing feature to attract new customers in the future. Such competition or continued price decreases may require us to lower our prices to remain competitive, may result in reduced revenue, a loss of customers, or a decrease in our subscriber line growth and may adversely impact our results of operations. In any of the foregoing were to occur, the value of our common shares would therefore be affected, and our shareholders could even lose their entire investment.
VoIP technology may fail to gain acceptance among mainstream retail consumers and hence adversely impact the growth of our business and our results from operations.
If VoIP technology fails to gain acceptance among mainstream retail consumers, our ability to grow our business will be limited, which could adversely impact our results of operations. The market for VoIP services has only recently begun to develop and is rapidly evolving. We currently generate all of our revenue from the sale of VoIP services and related products to residential, small office or home office customers and wholesale partners.
For our current residential user base, a significant portion of our revenue currently is derived from consumers who are early adopters of VoIP technology. However, in order for our business to experience sustained
growth, VoIP technology must gain acceptance among mainstream consumers, who tend to be less technically knowledgeable and more resistant to new technology or unfamiliar services. Because potential VoIP customers need to connect additional hardware at their location and take other technical steps not required for the use of traditional telephone service, mainstream consumers may be reluctant to use our service. If mainstream consumers choose not to adopt our technology, our ability to grow our business will be limited. As a result, our business, operating results and financial condition will be materially and adversely affected.
Certain aspects of our service are not the same as traditional telephone service, which may limit the acceptance of our services by mainstream consumers and our potential for growth which could affect the profitability and operations of our business.
Our continued growth is dependent on the adoption of our services by mainstream customers, so these differences are becoming increasingly important. For example:
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Our customers may experience lower call quality than they are used to from traditional wireline telephone companies, including static, echoes, dropped calls and delays in transmissions;
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In the event of a power loss or Internet access interruption experienced by a customer, our service is interrupted. Unlike some of our competitors, we have not installed batteries at customer premises to provide emergency power for our customers’ equipment if they lose power, although we do have backup power systems for our network equipment and service platform.
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Our emergency and new E-911 calling services are different from those offered by traditional wireline telephone companies and may expose us to significant liability.
Our service will not function in a power outage or a network failure and hence the profitability of our business due to potential litigation could reduce as customers would not be able to reach an emergency services provider.
If one of our customers experiences a broadband or power outage, or if a network failure were to occur, the customer will not be able to reach an emergency services provider which could increase the expenses and reduce the revenues of our business. The delays our customers encounter when making emergency services calls and any inability of the answering point to automatically recognize the caller’s location or telephone number can have devastating consequences. Customers may in the future attempt, to hold us responsible for any loss, damage, personal injury or death suffered as a result. Some traditional phone companies also may be unable to provide the precise location or the caller’s telephone number when their customers place emergency calls. However, traditional phone companies are covered by legislation exempting them from liability for failures of emergency calling services and we are not. This liability could be significant. In addition, we suspect we have lost, and may in the future lose, existing and prospective customers because of the limitations inherent in our emergency calling services. Any of these factors could cause us to lose revenues, incur greater expenses or cause our reputation or financial results to suffer.
Our technology and systems may have flaws resulting in a reduction of customer appeal for our products and hence reduce the profitability of our operations.
Flaws in our technology and systems could cause delays or interruptions of service, damage our reputation, cause us to lose customers and limit our growth affecting the profitability and operations of our business.
We have invested in the research and development of our VoIP telecommunications technology which permits the control, forwarding, storing and billing of phone calls made or received by our customers. We entirely own the technology, which has been developed by our employees and consultants. The calls are transmitted over our network to the Public Switched Telephone Network (PSTN), that is, the traditional wireline network that links all telephone devices around the world. Our network consists of leased bandwidth from numerous telecommunications and internet service providers. Bandwidth is defined as the passage of the call over the internet. The configuration of our technology together with this leased bandwidth and the telecommunications and computer hardware required for
our services to function is proprietary to our company. We do not own any fibre optic cabling or other types of physical data and voice transmission links, we lease dedicated capacity from our suppliers.
Although we have designed our service network to reduce the possibility of disruptions or other outages, our service may be disrupted by problems with our technology and systems, such as malfunctions in our software or other facilities, and overloading of our network. Our customers have experienced interruptions in the past, and may experience interruptions in the future as a result of these types of problems. Interruptions have in the past, and may in the future, cause us to lose customers and sometimes require us to offer substantial customer credits, which could adversely affect our revenue and profitability. Such an effect would likely result in a diminishment in the value our common shares, and our shareholders could even lose their entire investment.
Our ability to provide our service is dependent upon third-party facilities and equipment and hence our services could be interrupted due to our partner’s inability to provide continuous service, resulting in reduced profitability due to lost customers.
Our ability to provide our service is dependent upon third-party facilities and equipment, the failure of which could cause delays or interruptions of our service, damage our reputation, cause us to lose customers and limit our growth which could affect the future growth of our business.
Our success depends on our ability to provide quality and reliable service, which is in part dependent upon the proper functioning of facilities and equipment owned and operated by third parties and is, therefore, beyond our control. Unlike traditional wireline telephone service or wireless service, our service requires our customers to have an operative broadband Internet connection and an electrical power supply, which are provided by the customer’s Internet service provider and electric utility company, respectively, not by us. The quality of some broadband Internet connections may be too poor for customers to use our services properly. In addition, if there is any interruption to a customer’s broadband Internet service or electrical power supply, that customer will be unable to make or receive calls, including emergency calls, using our service. We also outsource several of our network functions to third-party providers. For example, we outsource the maintenance of our regional data connection points, which are the facilities at which our network interconnects with the public switched telephone network. If our third-party service providers fail to maintain these facilities properly, or fail to respond quickly to problems, our customers may experience service interruptions. Our customers have experienced such interruptions in the past and will experience interruptions in the future. In addition, our new E-911 service is currently dependent upon several third-party providers. Interruptions in service from these vendors could cause failures in our customers’ access to E-911 services. We believe interruptions in our service caused by third-party facilities have in the past caused, and may in the future, cause us to lose customers, or cause us to offer substantial customer credits, which could adversely affect our revenue and profitability. If interruptions adversely affect the perceived reliability of our service, we may have difficulty attracting new customers and our brand, reputation, and growth will be negatively impacted. As a result, we would incur extra expense to acquire new customers to replace those which have been affected by such a service issue, decreasing our profitability as expenses would increase. As a result, the value of our common shares would be adversely impacted, and our shareholders could even lose their entire investment.
Because much of our potential success and value lies in our use of internally developed systems and software, if we fail to protect them, it could affect the profitability and operations of our business.
Our ability to compete effectively is dependent in large part upon the maintenance and protection of internally developed systems and software. To date, we have relied on trade secret laws, as well as confidentiality procedures and licensing arrangements, to establish and protect our rights to our technology. We typically enter into confidentiality or license agreements with our employees, consultants, customers and vendors in an effort to control access to, and distribution of, technology, software, documentation and other information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use this technology without authorization.
Policing unauthorized use of this technology is difficult. The steps we take may not prevent misappropriation of the technology we rely on. In addition, effective protection may be unavailable or limited in some jurisdictions outside the United States and Canada. Litigation may be necessary in the future to enforce or protect our rights, or to determine the validity and scope of the rights of others. That litigation could cause us to incur substantial costs and divert resources away from our daily business, which in turn could materially adversely
affect our business through decreasing profitability and negative corporate image to our customers, causing a higher rate of customer defection. As a result, the value our common shares would be adversely impacted, and our shareholders could even lose their entire investment.
Future new technologies could render us less competitive than the industry standard, resulting in lower profitability due to decreased sales.
VoIP technology, which our business is based upon, did not exist and was not commercially viable until relatively recently. VoIP technology is having a disruptive effect on traditional telephone companies, whose businesses are based on other technologies. We also are subject to the risk of future disruptive technologies. If new technologies develop that are able to deliver competing voice services at lower prices, better or more conveniently, it could have a material adverse effect on us by causing a higher rate of customer defection to companies with this new technology, reducing our profitability due to decreased sales.
We cannot guarantee that our technology and trade secrets will not be stolen, decreasing our competitive advantage, resulting in lower profitability due to decreased sales.
We have invested in the research and development of our VoIP telecommunications technology which permits the control, forwarding, storing and billing of phone calls made or received by our customers. This technology has been developed by our employees and consultants and is owned entirely by us. The calls are transmitted over our network to the Public Switched Telephone Network (PSTN), that is, the traditional wireline network that links all telephone devices around the world. Our network consists of leased bandwidth from numerous telecommunications and internet service providers. Bandwidth is defined as the passage of the call over the internet. Much of the configuration of our technology together with this leased bandwidth and the telecommunications and computer hardware required for our services to function is proprietary to our company. We do not own all of the fibre optic cabling or other types of physical data and voice transmission links we rely on and we lease some of this via dedicated capacity from our suppliers. We rely on trade secrets and proprietary know-how to protect this technology. We cannot assure you that our technology will not be breached, that we will have adequate remedies for any breach, or that our trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others. If such a breach were to occur, our brand, reputation, and growth will be negatively impacted. As a result, we would incur extra expense to acquire new customers to replace those which have been acquired by the increased competitive presence, decreasing our profitability as expenses would increase.
We are dependent on key personnel.
Our success will be largely dependent upon the efforts of our sole executive officer, Mr. Benoit Laliberte. We do not have an employment agreement with Mr. Laliberte. The loss of the services of Mr. Laliberte could have a material adverse effect on our business and prospects. There can be no assurance that we will be able to retain the services of Mr. Laliberte in the future. We have not obtained key-man life insurance policies on Mr. Laliberte. We are also dependent to a substantial degree on our technical and development staff. Our success will be dependent upon our ability to hire and retain additional qualified technical, research, marketing and sales personnel. We will compete with other companies with greater financial and other resources for such personnel. Although we have not experienced difficulty in attracting qualified personnel to date, there can be no assurance that we will be able to retain our present personnel or acquire additional qualified personnel as and when needed.
Our officers and directors are located outside of the United States, you may have no effective recourse against our us or our management for misconduct and may not be able to enforce judgment and civil liabilities against our officers, directors, experts and agents.
Our directors and officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of such persons’ assets are located outside the United States. As a result, it may be difficult for investors to enforce within the United States any judgments obtained against our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof.
Our business will be harmed if we are unable to manage growth.
Our business may experience periods of rapid growth that will place significant demands on our managerial, operational and financial resources. In order to manage this possible growth, we must continue to improve and expand our management, operational and financial systems and controls. We will need to hire, train and manage our employee base. No assurance can be given that we will be able to timely and effectively meet such demands.
We have determined that our disclosure controls and procedures are currently not effective. The lack of effective disclosure controls and procedures could materially adversely affect our financial condition and ability to carry out our business plan.
As discussed in Item 9A, “Controls and Procedures”, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. At September 30, 2011, because of our failure to disclose in our reports filed or submitted under the Exchange Act certain required information within the time periods specified in the SEC’s rules and forms, which failure stems, we believe, primarily from the fact that we have limited personnel on our accounting and financial staff, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective. Ineffective disclosure controls and procedures may materially adversely affect our ability to report accurately our financial condition and results of operations in the future in a timely and reliable manner. In addition, we cannot assure you that we will not discover additional weaknesses in our disclosure controls and procedures. Any such additional weakness or failure to remediate the existing weakness could adversely affect our financial condition or ability to comply with applicable financial reporting requirements.
If we fail to adapt to rapid changes in the market for voice and messaging services, then our products and services could become obsolete.
The market for our products is constantly and rapidly evolving as we and our competitors introduce new and enhanced products and services and react to changes in VoIP and messaging technology and customer demands. We may not be able to develop or acquire new products and plans or product and plan enhancements that compete effectively with present or emerging VoIP and messaging technologies or differentiate our products and plans based on functionality and performance. In addition, we may not be able to establish or maintain strategic alliances that will permit enhancement opportunities or innovative distribution methods for our products and plans. New products based on new technologies or new industry standards could render our existing products obsolete and unmarketable.
To succeed, we believe that we need to expand into new market segments, develop new sources of revenue from new and existing customers, enhance our current products and plans, and develop new products and plans on a timely basis to keep pace with market needs and satisfy the increasingly sophisticated requirements of customers. VoIP and messaging technology is complex, and new products and plans and product and plan enhancements can require long development and testing periods. Any delays in developing and releasing new or enhanced products and plans, including as a result of any limitations with our internal systems or the integration of our new ordering and billing platforms, could cause us to lose revenue opportunities and customers. Any technical flaws in products we release could diminish the innovative impact of the products and have a negative effect on customer adoption and our reputation.
If we are unsuccessful at retaining customers or attracting new customers, we may experience a reduction in revenue or may be required to spend more money to grow our customer base.
Our customer retention rate could decrease in the future if customers are not satisfied with the quality and reliability of our network, the value proposition of our products, and the ability of our customer service to meet the needs and expectations of our customers. In addition, increased competition from other providers, increasing wireless substitution, disruptive technologies, general economic conditions, and our ability to activate and register new customers on the network, also influence the growth of our customer base. If we are unsuccessful in retaining customers, are required to spend significant amounts to acquire new customers beyond those budgeted, or our
marketing and advertising efforts are not effective in targeting specific customer segments, our revenue could decrease and operations could be adversely impacted.
Third parties may fraudulently use our name to obtain access to customer accounts and other personal information, use our services to commit fraud or steal our services, which could damage our reputation, limit our growth, and cause us to incur additional expenses.
Our customers may be subject to “phishing,” which occurs when a third party sends an email or pop-up message to a customer that claims to be from a business or organization that provides services to the customer. The purpose of the inquiry is typically to encourage the customer to visit a bogus website designed to look like a website operated by the legitimate business or organization. At the bogus website, the operator attempts to trick the customer into divulging customer account or other personal information such as credit card information or to introduce viruses through “Trojan horse” programs to the customers’ computers. This could result in identity theft from our customers and the unauthorized use of our services. Third parties may also use our communications services to commit fraud. If we are unable to detect and prevent “phishing,” use of our services for fraud, and similar activities, our brand reputation and growth may suffer and we may incur additional costs, including costs to increase security, or be required to credit significant amounts to customers.
Our business may be harmed if we are unable to maintain data security and meet industry data security standards.
We are dependent upon automated information technology processes. Any failure to maintain the security of our data and our customers’ confidential information, including via the penetration of our network security and the misappropriation of confidential information, could result in financial obligations to third parties, fines, penalties, regulatory proceedings, and private litigation with potentially large costs. Any such failure also could put us at a competitive disadvantage and result in deterioration in our customers’ confidence in us, which may have a material adverse impact on our business, financial condition, and results of operations.
Risks Related to Regulation
Regulation of VoIP and IPTV services is developing and therefore uncertain, and future legislative, regulatory, or judicial actions could adversely impact our business by exposing us to liability, which could adversely impact the operations of our business.
Our business has developed in an environment largely free from government regulation. However, the United States and other countries have begun to assert regulatory authority over VoIP as it pertains to offering emergency E-911 services, and are continuing to evaluate how VoIP will be regulated in the future. Both the application of existing rules to us and our competitors and the effects of future regulatory developments are uncertain.
Future legislative, judicial, or other regulatory actions could have a negative effect on our business. If we become subject to the rules and regulations applicable to telecommunications providers in individual states and provinces, we may incur significant litigation and compliance costs, and we may have to restructure our service offerings, exit certain markets, or raise the price of our services, any of which could cause our services to be less attractive to customers. In addition, future regulatory developments could increase our cost of doing business and limit our growth.
Intellectual property issues regarding IPTV are unclear. Teliphone Corp. as an IPTV carrier is not responsible for the content of its IPTV service and IPTV is carried on a public Internet stream. Nevertheless content providers may be challenged with regards to Intellectual Property.
Telecommunications is a Regulated Industry, Particularly in Canada, the Main Market Segment of our Business, and Future Regulation May Impede us from Achieving the Necessary Market Share to Succeed.
The current regulated environment in North America is extremely favorable for new, start-up companies, to enter the marketplace with new and innovative technologies and value added services. In Canada, our principal
market, the telecommunications regulator, Canadian-Radio and Telecommunications Commission (CRTC), has regulated the incumbent Telecommunications companies such that they cannot reduce their elevated pricing for residential phone service. This regulation has provided us with a competitive advantage to sell our products and acquire customers from the incumbents. However, the CRTC has decided that once they feel that adequate competition is present in the Canadian market, and that start-ups, such as our company, have achieved a significant market presence, they will lift the regulation, allowing the incumbent Telecommunications companies to similarly lower their prices. This will slow the growth of the acquisition of customers, reducing profitability and adversely affecting our growth prospects. IPTV is currently unregulated by the CRTC. While the agency has stated that it does not intend to regulate the technology, this policy may change over time as IPTV becomes more of a factor in the market.
Our customers may not have continued and unimpeded access to broadband. The success of our business relies on customers’ continued and unimpeded access to broadband service.
The success of our business relies on customers’ continued and unimpeded access to broadband service. Providers of broadband services may be able to block our services, or charge their customers more for using our services in addition to the broadband, which could adversely affect our revenue and growth.
It is not clear whether suppliers of broadband Internet access have a legal obligation to allow their customers to access and use our service without interference in the United States. As a result of recent decisions by the U.S. Supreme Court and the FCC, providers of broadband services are subject to relatively light regulation by the FCC. Consequently, federal and state regulators might not prohibit broadband providers from limiting their customers’ access to VoIP, or otherwise discriminating against VoIP providers. Interference with our service or higher charges for using our service as an additional service to their broadband could cause us to lose existing customers, impair our ability to attract new customers, and harm our revenue and growth, which would adversely affect the value of our common shares.
The Level of Competition is Increasing at a Fast Rate due to the Relative Low Barriers to Entry and Anticipated Market Growth over the Next 5 Years could adversely impact the operations of our business.
Land-based telecommunications technology has not evolved considerably over the past 125 years. However, the breakthrough of standardized, internet-based communications is revolutionizing the entire industry. In the past, significant investments were required in order to construct the infrastructure required for telecommunications, however, now that the infrastructure is in place, smaller investments are required in order to successfully transmit a voice call using Internet data transfer and sharing protocols. A new entry, for as little as $100,000, could purchase the necessary equipment in order to make such a voice call function. Numerous smaller players have entered the market.
Management’s experience in the telecommunications industry has permitted the registrant to identify that while barriers to entry to the marketplace exist including the requirement of further investment to build a successful company around the technology, the data from VoIP Action suggests that competition is increasing significantly. This increase can result in price erosion pricing, which could contribute to the reduction of our profitability and growth. While numerous providers have entered the market, we have not yet seen as yet pricing erosion in our market segments, however, this will be a factor over the next 3-4 years. This prediction is based on our experience in the industry.
We May not Hold Sufficient Professional or Product Liability Insurance Required to Protect Us and We Remain Exposed to Potential Liability Claims.
Subsequently, on January 1 2013 the Company purchased a comprehensive professional and product liability insurance policy. This may not be sufficient to protect the Company in the event of a substantial claim nor will it protect the Company from any claim that may arise for a liability accrued prior to January 1, 2013.. Professional and product liability insurance coverage is specifically tailored to the delivery of our phone services to the end user. For example, a customer whose phone service is not functional due to a service outage may sue us for damages related to the customer’s inability to make or receive a phone call (such as inability to call 9-1-1). Professional liability insurance exists to cover us for any costs associated with the legal defence, or any penalties
awarded to the plaintiff in such cases where judgment could be rendered against us in case of loss in court. Such penalties could be large monetary funds that a judge could force us to pay in the event where damages have been awarded to the plaintiff.
Our business exposes us to potential professional liability which is prevalent in the telecommunications industry. While we have adequate service level agreements which indicate that we cannot guarantee 100% up time, these service level agreements cannot guarantee that we will not be sued for damages. We currently have no specific professional or product liability insurance. Our current insurance policies cover theft and liability in our offices only. We intend to purchase professional and product liability insurance which will help to defray costs to us for defence against damage claims. We do not foresee any difficulties in obtaining such a policy, as we have already been approved and a quotation submitted for such coverage by a Canadian Insurance Company. In this proposal, the Insurance Company is aware of the geographical locations of our client base, which is predominantly in Canada however includes a small amount in the US and International. There can be no assurance that the coverage the commercial general liability insurance policy provides will be adequate to satisfy all claims that may arise. Regardless of merit or eventual outcome, such claims may result in decreased demand for a product, injury to our reputation and loss of revenues. Thus, a product liability claim may result in losses that could be material, affecting the value of the common shares of the company, and our shareholders could even lose their entire investment.
Risks Related To Our Common Stock
Coalitions of a few of our larger stockholders have sufficient voting power to make corporate governance decisions that could have significant effect on us and the other stockholders.
Our officers, directors and principal stockholders (greater than five percent stockholders) together control approximately 85%, of our outstanding common stock as of February 28 2013. Specifically, Ms. Poudrier beneficially owns 85%. As a result, these stockholders, if they act together, will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in our control and might affect the market price of our common stock, even when a change in control may be in the best interest of all stockholders. Furthermore, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders. Accordingly, these stockholders could cause us to enter into transactions or agreements that we would not otherwise consider.
To date, we have not paid any cash dividends and no cash dividends will be paid in the foreseeable future.
Holders of shares of our common stock are entitled to receive such dividends as may be declared by our board of directors. To date, we have paid no cash dividends on our shares of common stock and we do not expect to pay cash dividends on our common stock in the foreseeable future. We intend to retain future earnings, if any, to provide funds for operation of our business. Therefore, any return investors in our common stock will have to be in the form of appreciation, if any, in the market value of their shares of common stock.
Trading on the OTC pink sheets may be volatile and sporadic, which could depress the market price of our common stock and make it difficult for our stockholders to resell their shares.
Our common stock is quoted on the OTC pink sheets electronic quotation system. Trading in stock quoted on the OTC pink sheets is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance. Moreover, the OTC pink sheets is not a stock exchange, and trading of securities on the OTC pink sheets is often more sporadic than the trading of securities listed on a quotation system like NASDAQ or a stock exchange like Amex. These factors may result in investors having difficulty reselling any shares of our common stock.
Because our common stock is quoted and traded on the OTC pink sheets, short selling could increase the volatility of our stock price.
Short selling occurs when a person sells shares of stock which the person does not yet own and promises to buy stock in the future to cover the sale. The general objective of the person selling the shares short is to make a profit by buying the shares later, at a lower price, to cover the sale. Significant amounts of short selling, or the perception that a significant amount of short sales could occur, could depress the market price of our common stock. In contrast, purchases to cover a short position may have the effect of preventing or retarding a decline in the market price of our common stock, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of our common stock. As a result, the price of our common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued at any time. These transactions may be effected on the OTC pink sheets or any other available markets or exchanges. Such short selling if it were to occur could impact the value of our stock in an extreme and volatile manner to the detriment of our shareholders.
Because the SEC imposes additional sales practice requirements on brokers who deal in our shares that are penny stocks, some brokers may be unwilling to trade them. This means that you may have difficulty in reselling your shares and may cause the price of the shares to decline.
Our stock is a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations and the broker-dealer and salesperson compensation information must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in, and limit the marketability of, our common stock.
In addition to the “penny stock” rules promulgated by the Securities and Exchange Commission, Financial Industry Regulatory Authority (“FINRA”) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative, low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock.
We have additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock.
Our articles of incorporation authorize the issuance of 125,000,000 shares of our common stock. The common stock can be issued by our board of directors, without stockholder approval. Any future issuances of our common stock would further dilute the percentage ownership of our Company held by our public stockholders.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
Our executive offices are currently located 1550 Alberni, Vancouver BC, V4G 1A5 Canada. We also have a Toronto sales and client services office located at 330 Bay Street, Toronto Ontario and an executive and administrative office located at 424 St-Francois Xavier, Montreal Quebec. Subsequently, with the acquisition of the assets of Navigata, we acquired approximately 80 lease obligations for a total of approximately $162,000 per month. These include offices, antenna towers, crown leases, right of ways and other premises obligations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Former Owners of Orion Communications Inc.
On April 29, 2009, 9191-4200 Quebec Inc. (“9191”) entered into a purchase agreement (the “Purchase Agreement”) with the former shareholders (the “Former Owners”) of Orion Communications Inc. (“Orion”) for all of Orion’s issued and outstanding shares (the “Share Sale”) . On April 30, 2009, Orion, under management of 9191, executed a services agreement with Teliphone Inc. (a former subsidiary of the Company) to provide telecommunications services to the customers of Orion. On January 18, 2010, 9191 filed a Statement of Claim in Superior Court of Justice in the Province of Ontario, Canada, district of Toronto, for rescission of the Purchase Agreement due to overpayment and damages claiming misrepresentation of financial statements made by the Former Owners (the “Rescission Claim”).
As part of the Share Sale, 9191 retained one of the Former Owners as a Vice President of Sales. As a result of the Rescission Claim, the Company’s former subsidiary, Teliphone Inc., terminated this person’s employment.
On February 18, 2010, the Former Owners of Orion filed their defence and counterclaim against 9191, naming the Company, its former subsidiary Teliphone Inc., the Company’s President and CEO at the time and other parties as third party defendants (the “Third Party Defendants”) for a total of CDN$4,000,000. The Former Owners allege, among other things that the Third Party Defendants are proper parties to the Rescission Claim due to its agreements with 9191 to provide services to the clients of Orion.
The Former Owners are also pursued our former majority-owned subsidiary, Teliphone Inc., for $150,000 for the early termination of the employment agreement.
We did not believe, as a service provider, the agreements and disagreements between the 9191 and the Former Owners have anything to do with us and hence believed that the claims brought upon it do not have any merit. As a result, we have not accrued a liability for the amounts of the claims made by the Former Owners, however will continue to evaluate this as more information becomes readily available. We have accrued legal fees in connection with the claim.
Bank of Montreal, related to Former Owners of Orion Communications Inc.
On March 10, 2010, Bank of Montreal (“BMO”), a Canadian financial institution and creditor of Orion has filed a claim in Superior Court of Justice in the Province of Ontario, Canada, district of Brampton, against our former subsidiary, Teliphone Inc., requesting payment of Orion’s outstanding debt of CDN$778,607. BMO stands as a secured creditor of Orion based on its issuance of a credit line to Orion in 2007. BMO claimed that as a secured creditor holding a General Security Agreement, it has rights to the receivables of Orion and claims that these receivables are being collected by Teliphone Inc.
On March 30, 2011, BMO dropped its lawsuit against the Company’s subsidiary due to a negotiated settlement which permitted the transfer of full and unencumbered rights to the servicing contracts of the clients of Orion. As a result of the Company entered into a non-interest bearing Note Payable to BMO for a total of $375,000. The Note calls for an initial payment of $25,000 followed by 24 equal payments due on the 15th of the month of $11,458, and a final payment of $75,000 due on April 15, 2013. The Company has classified the Note Payable on
its balance sheet as at March 31, 2011 as $93,750 as a current liability and $281,250 as a long term liability. As of September 30, 2011, the Company has met all of its payment obligations on this note payable.
On November 15, 2011, BMO did not accept the monthly payment claiming that additional legal fees were owed to BMO by Teliphone. These fees were not listed in the original agreement and the Company and BMO entered into discussions to attempt to resolve BMO’s claim.
Subsequently, on January 23, 2013, the Company reached an all party agreement to settle all outstanding issues and obligations. The agreement calls for a payment of $305,520.69 which covers principle, interest and all costs to be paid over 10 months. An initial payment of $50,000 and the agreement calls for 9 monthly payments of $25,000 and a final payment of $30,520.69 on October 31, 2013.
Other than the disputes mentioned above, we are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is currently quoted on the OTC pink sheets electronic quotation system and prior to September 3, 2010 was quoted on the OTC Bulletin Board. The OTC pink sheets electronic quotation system is a network of security dealers who buy and sell stock. The dealers are connected by a computer network that provides information on current “bids” and “asks,” as well as volume information. Our shares are quoted on the OTC pink sheets electronic quotation system under the symbol “TLPH”.
The market for our common stock is limited, volatile and sporadic. The following table sets forth the range of high and low bid quotations for our common stock for each of the periods indicated as reported by the OTC Bulletin Board and OTC pink sheets.
These quotations below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
As of April 2, 2013 there were 124,660,745 of our common stock outstanding and 181 holders of record of our common stock and several other stockholders hold shares in street name. In many instances, a record holder is a broker or other entity holding shares in street name for one or more customers who beneficially own the shares.
Dividend Policy
To date, we have not declared or paid cash dividends on our shares of common stock. The holders of our common stock will be entitled to non-cumulative dividends on the shares of common stock, when and as declared by our board of directors, in its discretion. We intend to retain all future earnings, if any, for our business and do not anticipate paying cash dividends in the foreseeable future.
Any future determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements, general business conditions and such other factors as our board of directors may deem relevant.
Repurchases by the Company
During the fiscal year ended September 30, 2012, we did not repurchase any shares of our common stock on our own behalf or for any affiliated purchaser.
Securities Authorized for Issuance under Equity Compensation Plans
We do not have established any form of equity compensation plan for the benefit of our directors, officers or employees.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this annual report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” appearing elsewhere in this annual report on Form 10-K.
Trends in Our Industry and Business
A number of trends in our industry and business have a significant effect on our results of operations and are important to an understanding of our financial statements. These trends include:
Broadband adoption. The number of households with broadband Internet access in our core market of Canada has grown significantly since the introduction of Voice over IP and is now near 100%. We believe that access to broadband is no longer a major issue with respect to uptake of our services. We benefit from this trend because our service requires a broadband Internet connection and our potential addressable market has increased as broadband adoption increased.
Changing competitive landscape. We are facing increasing competition from other companies that offer multiple services such as cable television, voice and broadband Internet service. Several of these competitors are offering VoIP or other voice services as part of a bundle, in which they offer voice services at a lower price than we do to new subscribers. In addition, several of these competitors are working to develop new integrated offerings that we cannot provide and that could make their services more attractive to customers. We also compete against established alternative voice communication providers and independent VoIP service providers. Some of these service providers may choose to sacrifice revenue in order to gain market share and have offered their services at lower prices or for free. These offerings could negatively affect our ability to acquire new customers or retain our existing customers.
Consumer adoption of new VoIP technology. The development of our Teliphone VoIP service permits us to sell telecommunications services to consumers who have a broadband internet connection. Our technology permits customers to continue to use their traditional phone devices to make and receive calls at a lower cost than traditional phone services. One of the key challenges in the adoption of this new technology is the customer’s acceptance of potential loss of service when their internet connection goes down or they lose electrical power in their home or office. We have mitigated this risk for our customers by providing telephone call fail-over methods in case of loss of service. Management believes that even though this adoption risk exists, the reduction of cost for the services will negate the impact of occasional service loss much like how consumers accepted at times lower call quality in their worldwide adoption of mobile phones due to increased convenience.
Trends in the wholesale market. The market for wholesale traffic is a result of telecommunications deregulation which began in the mid 1980's. This allowed such traffic to originate, transit and/ or terminate on networks other than the incumbent carriers. With the introduction of the Internet as a means of carrying voice traffic and related hardware and software, the opportunities for third party providers increased substantially as well as wholesaling intermediaries. With a trend to ever lowering technical barriers to entry, the number of small to medium sized wholesale intermediaries increased significantly, primarily as sellers into the market. However, many of these companies have been transient in nature and typically enter and leave the market regularly. Management believes that the medium term trend will be the reduction in small to medium sized players as large buyers increasingly favor large suppliers which are more stable and cost less to maintain. As such, Teliphone is positioned serve this market through its established supply chain as well as act as an aggregator for smaller suppliers as the risk is low.
We will continue to cover our cash shortfalls through debt financing with affiliated parties. In the event that we do not have a significant increase in revenues and we do not raise sufficient capital in the offering herein, management estimates we can only sustain our cash requirements for three months. After three months, management will need to consider alternate sources of financing, including but not limited to additional debt financing, in order to sustain operations for the next twelve months. No agreements or arrangements have been made as of this date for such financing and we can make no guarantee that such financing will be available to us on acceptable terms or at all.
Results of Operations
Fiscal Year Ended September 30, 2012 as compared to September 30, 2011
Prior to April 1, 2011, all of the Company’s revenues were generated at subsidiary level by Teliphone Inc. Subsequent to April 1, 2011 due to the consolidation of operations between the Company and Teliphone Inc., all revenues were generated at the Company level. From April 1, 2011 to May 9, 2011, certain suppliers continued to invoice Teliphone Inc. for services delivered to the Company during such period. On May 9, 2011, Teliphone Inc. filed for creditor protection under provisions available to it under the Canadian Bankruptcy and Insolvency Act and as such, these payables do not appear on the books and records of the Company. These payables and current liabilities total $2,304,774. The Company sold all of its equity interest in Teliphone Inc. on May 31, 2011 for $1 and certain computer assets related to the delivery of Internet telephony services over Mobile phones. In return, the buyer assumed all of the liabilities of Teliphone Inc. and committed to make available $250,000 of cash to Teliphone Inc. in order to assist Teliphone Inc. to meet its obligations under its Proposal to Creditors.
The description that follows discusses the disposition of Teliphone Inc., the Company’s majority owned subsidiary, which is the primary result attributable to the Company recording a non-recurring gain from such disposition of $2,462,895 for the year ended September 30, 2011.
For information purposes only, the following outlines the Company’s Pro Forma Statement of Operations in order to demonstrate the Results of Operations for comparative purposes:
Teliphone Corp.
Pro Forma Statement of Operations for the Year Ended September 30, 2011
(US$)
Pre-Discontinued
Discontinued
Operations
Operations
Final
Sales
4,694,393
(2,437,008)
2,257,385
Cost of sales
Inventory, beginning of period
12,225
(12,225)
-
Purchases
2,939,535
(1,900,414)
1,039,121
(Gain) loss on foreign exchange
(263,025)
(24,350)
(287,375)
2,688,735
(1,936,989)
751,746
Inventory, end of period
(18,691)
(18,691)
2,670,044
(1,936,989)
733,055
Gross profit
2,024,349
(500,019)
1,524,330
Operating expenses
Salaries and wage levies
785,137
(490,392)
294,745
Selling and promotion
47,407
(33,058)
14,348
Legal settlement liability
-
-
-
Professional and consulting fees
430,100
(150,794)
279,306
Transport
-
-
-
Commissions
-
-
-
Interest on long term debt
40,941
(13,387)
27,554
Interest on Government Debt
329,919
(329,919)
-
Office and general
178,002
(80,557)
97,445
Interest and bank charges
71,483
(52,573)
18,910
Telephone
59,158
(55,688)
3,470
Forgiveness of debt
6,627
(6,627)
-
Bad Debt
14,490
-
14,490
Impairment
-
-
-
Government Income and sales tax
288,261
(288,261)
-
Amortization
354,364
(81,572)
272,792
2,605,888
(1,582,828)
1,023,060
Gain on disposal of subsidiary
(2,462,895)
2,462,895
Net earnings (loss)
(581,540)
1,082,809
501,270
Minority Interest
134,543
(134,543)
-
Deficit, beginning of period
(2,240,750)
1,548,601
(2,240,750)
Deficit, end of period
(2,687,746)
33,972
(224,851)
For informational purposes only, the following outlines, at May 31, 2011, the effects of discontinued operations on the Company’s balance sheet:
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock
$739,005
Additional paid-in capital
Accumulated deficit
(2,462,895)
Accumulated other comprehensive income (loss)
(227,576)
Noncontrolling interest
(238,164)
Total Stockholders' Equity (Deficit)
$(2,189,630)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
$115,144
According to disclosure requirements of the Financial Accounting Standards Board, the Company has disclosed its discontinued operations in accordance with in accordance with ASC 360-10-45, Property, Plant, and Equipment - Overall - Glossary-Component of an Entity, (formerly FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets) and as such have removed from the reporting of its Statement of Operations for the year ended September 30, 2011 operations which occurred within the disposed entity, Teliphone Inc. However, since the Company had consolidated its operations effective April 1, 2011, the Company included in its Management’s Discussion and Analysis financial information on a pro forma basis in order to provide a better understanding of the Company's operations for the year ended September 30, 2011, as compared to the prior year.
Revenues
We continue to generate revenues from the sale of telecommunications services to our customers, along with the hardware required for our customers to utilize these services even with the disposition of Teliphone Inc. Prior to the disposition of our equity interest in Teliphone Inc., all of the client and supplier agreements were assigned from Teliphone Inc. to the Company and hence there has been no change in the nature of our business or our ability to generate revenues from our existing customers.
For the year ended September 30, 2012, we recorded sales of $8,801,751. For the year ended September 30, 2011, we recorded consolidated sales of $4,694,393 (pre-discontinued operations),. The Company has increased sales by 188% compared to the prior year. The revenues were derived entirely from the sale of telecommunications services to residential and business clients. The increase was due primarily from wholesale telecommunications traffic from the acquisition of NYTEX.
Cost of Sales
Our cost of sales includes all of the necessary purchases required for us to deliver these services. This includes the use of broadband internet access required for our servers to be in communication with our customers’ VoIP devices at the customer’s location, our rental of voice channels connected to the Public-Switched-Telephone-Network; that is the traditional phone network which currently links all phone numbers worldwide as well as the cost to purchase the telecommunications services from major carriers that we re-sell to our customers.
Our cost of sales were $7,710,924 for the year period ended September 30, 2012 compared with cost of sales were $2,670,044 (pre-discontinued operations) for the year period ended September 30, 2011. The Company experienced 289% increase in the cost of sales due primarily to increased network costs for NYTEX and a one time assumption of NYTEX network liabilities post acquisition. Our cost of sales also includes any variable costs of service delivery that we may have, including our per-minute costs for terminating our customers’ calls on another carrier’s network. The Company continues to focus on increasing the efficiencies of its processes in order to deliver its services to its customers, as well as negotiating lower purchase rates form its suppliers. Some of the increased costs such as wages were undertaken as part of the Company's business plan to aggressively increase its markets.
Gross Margin
Gross margin for the year ended September 30, 2012 was $1,090,827, or approximately 12.5% of revenues, as compared to gross margin of $2,024,349 (pre-discontinued operations), or approximately 43% of revenues, for the year ended September 30, 2011. The decrease in margin was due to factors which include; the lower overall margins of wholesale traffic which now represent about half the revenues and a one time assumption of NYTEX liabilities post acquisition.
Operating Expenses
Aggregate operating expenses during the year ended September 30, 2012 were $3,835,184, compared with 2,670,044 in the previous year (pre-discontinued operation) The increase in operating expenses was predominantly due to a substantial increase in depreciation, from $354,364 in 2011 to $1,544,512 in 2012. The Company invested heavily in equipment to increase its capacity for growth and introduction of new products such as IPTV. There was also an increase in wages, professional and consulting fees from $1,215,237 in 2011 to $1,490,256 due to an increase in technical and management staff.
The following detailed breakdown of operating expenses considers the entire operation including Teliphone Inc. for the prior year comparatives. Selling and promotion expense was $1,539 for the period compared with $47,407 in the prior period. Other general and administrative expenses were $798,877 compared with $237,160 in the prior period due increased travel and rent expenses by the company, the latter being a result of end of free rent period in leases. Professional and consulting fees were $184,815 during that period as opposed to $430,100 for the same period last year due to decreased legal expenses related to various legal matters as described. The Company
increased its depreciation expenses from $354,364 for the year to $1,544,512 as the Company commenced its depreciation of network upgrade equipment.
Net Income
As a result of the above, we had net loss from continuing operations for the year ended September 30, 2012 of $2,782,104. For the year ended September 30, 2012, we had a net income from continuing operations of $501,269 and a net income of $2,015,898, after inclusion of a net gain from discontinued operations of $1,514,629.
Liquidity and Capital Resources
We had cash and cash equivalents of $22,821 at September 30, 2012 and $37,481 for September 30, 2011.
At September 30, 2012, we had a working capital deficit of $2,335,225; an increase from a working capital deficit of $1,093,818 as of September 30, 2011. The difference in working capital deficit is due primarily to increase in payables for NYTEX.
We have been able to sustain operations with a minimal cash balance as of September 30, 2012 and September 30, 2011 due to our ability to negotiate increased payment terms on individual invoices. No credit agreements exist with suppliers other than to keep payables current (30 days).
We do not have a line of credit in place to provide cash needed for growth purposes. To successfully grow our business, our management believes it must continue to increase our base of customers through the acquisition of telecommunications reseller. Our current cash on hand is insufficient to be able to make any acquisition of a telecommunications reseller. Accordingly, we must obtain additional financing in order to increase our customer based through acquisitions. We anticipate that any additional funding will be in the form of equity financing from the sale of our common stock. We intend to seek additional funding in the form of equity financing from the sale of our common stock, but cannot provide any assurance that we will be able to raise sufficient funding from the sale of our common stock to fund the acquisition of telecommunications resellers. If we are unable to obtain additional financing when sought, our ability to grow our business will be impaired and may be forced to curtail operations, liquidate assets, seek additional capital on less favorable terms and/or pursue other measures. Any additional equity financing may involve substantial dilution to our then existing shareholders. No financing agreements exist for the Company to date and we can make no guarantee that any such financing will be available to the Company on acceptable terms or at all. These risks are outlined in the Company’s RISK FACTORS within this annual report.
Cash provided by operating activities was $465,668 in the year ended September 30, 2012 compared to cash provided by operating activities of $793,907 during the same period last year. Net loss of $2,782,104, an increase in accounts payable and accrued expenses of $2,554,293, along with an increase in accounts receivable of $810,579 and the effect of non-cash charges to income, such as depreciation, were the primary reasons for our positive operating cash flow for the year ended September 30, 2012. We decreased our prepayments to suppliers since the Company assumed the supply contracts of its former subsidiary, Teliphone Inc. as there are fewer suppliers from the former subsidiary. Teliphone Inc. had outstanding payables with these same suppliers, additional security was required by these suppliers in order to permit the continuance of service delivery during the assignment of clients from Teliphone Inc.
Cash used in investing activities was $312,100 in the year ended September 30, 2012, compared to $47,180 during the prior period. All cash used in investing activities during period related to the acquisition of capital assets.
Cash used in financing activities was $153,867 in the year ended September 30, 2012, compared to cash provided by financing activities of $132,375 in the prior year. This change was primarily attributable to the repayments of related party payables.
Credit Facility. We do not have a line of credit in place. We will continue to seek a new credit facility with our bank since we sold our holdings of Teliphone Inc. which previously maintained a line of credit. No agreements are in place currently with our bank to borrow funds. Prior to the consolidation of Teliphone Inc.’s operations and subsequent disposition of our majority-interest in Teliphone, Inc., we had a line of credit in place to
provide cash needed for growth purposes. The Company presently does not have any outstanding credit facility or line of credit. The Company is seeking a credit facility or line of credit to provide the Company with funding should the need arise to finance growth or other expenditures. The Company has had only preliminary discussions with various financial institutions and third parties with the goal of obtaining a new credit facility or line of credit; however, it has no formal commitment regarding any of these alternatives at present. We anticipate that it will be difficult to obtain a new line of credit facility. Any new credit facility, if obtained, may not be on terms favorable to the Company. Any overdraft that the company may have is currently being secured by the personal guarantee of our President.
Commitments/Contingencies:
Capital Expenditures
At September 30, 2012, the Company has no material commitments for capital expenditures.
Lease commitments
The Company assumed the lease from its former subsidiary Teliphone Inc. for its Toronto, Canada offices, which is set to expire on August 31, 2014. The Company has the following commitments remaining on this lease:
September 30,
2013: $51,960
2014: $43,300
Rent expense associated with this lease for the year ended September 30, 2012 and 2011 were:
September 30,
2011: $50,139
2012: $50,442
The Company has a lease with a business center for its Montreal, Canada offices which is set to expire on November 30, 2013. The Company has the following commitments remaining on this lease:
September 30,
2013: $13,980
Rent expense associated with this lease for the year ended September 30, 2012 and 2011 were:
September 30,
2011: $82,346
2012: $83,663
Note Payable to Bank of Montreal
On March 30, 2011, the Company entered into a non-interest bearing note payable (the “Note”) to Bank of Montreal (“BMO”) for a total of $375,000 as part of its dispute resolution regarding the management of the clients of Orion Communications Inc. The Note called for an initial payment of $25,000 followed by 24 equal payments due on the 15th of the month of $11,458, and a final payment of $75,000 due on April 15, 2013. As of September 30, 2011, the Company had met all of its payment obligations on this note payable.
Subsequently on November 15, 2011, BMO did not accept the monthly payment claiming that additional legal fees were owed to BMO by Teliphone. These fees were not listed in the original agreement and the Company and BMO entered into discussions to attempt to resolve BMO's claim.
Subsequently, on January 23, 2013, the Company reached an all party agreement to settle all outstanding issues and obligations. The agreement now calls for a payment of $305,520.69 which covers principle, interest and all costs to be paid over 10 months. An initial payment of $50,000 and the agreement calls for 9 monthly payments of $25,000 and a final payment of $30,520.69 on October 31, 2013. The Company has classified the entire amount as a current liability on September 30, 2012, and has successfully made all required payments through February 2013.
Convertible Debentures
On February 6, 2009, the Company entered into a 12% Convertible Debenture (the “A Debenture”) with an individual. The A Debenture had an original maturity date of February 6, 2010, and incurred interest at a rate of 12% per annum. On February 6, 2010, the A Debenture was renewed for an additional 12 months at 12%. As of February 6, 2011 the debenture holder agreed to continue on a month to month basis with monthly interest payments continuing at the 12% rate.
The A Debenture can either be paid to the holder on the anniversary or converted at the Company's option any time after the first anniversary at a conversion price equal to $0.25 per share of the common stock.
On February 17, 2009, the Company entered into a 12% Convertible Debenture (the “B Debenture”) with an individual. The B Debenture had an original maturity date of February 17, 2010, and incurred interest at a rate of 12% per annum. On February 17, 2010, the B Debenture was renewed for an additional 12 months at 12% and was further renewed to mature on February 28, 2014.
The original terms of the A Debenture was that it could either be paid to the holder on the anniversary or converted at the Company's option any time after the first anniversary at a conversion price equal to $0.25 per share of the common stock. Subsequently, on February 1, 2013, the debenture was converted to a 2 year note at 12% per annum payable monthly with maturity on January 31, 2015, payable at any time by the Company without penalty.
The total amount of the A and B Debentures was $61,026.
Long Term Related Party Debt
On April 1, 2011, the Company assumed debt of a shareholder previously held within its former majority-owned subsidiary, Teliphone Inc. of $70,828. The loan matures on December 31, 2013 with interest only payable monthly at an annual rate of 12%. The Company reserves the right to pay the principal in its entirety at any time without penalty. The total amount is outstanding as of September 30, 2012.
The Company has accrued $31,873 in accrued interest on this payable.
Current Related Party Debt
The Company has a net balance due of $112,880 to a Director of the Company and a company owned and controlled by the same Director as of September 30, 2012. The advances are considered short term in nature, accrue interest at 12% per annum, and are due on demand. As of September 30, 2012, the Company has accrued $10,381 in interest on these advances.
Off Balance Sheet Arrangements
We do not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have material current or future effect on financial conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses.
Going Concern
The Company has a working capital deficit of $2,335,225 as of September 30, 2012, and has an accumulated deficit of $3,006,956 as of September 30, 2012. The Company has streamlined its business, and expanded their services throughout Canada and expects to generate positive gross margins and positive net income from continuing operations for the next fiscal year as the effect of new products and increased network capabilities take hold. In particular we will rely on expanded revenues from the acquisition of the core operations and network of Navigata Communications 2009 Inc. as well as integration of the NYTEX platform in to Navigata's current wholesale business. We expect that economies of scale with the merging of entities will play a large role in the overall lowering of cost of revenues. We will continue to look for acquisition opportunities that add to or complement our current offerings particularly where incremental revenues can accrue to the Company without incurring incremental overhead.
Working capital deficiency, low levels of cash required to support the business and an absence of an operating line of credit to support its cash needs continues to raise substantial doubt about the Company’s ability to continue as a going concern.
Teliphone Inc. had accumulated trade payables greater than their trade receivables up to May 2011. The Company had consolidated their operations such that the Company and not its former subsidiary, Teliphone Inc. is now operating the business as of April 1, 2011. On May 9, 2011, Teliphone Inc. filed for creditor protection under provisions of the Canadian Bankruptcy and Insolvency Act. On May 31, 2011, the Company sold its entire holdings of Teliphone Inc.
Off Balance Sheet Arrangements
We do not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have material current or future effect on financial conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses.
Critical Accounting Policies
Our consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). For a full discussion of our accounting policies as required by GAAP, refer to the accompanying notes to the consolidated financial statements. We consider the accounting policies discussed below to be critical to obtain an understanding of our consolidated financial statements because their application requires significant judgment and reliance on estimations of matters that are inherently uncertain. Specific risks related to these critical accounting policies are described below.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make 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. On an on-going basis, the Company evaluates its estimates, including, but not limited to, those related to investment tax credits, bad debts, income taxes and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments and other short-term investments with an initial maturity of three months or less to be cash equivalents.
Comprehensive Income
The Company adopted ASC 220-10, “Reporting Comprehensive Income,” (formerly SFAS No. 130). ASC 220-10 requires the reporting of comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of information that historically has not been recognized in the calculation of net income.
Currency Translation
For subsidiaries outside the United States that prepare financial statements in currencies other than the U.S. dollar, the Company translates income and expense amounts at average exchange rates for the year, translates assets and liabilities at year-end exchange rates and equity at historical rates. The Company’s functional currency is the Canadian dollar, while the Company reports its currency in the US dollar. The Company records these translation adjustments as accumulated other comprehensive income (loss). Gains and losses from foreign currency transactions are included in other income (expense) in the results of operations.
Research and Development
The Company occasionally incurs costs on activities that relate to research and development of new products. Research and development costs are expensed as incurred. Certain of these costs are reduced by government grants and investment tax credits where applicable.
Revenue Recognition
Operating revenues for the Company are generated directly within the Company and not in its former subsidiary, Teliphone Inc. since the Company consolidated its operations and sold the inoperative Teliphone Inc. on May 31, 2011. Operating revenues consist of telecommunications services (voice, video, data and long distance), customer equipment (which enables the Company's telephony services), consulting services and shipping revenue. Generally revenue recognition is the same for Teliphone Corp. and NYTEX except where indicated below. The point in time at which revenue is recognized is determined in accordance with Revenue Recognition under ASC 605-50, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products) ("ASC 605-50"), and ASC 605-25, "Revenue Arrangements with Multiple Deliverables" (“ASC 605-25”). When the Company emerged from the development stage with the acquisition of Teliphone Inc. in 2005, they began to recognize revenue from their Telephony services when they are earned, specifically when all the following conditions are met:
·
Services are provided or products are delivered to customers
·
There is clear evidence that an arrangement exists
·
Amounts are fixed or can be determined
·
The Company’s ability to collect is reasonably assured.
For Teliphone Corp:
·
Monthly fees for local, long distance and wireless voice services, as well as data services when we provide the services.
o
“Services over the Company’s network” means that a significant portion of the voice or data passes over the Company’s own data network which it controls; and
o
“Services resold from Major Provider’s networks” means that the Company re-sells the services purchased from a Major Provider to its customer, and hence does not control the voice or data flow (represents majority of the Company’s revenues).
·
Consulting fees which the Company earns when it sells hourly consulting services.
o
Consulting services are typically computer software development related, along with any administrative services that occur in the management of those resources (such as project management, accounting, administrative support, etc)
·
Other fees, such as network access fees, license fees, hosting fees, maintenance fees and standby fees, over the term of the contract.
·
Subscriber revenues when customers receive the service.
·
Revenues from the sale of equipment when the equipment is delivered and accepted by customers.
For NYTEX:
·
Revenue from minutes sold on the exchange at the time of purchase which includes the price of the minutes and a per minute transaction fee which can vary from transaction to transaction.
·
Consulting fees which the Company earns when it sells hourly consulting services:
o
Consulting services are typically for network operators which require advice on management of their international call termination
·
Revenues from the sale of equipment when the equipment is delivered and accepted by customers
Revenues exclude sales taxes and other taxes we collect from our customers.
Multiple-Element Arrangements
We enter into arrangements that may include the sale of a number of products and services, notably in sales of voice services over our own network. In all such cases, we separately account for each product or service according to the methods previously described when the following five conditions are met:
·
The product or service has value to our customer on a stand-alone basis.
·
here is objective and reliable evidence of the fair value of any undelivered product or service.
·
if the sale includes a general right of return relating to a delivered product or service, the delivery or performance of any undelivered product or service is probable and substantially in our control.
·
If there is objective and reliable evidence of fair value for all products and services in a sale, the total price to the customer is allocated to each product and service based on its relative fair value. Otherwise, we first allocate a portion of the total price to any undelivered products and services based on their fair value and the remainder to the products and services that have been delivered.
·
If the conditions to account separately for each product or service are not met, we recognize revenue pro rata over the term of the customer agreement.
Resellers
We may enter into arrangements with resellers who provide services to our customers. When we act as the principal in these arrangements, we recognize revenue based on the amounts billed to our customers. Otherwise, we recognize as revenue the net amount that we retain.
Sales Returns
We accrue an estimated amount for sales returns, based on our past experience, when revenue is recognized.
Deferred Revenues
We record payments we receive in advance, including upfront non-refundable payments, as deferred revenues until we provide the service or deliver the product to customers. Deferred revenues also include amounts billed under multiple-element sales contracts where the conditions to account separately for each product or service sold have not been met.
Accounts Receivable
The Company conducts business and extends credit based on an evaluation of the customers’ financial condition, generally without requiring collateral.
Exposure to losses on receivables is expected to vary by customer due to the financial condition of each customer. The Company monitors exposure to credit losses and maintains allowances for anticipated losses considered necessary under the circumstances.
Accounts receivable are generally due within 30 days and collateral is not required. Unbilled accounts receivable represents amounts due from customers for which billing statements have not been generated and sent to the customers.
Convertible Instruments
The Company reviews the terms of convertible debt and equity securities for indications requiring bifurcation, and separate accounting, for the embedded conversion feature. Generally, embedded conversion features where the ability to physical or net-share settle the conversion option is not within the control of the Company are bifurcated and accounted for as a derivative financial instrument. (See Derivative Financial Instruments below). Bifurcation of the embedded derivative instrument requires allocation of the proceeds first to the fair value of the embedded derivative instrument with the residual allocated to the debt instrument. The resulting discount to the face value of the debt instrument is amortized through periodic charges to interest expense using the Effective Interest Method.
Fixed Assets
Fixed assets are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets; automobiles - 3 years, computer equipment - 3 years, and furniture and fixtures - 5 years.
When assets are retired or otherwise disposed of, the costs and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized. Deduction is made for retirements resulting from renewals or betterments.
Impairment of Long-Lived Assets
Long-lived assets, primarily fixed assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. The Company does perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and estimated fair value.
Earnings (Loss) Per Share of Common Stock
Basic net income (loss) per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per share (EPS) includes additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. Common stock equivalents were not included in the computation of diluted earnings per share when the Company reported a loss because to do so would be anti-dilutive for periods presented.
The Company has not issued options or warrants to purchase stock in these periods. If there were options or warrants outstanding they would not be included in the computation of diluted EPS when the Company reported a loss because inclusion would have been antidilutive.
Non-controlling Interests
In accordance with ASC 810-10-45, Noncontrolling Interests in Consolidated Financial Statements, the Company classifies controlling interests as a component of equity within the consolidated balance sheets.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TELIPHONE CORP.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2012 AND 2011
Report of Independent Registered Public Accounting Firm
To the Directors of
Teliphone Corp.
We have audited the accompanying balance sheets of Teliphone Corp. (the "Company") as of September 30, 2012 and 2011, and the related statements of operations and comprehensive income (loss), changes in stockholders' equity (deficit) and cash flows for the years ended September 30, 2012 and 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Teliphone Corp. as of September 30, 2012 and 2011, and the results of its statements of operations and comprehensive income (loss), changes in stockholders’ equity (deficit), and cash flows for years ended September 30, 2012 and 2011 in conformity with principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has sustained operating losses and significant working capital deficits in the past few years, and has commenced profitable operations during this past year. The lack of profitable operations in the past and the need to continue to raise funds raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in this regard are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/KBL, LLP
New York, NY
March 27, 2013
TELIPHONE CORP.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2012 AND 2011
NOTE 1-
ORGANIZATION AND BASIS OF PRESENTATION
Teliphone Corp. (the “Company”) was incorporated in the State of Nevada on March 2, 1999 to serve as a vehicle to effect a merger, exchange of capital stock, asset acquisition or other business combination with a domestic or foreign private business. Effective April 28, 2005, the Company achieved its objectives with the reverse merger and reorganization with Teliphone Inc., a Canadian company.
Teliphone Corp. (the “Company”, formerly “OSK Capital II Corp” until it changed its name on August 21, 2006) was incorporated in the State of Nevada on March 2, 1999 to serve as a vehicle to effect a merger, exchange of capital stock, asset acquisition or other business combination with a domestic or foreign private business. Effective April 28, 2005, the Company achieved its objectives with the reverse merger and reorganization with Teliphone Inc., a Canadian company.
Teliphone, Inc. was founded by its original parent company, United American Corporation, a publicly traded Florida Corporation, in order to develop a Voice-over-Internet-Protocol (VoIP) network which enables users to connect an electronic device to their internet connection at the home or office which permits them to make telephone calls to any destination phone number anywhere in the world. VoIP is currently growing in scale significantly in North America. This innovative new approach to telecommunications has the benefit of drastically reducing the cost of making these calls as the distances are covered over the Internet instead of over dedicated lines such as traditional telephony.
Prior to its acquisition by the Company, Teliphone Inc. had grown primarily in the Province of Quebec, Canada through the sale of its product offering in retail stores and over the internet. In addition to the retail services provided, Teliphone Inc. also sold to wholesalers who re-billed these services to their customers and provided the necessary support to their customers directly.
Teliphone Inc. provided its telecommunications services provided over its own network, and also re-sells traditional telecommunications services provided over the network of Major Telecommunications Providers across Canada through a direct sales channel.
On April 1, 2011, the Company consolidated its operations into that of the parent company. On May 31, 2011, the Company sold its entire ownership holdings in its subsidiary, Teliphone Inc. and continued operating the same business as before the disposition.
The Company acquired the New York Telecom Exchange Inc. (NYTEX), a telecommunications commodity exchange on December 31, 2011 for 20,000,000 common shares at a value of $0.25 per share. Management believes that the acquisition will allow it to provide a fully-integrated series of options which can now include wholesale traffic. While NYTEX has been in operation since January 2009, expansion of NYTEX will require the Company to seek additional financing externally or through supplier agreements.
NYTEX is a telecommunications commodity exchange established in October 2008 and officially launched in June 2009. It focuses on facilitating the exchange of international call termination. International call termination occurs when a caller initiates a call in one country and it terminates in another. NYTEX provides services much like other commodity exchanges whereby it provides a platform for buyers and sellers to come together to purchase and sell international termination. Unlike traditional telecommunications exchanges where buyers and sellers are matched one to one on a circuit to circuit, in the NYTEX concept sellers sell their termination into a market and buyer buy from that market. NYTEX also offers a one to one trading facility for clients who request it. NYTEX manages all aspects of the transactions including technical clearing, financial clearing and quality control of the termination bought and sold on the exchange. NYTEX developed all technical and conceptual aspects in house which includes
a unique anti-False Answer Supervision (FAS) system which reduces the number of false calls by up to 90%. NYTEX has technical data centers in Montreal, London and Brussels which manage all calls.
On December 11, 2012, the Company completed the acquisition of the core assets and network (the "Navigata Acquired Businesses") of Navigata Communications 2009 Inc. (the "Seller"). The acquisition was effected pursuant to a two-step process involving a Purchase Agreement, dated as of November 30, 2012, among 9191-4200 Quebec Inc., a corporation incorporated under the laws of the Province of Quebec, Canada ("Quebec"), the Seller and certain affiliates of Quebec (the "Asset Purchase Agreement"); and a Share Exchange Agreement, dated as of December 11, 2012, by and between the Company and Fiducie Residence JAAM, a family trust registered in the Province of Quebec, Canada ("JAAM").
On November 30, 2012, pursuant to the Asset Purchase Agreement, Quebec acquired from Seller selected assets and liabilities related to the business of providing telecommunications services, including voice, data and internet services, to service providers and end users, using its national MPLS-enabled data backbone, microwave backhaul network in British Columbia, and carrier points of interconnection in Vancouver, Toronto, Seattle, LA, and New York (the "Asset Purchase"). As consideration for the Asset Purchase, Quebec paid an aggregate consideration of CD$6,440,000, along with the assumption of certain limited current liabilities of the Seller, as follows: (i) CD$500,000 paid in cash by wire transfer at closing of the Asset Purchase; (ii) $940,000 to be paid in cash by certified check, wire transfer or other immediately available funds on December 14, 2012; and (iii) a total of CD$5,000,000 to be paid in cash in five separate, equal instalments of CD$1,000,000 each due on December 15 of each of 2013, 2014, 2015, 2016 and 2017 (the "Deferred Consideration"). Interest will accrue on the Deferred Consideration at a rate of 6.5% per annum. In addition, under a Temporary Service Agreement, an additional CD$386,629 was agreed to be added to the purchase price for employees and Cascade Directors services, bringing the total purchase price to CD$6,826,630. On December 28, 2012, JAAM assumed the $5,000,000 debt from the Company in exchange for 11,416,667 warrants for common shares of the Company. The warrants are based on a vesting schedule of 5 tranches with each tranche exercisable for 3 years of the date of vesting as follows:
Tranche
Vesting Date
Number
Purchase Price
Expiry of Warrant
of Warrant
of Warrants
per share(USD)
December 15, 2013
5,000,000
$0.20
December 15, 2016
December 15, 2014
2,500,000
$0.40
December 15, 2017
December 15, 2015
1,666,667
$0.60
December 15, 2018
December 15, 2016
1,250,000
$0.80
December 15, 2019
December 15, 2017
1,000,000
$1.00
December 15, 2020
On December 11, 2012, the Company completed the acquisition from JAMM of 100% of the outstanding stock of Quebec (the "Stock Acquisition"). The Stock Acquisition was effected pursuant to a Share Exchange Agreement in which the Company acquired all of Quebec’s outstanding shares in exchange for tendering 61,500,00 shares of the Company, valued at US$13,530,000, to JAMM. Quebec was subsequently re-named Teliphone Navigata-Westel.
On December 28, 2012 the Company entered in to an agreement with The New York Telecom Exchange Inc., a New York Company (“NYTEX”) under which NYTEX unconditionally assumed all responsibility and liability for $992,958 of liabilities relating to invoices from three suppliers that are currently shown as ”Accounts Payable” on the books of the Company. No consideration is payable by the Company in this transaction. As a result of this transaction, the Company decreased the goodwill purchased in the transaction with NYTEX one year earlier.
On February 8, 2013 the Company completed the acquisition of 100% of the outstanding stock of Titan Communications Inc. The acquisition was effected through a two stage process. Firstly, pursuant to a Share Purchase Agreement (the “SPA”) effective February 8, 2013, Fiducie Familiale M.A.A. ("MAA"), a related party to the Company, acquired all of Titans outstanding shares in exchange for a total consideration of $1,696,600. The consideration is payable in accordance with the following schedule: i) $349,300 paid at closing; ii) $34,930 paid 30 days from closing; iii) $34,930 paid 60 days from closing; and iv) the balance ($1,277,440) to be paid in 36 equal monthly payments ($35,484 each) beginning 90 days from closing. Additional consideration equal to, 10% of the
aggregate revenue generated by Titan above $1,663,267 in the first 12 months beginning 30 days from closing and 10% of the aggregate revenue generated by Cloud-Phone Inc above $540,000 in the first 12 months beginning 30 days from closing, may also be payable if the revenue thresholds are surpassed. Secondly, also on February 8, 2013 the Company acquired from MAA all share capital, assets and liabilities of Titan in return for assuming all liabilities due to the former shareholders of Titan under the SPA plus the payment of $1.
On February 8, 2013 the Company completed the acquisition of 100% of the outstanding stock of Cloud-Phone Inc. The acquisition was effected pursuant through a two stage process. Firstly, pursuant to a Share Purchase Agreement (the “SPA”) effective February 8, 2013, Fiducie Familiale M.A.A. ("MAA"), a related party to the Companyacquired all of Cloud-Phones outstanding shares in exchange for the assumption of certain liabilities of Cloud Phone totaling $99,800. The consideration is payable in accordance with the following schedule: i) $19,960 payable at closing; ii) the balance ($79,840) to be paid in 20 equal monthly payments ($3,992 each) beginning 30 days after closing. Secondly, also on February 8, 2013 the Company acquired from MAA all share capital, assets and liabilities of Cloud-Phone in return for assuming all liabilities due under the SPA plus the payment of $1.
.
Going Concern
As shown in the accompanying financial statements, the Company has incurred a loss of $2,782,104 for the year ended September 30, 2012, as well as having a working capital deficit of $2,335,225 as of September 30 2012and has an accumulated deficit of $3,006,956 through September 30, 2012. The Company has and continues to streamline their business, and has expanded their services throughout Canada generating positive gross margins. With the acquisition of NYTEX the Company added wholesale international long distance termination to it service offerings. The positive gross margin generated by Teliphone was largely offset by an increase in depreciation due to investment in equipment and an increase in consulting fees for platform upgrades as well as product development and implementation of its IPTV service. The Company has now completed the migration all its voice/data purchases to a new supplier and as a result expects reduced its operating direct costs.
The Company is working on increasing its working capital deficit. The Company’s former subsidiary, Teliphone Inc. had accumulated trade payables greater than their trade receivables up to May 2011. The Company had consolidated their operations such that the Company and not its subsidiary, Teliphone Inc. is now operating the business as of April 1, 2011. On May 9, 2011, Teliphone Inc. filed for creditor protection under provisions of the Canadian Bankruptcy and Insolvency Act. On May 31, 2011, the Company sold its entire holdings of Teliphone Inc. and as such no longer has responsibility for this trade deficit.
Teliphone Inc. had accumulated trade payables greater than their trade receivables up to May 2011. The Company had consolidated their operations such that the Company and not its former subsidiary, Teliphone Inc. is now operating the business as of April 1, 2011. On May 9, 2011, Teliphone Inc. filed for creditor protection under provisions of the Canadian Bankruptcy and Insolvency Act. On May 31, 2011, the Company sold its entire holdings of Teliphone Inc.
On May 1, 2009, the Company entered into a customer assignment contract with 9191-4200 Quebec Inc. where it began to service the customers of Orion Communications Inc., an Ontario, Canada Company. The transaction is further detailed in Note 10.
Management believes that the Company’s capital requirements will depend on many factors. These factors include the increase in sales through existing channels as well as its ability to leverage its technology into the commercial small business segments.
Lastly, subsequent to September 30, 2012, on December 16, 2012 the Company completed an acquisition of the core operations and network of Navigata Communications 2009 Inc. pursuant to an asset purchase agreement executed on November 30 2012 through an acquisition company, 9191-4200 Quebec Inc. The assets acquired related to the business of providing telecommunications services, including voice, data and internet services, to service providers and end users, using its national MPLS-enabled data backbone,
microwave backhaul network in British Columbia, and carrier points of interconnection in Vancouver, Toronto, Seattle, Los Angeles, and New York. While the acquisition increased the Company's sales and net equity, it will require a significant effort related to restructuring including negotiation with creditors and rationalization of resources.
The Company’s ability to continue as a going concern for a reasonable period is dependent upon management’s ability to raise additional interim capital. There can be no assurance that management will be able to raise sufficient capital, under terms satisfactory to the Company, if at all.
The financial statements do not include any adjustments relating to the carrying amounts of recorded assets or the carrying amounts and classification of recorded liabilities that may be required should the Company be unable to continue as a going concern.
Effective July 1, 2009, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting Principles - Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards.
All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Positions or Emerging Issue Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASUs”).
The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the Codification.
NOTE 2-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
With the sale of Teliphone Inc. on May 31, 2011, the Company disposed of its only majority-owned subsidiary, and as a result, all non-controlling interests have been disposed of. The financial statements include no subsidiaries for the year ended September 30, 2012, and as a result of the acquisition of JAMM on December 11, 2012, the Company will begin to consolidate the results of that entity commencing with the quarter ended December 31, 2012.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make 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. On an on-going basis, the Company evaluates its estimates, including, but not limited to, those related to investment tax credits, bad debts, income taxes and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
Cash
The Company considers all highly liquid debt instruments and other short-term investments with an initial maturity of three months or less to be cash equivalents.
Comprehensive Income
The Company adopted ASC 220-10, “Reporting Comprehensive Income,” (formerly SFAS No. 130). ASC 220-10 requires the reporting of comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of information that historically has not been recognized in the calculation of net income.
Inventory
Inventory is valued at the lower of cost or market determined on a first-in-first-out basis. Inventory consisted only of finished goods.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash, accounts receivable and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. For the notes payable, the carrying amount reported is based upon the incremental borrowing rates otherwise available to the Company for similar borrowings.
Currency Translation
For accounts in currencies other than the U.S. dollar, the Company translates income and expense amounts at average exchange rates for the month, translates assets and liabilities at year-end exchange rates and equity at historical rates. The Company’s functional currency is the Canadian dollar, while the Company reports its currency in the US dollar. The Company records these translation adjustments as accumulated other comprehensive income (loss). Gains and losses from foreign currency transactions are included in other income (expense) in the results of operations.
Revenue Recognition
Operating revenues for the Company are generated directly within the Company and not in its former subsidiary, Teliphone Inc. since the Company consolidated its operations and sold the inoperative Teliphone Inc. on May 31, 2011. Operating revenues consist of telecommunications services (voice, video, data and long distance), customer equipment (which enables the Company's telephony services), consulting services and shipping revenue. Generally revenue recognition is the same for Teliphone Corp. and NYTEX except where indicated below. The point in time at which revenue is recognized is determined in accordance with Revenue Recognition under ASC 605-50, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products) ("ASC 605-50"), and ASC 605-25, "Revenue Arrangements with Multiple Deliverables" (“ASC 605-25”). When the Company emerged from the development stage with the acquisition of Teliphone Inc. in 2005, they began to recognize revenue from their Telephony services when they are earned, specifically when all the following conditions are met:
·
Services are provided or products are delivered to customers
·
There is clear evidence that an arrangement exists
·
Amounts are fixed or can be determined
·
The Company’s ability to collect is reasonably assured.
In particular, the Company recognizes:
For Teliphone Corp:
·
Monthly fees for local, long distance and wireless voice services, as well as data services when we provide the services
o
“Services over the Company’s network” means that a significant portion of the voice or data passes over the Company’s own data network which it controls and
o
“Services resold from Major Provider’s networks” means that the Company re-sells the services purchased from a Major Provider to its customer, and hence does not control the voice or data flow (represents majority of the Company’s revenues)
·
Consulting fees which the Company earns when it sells hourly consulting services.
o
Consulting services are typically computer software development related, along with any administrative services that occur in the management of those resources (such as project management, accounting, administrative support, etc)
·
Other fees, such as network access fees, license fees, hosting fees, maintenance fees and standby fees, over the term of the contract
·
Subscriber revenues when customers receive the service
·
Revenues from the sale of equipment when the equipment is delivered and accepted by customers
For NYTEX:
·
Revenue from minutes sold on the exchange at the time of purchase which includes the price of the minutes and a per minute transaction fee which can vary from transaction to transaction.
·
Consulting fees which the Company earns when it sells hourly consulting services
o
Consulting services are typically for network operators which require advice on management of their international call termination
·
Revenues from the sale of equipment when the equipment is delivered and accepted by customers
Revenues exclude sales taxes and other taxes we collect from our customers.
Multiple-Element Arrangements
The Company enters into arrangements that may include the sale of a number of products and services, notably in sales of voice services over their network. In all such cases, the Company separately accounts for each product or service according to the methods previously described when the following conditions are met:
·
The product or service has value to the customer on a stand-alone basis;
·
There is objective and reliable evidence of the fair value of any undelivered product or service;
·
If the sale includes a general right of return relating to a delivered product or service, the delivery or performance of any undelivered product or service is probable and substantially in the Company’s control;
·
If there is objective and reliable evidence of fair value for all products and services in a sale, the total price to the customer is allocated to each product and service based on its relative fair value. Otherwise, the Company first allocates a portion of the total price to any undelivered products and services based on their fair value and the remainder to the products and services that have been delivered: and
·
If the conditions to account separately for each product or service are not met, the Company recognizes revenue pro rata over the term of the customer agreement.
Resellers
The Company may enter into arrangements with resellers who provide services to its customers. When the Company acts as the principal in these arrangements, they recognize revenue based on the amounts billed to their customers. Otherwise, the Company recognizes as revenues, the net amount that it retains.
Sales Returns
The Company accrues an estimated amount for sales returns, based on their past experience, when revenue is recognized.
Deferred Revenues
The Company records payments they receive in advance, including upfront non-refundable payments, as deferred revenues until they provide the service or deliver the product to customers. Deferred revenues also include amounts billed under multiple-element sales contracts where the conditions to account separately for each product or service sold have not been met.
Accounts Receivable
The Company conducts business and extends credit based on an evaluation of the customers’ financial condition, generally without requiring collateral.
Exposure to losses on receivables is expected to vary by customer due to the financial condition of each customer. The Company monitors exposure to credit losses and maintains allowances for anticipated losses considered necessary under the circumstances. The Company has an allowance for doubtful accounts of $167,206 at September 30, 2012.
Accounts receivable are generally due within 30 days and collateral is not required. Unbilled accounts receivable represents amounts due from customers for which billing statements have not been generated and sent to the customers.
Income Taxes
The Company accounts for income taxes utilizing the liability method of accounting. Under the liability method, deferred taxes are determined based on differences between financial statement and tax bases of assets and liabilities at enacted tax rates in effect in years in which differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts that are expected to be realized.
Convertible Instruments
The Company reviews the terms of convertible debt and equity securities for indications requiring bifurcation, and separate accounting, for the embedded conversion feature. Generally, embedded conversion features where the ability to physical or net-share settle the conversion option is not within the control of the Company are bifurcated and accounted for as a derivative financial instrument. (See Derivative Financial Instruments below). Bifurcation of the embedded derivative instrument requires allocation of the proceeds first to the fair value of the embedded derivative instrument with the residual allocated to the debt instrument. The resulting discount to the face value of the debt instrument is amortized through periodic charges to interest expense using the Effective Interest Method.
Derivative Financial Instruments
The Company generally does not use derivative financial instruments to hedge exposures to cash-flow or market risks. However, certain other financial instruments, such as warrants or options to acquire common stock and the embedded conversion features of debt and preferred instruments that are indexed to the Company’s common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net share settlement is not within the control of the Company. In such instances, net-cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period.
Advertising Costs
The Company expenses the costs associated with advertising as incurred. Advertising expenses for the years ended September 30, 2012 and 2011 are included in selling and promotion expenses in the statements of operations.
Fixed Assets
Fixed assets are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets; computer equipment - 3 years, and furniture and fixtures - 5 years.
When assets are retired or otherwise disposed of, the costs and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized. Deduction is made for retirements resulting from renewals or betterments.
Impairment of Long-Lived Assets
Long-lived assets, primarily fixed assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. The Company does perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and estimated fair value. During the years ended September 30, 2012 and 2011, the Company did not impair any long-lived assets including goodwill and other intangible assets (see Note 10).
Earnings (Loss) Per Share of Common Stock
Basic net income (loss) per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per share (EPS) includes additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. Common stock equivalents were not included in the computation of diluted earnings per share when the Company reported a loss because to do so would be antidilutive for periods presented.
The following is a reconciliation of the computation for basic and diluted EPS:
September 30,
September 30,
Net income (loss)
$(2,782,104)
$2,015,898
Weighted-average common stock
Outstanding (Basic)
55,448,336
39,119,981
Weighted-average common stock
Equivalents
Stock Options
-
-
Warrants
-
-
Weighted-average common stock
Outstanding (Diluted)
55,448,336
39,119,981
The Company has not issued options or warrants to purchase stock in these periods. If there were options or warrants outstanding they would not be included in the computation of diluted EPS when the Company reported a loss because inclusion would have been anti-dilutive.
Stock-Based Compensation
In 2006, the Company adopted the provisions of ASC 718-10 “Share Based Payments” for its year ended September 30, 2008. The adoption of this principle had no effect on the Company’s operations.
The Company has elected to use the modified-prospective approach method. Under that transition method, the calculated expense in 2006 is equivalent to compensation expense for all awards granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair values. Stock-based compensation expense for all awards granted after January 1, 2006 is based on the grant-date fair values. The Company recognizes these compensation costs, net of an estimated forfeiture rate, on a pro rata basis over the requisite service period of each vesting tranche of each award. The Company considers voluntary termination behavior as well as trends of actual option forfeitures when estimating the forfeiture rate.
The Company measures compensation expense for its non-employee stock-based compensation under ASC 505-50, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”. The fair value of the option issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital.
Segment Information
The Company follows the provisions of ASC 280-10, “Disclosures about Segments of an Enterprise and Related Information”. This standard requires that companies disclose operating segments based on the manner in which management disaggregates the Company in making internal operating decisions. Up to December 31, 2011, the Company had not segregated the business despite the Company incurring sales of hardware components for the VoIP service as well as the service itself. The Company treated these items as one component.
With the acquisition of NYTEX, beginning January 1, 2012, the Company began segregating the business between the activities of Teliphone and NYTEX.
The method for determining what information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. The Company’s chief operating decision-maker is considered to be the Company’s chief executive officer (“CEO”). The CEO reviews financial information presented on an entity level basis accompanied by disaggregated information about revenues by product type and certain information about geographic regions where appropriate for purposes of making operating decisions and assessing financial performance. The entity level financial information is identical to the information presented in the accompanying consolidated statements of operations.
The Company has two primary operating areas; under the trade name ``Teliphone`` which provides voice, video and data services to residential and commercial clients across Canada, and under the trade name ``NYTEX`` (New York Telecom Exchange Inc.) which facilitates the exchange of international voice termination to wholesale clients internationally. The Company has determined that as of the balance sheet date, it is appropriate to present segmentation information by each of these primary operations. Specific geographical segmentation is not relevant for either operation.
Customer Lists
The Company acquired in two separate transactions in March 2011 and December 2011, customer lists. The customer lists are amortized over a period of five years. The customer lists are amortized utilizing the straight-line method, and the Company performs an annual impairment test regarding whether there needs to be additional write-off. The amortization for the years ended September 30, 2012 and 2011 of $383,759 and $154,380, respectively, do not include any additional impairment. Based on an evaluation of the customers, Management has determined no further impairment to be necessary as of September 30, 2012.
Uncertainty in Income Taxes
The Company follows ASC 740-10, “Accounting for Uncertainty in Income Taxes” (“ASC 740-10”). This interpretation requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. ASC 740-10 is effective for fiscal years beginning after December 15, 2006. Management has adopted ASC 740-10 for 2009, and they evaluate their tax positions on an annual basis, and has determined that as of September 30, 2012, no additional accrual for income taxes other than the federal and state provisions and related interest and estimated penalty accruals is not considered necessary.
The Company has performed a review of its material tax positions. During the years ended September 30, 2012 and 2011, the Company did not recognize any amounts for interest and penalties with respect to any unrecognized tax benefits.
Goodwill
Goodwill and Other Intangible Assets-Under ASC No. 350, “Intangibles-Goodwill and Other” (“ASC 350”), goodwill and indefinite lived intangible assets are not amortized but are reviewed annually for impairment, or more frequently, if impairment indicators arise. Intangible assets that have finite lives are amortized over their estimated useful lives and are subject to the provisions of ASC No. 360, “Property, Plant and Equipment” (“ASC 360”).
Goodwill impairment is tested at least annually (October 1 for the Company) or when factors indicate potential impairment using a two-step process that begins with an estimation of the fair value of each reporting unit. Step 1 is a screen for potential impairment pursuant to which the estimated fair value of each reporting unit is compared to its carrying value. The Company estimates the fair values of each reporting unit by a combination of (i) estimation of the discounted cash flows of each of the reporting units based on projected earnings in the future (the income approach) and (ii) a comparative analysis of revenue and margins multiples of public companies in similar markets (the market approach). If there is a deficiency (the estimated fair value of a reporting unit is less than its carrying value), a Step 2 test is required.
On December 30, 2011 the Company acquired the assets of the New York Telecom Exchange Inc. The Company issued 20,000,000 shares ($0.25 per share) on December 30, 2011 for the acquisition of the New York Telecom Exchange Inc. The value of $5,000,000 was allocated as follows: $2,300,000 for the trading platform, $200,000 for computer equipment, $500,000 for the customer lists, and the remaining balance of $2,000,000 allocated to goodwill.
In addition, the Company acquired $585,040 in goodwill from the Orion acquisition in 2011.
Upon performing an evaluation at September 30, 2012, Management determined that none of the goodwill has been impaired.
Noncontrolling Interests
In accordance with ASC 810-10-45, Noncontrolling Interests in Consolidated Financial Statements, the Company classifies controlling interests as a component of equity within the balance sheet. The
Company has retroactively applied the provisions in ASC 810-10-45 to the financial information for the year ended September 30, 2010. The Company disposed of their only non-wholly owned subsidiary on May 31, 2011.
Discontinued Operations
The Company has accounted for the sale of its entire holdings in its subsidiary Teliphone Inc in accordance with ASC 360-10-45, Property, Plant, and Equipment - Overall - Glossary-Component of an Entity, (formerly FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets). (See NOTE 13 - DISCONTINUED OPERATIONS). In the prior year financial statement comparatives, the Company has reflected the prior year presentation to reflect elements of the disposed subsidiary as discontinued operations. This reclassification had no effect on earnings per share of the prior period as is for presentation purposes only.
Recent Accounting Pronouncements
In May 2011, FASB issued Accounting Standards Update (ASU) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. FASB ASU 2011-04 amends and clarifies the measurement and disclosure requirements of FASB ASC 820 resulting in common requirements for measuring fair value and for disclosing information about fair value measurements, clarification of how to apply existing fair value measurement and disclosure requirements, and changes to certain principles and requirements for measuring fair value and disclosing information about fair value measurements. The new requirements are effective for fiscal years beginning after December 15, 2011. The Company plans to adopt this amended guidance on October 1, 2012 and at this time does not anticipate that it will have a material impact on the Company’s results of operations, cash flows or financial position.
In June 2011, FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which amends the disclosure and presentation requirements of Comprehensive Income. Specifically, FASB ASU No. 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in 1) a single continuous statement of comprehensive income or 2) two separate but consecutive statements, in which the first statement presents total net income and its components, and the second statement presents total other comprehensive income and its components. These new presentation requirements, as currently set forth, are effective for the Company beginning October 1, 2012, with early adoption permitted. The Company plans to adopt this amended guidance on October 1, 2012 and at this time does not anticipate that it will have a material impact on the Company’s results of operations, cash flows or financial position.
In September 2011, FASB issued ASU 2011-08, Testing Goodwill for Impairment, which amended goodwill impairment guidance to provide an option for entities to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. After assessing the totality of events and circumstances, if an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, performance of the two-step impairment test is no longer required. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. Adoption of this guidance is not expected to have any impact on the Company’s results of operations, cash flows or financial position.
In July 2012, the FASB issued ASU 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, on testing for indefinite-lived intangible assets for impairment. The new guidance provides an entity to simplify the testing for a drop in value of intangible assets such as trademarks, patents, and distribution rights. The amended standard reduces the cost of accounting for indefinite-lived intangible assets, especially in cases where the likelihood of impairment is low. The changes permit businesses and other organizations to first use subjective criteria to determine if an intangible asset has lost value. The amendments to U.S. GAAP will be effective for fiscal years
starting after September 15, 2012. The Company’s adoption of this accounting guidance does not have a material impact on the consolidated financial statements and related disclosures.
There were other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
NOTE 3-
FIXED ASSETS
Fixed assets as of September 30, 2012 and 2011 were as follows:
Estimated Useful
Life (Years)
September 30,
September 30,
Furniture and fixtures
$689
$689
Trading platform
2,300,000
-
Computer equipment
1,902,276
1,357,963
4,202,965
1,358,652
Less: accumulated depreciation
1,278,890
118,139
Fixed assets, net
$2,924,075
$1,240,513
There was $1,160,751 and $118,139 charged to operations for depreciation expense for continuing operations for the years ending September 30, 2012 and 2011, respectively. In addition, based on an evaluation of the Company’s fixed assets, Management has determined that there is no impairment on any of these long-lived assets.
NOTE 4-
CUSTOMER LISTS
Customer lists as of September 30, 2012 and 2011 were as follows:
Estimated Useful
Lives (Years)
September 30,
September 30,
Customer lists
$2,043,796
$ 1,543,796
2,043,796
1,543,796
Less: accumulated amortization
538,139
154,380
Customer lists, net
$1,505,657
$1,389,416
The amortization for the years ended September 30, 2012 and 2011 of $383,759 and $154,380, respectively, do not include any additional impairment. Based on an evaluation of the customers, Management has determined no further impairment to be necessary as of September 30, 2012.
NOTE 5-
RELATED PARTY LOANS
Long Term Related Party Debt
On April 1, 2011, the Company assumed debt of a shareholder previously held within its former majority-owned subsidiary, Teliphone Inc. of $70,828. The loan matures on December 31, 2013 with interest only payable monthly at an annual rate of 12%. The Company reserves the right to pay the principal in its entirety at any time without penalty. The total amount is outstanding as of September 30, 2012.
The Company has accrued $31,873 in accrued interest on this payable.
Current Related Party Debt
The Company has a net balance due of $112,880 to a Director of the Company and a company owned and controlled by the same Director as of September 30, 2012. The advances are considered short term in nature, accrue interest at 12% per annum, and are due on demand. As of September 30, 2012, the Company has accrued $10,381 in interest on these advances.
NOTE 6-
CONVERTIBLE DEBENTURES
On February 6, 2009, the Company entered into a 12% Convertible Debenture (the “A Debenture”) with an individual. The A Debenture had an original maturity date of February 6, 2010, and incurred interest at a rate of 12% per annum. On February 6, 2010, the A Debenture was renewed for an additional 12 months at 12%. As of February 6, 2011 the debenture holder agreed to continue on a month to month basis with monthly interest payments continuing at the 12% rate.
The A Debenture can either be paid to the holder on the anniversary or converted at the Company's option any time after the first anniversary at a conversion price equal to $0.25 per share of the common stock.
On February 17, 2009, the Company entered into a 12% Convertible Debenture (the “B Debenture”) with an individual. The B Debenture had an original maturity date of February 17, 2010, and incurred interest at a rate of 12% per annum. On February 17, 2010, the B Debenture was renewed for an additional 12 months at 12% and was further renewed to mature on February 28, 2014.
The original terms of the A Debenture was that it could either be paid to the holder on the anniversary or converted at the Company's option any time after the first anniversary at a conversion price equal to $0.25 per share of the common stock. Subsequently, on February 1, 2013, the debenture was converted to a 2 year note at 12% per annum payable monthly with maturity on January 31, 2015, payable at any time by the Company without penalty.
The total amount of the A and B Debentures was $61,026.
The convertible debentures met the definition of hybrid instruments, as defined in ASC 815-10, Accounting for Derivative Instruments and Hedging Activities (ASC 815-10). The hybrid instruments are comprised of a i) a debt instrument, as the host contract and ii) an option to convert the debentures into common stock of the Company, as an embedded derivative. The embedded derivative derives its value based on the underlying fair value of the Company’s common stock. The Embedded Derivative is not clearly and closely related to the underlying host debt instrument since the economic characteristics and risk associated with this derivative are based on the common stock fair value.
The embedded derivative did not qualify as a fair value or cash flow hedge under ASC 815-10.
NOTE 7-
COMMITMENTS / LITIGATION
Lease Commitments
The Company assumed the lease from its former subsidiary Teliphone Inc. for its Toronto, Canada offices, which is set to expire on August 31, 2014. The Company has the following commitments remaining on this lease:
September 30,
2013:$51,960
2014:
$43,300
Rent expense associated with this lease for the year ended September 30, 2012 and 2011 were:
September 30,
2011:$50,691
2012:
$50,442
The Company has a lease with a business center for its Montreal, Canada offices which is set to expire on November 30, 2013. The Company has the following commitments remaining on this lease:
September 30,
2013:$13,980
Rent expense associated with this lease for the year ended September 30, 2012 and 2011 were:
September 30,
2011:$83,253
2012:
$83,663
Teliphone Business Solutions Corp.
In September 2011 the Company began negotiations with Dezmocom Inc. of Montreal to establish Teliphone Business Solutions Corp, a joint venture between the Company and Dezmocom dedicated to the marketing of the Company's products and services and establishment of new sales channels. Dezmocom had an established track record of developing and overseeing marketing channels such as resellers and agents as well as internal expertise in sales of products the same or similar to those of the Company. Under an initial agreement executed on April 15, 2012 with the Company Dezmocom would share profits from the joint venture equally. The Company has been working with Dezmocom on this project and has advanced Teliphone Business Solutions an initial $19,426 increased to $20,444 which has been matched by Dezmocom. This amount is reflected in investments at September 30, 2012. Subsequently the Company reduced its stake in TBS to 20% to more accurately reflect the Company's level of involvement in TBS. However the Company continues to accrue the same direct financial benefits through sales of goods and services to TBS.
Litigation Claims
On April 29, 2009, 9191-4200 Quebec Inc. (“9191”) entered into a purchase agreement with 3 individuals residing in the Province of Ontario, Canada for all of the issued and outstanding shares of Orion Communications Inc. (“Orion”). On April 30, 2009, Orion, under management of 9191, had executed a services agreement with the Company’s subsidiary, Teliphone Inc. to provide telecommunications services to the customers of Orion. On January 18, 2010, 9191 filed a Statement of Claim in Superior Court of Justice in the Province of Ontario, Canada for rescission due to overpayment and damages totalling CDN$1,000,000 claiming misrepresentation of financial statements made by the former owners.
On February 18, 2010, the Former owners of Orion filed their defence and counterclaim against 9191, naming the Company, its former subsidiary Teliphone Inc., a current Director of the Company and the Company’s President and CEO at the time, and other individuals as third party claimants for a total of CDN$4,000,000. The Former Owners of Orion claim that the Company, its former subsidiary and
Director are third party claimants due to its agreements with 9191 to provide services to the clients of Orion.
The Former owners of Orion were also pursuing the Company’s former subsidiary Teliphone Inc. for $150,000 for the early termination of the employment agreement.
On March 10, 2010, Bank of Montreal (“BMO”), a Canadian financial institution and creditor of Orion had filed an original claim against the Company’s former subsidiary Teliphone Inc. requesting payment of Orion’s outstanding debt of CD$778,607. BMO stood as a secured creditor of Orion based on its issuance of a credit line to Orion in 2007. BMO claimed that as a secured creditor holding a General Security Agreement, it had rights to the receivables of Orion and claims that these receivables are being collected by Teliphone Inc.
On March 30, 2011, the Company acquired the client lists from BMO and therefore resolved the disputes with BMO for a total settlement of $375,000 payable over 24 months as follows: $25,000 due at commencement and a further $11,458 per month, with a final payment of $75,000 on the 24th month (See Note 12 for further discussion).
On November 15, 2011, BMO did not accept the monthly payment claiming that additional legal fees were owed to BMO by Teliphone. These fees were not listed in the original agreement and the Company and BMO entered into discussions to attempt to resolve BMO’s claim.
Subsequently, on January 23, 2013 the Company reached an all party agreement to settle all outstanding issues and obligations. The agreement now calls for a payment of $305,520.69 which covers principle, interest and all costs to be paid over 10 months. An initial payment of $50,000 and the agreement calls for 9 monthly payments of $25,000 and a final payment of $30,520.69 on October 31, 2013. The Company has classified the entire amount as a current liability on September 30, 2012, and has successfully made all required payments through February 2013.
NOTE 8-
STOCKHOLDERS’ EQUITY (DEFICIT)
Common Stock
As of September 30, 2012, the Company has 125,000,000 shares of common stock authorized with a par value of $.001.
The Company has 63,160,745 shares issued and outstanding as of September 30, 2012.
The Company issued 3,804,088 shares on May 4, 2011 for the acquisition of the rights to service the former clients of Orion Communications Inc. (“Orion”) after its dispute settlement with Orion’s secured creditors.
The Company agreed to issue 489,871 shares on March 31, 2010 as part of an interest payment to shareholders in order to solidify personal guarantees in conjunction with an extension of the Company’s operating line of credit facility with its Bank. In addition, the Company has agreed to issue 1,800,000 shares of stock for its acquisition of $450,000 worth of equipment from Orion Communications, Inc. on September 1, 2011. The 2,289,471 shares of stock has not been issued, however the Company has booked a liability for stock to be issued of $469,868 as of September 30, 2011. The 1,800,000 shares were issued in fiscal 2012.
The Company issued 20,000,000 shares ($0.25 per share) on December 30, 2011 for the acquisition of the New York Telecom Exchange Inc. The value of $5,000,000 was allocated as follows: $2,300,000 for the trading platform, $200,000 for computer equipment, $500,000 for the customer lists, and the remaining balance of $2,000,000 allocated to goodwill. This is considered a related party transaction as the Company’s President and CEO and 10% Beneficial Owner are majority owners of the owner of all the issued and outstanding stock of The New York Telecom Exchange, Inc.
Subsequently on December 11, 2012 the Company issued 61,500,000 shares ($0.22 per share) for the acquisition of the core operations, assets and network of Navigata Communications 2009 Inc.
The Company as of September 30, 2012 and for the years ended September 30, 2012 and 2011, has not issued any options or warrants.
NOTE 9-
PROVISION FOR INCOME TAXES
Deferred income taxes are determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company’s assets and liabilities. Deferred income taxes are measured based on the tax rates expected to be in effect when the temporary differences are included in the Company’s tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.
At September 30, 2012 the Company had no deferred tax assets.
At September 30, 2012, the Company had a net operating loss in the amount of amount of $2,782,104 for the year and a cumulative losses of $3,006,956, all of which occurring within the Province of Ontario, Canada, and is offset by net loss carry forward and hence no income tax is due.
A reconciliation of the Company’s effective tax rate as a percentage of income before taxes and federal statutory rate for the periods ended September 30, 2012 and 2011 is summarized as follows:
Federal statutory rate
(34.0)%
(34.0)%
State income taxes, net of federal benefits
3.3
3.3
Valuation allowance
30.7
30.7
0%
0%
Canadian Federal statutory rate
3.5%
3.5%
Canadian Provincial income taxes, net of federal benefits
12.0
12.0
Valuation allowance
0.0
0.0
15.5%
15.5%
NOTE 10-
SERVICING CONTRACT FOR THE CUSTOMERS OF ORION COMMUNICATIONS INC.
On May 7, 2009, the Company’s then subsidiary Teliphone Inc. entered into an assignment agreement with 9191-4200 Quebec Inc. (“9191”) in order to have the customer contracts of Orion Communications Inc., (“Orion”) an Ontario, Canada Company assigned to the Company for its management. No consideration was paid however the Company and 9191 had agreed to share 50% each of the gross benefits received from the customer base.
On February 23, 2010, the Company’s agreement of assignment with 9191 was cancelled due to a default of the assignor. As a result of the default, immediate payment for all amounts owed by 9191 was requested, however 9191 did not comply. The delivery of services to Orion clients was suspended, and the clients were permitted to request delivery of service directly from the Company. As a result of the cancellation of the contract, the Company took a write-down (fully impaired) of $337,275 previously listed as Goodwill.
As a result of the lawsuits against the Company’s former subsidiary resulting from the transaction (See NOTE 7), on March 31, 2011, the Company negotiated and entered into an Asset Purchase Agreement with Orion Communications, Inc. (“Orion”) and 9191-4200 Quebec, Inc. (“9191”) to acquire the customers from Orion valued at $1,479,265. As consideration for these customers, the Company issued 3,804,088 shares at a value of $0.25 per share for a total of $951,022, pay $375,000 to BMO in the form of a note payable (see Note 12) and utilize the $153,243 paid in advances from prior years.
NOTE 11-
OBLIGATIONS UNDER CAPITAL LEASE
On April 1, 2011, the Company assumed the capital leases of its former subsidiary Teliphone Inc. The Company leases some of its computer equipment pursuant to capital leases. At September 30, 2012, minimum future annual lease obligations are as follows:
Year Ending
September 30, 2013
3,992
3,992
Less: Amounts representing interest
(70)
Total
3,922
Current portion
(3,922)
Long-term portion
$-
NOTE 12-
NOTE PAYABLE - BMO
On March 30, 2011, the Company entered into a non-interest bearing Note Payable to Bank of Montreal (“BMO”) for a total of $375,000 as part of its dispute resolution regarding the management of the clients of Orion Communications Inc. The Note called for an initial payment of $25,000 followed by 24 equal payments due on the 15th of the month of $11,458, and a final payment of $75,000 originally due on April 15, 2013.
On November 15, 2011, BMO did not accept the monthly payment claiming that additional legal fees were owed to BMO by Teliphone. These fees were not listed in the original agreement and the Company and BMO entered into discussions to attempt to resolve BMO’s claim.
Subsequently, on January 23, 2013 the Company reached an all party agreement to settle all outstanding issues and obligations. The agreement now calls for a payment of $305,520.69 which covers principle, interest and all costs to be paid over 10 months. An initial payment of $50,000 and the agreement calls for 9 monthly payments of $25,000 and a final payment of $30,520.69 on October 31, 2013. The Company has classified the entire amount as a current liability on September 30, 2012, and has successfully made all required payments through February 2013.
See NOTE 14 - SUBSEQUENT EVENTS.
NOTE 13-
DISCONTINUED OPERATIONS
On April 1, 2011, the Company consolidated the operations of its subsidiary (operating within the jurisdictions of Quebec, Canada and Ontario, Canada) unto itself (operating in the jurisdiction of Nevada). As a result of the consolidation, the following fixed assets (net of accumulated depreciation) were transferred from Teliphone Inc. to Teliphone Corp.:
Computer Equipment for IPTV:
$395,170
Computer Equipment for VoIP:
$132,431
Furniture and Office Equipment:
$ 660
Total:
$528,261
The only remaining fixed asset in Teliphone Inc. was:
Computer Equipment for Mobile VoIP:
$15,840
The Company also assigned all client and supplier contracts from Teliphone Inc. to Teliphone Corp and as such, continued to operate the same business.
On May 31, 2011, the Company sold its entire holdings consisting of 89.1% of the issued and outstanding Common Shares of its subsidiary Teliphone Inc. to YEURB INVESTMENTS COMPANY LIMITED, a Commonwealth of the Bahamas Corporation. The gains and losses from the disposition of certain income-producing assets and associated liabilities, operating results, and cash flows are reflected as discontinued operations in the financial statements for all periods presented. Although net earnings are not affected, the Company has reclassified results that were previously included in continuing operations as discontinued operations for qualifying dispositions.
As a result of this transaction, the Company’s financial statements have been prepared with the results of operations and cash flows of this disposed property shown as discontinued operations. All historical statements have been restated in accordance with GAAP. Summarized financial information for discontinued operations for the year ended September 30, 2011 are as follows:
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock
$739,005
Additional paid-in capital
Accumulated deficit
(2,462,895)
Accumulated other comprehensive income (loss)
(227,576)
Noncontrolling interest
(238,164)
Total Stockholders' Equity (Deficit)
$(2,189,630)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
$115,144
Sales
(2,437,008)
Cost of sales
Inventory, beginning of period
12,225
Purchases
1,900,414
Inventory, end of period
-
1,912,639
Gross profit
(524,369)
Operating expenses
Selling and promotion
33,058
Wages, professional and consulting fees
641,186
Other general and administrative expenses
483,706
Depreciation and Amortization
81,572
1,239,522
Interest
343,297
(Gain) loss on foreign exchange
(24,350)
318,947
(Gain) loss on disposal of subsidiary
(2,462,895)
Net earnings (loss)
1,082,809
Minority Interest
(134,543)
The impact on the balance sheet due to the disposition of the former subsidiary was as follows: a reduction of Assets by a total of $115,114, a reduction of liabilities by $2,304,774 and an increase of stockholders’ equity of $2,189,630. For the year ended September 30, 2011, the transaction had the following impact on the statement of operations: a reduction of Gross Profit by $500,019, and a reduction of Expenses including Operations, Interest and Amortization by a total of $1,582,828. In total, the Company experienced a gain on disposal of its subsidiary of $948,266, net of the adjustment for minority interest of $134,543.
NOTE 14-
SUBSEQUENT EVENTS
On November 15, 2011, BMO did not accept the monthly payment claiming that additional legal fees were owed to BMO by the Company. These fees were not listed in the original agreement and the Company and BMO entered into discussions to attempt to resolve BMO's claim.
Subsequently, on January 23, 2013 the Company reached an all party agreement to settle all outstanding issues and obligations. The agreement now calls for a payment of $305,520.69 which covers principle, interest and all costs to be paid over 10 months. An initial payment of $50,000 and the agreement calls for 9 monthly payments of $25,000 and a final payment of $30,520.69 on October 31, 2013. The Company has classified the entire amount as a current liability on September 30, 2012, and has successfully made all required payments through February 2013.
On December 11, 2012, the Company completed the acquisition of the core assets and network (the "Navigata Acquired Businesses") of Navigata Communications 2009 Inc. (the "Seller"). The acquisition was effected pursuant to a two-step process involving a Purchase Agreement, dated as of November 30, 2012, among 9191-4200 Quebec Inc., a corporation incorporated under the laws of the Province of Quebec, Canada ("Quebec"), the Seller and certain affiliates of Quebec (the "Asset Purchase Agreement"); and a Share Exchange Agreement, dated as of December 11, 2012, by and between the Company and Fiducie Residence JAAM, a family trust registered in the Province of Quebec, Canada ("JAAM").
On November 30, 2012, pursuant to the Asset Purchase Agreement, Quebec acquired from Seller selected assets and liabilities related to the business of providing telecommunications services, including voice, data and internet services, to service providers and end users, using its national MPLS-enabled data backbone, microwave backhaul network in British Columbia, and carrier points of interconnection in Vancouver, Toronto, Seattle, LA, and New York (the "Asset Purchase"). As consideration for the Asset Purchase, Quebec paid an aggregate consideration of CD$6,440,000, along with the assumption of certain limited current liabilities of the Seller, as follows: (i) CD$500,000 paid in cash by wire transfer at closing of the Asset Purchase; (ii) $940,000 to be paid in cash by certified check, wire transfer or other immediately available funds on December 14, 2012; and (iii) a total of CD$5,000,000 to be paid in cash in five separate, equal instalments of CD$1,000,000 each due on December 15 of each of 2013, 2014, 2015, 2016 and 2017 (the "Deferred Consideration"). Interest will accrue on the Deferred Consideration at a rate of 6.5% per annum. In addition, under a Temporary Service Agreement, an additional CD$386,629 was agreed to be added to the purchase price for employees and Cascade Directors services, bringing the total purchase price to CD$6,826,630. On December 28, 2012, JAAM assumed the $5,000,000 debt from the Company in exchange for 11,416,667 warrants for common shares of the Company. The warrants are based on a vesting schedule of 5 tranches with each tranche exercisable for 3 years of the date of vesting as follows:
Tranche
Vesting Date
Number
Purchase Price
Expiry of Warrant
of Warrant
of Warrants
per share(USD)
December 15, 2013
5,000,000
$0.20
December 15, 2016
December 15, 2014
2,500,000
$0.40
December 15, 2017
December 15, 2015
1,666,667
$0.60
December 15, 2018
December 15, 2016
1,250,000
$0.80
December 15, 2019
December 15, 2017
1,000,000
$1.00
December 15, 2020
On December 11, 2012, the Company completed the acquisition from JAMM of 100% of the outstanding stock of Quebec (the "Stock Acquisition"). The Stock Acquisition was effected pursuant to a Share Exchange Agreement in which the Company acquired all of Quebec’s outstanding shares in exchange for tendering 61,500,00 shares of the Company, valued at US$13,530,000, to JAMM. Quebec was subsequently re-named Teliphone Navigata-Westel.
The Company acquired the assets as noted below in consideration of the shares. Based on the fair values at the effective date of acquisition the purchase price in US$ was allocated as follows:
(1)
On December 28, 2012, JAAM assumed the $5,000,000 debt from the Company in exchange for 11,416,667 warrants for common shares of the Company. The warrants are based on a vesting schedule of 5 tranches with each tranche exercisable for 3 years of the date of vesting.
The goodwill will not be amortized but it will be tested annually for impairment. Goodwill in connection with this acquisition is stated at $12,049,765in the books and records of the Company.
The following table shows pro-forma results for the years ended September 30, 2012 and 2011 as if the acquisition had occurred on October 1, 2010. These unaudited pro forma results of operations are based on the historical financial statements and related notes of each of the purchased Company and Teliphone Corp.
For the years ended September 30,
Revenues $32,356,660 $34,083,238
Net income (loss) $(3,924,142) $4,090,416
.
On December 28, 2012 the Company entered in to an agreement with The New York Telecom Exchange Inc., a New York Company (“NYTEX”) under which NYTEX unconditionally assumed all responsibility and liability for $992,958 of liabilities relating to invoices from three suppliers that are currently shown as ”Accounts Payable” on the books of the Company. No consideration is payable by the Company in this transaction. As a result of this transaction, the Company decreased the goodwill purchased in the transaction with NYTEX one year earlier.
On February 8, 2013 the Company completed the acquisition of 100% of the outstanding stock of Titan Communications Inc. The acquisition was effected through a two stage process. Firstly, pursuant to a Share Purchase Agreement (the “SPA”) effective February 8, 2013, Fiducie Familiale M.A.A. ("MAA"), a related party to the Company, acquired all of Titans outstanding shares in exchange for a total consideration of $1,696,600. The consideration is payable in accordance with the following schedule: i) $349,300 paid at closing; ii) $34,930 paid 30 days from closing; iii) $34,930 paid 60 days from closing; and iv) the balance ($1,277,440) to be paid in 36 equal monthly payments ($35,484 each) beginning 90 days from closing. Additional consideration equal to, 10% of the aggregate revenue generated by Titan above $1,663,267 in the first 12 months beginning 30 days from closing and 10% of the aggregate revenue generated by Cloud-Phone Inc above $540,000 in the first 12 months beginning 30 days from closing, may also be payable if the revenue thresholds are surpassed. Secondly, also on February 8, 2013 the Company acquired from MAA all share capital, assets and liabilities of Titan in return for assuming all liabilities due to the former shareholders of Titan under the SPA plus the payment of $1.
On February 8, 2013 the Company completed the acquisition of 100% of the outstanding stock of Cloud-Phone Inc. The acquisition was effected pursuant through a two stage process. Firstly, pursuant to a Share Purchase Agreement (the “SPA”) effective February 8, 2013, Fiducie Familiale M.A.A. ("MAA"), a related party to the Companyacquired all of Cloud-Phones outstanding shares in exchange for the assumption of certain liabilities of Cloud Phone totaling $99,800. The consideration is payable in accordance with the following schedule: i) $19,960 payable at closing; ii) the balance ($79,840) to be paid in 20 equal monthly payments ($3,992 each) beginning 30 days after closing. Secondly, also on February 8, 2013 the Company acquired from MAA all share capital, assets and liabilities of Cloud-Phone in return for assuming all liabilities due under the SPA plus the payment of $1.
The combined net assets purchased in both transactions on February 8, 2013 were:
The goodwill will not be amortized but it will be tested annually for impairment. Goodwill in connection with these acquisitions is stated at $616,393 in the books and records of the Company
The following table shows pro-forma results for the years ended September 30, 2012 and 2011 as if both acquisitions had occurred on October 1, 2010. These unaudited pro forma results of operations are based on the historical financial statements and related notes of each of the purchased Company and Teliphone Corp.
For the years ended September 30,
Revenues
$34,561,308
$35,748,971
Net income (loss)
$(3,968,468)
$3,904,975
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on this evaluation as of September 30, 2012, the end of the period covered by this Annual Report on Form 10-K, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level to ensure that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, including this Annual Report, were recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and
was accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. While we have improved our timeliness of disclosure such as the timely filing of Form 8-K notices of certain events for which disclosure is required, we believe, primarily from the fact that we have limited personnel and funds available for continuous legal counsel to oversee our daily operations as it pertains to our filing requirements with the SEC. We are in the process of considering changes in our disclosure controls and procedures in order to address the aforementioned failure to timely file the notification. We believe that improvements will occur with the subsequent acquisition of Navigata Communications 2009 Inc. in December 2012 due to more internal resources being available for delivery of effective disclosures, controls and procedures. The expanded entity now has a dedicated staff position to each of Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and Senior Vice President Corporate Affairs rather than combined responsibilities.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
·
Provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
In connection with the filing of our Annual Report on Form 10-K, our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2011. In making this assessment, our management used the criteria set forth by Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on our assessment using those criteria, management believes that, as of September 30, 2012 our internal control over financial reporting is not effective based on those criteria. Ineffective disclosure controls and procedures may materially adversely affect our ability to report accurately our financial condition and results of operations in the future in a timely and reliable manner. In addition, we cannot assure you that we will not discover additional weaknesses in our disclosure controls and procedures. Any such additional weakness or failure to remediate the existing weakness could adversely affect our financial condition or ability to comply with applicable financial reporting requirements.
This annual report does not include an attestation report of our Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Controls
There have been no changes in our internal controls over financial reporting or in other factors that could materially affect, or are reasonably likely to affect, our internal controls over financial reporting during the year ended September 30, 2012.
Subsequently as noted in the first section we engaged the services of a dedicated and accredited Financial Officer. We believe that this will begin to address the issues of internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
On May 31, 2011, we sold our entire equity interest in Teliphone Inc., along with some early-stage mobile call processing technology and various supplier liabilities to YEURB Investments for $1.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The following information sets forth the names of our current director and executive officers, their ages and their present positions.
Benoit Laliberte. Mr. Laliberte was appointed to serve as our Chief Executive Officer, Chief Financial Officer and President on November 30, 2012. He has been involved in the hi-tech field for most of his life, having started his first computer business in high school. In 1994 he created the first electronic virus immune computer using its Electronic Virus Activity Control (EVAC) technology. EVAC was built into computer servers to immediately detect and prevent viruses. In1996, he won the Young Entrepreneur of the Year award by the Business Development Bank of Canada. He worked with Microsoft to develop the first generation of Cloud Computing and also created Windows Based Intelligent Terminals. In 2004 he founded Teliphone and has been the primary force behind its development since that time. We believe that Mr. Laliberte’s extensive business expertise, his experience in managing business development within a technology environment gives him the qualifications and skills to serve as a Director.
Our Director was appointed to hold office until the next annual meeting of our stockholders or until their successors are elected and qualified. Officers are elected annually and serve at the discretion of the Board of Directors. Board vacancies are filled by a majority vote of the Board.
Family Relationships
There are no family relationships between or among the directors, executive officers or persons nominated or chosen by us to become directors or executive officers.
Audit Committee
We do not have a separately-designated standing audit committee. The entire Board of Directors performs the functions of an audit committee, but no written charter governs the actions of the Board when performing the functions of that would generally be performed by an audit committee. The Board approves the selection of our independent accountants and meets and interacts with the independent accountants to discuss issues related to financial reporting. In addition, the Board reviews the scope and results of the audit with the independent accountants, reviews with management and the independent accountants our annual operating results, considers the adequacy of our internal accounting procedures and considers other auditing and accounting matters including fees to be paid to the independent auditor and the performance of the independent auditor.
For the fiscal year ending September 30, 2012, the Board:
·
Reviewed and discussed the audited financial statements with management, and
·
Reviewed and discussed the written disclosures and the letter from our independent auditors on the matters relating to the auditor’s independence.
Based upon the Board’s review and discussion of the matters above, the Board authorized inclusion of the audited financial statements for the year ended September 30, 2012 to be included in the Annual Report on Form 10-K and filed with the Securities and Exchange Commission.
Section 16(a) Beneficial Ownership Reporting
Section 16(a) of the Securities Act of 1934, as amended, requires our executive officers and directors, and persons who own more than ten percent (10%) of our common stock, to file with the Securities and Exchange Commission reports of ownership of, and transactions in, our securities and to provide us with copies of those filings. To our knowledge, based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during the year ended September 30, 2012, all filing requirements applicable to our officers, directors and greater than ten percent beneficial owners were complied with.
Code of Ethics and Conduct
Our Board of Directors has adopted a Code of Ethics and Conduct that is applicable to our Senior Financial Officers, including our principal executive officer, principal financial officer, principal accounting officer or persons performing similar functions. Our Code of Ethics and Conduct is intended to ensure that our employees act in accordance with the highest ethical standards. The Code of Ethics and Conduct is filed as an exhibit to our Annual Report on Form 10-KSB for the fiscal year ended September 30, 2005. Such standards will apply to all acquired entities.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table presents information concerning the total compensation of our Chief Executive Officer, Chief Financial Officer and the other most highly compensated officers during the last fiscal year (the “Named Executive Officers”) for services rendered to us in all capacities for the years ended September 30, 2012 and 2011:
Summary Compensation Table
(1)
Mr. Trevor Deutsch was appointed to serve as our Chief Executive Officer, Chief Financial Officer and President on October 19, 2010.
Subsequently he resigned as Chief Executive Officer and Chief Financial Officer and President on November 30, 2012
Consulting Agreement
The Company utilizes the services of Mr. Benoit Laliberte through a consulting agreement with SeaJordan Inc . SeaJordan Inc. is owned by “Fiducie Familiale MAA” (MAA Family Trust) and the beneficial owner of shares held by this entity is Ann Marie Poudrier, Benoit Laliberte's spouse. SeaJordan Inc./MAA was paid $253,304 during the year ended September 30, 2012 related to the delivery of these consulting services to the Company.
Compensation Components
Base Salary and Bonuses. At this time, we do not compensate our executive officers by the payment of bonus compensation. During the Fiscal Year 2012, Mr. Trevor-Deutsch as President was at an annual rate of $50,000.
Stock Options. Stock option awards are determined by the Board of Directors based on numerous factors, some of which include responsibilities incumbent with the role of each executive to the Company and tenure with the Company. We did not grant any stock option awards to our executive officers during the year ended September 30, 2012.
Outstanding Equity Awards at Fiscal Year-End
There were no outstanding equity awards issued to any of our named executive officers at September 30, 2012.
Equity Compensation or Other Benefit Plans
We have never established any form of equity compensation plan for the benefit of our directors, officers or future employees. We do not have a long-term incentive plan or any defined benefit, pension plan, profit sharing or other retirement plan.
Compensation of Directors
Our directors did not receive any compensation for their service during the year ended September 30, 2012. No options were granted or exercised in 2012. We have no standard arrangement to compensate directors for their services in their capacity as directors. Directors are not paid for meetings attended. All travel and lodging expenses associated with corporate matters are reimbursed by us, if and when incurred.
Employment Contracts; Termination of Employment and Change-in-Control Arrangements
We do not have any employment agreements with any of our executive officers.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth, as of April 2, 2013 the number and percentage of outstanding shares of common stock beneficially owned by (a) each person known by us to beneficially own more than five percent of such stock, (b) each director of the Company, (c) each named officer of the Company, and (d) all our directors and executive officers as a group. We have no other class of capital stock outstanding.
(1)
Unless otherwise provided, the address of each person is c/o 424 St-François-Xavier Street, Montreal, Quebec, Canada H2Y 2S9.
(2)
This column represents shares not included in “Shares Owned” that may be acquired by the exercise of options within 60 days of January 13, 2012
(3)
Lawry Trevor-Deutsch is the indirect beneficial owner of 534,184 shares held by Strathmere Associates International Limited.
(4)
Fiducie Residence JAAM is a family trust and this entity is controlled by Anne Marie Poudrier, a Director of the Company and Benoit Laliberte's spouse
(5)
New York Telecom Exchange Inc. is a Florida Corporation controlled by Anne Marie Poudrier, a Director of the Company and Benoit Laliberte's spouse.
(6)
3874958 Canada Inc. is owned by “Fiducie Familiale MAA” (MAA Family Trust) and the beneficial owner of shares held by this entity is Anne Marie Poudrier, a Director of the Company and Benoit Laliberte's spouse.
(7)
9191-4200 Quebec Inc. is 100% owned by Teliphone Corp.
The above beneficial ownership information is based on information furnished by the specified persons and is determined in accordance with Rule 13d-3 under the Exchange Act, as required for purposes of this annual report; accordingly, it includes shares of our common stock that are issuable upon the exercise of stock options exercisable within 60 days of April 2, 2013. Such information is not necessarily to be construed as an admission of beneficial ownership for other purposes.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Other than as set forth below, none of our directors or executive officers, nor any proposed nominee for election as a director, nor any person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to all of our outstanding shares, nor any members of the immediate family (including spouse, parents, children, siblings, and in-laws) of any of the foregoing persons has any material interest, direct or indirect, in any transaction since the beginning of our last fiscal year on October 1, 2010 or in any presently proposed transaction which, in either case, has or will materially affect us.
·
On September 16, 2009, we entered into a verbal loan agreement (the “Loan Agreement”) with Mr. Trevor-Deutsch. The loan agreement provides us the opportunity to extend our existing credit facility with our bank, TD Canada Trust (TD). Under the terms of the Loan Agreement, Mr. Trevor-Deutsch agreed to loan us One Hundred Seventy Five Thousand Dollars ($175,000) (the “Loan”) in order to secure a Guaranteed Investment Certificate (“GIC”) for the same principal amount as collateral security for the TD credit facility. We agreed to repay the Loan on demand together with interest at a rate of twelve percent (12%) per year plus any borrowing fees incurred by Mr. Trevor-Deutsch. Interest of eight percent (8%) under the Loan Agreement is payable partly in cash (four percent (4%)) and partly in shares (four percent (4%)) of our common stock based on the average quarterly trading price of our shares as traded on the Over-The-Counter-Bulletin-Board. For the year ending September 30 2012, we have paid Mr. Trevor-Deutsch $5,746 in cash and are obligated to issue him 1,160,000 shares, which have not been issued as of the date of this report.
·
On December 31, 2008, we entered into a verbal long-term loan agreement (“Long-Term Loan Agreement”) with Strathmere Associates International Limited (“Strathmere”), a company controlled by Mr. Trevor-Deutsch for a total of seventy thousand eight hundred and twenty-eight dollars ($70,828). The Long-Term Loan Agreement combined all prior advances that were made by Strathmere prior to December 31, 2008. Under the Terms of the Long-Term Loan Agreement, we agreed to pay the long-term loan on demand along with interest at a rate of twelve percent (12%) paid quarterly. No payments were made in fiscal years 2012 and 2011.
On December 31, 2011, the Company acquired all of the Assets and Liabilities of the New York Telecom Exchange Inc (NYTEX-NY) a New York Company. As part of the agreement, 20,000,000 shares will be issued to the owners of NYTEX-NY at a transaction valued at $5,000,000. Mr. Trevor-Deutsch, Our President, CEO and CFO, along with 3874958 Canada Inc. are majority owners of New York Telecom Exchange Inc., a Florida Company (NYTEX-FL). NYTEX-FL owns all of the issued and outstanding shares of NYTEX-NY and hence this transaction was a related party transaction through common ownership.
Acquisition of Assets from Navigata Communications 2009 Inc.
On December 11, 2012, Teliphone Corp. (the "Company") completed the acquisition of the core assets and network (the "Navigata Acquired Businesses") of Navigata Communications 2009 Inc. (the "Seller"). The acquisition was effected pursuant to a two-step process involving a Purchase Agreement, dated as of November 30, 2012, among 9191-4200 Quebec Inc., a corporation incorporated under the laws of the Province of Quebec, Canada ("Quebec"), the Seller and certain affiliates of Quebec (the "Asset Purchase Agreement"); and a Share Exchange Agreement, dated as of December 11, 2012, by and between the Company and Fiducie Residence JAAM, a family trust registered in the Province of Quebec, Canada ("JAAM").
On November 30, 2012, pursuant to the Asset Purchase Agreement, Quebec acquired from Seller selected assets and liabilities related to the business of providing telecommunications services, including voice, data and internet services, to service providers and end users, using its national MPLS-enabled data backbone, microwave backhaul network in British Columbia, and carrier points of interconnection in Vancouver, Toronto, Seattle, LA, and New York (the "Asset Purchase"). As consideration for the Asset Purchase, Quebec paid an aggregate consideration of CD$6,440,000, along with the assumption of certain limited current liabilities of the Seller, as follows: (i) CD$500,000 paid in cash by wire transfer at closing of the Asset Purchase; (ii) $940,000 to be paid in cash by certified check, wire transfer or other immediately available funds on December 14, 2012; and (iii) a total of
CD$5,000,000 to be paid in cash in five separate, equal instalments of CD$1,000,000 each due on December 15 of each of 2013, 2014, 2015, 2016 and 2017 (the "Deferred Consideration"). Interest will accrue on the Deferred Consideration at a rate of 6.5% per annum. In addition, under a Temporary Service Agreement, an additional CD$386,629 was agreed to be added to the purchase price for employees and Cascade Directors services, bringing the total purchase price to CD$6,826,630. On December 28, 2012, JAAM assumed the $5,000,000 debt from the Company in exchange for 11,416,667 warrants for common shares of the Company. The warrants are based on a vesting schedule of 5 tranches with each tranche exercisable for 3 years of the date of vesting as follows:
Tranche
Vesting Date
Number
Purchase Price
Expiry of Warrant
of Warrant
of Warrants
per share(USD)
December 15, 2013
5,000,000
$0.20
December 15, 2016
December 15, 2014
2,500,000
$0.40
December 15, 2017
December 15, 2015
1,666,667
$0.60
December 15, 2018
December 15, 2016
1,250,000
$0.80
December 15, 2019
December 15, 2017
1,000,000
$1.00
December 15, 2020
On December 11, 2012, the Company completed the acquisition from JAMM of 100% of the outstanding stock of Quebec (the "Stock Acquisition"). The Stock Acquisition was effected pursuant to a Share Exchange Agreement in which the Company acquired all of Quebec’s outstanding shares in exchange for tendering 61,500,00 shares of the Company, valued at US$13,530,000, to JAMM. Quebec was subsequently re-named Teliphone Navigata-Westel.
Liability Assumption Agreement
On December 28, 2012 the Company entered in to an agreement with The New York Telecom Exchange Inc., a New York Company (“NYTEX”) under which NYTEX unconditionally assumed all responsibility and liability for $992,958 of liabilities relating to invoices from three suppliers that are currently shown as ”Accounts Payable” on the books of the Company. No consideration is payable by the Company in this transaction. As a result of this transaction, the Company decreased the goodwill purchased in the transaction with NYTEX one year earlier.
Acquisitions of Titan Communications Inc.& Cloud-Phone Inc.
On February 8, 2013 the Company completed the acquisition of 100% of the outstanding stock of Titan Communications Inc. The acquisition was effected through a two stage process. Firstly, pursuant to a Share Purchase Agreement (the “SPA”) effective February 8, 2013, Fiducie Familiale M.A.A. ("MAA"), a related party to the Company, acquired all of Titans outstanding shares in exchange for a total consideration of $1,696,600. The consideration is payable in accordance with the following schedule: i) $349,300 paid at closing; ii) $34,930 paid 30 days from closing; iii) $34,930 paid 60 days from closing; and iv) the balance ($1,277,440) to be paid in 36 equal monthly payments ($35,484 each) beginning 90 days from closing. Additional consideration equal to, 10% of the aggregate revenue generated by Titan above $1,663,267 in the first 12 months beginning 30 days from closing and 10% of the aggregate revenue generated by Cloud-Phone Inc above $540,000 in the first 12 months beginning 30 days from closing, may also be payable if the revenue thresholds are surpassed. Secondly, also on February 8, 2013 the Company acquired from MAA all share capital, assets and liabilities of Titan in return for assuming all liabilities due to the former shareholders of Titan under the SPA plus the payment of $1.
On February 8, 2013 the Company completed the acquisition of 100% of the outstanding stock of Cloud-Phone Inc. The acquisition was effected pursuant through a two stage process. Firstly, pursuant to a Share Purchase Agreement (the “SPA”) effective February 8, 2013, Fiducie Familiale M.A.A. ("MAA"), a related party to the Companyacquired all of Cloud-Phones outstanding shares in exchange for the assumption of certain liabilities of Cloud Phone totaling $99,800. The consideration is payable in accordance with the following schedule: i) $19,960 payable at closing; ii) the balance ($79,840) to be paid in 20 equal monthly payments ($3,992 each) beginning 30 days after closing. Secondly, also on February 8, 2013 the Company acquired from MAA all share capital, assets and liabilities of Cloud-Phone in return for assuming all liabilities due under the SPA plus the payment of $1.
Director Independence
Our Board of Directors undertook its annual review of the independence of the directors and considered whether any director had a material relationship with us or our management that could compromise his ability to exercise independent judgment in carrying out his responsibilities. As a result of this review, the Board of Directors affirmatively determined that Mr. Trevor-Deutsch, because of his service as an officer of the Company, is not an “independent director” as such term is used under the rules and regulations of the Securities and Exchange Commission.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table is a summary of the fees billed to us by KBL, LLP for professional services for the fiscal year ended September 30, 2012 and for professional services for the fiscal year ended September 30, 2012:
Audit Fees. Consists of fees billed for professional services rendered for the audit of our consolidated financial statements and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by our independent registered public accounting firms in connection with statutory and regulatory filings or engagements.
Audit-Related Fees. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit Fees.” These services include employee benefit plan audits, accounting consultations in connection with acquisitions, attest services that are not required by statute or regulation, and consultations concerning financial accounting and reporting standards.
Tax Fees. Consists of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and international tax compliance, tax audit defence, customs and duties, mergers and acquisitions, and international tax planning.
All Other Fees. Consists of fees for products and services other than the services reported above.
Our practice is to consider and approve in advance all proposed audit and non-audit services to be provided by our independent registered public accounting firm.
The audit report of KBL, LLP on the consolidated financial statements of the Company for the year ended September 30, 2011 did not contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles, except that the audit reports on our consolidated financial statements for the fiscal years ended September 30, 2012 and September 30, 2011 contained an uncertainty about our ability to continue as a going concern.
During our fiscal years ended September 30, 2012 and 2011, there were no disagreements with KBL, LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to KBL, LLP satisfaction would have caused it to make reference to the subject matter of such disagreements in connection with its reports on the consolidated financial statements for such periods.
During our fiscal years ended September 30, 2012 and 2011, there were no reportable events (as described in Item 304(a)(1)(v) of Regulation S-K).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TELIPHONE CORP.
Date: April 2, 2013
By:
/s/ Benoit Laliberte
Benoit Laliberte
Chief Executive Officer,
Principal Financial Officer and
Principal Accounting Officer
In accordance with the Exchange Act, the report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: April 2, 2013
By:
/s/ Anne Marie Poudrier
Anne Marie Poudrier
Director
ITEM 15.
ITEM 15. EXHIBITS
TELIPHONE CORP.
EXHIBIT INDEX
TO
2012 ANNUAL REPORT ON FORM 10-K
10.3 Sale of All of the Company’s holdings in Teliphone Inc. to YEURB Investment Corporation (Bahamas) May 31, 2011.
10.4 Consulting Agreement with SeaJordan Inc., October 1, 2010 (assigned from Teliphone Inc., former
Subsidiary)
10.6
Asset Purchase Agreement by and among Teliphone Corp and the New York Telecom Exchange Inc. dated as of December 31, 2011 (incorporated by reference to Exhibit 10.1 to current report of Teliphone Corp. on Form 8-K dated December 31, 2011)
14.1 Code of Ethics (incorporated by reference from the Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on February 27, 2006).
31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULES 13A-14 AND 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934
31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULES 13A-14 AND 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934
32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
___________