ITEM 1. BUSINESS
Unless otherwise indicated or the context otherwise requires, the terms “Company,” “we,” “us” and “our” herein refer to the Registrant and WQN, after giving effect to the Merger (as defined below).
The Registrant Quamtel, Inc., formerly known as Atomic Guppy, Inc., was incorporated on November 16, 1999 under the laws of the State of Nevada. On July 28, 2009, the Registrant and WQN, Inc., a Texas corporation (“WQN”), consummated a Share Exchange Agreement (the “Share Exchange Agreement”), pursuant to which the shareholders of WQN received a total of 15,000,000 (post-split) shares of the Registrant’s common stock in exchange for all of their shares of WQN stock (the “Exchange” or “Merger”). As a result of the Merger, the shareholders of WQN owned approximately 91% of the then outstanding common stock of the Registrant, and WQN became a wholly-owned subsidiary of the Registrant, through which its primary operations are now conducted.
In conjunction with closing the Merger, certain outstanding obligations of the Registrant including officers and director’s compensation, notes and amounts payable to officers and directors and third party loans outstanding were exchanged for 1,275,000 shares of the Registrant’s common stock.
WQN was formed as a Texas corporation in June 2007. The Company’s principal office is located at 14911 Quorum Drive, Suite 140 Dallas, Texas 75254, and its telephone number is 972-361-1980.
The Company provides prepaid and postpaid enhanced telecommunications services with an emphasis on transporting calls that originate from the United States and Canada and terminate in other specific regions of the world. Customers utilize WQN’s Voice Over Internet Protocol (“VoIP”) network to place quality international calls at discounted rates. The voice quality of WQN’s VoIP calls is virtually the same as an international telephone call carried over a traditional telephone line. A substantial portion of WQN’s revenue is derived from the sale of prepaid service to customers calling from the United States to India. WQN’s products and services are provisioned and sold online via its websites.
The Company’s primary products are international prepaid calling services, primarily marketed as EasyTalk. WQN focuses on quality and convenience features for consumers and believes that EasyTalk is a step beyond the traditional calling cards consumers typically use to place low cost international calls. WQN’s network is securely integrated with its websites and provides customers with instant activation and immediate access to the service, eliminating the need to use a PIN or switch long distance carriers. Through automatic number identification recognition, WQN systematically recognizes the telephone numbers customers register during the online sign up process. EasyTalk consumer features include 24 hour online and over the phone recharge, speed dial, PINless dialing and online access to account balance, call history and purchase history. Due to the high cost of placing international calls directly from a cell phone, a growing number of WQN’s customers register their cell phones with the service to place low cost international calls. WQN plans to continue to focus on the development of online and mobile applications to leverage a broader base of cell phone subscribers with a need to quickly and conveniently place low cost international calls from their cell phones. As of December 31, 2010, WQN had approximately 16,098 prepaid calling card customers including EasyTalk customers. Revenues generated from these product offerings amounted to approximately $1.9 million for the year ended December 31, 2010.
The Company’s consumer based broadband Internet telephony product, RocketVoIP, allows customers to place unlimited local, long distance and international calls using their high-speed Internet connection. Included in RocketVoIP’s monthly service fee are features such as caller ID, call waiting, call forwarding and enhanced voice mail. RocketVoIP customers have the option to use their cell phone to make local, long distance and international calls using the plan’s included minutes. As of December 31, 2010, WQN had approximately 562 Rocket VoIP customers, and revenues generated from this product offering amounted to approximately $120,000 for the year ended December 31, 2010.
The Company’s enhanced personal toll free service, My800Online, allows customers to obtain a toll free number and route it to any home, business or cell phone number in the world. Using My800Online’s account management interface, customers can change the number their personal toll free number is routed to and view their call detail records and billing history online.
Effective September 30, 2009, the Company acquired the URL 800.com for $250,000 in cash plus 25,000 shares of its unregistered common shares. The Company is currently expanding 800.com to include virtual office features such as auto attendant, faxing, personalized greetings and enhanced voice mail to cater to the needs of small business owners on a tight budget. No revenues were generated for this product in 2010.
In December 2009, the Company acquired the URL DataJack.com for $30,000 in cash plus the commitment to issue to the seller 10,000 shares of its unregistered common shares in 2010.
On December 9, 2009, the Company acquired all of the outstanding membership interests of Mobile Internet Devices, LLC, a Florida limited liability company (“Mobile Devices”), in exchange for 500,000 shares of its unregistered common stock, and up to 500,000 additional unregistered common stock shares contingent upon Mobile Devices achieving specified levels of new customers in the future. Mobile Devices was subsequently renamed and reorganized as Data Jack, Inc., a Texas corporation (“Data Jack”). Data Jack was formed in February 2009, and its revenues prior to the Company’s acquisition were $96,113. Data Jack specializes in delivering nationwide mobile 3G data coverage for a competitive fixed monthly price, through a proprietary USB device connected to any computer with a Windows or Mac operating system. Approximately $387,000 of revenue was generated from this company in 2010.
Effective August 18, 2010, the Company acquired all of the outstanding membership interests of Syncpointe, LLC, a Missouri limited liability company (“Syncpointe LLC”), from Half A Minute, L.L.C., McPheeters Communication Group, LLC and VKS, LLC (the “Sellers”). Syncpointe LLC was subsequently renamed and reorganized as Syncpointe, Inc., a Texas corporation (“Syncpointe”). The Company acquired Syncpointe in exchange for 1,000,000 shares of its unregistered common stock with piggyback registration rights. The Sellers may receive earn-out payments equal to 12.5% of Syncpointe’s net profit (as defined in the Syncpointe LLC Membership Interest Purchase Agreement) for the first 18 months that it operates as a division of the Registrant. Syncpointe is a software developer focused on the development of mobile device management software. Syncpointe’s products are geared towards global enterprise, government, and consumer markets. Syncpointe LLC was formed in November 2008, and its revenues prior to the Company’s acquisition were $0 and $89,000 during 2010 and 2009, respectively. No revenues were generated from this company in 2010.
In October 2010, we established Novotel, Inc., a Florida corporation ("Novotel”), through which we manage our banking relationship with JP Morgan Chase Bank, N.A. in Florida (“JPMBC”). We utilize JPMBC for our wiring account to pay our overseas telecom carriers who require that we pay them via wire transfers, to minimize foreign exchange fluctuations. Novotel is our wholly owned subsidiary.
The Company markets to individuals and businesses with a specific focus on international populations in the United States and Canada who want an easy and cost-effective way to communicate with family, friends and colleagues overseas as well as to the general consumer and business populations who cannot or do not want to be locked into long-term contracts for telecommunications services.
The Company concentrates its marketing efforts on customers who prefer or need to pre-pay for mobile data, international calling and global VoIP services. The Company’s no-contract, no-credit check policy allows it to service a wide spectrum of consumers and business customers while providing an easy and economical way to use and purchase those services without sacrificing quality. The Company also focuses on developing proprietary technologies that control and manage associated communication devices for both carriers and consumers.
The Company was a pioneer in transitioning calling cards from a simple, static card with no value-added services to a feature-rich, e-commerce-based calling account where the consumer has the power to view account features such as call history, purchase history, call details and more. In addition, the Company pioneered the introduction of automatic number identification (ANI) which eliminates the need for users to enter a PIN number, making calling faster and easier.
The Company developed its proprietary QuamTel Application Network (QAN), a next-generation e-commerce sales and service platform that has been designed to dramatically increase the quality and value of the telecommunications services it provides to both retail and wholesale customers. This plug-n-play platform allows the Company to quickly and more easily create new features and functionality to support the addition of substantial revenue streams such as toll-free services, global international voice-over-internet services and country-specific celebrity branded international communication sites. Its modular application architecture creates a flexible and scalable development environment that provides easy integration of the Company’s newly acquired companies like DataJack and products and brands such as 800.com.
In addition to its consumer and business-to-business products and services, the Company also offers its portfolio of sophisticated, user-friendly telecommunications products to third parties utilizing cloud computing and delivering the product as Software as a Service (“SaaS”). The object-oriented architecture of the QAN greatly reduces the time-to-market normally associated with new product and service offerings. In addition to telecommunications, our newly developed e-commerce sales and support modules have also been made readily available to wholesale customers. These wholesale clients will have full control to host one of our many customized web portals and associated web services anywhere in the cloud and communicate directly with the Company’s back-end transactional processing system. This sophisticated e-commerce system will not only enhance customer service and provide additional revenue streams, but also create more robust integration with Google ad-word campaigns, resulting in deeper market penetration through more effective and cost-efficient outbound marketing for the Company’s subsidiaries and brands.
Our sales and marketing strategy includes the use of the following internet-based approaches:
·
Direct internet advertising;
·
Search engine optimization (SEO) and search engine marketing (SEM) activities, coupled with pay-per-click advertising;
·
Direct e-mail marketing to current customers; and
·
Marketing through affiliates and resellers.
The Company’s websites are accessible 24 hours a day, seven days a week. The websites can be accessed from any location where a connection to the Internet is available, eliminating the need to physically travel to another location to make a purchase and receive delivery. Quamtels’s websites include the following:
www.wqn.com
www.RocketVoIP.com
www.1800TalkTime.com
www.DataJack.com
www.800.com
www.MyWQN.com
www.ValuecomOnline.com
www.My800Online.com
www.SuperTel.com
www.syncpointe.com
www.ringsuite.com
www.Machine2Machine.com
Competition
We compete in the retail prepaid calling services market and the consumer broadband Internet telephony market. The worldwide telecommunications industry has been characterized in recent years by intense price competition, which has resulted in declines in both our average per minute price realizations and our average per minute termination costs, as well as decreases in our revenue. Many of our competitors continue to aggressively price their services. The intense competition has led to continued erosion in our pricing power, both in our prepaid services and wholesale markets.
Over the past few years, we have also experienced a gradual shift in demand industry-wide, away from calling cards and into wireless products and Internet protocol (or IP)-based products, which, among other things, further erodes our pricing power. The continued growth of these competitive wireless and IP-based services, largely due to lower pricing of such services, may have adversely affected the sales of our calling cards as customers migrate from using calling cards to using these alternative services. We expect pricing of wireless and IP-based services to continue to decrease, which may result in increased substitution and increased pricing pressure on our calling card sales and margins.
The wholesale carrier industry has numerous entities competing for the same customers, primarily on the basis of price, products and quality of service. In our wholesale carrier services business, we have generally had to pass along all or some of our per-minute cost savings to our customers in the form of lower prices. Although the market for these services is highly competitive, we believe we can compete effectively because of our experience in the online distribution of products and services, the speed in which we can bring enhanced services and features to market, and our continued focus on quality at a competitive price. Collectively, these advantages represent a competitive advantage that we expect will allow us to expand both in volume and profit margins.
Regulation
International Services
The Company’s international services are regulated by the Federal Communications Commission (“FCC”). The FCC’s regulations distinguish between dominant and non-dominant providers of international services. The Company is considered a non-dominant provider of international services. As such, it is subject to minimal regulation and oversight.
The Company is also subject to certain minimal annual reporting requirements for its international operations and must pay annual regulatory fees and contribute to various federal funds including the federal Telecommunications Relay Fund (“TRS”). In addition, the Company must contribute to the funding of the North American Numbering Plan Administrators (“NANPA”) and Local Number Portability Administrators (“LNPA”). The Company is entitled to recover all of these contributions and fees from its customers, either through direct surcharges or as part of its rates. The Company has made, or is in the process of making, the necessary federal filings, has paid the required fees and believes it is in compliance with all applicable requirements.
While the Company must file reports with the FCC for the federal Universal Service Fund (“USF”), the Company’s international operations are generally not subject to a contribution obligation. This is because of the FCC’s Limited International Revenue Exemption (“LIRE”). Under the LIRE, contributors whose interstate revenues comprise less than twelve percent of their combined interstate and international revenues only contribute based on their interstate revenues. However, if the Company’s VoIP operations (see below) grow substantially, the Company may no longer be subject to the LIRE and may be required to contribute to the fund based on its international revenues. However, the Company is entitled to recover its USF contributions from its customers, either through direct surcharges or as part of its rates.
As a non-dominant carrier, the Company is not required to file a tariff for its services and its rates are not regulated by the FCC. The FCC also does not have rules governing the provision of international prepaid services. However, the Company is required to post its rates on its Internet website and maintain records for a specified period of time in order to respond to customer inquiries. The Company is in compliance with these requirements.
As an international provider, the Company is not subject to regulation by any of the state public utility commissions. However, in some states the Company’s prepaid operations may be subject to statutory provisions enforced by the state Attorney General or other state agency enforcing consumer protection standards relating to the issuance of prepaid cards, the establishment of prepaid accounts, and disclosures associated with prepaid cards and accounts. The Company believes that its general operating procedures already comply with most of these requirements and that, should it become subject to such requirements, the impact on the Company’s business will be minimal.
Voice Over Internet Protocol (VoIP) Services
The Company’s VoIP services utilize cutting edge technology, the regulatory status of which has not been definitively determined. Specifically, the FCC has not yet determined if the service is an unregulated information service or a regulated telecommunications service. An FCC rulemaking proceeding to identify how various types of IP-enabled services, including VoIP, should be classified and regulated has been pending since 2004.
Starting in 2005, the FCC singled out one particular type of VoIP service, which it calls interconnected VoIP service, for various types of non-rate regulation. Interconnected VoIP service is defined as a service that (1) enables real-time, two-way voice communications; (2) requires a broadband connection from the user’s location; (3) requires IP-compatible CPE (Customer Premises Equipment); and (4) permits users generally to receive calls that originate on the PSTN (public switched telephone network) and to terminate calls to the PSTN. This definition fits the type of service that the Company currently provides.
Generally speaking, the FCC views this service as a substitute for traditional telephone service. While not ruling definitively as to whether this service is a telecommunications service, the FCC has imposed various operational obligations on providers of interconnected VoIP service. This includes: providing enhanced 911 (E911) capabilities as a standard feature of all interconnected VoIP and making certain customer disclosures; complying with the requirements of the Communications Assistance for Law Enforcement Act (CALEA); and complying with the FCC’s telecommunications relay service, disability access, Customer Proprietary Network Information (CPNI), and local number portability rules that currently apply to telecommunications carriers. The FCC has not required the filing of tariffs for interconnected VoIP service and does not regulate the rates and charges for such services. The Company believes it is currently in compliance with these operational requirements.
The FCC has also imposed various financial and other reporting requirements on interconnected VoIP providers. This includes registration, annual local competition and broadband reporting, and the filing of annual CPNI statements. In addition, interconnected VoIP providers must report their revenues and contribute to the USF, TRS, NANPA, and LNPA funding mechanisms and pay regulatory fees. The Company is entitled to recover all of these fees from its customers, either through direct surcharges or as part of its rates. The Company believes it is currently in compliance with these reporting and financial requirements.
The FCC had not yet ruled definitively on whether access charges apply to traffic that originates from and/or terminates to interconnected VoIP networks. The imposition of such charges may affect the underlying costs of the Company’s service but the Company does not anticipate that it will have an adverse impact on the Company’s business prospects. First, all competitors will be subject to the same requirements, ensuring a level playing field. In addition, if the Company is allowed to asses originating access charges on calls which originate from its customer base and terminate to other carriers, the Company will recognize a new revenue stream not currently available to it.
Since the regulatory status of VoIP service has not been definitively determined, it is possible that additional regulation will be applied to the Company in the future. However, even if the FCC determines that interconnected VoIP services are telecommunications services, the Company would be considered a non-dominant carrier and would not be subject to tariff or rate regulation. Significantly, the FCC has said the interconnected VoIP providers are most similar to wireless carriers, who are largely unregulated on both the federal and state levels.
Interconnected VoIP service has generally not been subject to state public utility commission regulation. In 2004, the FCC ruled that VoIP services meeting certain characteristics are interstate in nature and cannot be regulated by the states. A major reason for the FCC’s decision was the inability of VoIP providers to identify which calls were completed on an interstate basis and which calls were completed on an intrastate basis. The preemption will apply to entities which, like the Company, offer IP-enabled services with these basic characteristics: (1) the service requires a broadband connection; (2) the service requires IP-compatible CPE; and (3) the service offering includes a suite of integrated capabilities and features, able to be invoked sequentially or simultaneously, that allow customers to manage personal communications dynamically, including enabling them to originate and receive voice communications and access other features and capabilities, even video. The FCC’s decision was affirmed by the Eighth Circuit Court of Appeals. However, the Court left open the possibility that “If, in the future, advances in technology undermine the central rationale of the FCC’s decision, its preemptive effect may be reexamined.”
Due to this decision, state commissions have not attempted to regulate the rates, terms, and conditions of VoIP service. Significantly, state legislatures have begun to address the proper regulatory treatment of VoIP service and have, in all cases where the issue was considered, amended the state communications statute to expressly prohibit the state from regulating the rates, terms, and conditions of VoIP service. In some cases, state commissions have been given authority to require the registration (but not certification) of VoIP providers and to collect state USF, TRS, and similar fees from VoIP providers. In addition, many states require VoIP providers to collect state 911 (emergency telephone service) charges and remit those to a state entity. The Company is in compliance with these registration and remittance requirements in the states in which it operates. The Company is entitled to recover all of the contributions and fees it must pay from its customers, either through direct surcharges or as part of its rates. While additional states may adopt similar requirements in the future, the Company does not believe that these requirements have, or will have, a materially adverse impact on its business.
From time to time, new legislation may be enacted that affects the telecommunications and VoIP industries and the Company’s business. Additionally, court decisions interpreting existing laws and rules and regulations applicable to the industry may also have a significant effect on the Company’s business. There can be no assurance that the FCC, PUCs (Public Utility Commissions), or any other regulatory authorities will not raise material issues with regard to the Company’s compliance with existing regulations or that changes to existing laws and regulations or the enactment of new ones, applicable to the activities of the Company, will not have a material adverse effect on the Company.
Patents and Trademarks
The Company owns a patent associated with its Syncpointe acquisition. The patent provides a method of tracking wireless telephone minutes used and provides an alert to individual users or account administrators before overage charges are accrued. The patent also provides a personal and business management tool for maximizing the use of allotted minutes. The Company relies on the technical experience of its key employees, coupled with its existing business relationships to support its operations. The Company is pursuing selected trademark applications.
Employees
As of December 31, 2010, the Company had 17 employees, consisting of four in management, four in technical support, four in customer service and five in administration, and three persons providing services to the Company as independent contractors.
ITEM 1A.
ITEM 1A. RISK FACTORS
Before you invest in the Company’s securities, you should be aware that there are various risks. You should consider carefully these risk factors, together with all of the other information included in this annual report before you decide to purchase the Company’s securities. If any of the following risks and uncertainties develop into actual events, the Company’s business, financial condition or results of operations could be materially adversely affected and you could lose your entire investment in the Company.
Risks Relating to Our Business
Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern, which may also hinder our ability to obtain future financing.
In their report dated May 17, 2011, our independent registered public accounting firm stated that our financial statements for the year ended December 31, 2010 were prepared assuming that we would continue as a going concern. However, they expressed substantial doubt about our ability to do so. The Company has experienced an accumulated loss deficit of $11,982,372 as of December 31, 2010, including a net loss of $10,052,360 for the year ended December 31, 2010. We also had a working capital deficit of $4,502,967 at December 31, 2010 and cash on hand of $78,739. We also expect to incur additional losses for the first quarter of 2011.
Our ability to continue as a going concern is subject to our ability to increase revenues and generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities, generating sales, or obtaining financing from various financial institutions where possible. By adjusting our operations and development to the level of capitalization, we believe that we have sufficient capital resources to meet projected near-term cash flow requirements. However, if during that period or thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations, liquidity and financial condition. There can be no assurances that our efforts will prove successful. The Company’s financial statements do not include any adjustments that might result from the outcome of this uncertainty.
A significant portion of our total assets consists of goodwill, which is subject to a periodic impairment analysis, and a significant impairment determination in any future period could have an adverse effect on our results of operations even without a significant loss of revenue or increase in cash expenses attributable to such period.
Our balance sheet at December 31, 2010 includes $669,957 in goodwill and $408,888 in other intangible assets recorded in connection with our acquisitions.
In accordance with ASU 350-20-35, we test the carrying value of our goodwill and our other intangible assets for impairment at least annually by comparing the fair values of these assets to their carrying values. As a result, during the year ended December 31, 2010 we recorded an impairment charge to our operating results of approximately $3.4 million relating to goodwill previously recorded for our WQN and Syncpointe acquisitions, due primarily to our inability to secure sufficient rights to related software since our acquisition of Syncpointe, and to management’s assessment of operating results and forecasted discounted cash flows for WQN. This impairment charge reduced the carrying value of these subsidiaries to their estimated fair value, eliminating all related goodwill. We may be required to record additional impairment charges for other remaining intangible assets in the future, which could materially adversely affect our financial condition and results of operations.
We have limited operating history upon which you can evaluate us.
The Registrant had no operations just prior to the Merger, and WQN has only been in operation since June 2007 and has incurred substantial operating losses. Therefore we have very limited operating history upon which you can evaluate our current business and prospects. You should consider our prospects in light of the risks, expenses and difficulties we may encounter as an early stage company a business in the new and rapidly evolving VoIP market.
Insufficient systems capacity or systems failures could harm our business.
Our business depends on the performance and reliability of the computer and communications systems supporting it. Notwithstanding our current capacity, heavy use of our computer systems during peak trading times or at times of unusual market volatility could cause our systems to operate slowly or even to fail for periods of time. If our systems cannot be expanded successfully to handle increased demand, or otherwise fail to perform, we could experience disruptions in service, slower response times, and delays in introducing new products and services.
Our systems and operations also are vulnerable to damage or interruption from human error, natural disasters, power loss, sabotage or terrorism, computer viruses, intentional acts of vandalism, and similar events. Any system failure that causes an interruption in service or decreases the responsiveness of our service could impair our reputation, damage our brand name and negatively impact our revenues. We also rely on a number of third parties for systems support. Any interruption in these third-party services or deterioration in the performance of these services could also be disruptive to our business and have a material adverse effect on our business, financial condition and operating results. We cannot predict the likelihood that services provided by third parties may be interrupted.
We have not voluntarily implemented various corporate governance measures, in the absence of which, stockholders may have more limited protections against interested director transactions, conflicts of interest and similar matters.
Recent Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE or The Nasdaq Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges are those that address board of directors’ independence, audit committee oversight, and the adoption of a code of ethics. We have not adopted a Code of Business Conduct and Ethics nor have we yet adopted any other corporate governance measures and, since our securities are not listed on a national securities exchange, we are not required to do so. We have not adopted corporate governance measures such as an audit or other independent committees of our Board of Directors. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions.
Our internal controls over financial reporting, and our disclosure controls and procedures, are not adequate, which could have a significant and adverse effect on our business and reputation.
Section 404 of Sarbanes-Oxley and the rules and regulations of the Securities and Exchange Commission (the “SEC”) associated with Sarbanes-Oxley, which we refer to as Section 404, require a reporting company to, among other things, annually review and disclose its internal controls over financial reporting, and evaluate and disclose changes in its internal controls over financial reporting quarterly. Under Section 404 a reporting company is required to document and evaluate such internal controls in order to allow its management to report on these controls. As reported in Item 9A. Controls and Procedures, we have concluded that our disclosure controls and procedures, and our financial reporting controls, are currently ineffective. If we are not able to implement the requirements of Section 404 with adequate compliance, we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur substantial costs in improving our internal control system and the hiring of additional personnel. Any such actions could adversely affect our results of operations, cash flows and financial condition.
Our inability to protect our intellectual property rights could adversely affect our business.
To protect our intellectual property rights, we rely on a combination of trademark laws, trade secret protection, confidentiality agreements and other contractual arrangements with our affiliates, customers, strategic investors and others. The protective steps we have taken may be inadequate to deter misappropriation of our proprietary information. We may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Failure to protect our intellectual property adequately could harm our brand and affect our ability to compete effectively. Further, defending our intellectual property rights could result in the expenditure of significant financial and managerial resources, which could adversely affect our business, financial condition and operating results.
Intellectual property and proprietary rights of others may prevent us from using the technology necessary to provide our services and may subject us to expensive intellectual property litigation.
If a court determines that the technology necessary for us to provide our services infringes a patent held by another person, and if that person is unwilling to grant us a license on acceptable terms, we may be ordered not to use the technology. We may also be ordered to pay significant monetary damages to the patent-holder. If we are ordered not to use the technology, we may be forced to cease offering services that depend on such use. In the event that a claim of infringement is brought against us based on the use or sale of our technology, or against any of our customers based on the use of our technology which we have agreed to indemnify our customers against, we may be subject to litigation to determine whether there is an infringement. Such litigation is expensive and distracting to our business and operations, regardless of the outcome of the suit.
If our fraud prevention methods are not effective, our business, reputation and financial results may be adversely affected.
We are susceptible to online cardholder-not-present fraud and call processing fraud. We control fraud through the use of internally developed proprietary technology and commercially available licensed technology. Traditional means of controlling online cardholder-not-present fraud insufficiently controls fraudsters who obtain personal credit card information and pose as legitimate cardholders. To address this risk, we have developed automated proprietary as well as off-the-shelf technology, coupled with in-house staff reviews, to constantly monitor and block suspicious transactions based on defined criteria. We are also at risk of attempts to hack into our system using various PIN combinations in an attempt to find a valid account. To address this risk, our system has integrated fraud detection mechanisms that detect such patterns and block the numbers from making further attempts. In-house fraud specialists also monitor traffic reports and usage patterns to identify and investigate suspicious calling patterns. While we place a high priority on fraud prevention, there is no guarantee that our measures will be successful in preventing significant fraudulent use of our network and resources, thereby materially adversely affecting our business, reputation and financial results.
We depend on key management personnel and the loss of their services could adversely affect our business.
We rely substantially on the efforts and abilities of our chief executive officer Stuart Ehrlich, and our non-executive staff and consultants. The loss of the services of any of our key personnel may have a material adverse effect on our business, operations, revenues or prospects. We also do not maintain key-man life insurance policies.
Also, we believe that our future success will depend in large part on our ability to attract and retain highly skilled, knowledgeable, sophisticated and qualified managerial, professional and technical personnel. We have experienced significant competition in attracting and retaining personnel who possess the skills that we are seeking. As a result of this significant competition, we may experience a shortage of qualified personnel.
We must be able to increase the volume of traffic on our network to become profitable.
Certain aspects of our business depend on the increased volume of traffic on our network. In order to realize our targets for sales and revenue growth, cash flow, operating efficiencies and other network benefits, we must continue to increase the volume of Internet, data, voice and video transmissions on our communications network at acceptable prices. If we do not maintain or improve our current relationship with existing customers and develop new large-volume and enterprise customers, we may not be able to substantially increase traffic on our network. The failure to increase network traffic would adversely affect our ability to become profitable.
Our business depends on our ability to continue to develop effective business support systems, and the failure to do so would have a negative effect on our achievement of financial goals and objectives.
Developing effective business support systems is a complicated undertaking requiring significant resources and expertise and support from third-party vendors. Business support systems are needed to:
·
implement customer orders for services;
·
provision, install and deliver these services; and
·
bill monthly for these services.
Because our business provides for continued rapid growth in our number of customers and our volume of services we offer, we need to continue to develop our business support systems on an accelerated schedule. Our failure to continue to develop effective business support systems and meet proposed service rollout dates would materially adversely affect our ability to implement our plans for growth and meet our financial goals and objectives.
Termination of relationships with key suppliers could cause delay and increased costs which may adversely affect our business.
Our business is dependent on third-party suppliers for computers, software, transmission electronics and related components that are integrated into our network. If any of these relationships is terminated or a supplier fails to provide reliable services or equipment and we are unable to reach suitable alternative arrangements quickly, we may experience significant additional costs. If that happens, our business may be materially adversely affected.
We may lose customers if we experience system failures that significantly disrupt the availability and quality of the services that we provide.
Our operations depend on our ability to avoid and mitigate interruptions in service. It is possible that we may experience a failure of the equipment or facility on our network could result in a significant interruption. Our network is subject to a number of events that could affect its ability to transfer information, including power outages, security breaches and computer viruses. Many of these events may be due to forces beyond our control, such as weather conditions, natural disasters and terrorist attacks. As a result, our network may experience information delays or require costly modifications that could interrupt service to our customers or significantly harm our business.
Interruptions in service undermine consumer confidence in our services and affect our ability to retain existing customers and attract new ones. Also, because many of our services are critical to our customers’ businesses, any interruption will result in loss to our customers. Although we disclaim liability for loss arising from interruptions in service beyond our control in our service agreements, a court may not enforce such limitations. As a result, we may be exposed to financial loss if a court orders us to pay monetary damages.
We have generated substantial losses, which we expect will continue.
The development of our communications business has required, and may continue to require, significant expenditures. These expenditures may result in substantial negative cash flow from operating activities and substantial net losses in the near future. We may continue to experience losses and may not be able to achieve or sustain operating profitability in the future. Continued operating losses may limit our ability to obtain the cash needed to expand our network, make interest and principal payments on our debt and fund our other business needs.
Risks Related to Our Industry
If we are unable to fund the expansion and adaptation of our network to stay competitive in the communications industry, our business would be adversely affected.
The communications industry is subject to rapid and significant changes in technology. In addition, the introduction of new services and technologies, as well as further development of existing services and technologies, may reduce the cost or increase the supply of those we provide. As a result, our most significant competitors in the future may be new entrants to the communications industry. These new entrants may not be burdened by an installed base of outdated equipment and may be better able to respond to the demands of our industry, such as:
·
growing number of customers;
·
development and launching of new services;
·
increased demands by customers to transmit larger amounts of data;
·
changes in customers’ service requirements;
·
technological advances by competitors; and
·
governmental regulations.
In order to stay competitive in our industry we must expand and adapt our network according to these demands. This will require substantial additional financial, operational and managerial resources, which may not be available when needed. If we are unable to fund the expansion or adaptation of our network quickly and at a commercially reasonable cost, our business would be materially adversely affected.
Failure to complete development, testing and introduction of new services, including VoIP services, could negatively affect our ability to compete in the industry.
We continuously develop, test and introduce new communications services that are delivered over our communications network. These new services are intended to allow us to address new segments of the communications marketplace and to compete for additional customers. In certain instances, the introduction of new services requires the successful development of new technology. To the extent that upgrades of existing technology are required for the introduction of new services, the success of these upgrades may depend on successful dealings with our vendors and on our vendors fulfilling their obligations in a timely manner. If we are not able to successfully complete the development and introduction of new services in a timely manner, our business could be materially adversely affected.
In addition, new service offerings may not be widely accepted by our customers. If our new service offerings are not widely accepted by our customers, we may discontinue those services and impair any assets or information technology used to develop or offer them.
The prices we charge for our communications services may decrease over time resulting in lost revenue.
Over the past few years the prices telecommunications providers have been able to charge for certain services have decreased. This decrease results from downward market pressure and other factors, including:
·
increased transmission capacity by telecommunications companies on their existing and new networks;
·
customer agreements containing volume-based pricing or other contractually agreed upon price decreases during the term of the agreement; and
·
technological advances or otherwise.
If we are unable to increase traffic volume through additional services and derive additional revenue as prices decrease, our operating results would decline. Declining operating results may lead to lost revenue.
The success of our VoIP services depends on the public acceptance of VoIP telephony and there is no guarantee that our VoIP services will garner broad market appeal.
The success of our Voice over Internet Protocol (or VoIP) services depends on future demand for VoIP telephony services in general in the marketplace. In order for the IP telephony market to continue to grow, several industry developments must take place, including:
·
telephone and cable service providers continuing to invest in the deployment of high speed broadband networks to residential and commercial customers;
·
VoIP networks continuing to improve quality of service for real-time communications, managing effects such as packet jitter, packet loss and unreliable bandwidth, so that toll-quality service can be provided;
·
VoIP telephony equipment and services achieving a similar level of reliability that users of the public switched telephone network have come to expect from their telephone service, including emergency calling features and capabilities; and
·
VoIP telephony service providers offering cost and feature benefits to their customers that are sufficient to cause the customers to switch from traditional telephony service providers.
If any or all of these developments fail to occur, our VoIP services business may not continue or grow as expected.
In addition, our VoIP services are a relatively new offering and we have limited experience implementing the related programs. As a result, we may encounter many difficulties, including regulatory hurdles, technological issues, intellectual property matters, developmental constraints and other problems that we may not anticipate. We can provide no assurances that we will be successful in generating significant VoIP revenues.
We are subject to significant regulation which may adversely affect our business and profitability.
The telecommunications industry is subject to significant regulation at the national, state, local and international levels. These regulations affect our business and our existing and potential competitors. Obtaining required regulatory approvals, including those related to acquisitions or financing activities, performing under agreements with local carriers or the enactment of adverse regulation may have a material adverse effect on our business. In addition, future legislative and judicial actions could have a material adverse effect on our business.
Federal legislation provides for a significant deregulation of the U.S. telecommunications industry, including the local exchange, long distance and cable television industries. This legislation remains subject to judicial review and additional Federal Communications Commission (or FCC) rulemaking. As a result, we cannot predict the legislation’s effect on our future operations. Many regulatory actions are under way or are being contemplated by federal and state authorities regarding important items. These actions could have a material adverse effect on our business.
The FCC has, to date, treated Internet service providers as enhanced service providers. In addition, Congress has not, to date, sought to heavily regulate intellectual property (or IP) based services. Both Congress and the FCC are considering proposals that involve greater regulation of IP-based service providers. Depending on the content and scope of proposed legislation, the imposition of new regulations could have a material adverse effect on our business and the profitability of our services.
Increased scrutiny of financial disclosure, particularly in the telecommunications industry, may adversely affect our investor confidence and any restatement of earnings may increase litigation risk and limit our ability to access the capital markets.
Congress, the SEC, other regulatory authorities and the media pay very close attention to financial reporting practices. Particular attention has been focused on the telecommunications industry and companies’ interpretations of generally accepted accounting principles. If we were required to restate our financial statements as a result of a determination that we had incorrectly applied generally accepted accounting principles, that restatement could adversely affect our ability to access the capital markets or the trading price of our securities. The recent scrutiny regarding financial reporting has also resulted in an increase in litigation in the telecommunications industry. There can be no assurance that any such litigation against us would not materially adversely affect our business or the trading price of our securities.
Our ability to withstand competition in the telecommunications industry may be impeded by participants with greater resources and a greater number of existing customers.
The telecommunications industry is highly competitive. Many of our existing and potential competitors have resources that are significantly greater than ours with respect to finances, personnel, marketing and other business aspects. Many of these competitors have the added advantage of a larger existing customer base. In addition, significant new competition could arise as a result of:
·
the consolidation in the industry led by AT&T and Verizon in the United States;
·
allowing foreign carriers to compete in the U.S. market;
·
further technological advances; and
·
further deregulation and other regulatory initiatives.
If we are unable to compete successfully, our business could be significantly harmed.
Risks Related To Our Common Stock
Our common stock is subject to the “penny stock” rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.
The SEC has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
·
that a broker or dealer approve a person’s account for transactions in penny stocks; and
·
the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
·
obtain financial information and investment experience and objectives of the person; and
·
make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form:
·
sets forth the basis on which the broker or dealer made the suitability determination; and
·
that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Provisions of our articles of incorporation and bylaws may delay or prevent a take-over which may not be in the best interests of our stockholders.
Provisions of our articles of incorporation and bylaws may be deemed to have anti-takeover effects, which include when and by whom special meetings of our stockholders may be called, and may delay, defer or prevent a takeover attempt. In addition, certain provisions of the Nevada Revised Statutes also may be deemed to have certain anti-takeover effects which include that control of shares acquired in excess of certain specified thresholds will not possess any voting rights unless these voting rights are approved by a majority of a corporation’s disinterested stockholders.
Our common stock could be removed from quotation on the OTCBB if we fail to timely file our annual or quarterly reports. If our common stock were no longer eligible for quotation on the OTCBB, the liquidity of our stock may be further adversely impacted.
Under the rules of the SEC we are required to file our quarterly reports within 45 days from the end of the fiscal quarter and our annual report within 90 days from the end of our fiscal year. Under rules adopted by the Financial Industry Regulatory Authority (FINRA) in 2005 which is informally known as the “Three Strikes Rule”, a FINRA member is prohibited from quoting securities of an OTCBB issuer such as our company if the issuer either fails to timely file these reports or is otherwise delinquent in the filing requirements three times in the prior two year period or if the issuer’s common stock has been removed from quotation on the OTCBB twice in that two year period.
Volatility of our stock price could adversely affect stockholders.
The market price of our common stock could fluctuate significantly as a result of:
·
quarterly variations in our operating results;
·
interest rate changes;
·
changes in the market’s expectations about our operating results;
·
our operating results failing to meet the expectation of investors in a particular period;
·
operating and stock price performance of other companies that investors deem comparable to us;
·
news reports relating to trends in our markets;
·
changes in laws and regulations affecting our business;
·
material announcements by us or our competitors;
·
sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur; and
·
general economic and political conditions such as recessions and acts of war or terrorism.
Fluctuations in the price of our common stock could contribute to the loss of all or part of an investor’s investment in the company.
We may never issue dividends.
We currently do not plan to declare dividends on our common stock in the foreseeable future. Any payment of cash dividends will depend upon our financial condition, capital requirements, earnings and other factors deemed relevant by our Board of Directors. Agreements governing future indebtedness will likely contain similar restrictions on our ability to pay cash dividends. See “Dividend Policy” for more information. Consequently, an investor’s only opportunity to achieve a return on investment will be if the market price of our common stock appreciates and the shares are sold for a profit.
Additional issuances of equity securities by us would dilute the ownership of our existing stockholders
As more fully described in our consolidated statement of changes in stockholders’ equity in Item 8, we issued 4,650,062 shares of common stock in 2010, with per-share issuance prices as low as $0.25. We will continue to so issue additional equity securities pursuant to certain strategic transactions, to fund expansion of our operations or for other purposes. We may issue shares of our common stock in the future for consideration that is greater than or less than the prevailing market price. To the extent we issue additional equity securities, our shareholders’ ownership percentage may be reduced, perhaps substantially.
In conjunction with the Data Jack acquisition more fully described in Note D to the consolidated financial statements, 25,000 additional shares of the Company’s restricted common stock are to be issued to the Sellers for every 5,000 new DataJack customers that the Company acquires, subject to a maximum of 500,000 shares issued.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2.
PROPERTIES
The Company’s principal office is located at 14911 Quorum Drive, Suite 140 Dallas, Texas 75254. The Company leases approximately 3,124 square feet of office space, which lease expires in February, 2015. The Company no longer subleases a portion of these premises. On March 1, 2010 the Company also began leasing approximately 2,887 square feet of office space located at 6365 NW 5th Way, Fort Lauderdale, Florida 33309. This lease expires in February, 2013. The monthly rental and sublease portion on these leases are as follows:
(1) The monthly base rent at Ft. Lauderdale, FL increases annually from $1,925 in the first year, to $2,646 in the second year to $3,128 in the third year.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.
ITEM 4.
ITEM 4.
(REMOVED AND RESERVED)
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company’s common stock is quoted on the OTCBB under the symbol QUMI. The stock is very thinly traded and the market could be considered illiquid. The following quotations reflect the high and low bid prices for our common stock during each fiscal quarter within the last two fiscal years, without retail mark-up, mark-down or commission and may not represent actual transactions:
Holders
As of May 9, 2011, there were 24,962,237 shares of our common stock outstanding held by 132 shareholders of record, not including 100,000 shares held in our treasury.
Dividends
No dividends have been paid the last two fiscal years. We have no current plans to pay any future cash dividends on the common stock. Instead, we intend to retain all earnings, other than those required to be paid to the holders of any preferred stock we may issue in the future, to support our operations and future growth. The payment of any future dividends on the common stock will be determined by the Board of Directors based upon our earnings, financial condition and cash requirements; possible restrictions in future financing agreements, if any; business conditions; and such other factors deemed relevant.
Securities Authorized for Issuance under Equity Compensation Plans
The Company’s 2009 Equity Incentive Plan (the “Plan”) allows for the issuance of options to purchase, and other stock-based awards of, up to 5,000,000 shares of the Company’s common stock to selected employees, outside directors and consultants of Quamtel and its affiliates, at the sole discretion of, and with terms determined by, the Company’s Board of Directors. All of the 5,000,000 shares issuable under the Plan have been registered on a Form S-8 registration statement filed with the SEC on November 9, 2009. No options have been granted under the Plan through December 31, 2010, however, awards totaling 639,000 shares of the Company’s registered common stock have been granted under the Plan.
2009 Consulting Services Plan
Additionally, on November 25, 2009, the Company issued 300,000 shares of its common stock to Warren Gilbert (“Gilbert”) pursuant to a one-year consulting agreement with Gilbert entered into on November 20, 2009. Under this agreement, Gilbert provided advice and counsel to the Company regarding financial management and strategic opportunities. The 300,000 shares of the Company’s common stock issued to Gilbert were registered on a Form S-8 registration statement filed with the SEC on November 9, 2009.
The following table sets forth information about the Company’s equity compensation plans as of December 31, 2010:
Plan Category
Number of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted-average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders
N/A
4,361,000
Equity compensation plans not approved by security holders
N/A
-
Total
N/A
4,361,000
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
In the fourth quarter of 2010, the Company issued 1,960,000 shares of its unregistered common stock valued at $1,457,050, as follows:
·
On October 12, 60,000 restricted shares valued at $155,400 were issued Marcin Pycko as additional compensation. Mr. Pycko was at that time the Company’s Chief Technology Officer.
·
On October 21, 15,000 restricted shares valued at $38,850 were issued to Gina Corey in exchange for consulting services.
·
On December 2, 25,000 restricted shares valued at $25,000 were issued to Abundance Partners LP, in payment toward a note payable as discussed below.
·
On December 16, 1,300,000 restricted shares were sold to two accredited investors for net proceeds of $325,000. Those investors invested an additional $175,000 on that same date but shares for that additional investment have not yet been issued.
·
On December 28, 51,438 restricted shares valued at $83,844 were issued in conjunction with the Syncpointe acquisition discussed in Note C to the Company’s consolidated financial statements.
·
On December 28, 148,562 shares valued at $242,156 were issued to Scott Jonasz, President of Syncpointe, as compensation pursuant to his employment agreement dated August 18, 2010.
·
On December 28, 200,000 restricted shares valued at $326,000 were issued to Stuart Ehrlich, President of the Company, as additional compensation.
·
On December 28, 160,000 restricted shares valued at $260,800 were issued to Robert Picow, the Company’s Chairman of its Board of Directors, as compensation for services performed as Chairman for the Company.
All of these issuances were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 on the basis of the sophistication and small number of purchasers, and the restrictions placed on the certificates representing the shares and the representation received from the purchasers.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
Not required.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains various “forward looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding future events or the future financial performance of the Company that involve risks and uncertainties. Certain statements included in this Form 10-K, including, without limitation, statements related to anticipated cash flow sources and uses, and words including but not limited to “anticipates”, “believes”, “plans”, “expects”, “future” and similar statements or expressions, identify forward looking statements. Any forward-looking statements herein are subject to certain risks and uncertainties in the Company’s business, including but not limited to, reliance on key customers and competition in its markets, market demand, product performance, technological developments, maintenance of relationships with key suppliers, difficulties of hiring or retaining key personnel and any changes in federal regulation or current accounting rules, all of which may be beyond the control of the Company. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth therein.
This MD&A should be read in conjunction with the financial statements included herein.
On January 13, 2009, Quamtel and WQN executed the Share Exchange Agreement pursuant to which the shareholders of WQN received a total of 15,000,000 post-split shares of Quamtel’s common stock in exchange for one hundred percent of the outstanding WQN stock held by them. All conditions for closing were satisfied or waived, and the transaction closed on July 28, 2009. As a result of the Exchange, the shareholders of WQN own approximately 91% of the outstanding common stock of Quamtel. In conjunction with closing the Exchange, certain outstanding obligations of Quamtel, including officers and director’s compensation, notes and amounts payable to officers and directors and third party loans outstanding, were exchanged for 1,275,000 post-split shares of Quamtel’s common stock.
As a result of the Exchange and Merger, WQN became a wholly-owned subsidiary of Quamtel, through which its operations are conducted. On September 8, 2009, Quamtel filed an amendment to its Articles of Incorporation reflecting a one-for-ten reverse split of its common stock, and increasing its authorized stock to 200,000,000 common shares and 50,000,000 preferred shares.
Overview
WQN was formed as a Texas corporation in June 2007, when it acquired an operating business that was originally founded in 1996. WQN provides prepaid and postpaid enhanced telecommunications services with an emphasis on transporting calls that originate from the United States and Canada and terminate in specific regions of the world. Customers utilize WQN’s VoIP network to place quality international calls at discounted rates. The voice quality of WQN’s VoIP calls is nearly the same as an international telephone call carried over a traditional telephone line. A substantial portion of WQN’s revenue is derived from the sale of prepaid service to customers calling from the United States to India. WQN’s products and services are provisioned and sold online via its websites.
On December 9, 2009, the Company acquired all of the outstanding membership interests of Mobile Devices in exchange for 500,000 shares of its unregistered common stock, and up to 500,000 additional unregistered common stock shares contingent upon Mobile Devices achieving specified levels of new customers in the future. Mobile Devices was subsequently renamed and reorganized as Data Jack. Data Jack was formed in February 2009, and its revenues prior to the Company’s acquisition were $96,113. Data Jack specializes in delivering nationwide mobile 3G data coverage for a competitive fixed monthly price, through a proprietary USB device connected to any computer with a Windows or Mac operating system. Approximately $387,000 of revenue and a net loss of approximately $333,000 were generated from this subsidiary in 2010.
Effective August 18, 2010, the Company acquired all of the outstanding membership interests of Syncpointe LLC from the Sellers. Syncpointe LLC was subsequently renamed and reorganized as Syncpointe. The Company acquired Syncpointe in exchange for 1,000,000 shares of its unregistered common stock with piggyback registration rights. The Sellers may receive earn-out payments equal to 12.5% of Syncpointe’s net profit (as defined in the Syncpointe LLC Membership Interest Purchase Agreement) for the first 18 months that it operates as a division of the Registrant. Syncpointe is a software developer focused on the development of mobile device management software. Syncpointe’s products are geared towards global enterprise, government, and consumer markets. Syncpointe LLC was formed in November 2008, and its revenues prior to the Company’s acquisition were $0 and $89,000 during 2010 and 2009, respectively. No revenues and a net loss of approximately $105,000 were generated from this company in 2010.
Results of Operations for the Year Ended December 31, 2010 Compared to the Same Period in 2009
Revenues
Our revenues for the years ended December 31, 2010 and 2009 were $2,182,258 and $2,462,060, respectively. A $387,000 revenue increase associated with Data Jack was substantially offset by reductions in EasyTalk and RocketVoIP revenues primarily because the retail rates to India, one of the Company’s primary markets, have been declining due to increased competition. In addition, our revenues are under pressure due to competing technologies such as Skype and inexpensive home phone replacements, such as Vonage, which offer unlimited calling to India. This trend is expected to continue, putting further downward pressure on revenues and margins. Inflation has not had a material effect on revenues during the past two fiscal years.
Cost of Sales and Gross Profit
Cost of sales was $1,826,657 and $1,638,895 for the years ended December 31, 2010 and 2009, respectively. This resulted in gross profit of $355,601 (16%) and $823,164 (33.4%) for the respective 2010 and 2009 periods. The decreased gross margin in 2010 was due to lowering our effective sales prices on our India traffic due to competitive market pressures, while our vendor cost reductions have not kept pace.
Operating Expenses
Operating expenses were $10,144,472 and $2,729,233 for the years ended December 31, 2010 and 2009, respectively. Compensation and consulting expenses increased from $1,748,645 to $5,347,150 during these periods due primarily to the $3,377,717 noncash compensation consulting agreement charge as described in Note I to the Company’s consolidated financial statements and, to a lesser extent, the iTella, Inc. (“Itella”) consulting agreement entered into in 2010, as described in Note G to the Company’s consolidated financial statements. General and administrative (“G&A”) expenses increased from $890,832 in 2009 to $1,280,434 in 2010, primarily due to increased expenses associated with operating the recently-acquired companies Data Jack and Syncpointe.
In accordance with ASU 350-20-35, we test the carrying value of our goodwill and our other intangible assets for impairment at least annually by comparing the fair values of these assets to their carrying values. As a result, during the year ended December 31, 2010 we recorded an impairment charge to our operating results of approximately $3.4 million relating to goodwill previously recorded for our WQN and Syncpointe acquisitions, due primarily to our inability to secure sufficient rights to related software since our acquisition of Syncpointe, and to management’s assessment of operating results and forecasted discounted cash flows for WQN. This impairment charge reduced the carrying value of these subsidiaries to their estimated fair value, eliminating all related goodwill. We may be required to record additional impairment charges for other remaining intangible assets in the future, which could materially adversely affect our financial condition and results of operations.
Net Income (Loss)
The gross margin decrease coupled with the operating expense increases noted above, combined to result in a net loss of $(10,052,360), compared to a net loss of $(1,931,897), in 2010 and 2009, respectively.
Liquidity and Capital Resources
Cash and cash equivalents were $78,739 at December 31, 2010. Our net cash used in operating activities for the year ended December 31, 2010 was $2,400,382, due primarily to our cash-based net loss during this period, partially offset by increases in our accounts and stock payable, and a decrease in prepaid expenses. Cash from investing activities was used primarily to purchase the domain names 800.com and DataJack.com and network equipment during this period. Our primary source of funding, as needed, has been through promissory note issuances, and sales of common stock for cash.
Our working capital decreased by $3,172,870 during the year ended December 31, 2010 from a working capital deficit of $1,330,097 at December 31, 2009 to a working capital deficit of $4,502,967 at December 31, 2010.
Our accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The Company has incurred operating losses and negative cash flows from operations since the Exchange and Merger, has incurred a accumulated deficit of $11,982,372 through December 31, 2010, and has been dependent on issuances of debt and equity instruments to fund its operations. The Company intends to increase its future profitability and seek new sources or methods of financing or revenue to pursue its business strategy. However, there can be no certainly that the Company will be successful in this strategy. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Accordingly, the Company’s independent auditors have added an explanatory paragraph to their opinion on the Company’s consolidated financial statements for the year ended December 31, 2010, based on substantial doubt about the Company’s ability to continue as a going concern.
These consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. Management is proposing to raise any necessary additional funds through loans and additional sales of its common stock. There is no assurance that the Company will be successful in raising additional capital in amounts or on terms acceptable to us, if at all.
Certain Loan Agreements
As a result of the August 18, 2010 acquisition of Syncpointe LLC, the Company entered into an agreement effective November 4, 2010 with Abundance Partners LP (“Abundance”) and Syncpointe relating to the $80,000 principal balance on a secured $100,000 loan, bearing interest at 6% per annum, that Abundnace made to Syncpointe LLC on June 3, 2010 (the “Abundance Loan”). Pursuant to the terms of this agreement, the Company issued to Abundance 25,000 shares of its unregistered common stock in lieu of an equity interest in Syncpointe and paid a $25,000 default fee due under the Abundance Loan which went into default on July 3, 2010. Additionally, Syncpointe agreed to apply 15% of the cash proceeds to Syncpointe or the Company from any loan or sale of equity towards paying down the balance of the loan plus accrued but unpaid interest (the “Required Payments”), and agreed to pay off the balance of the Abundance Loan, plus interest, on or before March 31, 2011 (the “Maturity Date”). Abundance agreed to reduce the 18% default interest rate to 12%, retroactive to July 3, 2010, and the parties further agreed that if the Abundance Loan went into default again, the interest rate would increase to 18%, retroactive to July 3, 2010. The Company agreed that its Collateral (as that term is defined in the original Abundance Loan agreement) would be included with the Syncpointe Collateral as part of the security interest under that agreement and that such security interest would be subordinated to the first priority interest granted under the 2010 Secured Gilder Note (defined below). Because the Required Payments were not made and the Abundance Loan was not repaid in full by the Maturity date, the Abundance Loan is currently in default.
Because of reduced monthly payments under the 2010 Secured Gilder Note (discussed under Item 13 below), the Company is in default of the terms of that note and, as such, at the option of Gilder, the entire unpaid principal balance and the accrued and unpaid interest are due and payable on demand, with past due principal bearing interest from the date of default at the maximum rate allowed by law. Gilder (defined below), under a security agreement with the Company, holds a first priority lien and security interest in all of the assets of the Company, which secures the performance of the Company’s obligations under the 2010 Secured Gilder Note.
We have requested waivers from Abundance and Gilder of the default provisions of the Abundance Loan and the 2010 Secured Gilder Note, respectively, and we have received oral commitments to such waivers, subject to negotiations. We cannot assure you, however, that the terms of such waivers will be acceptable to us. Even if the terms of such waivers are acceptable, we may not be able to satisfy those terms in the future or be able to pursue our strategies within the constraints of those agreements. These circumstances could materially and adversely impair our liquidity and, among other factors, raise substantial doubt regarding our ability to continue as a going concern.
Capital Expenditure Commitments
We did not have any substantial outstanding commitments to purchase capital equipment at December 31, 2010.
Plan of Operations
We expect to adjust our operations and development to the level of capitalization, but we may not have sufficient capital resources to meet projected cash flow requirements for the next three months. If during that period or thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations, liquidity and financial condition.
Our future cash requirements include those associated with maintaining our status as a reporting entity. We believe that on an annual basis those costs would not exceed an average of $25,000 per month.
We presently do not have any available credit, bank financing or other external sources of liquidity. Due to our brief operating history and lack of substantial historical operating profits, our operations have not been a source of liquidity. We will need to obtain additional capital in order to fund our operations and become profitable. In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders. There can be no assurance that we will be successful in obtaining additional funding in amounts or on terms acceptable to us, if at all.
Critical Accounting Policies
The application of our accounting policies, which are important to our financial position and results of operations, requires significant judgments and estimates on the part of management. These estimates bear the risk of change due to the inherent uncertainty attached to the estimate and are likely to differ to some extent from actual results. A description of our critical accounting policies follows:
1.
In accordance with FASB ASC 350 (formerly Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” the Company tests its intangible asset (goodwill) for impairment at least annually by comparing the fair value of this asset to its carrying value. If in the future the carrying value of our goodwill exceeds its fair value, the Company will recognize an impairment charge in an amount equal to that excess. For purposes of these tests, the excess of the fair value of the Company over the amounts assigned to its identified assets and liabilities is the implied fair value of its goodwill.
2.
Our revenues are primarily derived from fees charged to carry voice services over the Company’s network and from related monthly recurring charges. Variable revenue is earned based on the number of minutes during a call and is recognized upon completion of a call. Revenue for each customer is calculated from information received through the Company’s network switches. The Company tracks the information received from the switch and analyzes the call detail records and applies the respective revenue rate for each call. Fixed revenue is earned from monthly recurring services provided to customers that are fixed and recurring in nature, and are connected for a specified period of time. Revenues are recognized as the services are provided and continue until the expiration of the contract or until cancellation of the service by the customer. Cash fees received prior to call completion are recorded on the Company’s balance sheet as unearned revenue.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company’s consolidated financial statements are included following the signature page to this Form 10-K.
The audited financial statements of the acquiree Mobile Devices (for the period ended September 30, 2009) are incorporated by reference to the Company’s Current Report on Form 8-K/A as filed on February 23, 2010. The audited financial statements of the acquiree Syncpointe LLC (for the years ended December 31, 2009 and 2008) are incorporated by reference to the Company’s Current Report on Form 8-K/A as filed on November 5, 2010.
ITEM 9.
ITEM 9.
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On February 20, 2011 Jewett, Schwartz, Wolfe & Associates (“JSW”) advised the Company that its audit practice was acquired by RBSM LLP (“RBSM”), an independent registered public accounting firm and that, accordingly, JSW was resigning as the Company’s independent registered public accounting firm. The Company has since retained RBSM as its independent registered public accounting firm. The Company’s related Current Report on Form 8-K as filed on February 24, 2011 is incorporated by reference.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Management’s Annual Report on Internal Control over Financial Reporting
As required by Rule 13a-15(b) under the Exchange Act, as of December 31, 2010, our management conducted an evaluation with the participation of our President who also serves as our principal financial and accounting officer (the “Certifying Officer”) regarding the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our management, with the participation of the Certifying Officer, also conducted an evaluation of our internal control over financial reporting as of December 31, 2010.
A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects a company’s ability to initiate, authorize, record, process or report external financial data reliably in accordance with generally accepted accounting principles, such that there is more than a remote likelihood that a misstatement of our annual or interim financial statements that is more than inconsequential will not be prevented or detected. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected, as of December 31, 2010. Our President, who is our sole executive officer, is not a financial or accounting professional, and we do not have a chief financial officer or sufficient accounting staff. Until we are able to engage a qualified financial officer, and/or accounting staff, we may continue to experience material weaknesses in our disclosure controls that may continue to adversely affect our ability to timely file our quarterly and annual reports.
Based on this evaluation and in accordance with the requirements of Auditing Standard No. 2 of the Public Company Accounting Oversight Board, our Certifying Officer concluded that our disclosure controls and procedures were ineffective as of December 31, 2010.
Our management, including the Certifying Officer, does not expect that our disclosure controls and procedures will prevent all errors and all improper conduct. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, a design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of improper conduct, if any, have been detected. These inherent limitations include the realities that judgments and decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more persons, or by management override of the control. Further, the design of any system of controls is also based in part upon assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations and a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process 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 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 authorization 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.
Our management, including the Certifying Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. Based on this evaluation and in accordance with the requirements of Auditing Standard No. 2 of the Public Company Accounting Oversight Board, the Certifying Officer concluded that we did not maintain effective internal control over financial reporting as of December 31, 2010 based on the criteria in the Internal Control - Integrated Framework. Until we are able to engage a qualified financial officer, and/or accounting staff, we may continue to be unable to maintain effective internal control over our financial reporting.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
On February 17, 2011, Marcin Pycko resigned as the Company’s Chief Technology Officer. He is still employed by the Company, however, as its Director of Communications Technology.
PART II
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Below are the names and certain information regarding the Company’s executive officers and directors:
Directors are elected to serve until the next annual meeting of stockholders and until their successors are elected and qualified. Currently there are four seats on our Board of Directors. Officers are elected by the Board of Directors and serve until their successors are appointed by the Board of Directors. Diversity is not a formal consideration in determining Board of Directors member nominations. The Board of Directors has chosen to separate the Chairman and Chief Executive Officer positions in order to enhance the independence of the Board of Directors and management. There was one Board of Directors meeting by telephone on January 21, 2010, and several actions by written consent.
Biographical resumes of each officer, director and significant employee are set forth below.
Stuart Ehrlich joined the Company at the closing of the Exchange as its President, Chief Executive Officer and as a director. He also serves as the Company’s acting principal financial officer. Prior to his position with QuamTel, Mr. Ehrlich founded CandoCorp in 2005, a private consulting company focused on the telecommunications, finance, high technology and entertainment industries.
Gladys Perez has served as a consultant for WQN since June 2007, formulating strategies to diversify its product portfolio and penetrate new ethnic markets. From March 1999 through May 2006, she served as a marketing consultant for the Sun-Sentinel, Inc., and from 1989 through 1999 she held marketing and management positions with Caribbean Overseas Trading, Inc. and Embassy Suites. Ms. Perez brings relevant management and marketing experience to her position as a Board of Directors member.
Marc Moore has served as Chief Executive Officer of Collabria LLC since 2008, a company that operates in the information technology sector. From 1990 to 1997, Mr. Moore served as President and Chief Executive Officer of Payroll Transfers, Inc. (“PTI”), a private corporation he co-founded. During his eight year tenure at PTI, that company grew from startup into one of the largest companies in the industry and was named twice as one of the Inc. 500 Fastest Growing Companies in America. At the time of his departure, PTI had over 250 employees and sales representatives and annualized revenue in excess of $400 million. The company grew to over $1.5 billion in annual revenue and was listed in Forbes magazine as one of the top 100 private firms in America until its acquisition by a public company. Prior to founding PTI, Mr. Moore was an Assistant Vice President with both Kidder Peabody and Merrill Lynch where he handled corporate cash management and pension accounts.
Mr. Moore has served as the president of two Florida and two national associations representing over one thousand companies and over three million employees. He is also a board member of the Center for Entrepreneurship and on the Dean’s Advisory Council for the College of Business at the University of South Florida. Mr. Moore currently has multiple business interests as well as serving as an advisor and director for private corporations.
Mr. Moore is an honors graduate of the United States Air Force Academy with a degree in Economics and Financial Management. Following his graduation, Mr. Moore served as an Air Force fighter pilot for eight (8) years, flying the and aircraft. During his tour with the Air Force, he was a member of numerous international committees and involved in systems development, operational readiness and flight operations of U.S. and allied air forces.
Significant Employees and Consultants
Marcin Pycko became Chief Technical Officer (“CTO”) upon the closing of the Exchange. From 2004 until the present, he has been CEO of PhonicEQ, Inc., a manufacturer of telecommunications hardware. Also from 2004 to 2007, he consulted with Voiceglo, a unit of The Globe.com, Inc., developing peer-to-peer telecommunications via the Internet. Prior to 2004, he worked at Digium, Inc and Nasza telecom, S.A., one of the first free-enterprise telecom operators in Warsaw, Poland. Mr. Pycko also earned a Telecommunications degree in 2002 from the Warsaw University of Technology. February 17, 2011, Mr Pycko resigned as our CTO. However, he is still an employee of the Company and currently serves as its Director of Communications Technology. Mr. Pycko brings relevant general management and technical telecommunications experience to his position at the Company.
Robert Picow served as a Director of the Company and Chairman of our Board of Directors from January 1, 2010 until his resignation from those positions on May 13, 2011. Mr. Picow will continue to serve the Company as a sales and marketing consultant.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers and holders of more than 10% of our common stock to file with the SEC reports of their ownership and changes in ownership of our securities. Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file. To our knowledge, based solely on a review of the copies of such reports and written representations that no other reports were required, we believe that all filing requirements applicable to our officers, directors and greater than 10% shareholders were satisfied during the year ended December 31, 2010, except for the following: One Form 3 for one member of our Board of Directors was not filed, and 5 Forms 4 and one Form 5 for that same director were not filed. Two Forms 4 and one Form 5 were not filed for a second director.
Board Committees
The Company does not maintain a separately-designated, standing audit committee, compensation committee, or nominating committee, and the Board of Directors performs these functions. Due to the Company’s relatively small size, the Board of Directors has determined that it is not necessary to have a separately-designated, standing nominating committee or procedures for submitting shareholder nominations. The Board of Directors has not established separately-designated, standing audit committee or compensation committee for similar reasons. Eventually, the Board of Directors will review the advisability of establishing audit, compensation and nominating committees composed primarily of independent directors to perform the functions normally performed by such groups.
Code of Ethics
Due to its relatively small size, the Company has not yet adopted a comprehensive written code of ethics that applies to the principal executive officer, principal financial officer, principal accounting officer or controller, or person performing similar functions. It is generally the Company’s policy that its operations are to be conducted in compliance with applicable laws and regulations and with high ethical standards. This policy applies to all employees and others working on behalf of Quamtel wherever located.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation paid to the Company’s Chief Executive Officer and the other executive officers at the end of the last completed fiscal year. We refer to all of these officers collectively as our “named executive officers.”
Summary Compensation Table
___________________________
(1) Mr. Ehrlich also acts as the Company’s principal financial officer.
(2) Mr. Pycko resigned as the Company’s Chief Technology Officer as of February 17, 2011.
Outstanding Equity Awards at Fiscal Year-End Table.
None.
Employment Agreements with Executive Officers
All of the Company’s employees are employed at-will. The Company intends to enter into an employment agreement with Stuart Ehrlich. Terms of such an agreement have not yet been set, except that for 2011, the Company has agreed to pay Mr. Ehrlich a salary of $75,000 in cash plus 200,000 shares of the Company’s unregistered stock.
Consulting Agreements
Effective August 1, 2009 and subsequently amended, the Company executed a consulting services agreement with iTella (the “iTella Agreement”), whereby iTella provides, at the reasonable request of the Company’s management, advanced business strategy, financing, product development and marketing advice including but not limited to day to day operations. The initial term of this agreement is for five years, and automatically renews for additional one year terms if approved by both parties. Consultant’s compensation consists of the following:
1.
Cash payments totaling $8,333 for the first two months, payable monthly;
2.
Cash payments totaling $66,667 for the next four months, payable monthly;
3.
Annual cash payments of $250,000 thereafter, payable monthly;
4.
Nine percent of the Company’s consolidated gross revenue, payable quarterly (except the first two months, in which the rate is one percent of gross revenues), subject to an annual calendar year cap of $800,000;
5.
Employees of Consultant may be eligible for grants of stock options pursuant to the Company’s 2009 Equity Incentive Plan, in such amounts as may from time to time be determined by the Company, at its sole discretion; and
6.
Reimbursement of reasonable, related business expenses.
Expenses under the iTella Agreement for the year ended December 31, 2010 were $467,045. Prior to hiring iTella, the Company did not have expertise in the management and financing of a public company, and required the services of iTella as outlined in the iTella Agreement. The iTella Agreement is not cancellable by either party in advance of its contractual term, except under a defined change in control of the Company. Upon such a cancellation, iTella would be entitled to a lump sum payment equal to all consideration due for the remaining term.
On August 20, 2009, the Company also executed a one-year consulting agreement with consultant Gilbert, whereby Gilbert provided advice and counsel regarding the Company’s financial management and strategic opportunities. As compensation, Gilbert was issued 300,000 shares of the Company’s common stock, which were registered in a registration statement on Form S-8 filed with the SEC on November 9, 2009.
On June 7, 2010, the Company executed a one-year consulting agreement with Mr. Windel Thelusma, whereby Mr. Thelusma agreed to provide advice and counsel regarding the Company’s financial management and strategic opportunities. As compensation, Mr. Thelusma was issued 100,000 shares of the Company’s common stock valued at $260,000 on July 9, 2010. These shares were registered in a registration statement on Form S-8 filed with the SEC on November 9, 2009.
On August 23, 2010, the Company executed a six-month consulting agreement with Mirador Consulting, Inc. (“Mirador”), whereby Mirador agreed to provide advice and counsel regarding the Company’s financial management and strategic opportunities. As compensation, Mirador was issued 125,000 shares of the Company’s common stock valued at $310,000 on August 23, 2010.
Director Compensation
Our directors are elected by the vote of a majority in interest of the holders of our voting stock and each holds office until the expiration of the term for which he or she was elected and until a successor has been elected and qualified.
A majority of the authorized number of directors constitutes a quorum of the Board of Directors for the transaction of business. The directors must be present at the meeting to constitute a quorum. However, any action required or permitted to be taken by the Board of Directors may be taken without a meeting if all members of the Board of Directors individually or collectively consent in writing to the action.
Our directors have received compensation for their services as follows:
Gladys Perez was paid $12,000 in each of 2009 and 2010 for her services as a director of the Company and will receive $12,000 in 2011 as well.
Robert Picow, a director of the Company and Chairman of the Board of Directors from January 1, 2010 to May 13, 2011, was compensated for his services to the Company as a director. His 2010 compensation consisted of 220,000 shares of the Company’s unregistered common stock valued at $416,800, 24,000 shares of the Company’s registered common stock (of which he has received 14,000 shares) and cash payments totaling $60,000 (of which he has received $20,000).
The following table sets forth information regarding compensation Paid or accrued to our directors for the year ended December 31, 2010.
Director Compensation
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plans
The Company’s Plan allows for the issuance of options to purchase, and other stock-based awards of, up to 5,000,000 shares of the Company’s common stock to selected employees, outside directors and consultants of Quamtel and its affiliates, at the sole discretion of, and with terms determined by, the Company’s Board of Directors. No options were issued under the Plan through December 31, 2010; however, in 2010, the Company did issue grants of stock under the Plan totaling 639,000 registered shares. The Company issued an additional 300,000 registered shares (not under the Plan) to Gilbert pursuant to a one-year consulting agreement with him.
Beneficial Ownership
The following table sets forth information as of May 9, 2011, except as otherwise noted, with respect to the beneficial ownership of our common stock and is based on 24,962,237 shares of common stock issued and outstanding as of May 9, 2011:
·
Each person known by us to own beneficially more than five percent of our outstanding common stock;
·
Each of our directors;
·
Our Chief Executive Officer and each person who serves as an executive officer of the Company; and
·
All our executive officers and directors as a group.
The number of shares beneficially owned by each shareholder is determined under rules promulgated by the SEC. The information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and any shares as to which the individual has the right to acquire beneficial ownership within 60 days, except as otherwise noted, through the exercise or conversion of any stock option, warrant, preferred stock or other right. The inclusion in the following table of those shares, however, does not constitute an admission that the named shareholder is a direct or indirect beneficial owner of those shares. Unless otherwise indicated, to our knowledge based upon information produced by the persons and entities named in the table, each person or entity named in the table has sole voting power and investment power, or shares voting and/or investment power with his or her spouse, with respect to all shares of capital stock listed as owned by that person or entity.
The address for each of our officers and directors is c/o Quamtel, Inc., 14911 Quorum Drive, Suite 140, Dallas, Texas 75254.
*Less than 1%.
(1) Includes 7,000,000 shares owned by eTeltec Inc. (“eTeltec”). Ms. Perez is the President and owner of eTeltec.
(2) Consists of 7,000,000 shares owned by eTeltec. eTeltec obtained such shares through purchase from Steven Ivester under a Stock Purchase Agreement dated July 1, 2009 for the sum of $4,500,000, payable in a five year unsecured note plus interest at 3.5%. Mr. Ivester and Ms. Perez enjoy a close personal relationship. As such, Mr. Ivester may be deemed to beneficially own all of the shares owned by eTeltec. Mr. Ivester disclaims beneficial ownership of such shares, and the information reported herein shall not be deemed an admission that such reporting person is the beneficial owner of the shares for any purpose, except to the extent of such person’s pecuniary interest therein. This ownership disclosure is based in part on a Schedule 13D/A filed with the SEC on January 23, 2010 by eTeltec, Mr. Ivester and Ms. Perez.
(3) Includes 4,525,000 shares of the Company’s common stock held by Gilder Funding Corp. Mr. Gilbert controls Gilder Funding Corp.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
From time to time, Steven Ivester, the Company’s former sole shareholder and currently a consultant to the Company through the iTella Agreement (more fully described above and in Note G to the Company’s consolidated financial statements. Mr. Ivester is the principal employee of iTella.), has made personal advances to the Company. These advances, formalized under an unsecured revolving promissory note dated March 18, 2010, allow for a maximum principal loan amount of $1,000,000, are repayable upon demand, and are non-interest bearing. The outstanding balance of these advances was $569,037 and $758,781 at December 31, 2010 and 2009, respectively.
On December 15, 2009, the Company issued an unsecured $200,000 promissory note (the “2009 Gilbert Note”) to Gilbert for cash. The 2009 Gilbert Note bore interest at 15.9% per year, and unpaid principal and interest was repayable in full on June 15, 2010. Under the terms of the 2009 Gilbert Note, Gilbert was to be paid $40 toward the Gilbert Note for each Data Jack unit sold, plus a $5.00 bonus payment (in addition to interest) on each Data Jack unit sold up to 5,000 units. No such payments were due or made. The 2009 Gilbert Note, with accrued interest, was repaid in full on February 27, 2010 from proceeds of the 2010 Secured Gilder Note (defined below).
On August 20, 2009, the Company issued and sold $300,000 in principal amount of an unsecured convertible note to Gilbert, receiving net proceeds of $300,000. This note bore interest at 18% and was converted into 115,000 shares of the Company’s common stock at a conversion price of $2.70 per share on September 10, 2009. In connection with his purchase of this convertible note, on August 20, 2009, Gilbert also received six-year warrants to purchase 54,000 shares of the Company’s common stock exercisable at a price of $2.70 per share. On May 9, 2011, Gilbert signed an agreement with the Company rescinding and cancelling these warrants as of their issue date, August 20, 2009.
On August 20, 2009, the Company also executed a one-year consulting agreement with Gilbert. Gilbert is the president of Gilder Funding Corp., a shareholder of the Company. Pursuant to the terms of this agreement, Gilbert provided advice and counsel regarding the Company’s financial management and strategic opportunities. As compensation, Gilbert was issued 300,000 shares of the Company’s common stock, which were registered with the SEC in a registration statement on Form S-8 on November 9, 2009.
On February 27, 2010, the Company executed a $1,000,000 Senior Secured Promissory Note payable to Gilder Funding Corp. (“Gilder”), a company that is a shareholder of the Company and controlled by Gilbert (the “2010 Secured Gilder Note”) for cash. The proceeds of the 2010 Secured Gilder Note were used, in part, to repay the 2009 Gilbert Note, with accrued interest. Interest on the 2010 Secured Gilder Note is 15% per annum, and beginning April 5, 2010, the Company was required to make monthly payments on the 2010 Secured Gilder Note in the amount of $23,789.93 per month, with any remaining outstanding principal and any accrued but unpaid interest due on or before February 27, 2016. The 2010 Secured Gilbert Note is secured by substantially all of the Company’s assets. Effective May 24, 2010, the Company and Gilder amended the 2010 Secured Gilder Note to increase the principal amount to $1,250,000, with the Company receiving the additional $250,000 in cash. Effective June 15, 2010, monthly payments were increased to $27,000; and the maturity date was changed to February 27, 2015. The Company made three monthly payments of $27,000 under the 2010 Secured Gilder Note and has since begun making monthly payments of $11,000. Because of this reduced monthly payment, the Company is in default of the terms of the 2010 Secured Gilder Note and, as such, at the option of Gilder, the entire unpaid principal balance and the accrued and unpaid interest are due and payable on demand, with past due principal bearing interest from the date of default at the maximum rate allowed by law. Gilder, under a security agreement with the Company, holds a first priority lien and security interest in all of the assets of the Company, which secures the performance of the Company’s obligations under the 2010 Secured Gilder Note. The Company has requested that Gilder waive these default provisions and has received his oral commitment to do so.
On December 13, 2010, the Company issued an unsecured $250,000 promissory note to Gerald and Seena Sperling (the “2010 Sperling Note”), together a shareholder of the Company (the “Sperlings”), for cash. The 2010 Sperling Note bore interest at 3% per year and was payable in full, with interest, on February 25, 2012. At December 31, 2010, the outstanding principal and interest on the 2010 Sperling Note was $250,349. On March 10, 2011, the Company replaced and cancelled the 2010 Sperling Note with a new note (the “2011 Sperling Note”) in the amount of $500,000 in exchange for an additional $250,000 in cash from the Sperlings. As a result of this transaction, the 2010 Sperling Note was deemed paid in full. The 2011 Sperling Note bears interest at 3% per year and is payable in full, with interest, on March 10, 2013.
On December 16, 2010, the Sperlings made a short term loan to the Company of $75,000. This loan was made pursuant to an oral agreement, bore no interest and was repaid in full prior to the end of the year.
On December 16, 2010, the Sperlings invested an additional $500,000 in the Company and received 1,300,000 shares for $325,000 of that investment, or $0.25 per share. The Sperlings will receive an additional 700,000 shares for the remaining $175,000 of their investment.
Director Independence
Our directors are not “independent” directors within the meaning of Marketplace Rule 4200 of The Nasdaq Stock Market, Inc.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
On February 20, 2011, the Company engaged RBSM, LLP (“RBSM”), which acquired the audit practice of Jewett, Schwartz, Wolfe & Associates (“JSW”), the Company’s previous auditor, as its independent registered public accounting firm for the Company’s fiscal year ended December 31, 2010.
JSW provided services to us during the year ended December 31, 2009 and services through February 20, 2011. Since RBSM was engaged subsequent to December 31, 2010, the following table shows the fees that we were billed by JSW for audit and other services provided by our independent auditors during the years ended December 31, 2010 and 2009
(1)
Audit fees - These are fees billed for professional services performed by JSW for the audit of our annual financial statements and review of financial statements included in our Form 10-Q filings, and services that are normally provided in connection with statutory regulatory filings or engagements.
(2)
Audit-related fees - These are fees billed for assurance and related services performed by JSW as applicable, that are reasonably related to the performance of the audit or review of our financial statements. Included in the above fees were audit services related to the acquisition of DataJack, Inc. and Syncpointe, LLC. These include attestations that are not required by statute, and consulting on financial accounting/reporting standards.
(3)
Tax fees - These are fees billed for professional services performed by JSW, as applicable, with respect to tax compliance, tax advice and tax planning. These include preparation of original and amended tax returns for the Company and its consolidated subsidiaries, refund claims, payment planning, tax audit assistance, and tax work stemming from “audit-related” items.
(4)
All other fees - Services that do not meet the above three category descriptions are not permissible work performed for us by JSW, as applicable.
All services to be performed for the Company by independent public accountants, including those fees outlined above for 2010 and 2009, must be pre-approved by the Board of Directors, which has chosen not to adopt any pre-approval policies for enumerated services and situations, but instead has retained the sole authority for such approvals.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated:
_______
*filed herewith
(1)
Filed with the SEC on October 12, 2000, as an exhibit, numbered as indicated above, to the Registrant’s registration statement (SEC File No. 000-31757) on Form 10-SB, which exhibit is incorporated herein by reference.
(2)
Filed with the SEC on January 11, 2008, as an exhibit, numbered as indicated above, to the Registrant’s current report (SEC File No. 000-31757) on Form 8-K, which exhibit is incorporated herein by reference.
(3)
Filed with the SEC on August 3, 2009, as an exhibit, numbered as indicated above, to the Registrant’s current report (SEC File No. 000-31757) on Form 8-K, which exhibit is incorporated herein by reference.
(4)
Filed with the SEC on November 9, 2009, as an exhibit, numbered as indicated above, to the Registrant’s registration statement (SEC File No. 000-31757) on Form S-8, which exhibit is incorporated herein by reference.
(5)
Filed with the SEC on November 16, 2009, as an exhibit, numbered as indicated above, to the Registrant’s quarterly report (SEC File No. 000-31757) on Form 10-Q, which exhibit is incorporated herein by reference.
(6)
Filed with the SEC on December 14, 2009, as an exhibit, numbered as indicated above, to the Registrant’s current report (SEC File No. 000-31757) on Form 8-K, which exhibit is incorporated herein by reference.
(7)
Filed with the SEC August 17, 2009, as an exhibit, numbered as indicated above, to the Registrant’s definitive proxy statement (SEC File No. 000-31757) on Form 14C, which exhibit is incorporated herein by reference.
(8)
Filed with the SEC on January 27, 2010, as an exhibit, numbered as indicated above, to the Registrant’s current report (SEC File No. 000-31757) on Form 8-K, which exhibit is incorporated herein by reference.
(9)
Filed with the SEC on February 23, as an exhibit, numbered as indicated above, to the Registrant’s current report (SEC File No. 000-31757) on Form 8-K/A, which exhibit is incorporated herein by reference.
(10)
Filed with the SEC on August 13, 2010, as an exhibit, numbered as indicated above, to the Registrant’s current report (SEC File No. 000-31757) on Form 8-K, which exhibit is incorporated herein by reference.
(11)
Filed with the SEC on July 9, 2010, as an exhibit, numbered as indicated above, to the Registrant’s current report (SEC File No. 000-31757) on Form 8-K, which exhibit is incorporated herein by reference.
(12)
Filed with the SEC on August 24, 2010, as an exhibit, numbered as indicated above, to the Registrant’s current report (SEC File No. 000-31757) on Form 8-K, which exhibit is incorporated herein by reference.
(13)
Filed with the SEC on November 5, 2010, as an exhibit, numbered as indicated above, to the Registrant’s current report (SEC File No. 000-31757) on Form 8-K/A, which exhibit is incorporated herein by reference.
(14)
Filed with the SEC on March 31, 2010, as an exhibit, numbered as indicated above, to the Registrant’s annual report (SEC File No. 000-31757) on Form 10-K, which exhibit is incorporated herein by reference.
(15)
Filed with the SEC on November 15, 2010, as an exhibit, numbered as indicated above, to the Registrant’s quarterly report (SEC File No. 000-31757) on Form 10-Q, which exhibit is incorporated herein by reference.
(16)
Filed with the SEC on December 17, 2010, as an exhibit, numbered as indicated above, to the Registrant’s current report (SEC File No. 000-31757) on Form 8-K, which exhibit is incorporated herein by reference.
(17)
Filed with the SEC on February 1, 2011, as an exhibit, numbered as indicated above, to the Registrant’s current report (SEC File No. 000-31757) on Form 8-K, which exhibit is incorporated herein by reference.
(18)
Filed with the SEC on August 24, 2011, as an exhibit, numbered as indicated above, to the Registrant’s current report (SEC File No. 000-31757) on Form 8-K, which exhibit is incorporated herein by reference.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
QUAMTEL, INC.
Date: May 17, 2011
By:
/s/ Stuart Ehrlich
Stuart Ehrlich
Chief Executive Officer, President,
principal executive officer and
principal financial and accounting officer
In accordance with the Exchange Act, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
/s/ Stuart Ehrlich
Director; Chief Executive Officer, President, and Treasurer
May17, 2011
Stuart Ehrlich
/s/ Gladys Perez
Director
May17, 2011
Gladys Perez
/s/ marc Moore
Director
May17, 2011
Marc Moore
CONSOLIDATED FINANCIAL STATEMENTS
Quamtel, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Quamtel, Inc.
We have audited the accompanying consolidated balance sheet of Quamtel, Inc. as of December 31, 2010 and the related consolidated statements of operations, changes in shareholders’ equity (deficiency), and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the 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 audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circmstances, 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Quamtel, Inc. as of December 31, 2010 and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
These accompanying consolidated financial statements referred to above have been prepared assuming that the Company will continue as a going concern. As discussed in the Note C to the accompanying consolidated financial statements, the Company has incurred significant operating losses in the current year and also in the past. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ RBSM LLP
New York, New York
May 17, 2011
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Quamtel, Inc.
We have audited the accompanying consolidated balance sheets of Quamtel, Inc. as of December 31, 2009 and the related consolidated statements of operations, changes in shareholders’ equity (deficiency) and cash flows for the year ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 audit provided a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Quamtel, Inc. as of December 31, 2009, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.
These consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note C to the consolidated financial statements, the Company has operating and liquidity concerns, has incurred net losses approximating $1,900,000 as of December 31, 2009. These factors raise substantial doubt about the ability of the Company to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. In this regard, Management is proposing to raise any necessary additional funds through loans and additional sales of its common stock. There is no assurance that the Company will be successful in raising additional capital.
/s/ Jewett, Schwartz, Wolfe & Associates
Jewett, Schwartz, Wolfe & Associates
Hollywood, Florida
March 26, 2010
Quamtel, Inc.
Consolidated Balance Sheets
As of December 31, 2010 and 2009
The accompanying notes are an integral part of these consolidated financial statements.
Quamtel, Inc.
Consolidated Statement of Operations
Years Ended December 31, 2010 and 2009
The accompanying notes are an integral part of these consolidated financial statements.
Quamtel, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2010 and 2009
The accompanying notes are an integral part of these consolidated financial statements.
Quamtel, Inc.
Consolidated Statements of Changes in Shareholders’ Equity (Deficiency)
Years Ended December 31, 2010 and 2009
The accompanying notes are an integral part of these consolidated financial statements.
QUAMTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
Description of Business
The Company provides prepaid and postpaid enhanced telecommunications services with an emphasis on transporting calls that originate from the United States and Canada and terminate in other specific regions of the world. Customers utilize WQN’s Voice Over Internet Protocol (“VoIP”) network to place quality international calls at discounted rates. The voice quality of WQN’s VoIP calls is virtually the same as an international telephone call carried over a traditional telephone line. A substantial portion of WQN’s revenue is derived from the sale of prepaid service to customers calling from the United States to India. WQN’s products and services are provisioned and sold online via its websites.
Organization and Basis of Presentation
Quamtel, Inc., formerly known as Atomic Guppy, Inc., XTX Energy, Inc. and Glen Manor Resources Inc., (the “Company”) was incorporated on November 16, 1999 under the laws of the State of Nevada. Prior to the closing of the share exchange agreement described below, the Company was a “shell” corporation as that term is defined in Rule 405 of the Securities Act and Rule 12b-2 of the Exchange Act, as well as SEC Release Number 33-8407.
On January 13, 2009, the Company executed a Share Exchange Agreement (the “Share Exchange Agreement”), pursuant to which the shareholders of WQN, Inc. were entitled to receive a total of 15,000,000 post-split shares of the Company’s common stock. All conditions for closing were satisfied or waived, and the transaction closed on July 28, 2009. As a result of the Exchange, the shareholders of WQN, Inc. owned approximately 91% of the outstanding Common Stock of Quamtel. In conjunction with closing the Share Exchange Agreement, certain outstanding obligations of Quamtel including officers and director’s compensation, notes and amounts payable to officers and directors and third party loans outstanding, were exchanged for 1,275,000 post-split shares of Quamtel’s common stock.
As a result of the Share Exchange Agreement, WQN, Inc. became a wholly-owned subsidiary of Quamtel, through which its operations are now conducted. On September 8, 2009, Quamtel filed an amendment to its Articles of Incorporation concluding a one-for-ten reverse split of its common stock, and increasing its authorized stock to 200,000,000 common shares and 50,000,000 preferred shares.
The Share Exchange Agreement has been accounted for as a reverse merger, and as such the historical financial statements of WQN, Inc. are being presented herein as those of the Company. Also, the capital structure of the Company for all periods presented herein is different from that appearing in the historical financial statements of the Company due to the recapitalization accounting.
QUAMTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Quamtel, Inc. and its wholly owned subsidiaries WQN Inc., Data Jack, Inc., Syncpointe Inc. and Novotel, Inc. All significant intercompany transactions and balances have been eliminated. The Company makes operating decisions, assesses performance and manages the business as one reportable segment.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities; disclosure of contingent assets and liabilities at the date of the financial statements; and the reported amounts of revenues and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all cash on hand, in banks, including amounts in book overdraft positions, certificates of deposit and other highly liquid debt instruments with a maturity of three months or less at the date of purchase, to be cash and cash equivalents. Cash overdraft positions may occur from time to time due to the timing of making bank deposits and releasing checks, in accordance with the Company’s cash management policies.
Restricted Cash
Restricted cash represents collateral on a standby letter of credit related to an agreement with one of the Company’s telecommunications service providers, effectively providing a guarantee of the Company’s payment of its account payable to this service provider.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts based on its assessment of the current status of the individual receivables and after using reasonable collection efforts. The allowance for doubtful accounts as of December 31, 2010 and 2009 was zero.
Inventories
Inventories consist of Data Jack’s proprietary USB devices which provide customers the ability to deliver nationwide mobile 3G data coverage. Inventories are stated at the lower of cost or market determined by the first in, first out (FIFO) method.
QUAMTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Prepaid Expenses and Deposits
A $300,000 cash payment was made in December 2009 for a planned inventory purchase. The inventory was received in January 2010 but was not as ordered. Therefore it was returned for a cash refund. The $300,000 paid was included in prepaid expenses and deposits in the consolidated balance sheet at December 31, 2009.
At December 31, 2010, prepaid expenses and deposits consisted primarily of cash deposit payments made to several of the Company’s service providers.
Income Taxes
The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recognized.
The Company accounts for uncertain tax positions in accordance with ASC 740-10. ASC 740-10-25 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company does not believe it has any material unrecognized income tax positions.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing the net income (loss) for the year by the weighted-average number of shares of common stock outstanding. The calculation of fully diluted earnings per share is computed. using the weighted average number of common shares outstanding and common stock equivalents with the assumption that all common stock equivalents were converted at the beginning of the year. Options, warrants and unvested shares are considered to be common stock equivalents and are only included in the calculation of diluted earnings per common share when their effect is dilutive. Common stock equivalents are excluded from the computation if their effect is anti-dilutive or, for options and warrants, if the exercise price exceeds the tradable value of the underlying stock.
Reverse Stock Split
The Board of Directors approved a one-for-twenty (1:20) reverse stock split of our common stock effective June 22, 2007 and a one-for-ten (1:10) reverse stock split of our common stock effective September 9, 2009. All per share amounts in the financial statements have been retroactively adjusted to the earliest period presented for the effect of this reverse split.
QUAMTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and notes payable, as applicable, approximates fair value due to the short term nature of these items and/or the current interest rates payable in relation to current market conditions.
Fair Value Measurements
ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:
Level 1-Quoted prices in active markets for identical assets or liabilities.
Level 2-Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3-Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
The financial assets of the Company measured at fair value on a recurring basis are primarily cash and cash equivalents. The Company’s cash and cash equivalents securities are generally classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.
Revenue Recognition
The Company follows the guidance in Staff Accounting Bulletin (SAB) No. 104, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB 104 states that revenue is realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement exists, services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectability is reasonably assured.
QUAMTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Revenues are primarily derived from fees charged to terminate voice services over the Company’s network and from related monthly recurring charges. Variable revenue is earned based on the number of minutes during a call and is recognized upon completion of a call. Revenue from each customer is calculated from information received through the Company’s network switches. The Company tracks the information received from the switch and analyzes the call detail records and applies the respective revenue rate for each call. Fixed revenue is earned from monthly recurring services provided to customers that are fixed and recurring in nature, and are connected for a specified period of time. Revenues are recognized as the services are provided and continue until the expiration of the contract or until cancellation of the service by the customer. Cash fees received prior to call completion are recorded on the Company’s consolidated balance sheet as unearned revenue. As of December 31, 2010 and 2009, the Company recorded unearned revenue of $363,227 and $445,347, respectively.
Economic Dependency
The Company utilizes a limited number of suppliers. The Company is vulnerable to the risk of renewing favorable supplier contracts and timeliness of the supplier in processing the Company’s orders for customers, and is at risk related to regulation and regulatory developments that govern the rates to be charged to the Company and, in some instances, whether certain facilities are required to be made available to the Company.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight line method. The useful lives of assets range from three to five years. The Company reviews the recoverability of its property and equipment when events or changes in circumstances occur that indicate that the carrying value of the asset group may not be recoverable.
Costs for the internal development of computer software related to the Company’s proprietary systems are expensed as development stage costs until technological feasibility has been established. Thereafter, all additional software development costs are capitalized and amortized on a straight-line basis over their estimated useful lives.
Long-lived Assets
Property, equipment and definite lived intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell, and depreciation ceases.
QUAMTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Goodwill and Other Intangible Assets
The Company records the excess of the fair value of companies acquired over the amounts assigned to their identified assets and liabilities as goodwill. The Company determines the fair value of a reporting unit using a combination of the income approach, which is based on the present value of estimated future cash flows, and the market approach, which compares the business unit's financial multiples to its competitors. In accordance with ASU 350-20-35, “Goodwill and Other Intangible Assets,” the Company does not amortize its goodwill, and amortizes its identifiable intangible assets over 10 years. The Company tests its goodwill and other intangible assets for impairment at least annually by comparing the fair value of these assets to their carrying value. The Company has elected to perform its annual impairment test as of December 31 of each calendar year. An interim impairment test would be performed if an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of an intangible asset below its carrying amount. If in the future the carrying value of goodwill or anther intangible asset exceeds its related fair value, the Company will recognize an impairment charge in an amount equal to that excess.
Stock-Based Compensation
Compensation costs related to share-based payment transactions are recognized in the statement of operations. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be remeasured each reporting period. The Company’s common shares issued as additional compensation and for consulting services have been valued at the shares’ exchange-quoted market prices at their respective dates of issuance or commitment. Compensation cost will be recognized over the period that an employee provides service in exchange for the award.
In December 2010, the FASB issued Accounting Standards Update 2010-28 which amends "Intangibles- Goodwill and Other" (Topic 350). The ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting entities, they are required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. An entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance in Topic 350, which requires that goodwill of a reporting unit be tested for impairment between annual testes if an event occurs or circumstances changes that would more likely than not reduce the fair value of a reporting unit below its carrying amount. ASU 2010-28 is effective for fiscal years, and interim periods within those years beginning after December 15, 2010. Early adoption is not permitted. The Company is currently evaluating the impact of this ASU. Adoption of this ASU could have a material impact on the Company’s consolidated financial statements.
QUAMTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In February 2010, the FASB issued ASU 2010-09, Amendments to Certain Recognition and Disclosure Requirements, as an amendment to Accounting Standards Codification (“ASC”) Topic 855, Subsequent Events (“ASC 855”). As a result of ASU 2010-09, SEC registrants will not disclose the date through which management evaluated subsequent events in the financial statements. ASU 2010-09 is effective immediately for all financial statements that have not yet been issued or have not yet become available to be issued, or December 31, 2010 for the Company. The adoption of ASU 2010-09 is for disclosure purposes only and did not have any effect on the Company’s financial position or results of operations.
Other ASUs not effective until after December 31, 2010 are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.
NOTE C - GOING CONCERN
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has reported a net loss from continuing operations of $(10,052,360) and $1,931,897 for the years ended December 31, 2010 and 2009. As of December 31, 2010, the Company has reported an accumulated deficit of $(11,982,372) and a working capital deficit of $(4,502,967), and has been dependent on issuances of debt and equity instruments to fund its operations.
The Company intends to increase its future profitability and seek new sources or methods of revenue to pursue its business strategy. If the Company’s financial resources from operations are insufficient, the Company will require additional financing in order to execute its operating plan and continue as a going concern. The Company cannot predict whether this additional financing will be in the form of equity or debt, or be in another form. The Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In any of these events, the Company may be unable to implement its current plans for expansion, repay its debt obligations as they become due, or respond to competitive pressures, any of which circumstances would have a material adverse effect on its business, prospects, financial condition and results of operations.
The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
NOTE D - ACQUISITIONS
On December 9, 2009, the Company acquired all of the outstanding membership interests of Mobile Internet Devices, LLC, a Florida limited liability (“Mobile Devices”), for a combination of common stock, stock warrants, and a royalty based on future earnings and new subscribers of the acquired company. Mobile Devices was subsequently renamed and reorganized as Data Jack, Inc., a Texas corporation (“Data Jack”). Effective August 4, 2010, the parties agreed to a partial rescission of the terms of the acquisition. The purchase price, as subsequently amended, consisted of the following:
QUAMTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1)
500,000 shares of Quamtel’s restricted common stock; and
(2)
25,000 additional shares of Quamtel’s restricted stock for every 5,000 new DataJack customers that the Company acquires, subject to a limit 500,000 shares
Effective August 18, 2010, the Company acquired all of the outstanding membership interests of Syncpointe, LLC, a Missouri limited liability company (“Syncpointe LLC”). Syncpointe LLC was subsequently renamed and reorganized as Syncpointe, Inc., a Texas corporation (“Syncpointe”). The purchase price consisted of the following:
(1)
1,000,000 shares of Quamtel’s unregistered common stock with piggyback registration rights; and
(2)
Additional contingent consideration consisting of earn-out payments equal to 12.5% of Syncpointe net income (as defined in the Membership Interest Purchase Agreement) as it operates as a division of the Registrant for 18 months.
The condensed Data Jack and Syncpointe balance sheets, reflecting the net fair value amounts assigned to each major asset and liability as of its acquisition date is as follows:
The goodwill recorded for the acquisitions of Data Jack and Syncpointe represents the fair market value of the net liabilities assumed as of the acquisition date, plus the fair value of the Company’s common stock issued pursuant to the acquisitions of $625,000 and $2,563,844, respectively. At the date of acquisition, the Company did not place a fair value of the purchase price contingencies due to the probability of the earn-outs. For income tax reporting purposes, the goodwill identified above are non-deductible.
QUAMTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited condensed combined pro forma results of operations reflect the pro forma combination of the Data Jack and Syncpointe businesses as if the combination had occurred at the beginning of the periods presented compared with the actual results of operations of Quamtel, Inc. for the same periods. The unaudited pro forma condensed combined results of operations do not purport to represent what the companies’ combined results of operations would have been if such transactions had occurred at the beginning of the periods presented, and are not necessarily indicative of Quamtel’s future results.
NOTE E - PROPERTY AND EQUIPMENT, NET
At December 31, 2010 and 2009, respectively, property and equipment consisted of the following:
Depreciation expense for the years ended December 31, 2010 and 2009 amounted to $86,655 and $81,818, respectively.
QUAMTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - GOOD WILL AND OTHER INTANGIBLES
At December 31, 2010 and 2009, respectively, intangible assets consisted of the following:
Estimated future amortization expense as of December 31, 2010 is as follows:
The goodwill amount of $367,589 was recorded primarily in connection with the WQN, Inc. acquisition in June 2007.
QUAMTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On August 4, 2010, the Company and the original Data Jack sellers amended the Membership Purchase Agreement dated December 9, 2009, whereby the consideration was reduced from 1,500,000 to 500,000 shares of the Company’s restricted common stock, with the 1,000,000 reduced shares redeemed by the Company. The Data Jack goodwill was correspondingly reduced from $1,919,957 to $669,957.
In August 2009, the Company issued 25,000 of its common shares, valued at $67,500, to acquire an option to purchase the URL 800.com (the “800 Domain Name”). Steven Ivester, an agent of iTella, Inc., (“Assignor”), subsequently acquired the 800 Domain Name in a Bankruptcy Court auction for the sum of $250,000. The acquisition was made for the benefit of the Company. Effective September 30, 2009, in return for the Company reimbursing to Assignor his $250,000 cost, Assignor assigned to the Company all right, title and interest in and to the 800 Domain Name. The total cost of the 800 Domain Name was $317,500 which is less than its estimated fair value, and is being amortized over a period of 10 years.
In December 2009, the Company purchased the URL DataJack.com (the “DataJack Domain Name”) for a cash payment of $30,000, plus a commitment to issue 10,000 of the Company’s common shares which were valued at $26,000. The shares have not yet been issued, and the liability is reflected as a stock-based payable on the Company’s consolidated balance sheet at December 31, 2009. The total cost of the DataJack Domain Name was $56,000 which is less than its estimated fair value, and is being amortized over a period of 10 years.
In January 2010, the Company purchased the URL machine2machine.com and similarly-named domains (the "M2M Domain Names”) for a cash payment of $25,377, plus 25,000 of the Company’s common shares, which were valued at $62,250. The total cost of the M2M Domain Names plus other domain names purchased in 2010 was $88,827 which is less than their estimated fair value, and is being amortized over a period of 10 years.
During the year ended December 31, 2010 the Company recorded an impairment charge to its operating results of $3,384,731 relating to goodwill previously recorded for its WQN and Syncpointe acquisitions, due primarily to the Company’s inability to secure sufficient rights to related software since its acquisition of Syncpointe, and to management’s assessment of operating results and forecasted discounted cash flows for WQN. These impairment charges reduced the carrying value of the subsidiaries to their estimated fair value, eliminating all related goodwill.
Considerable management judgment is necessary to estimate fair value. As of December 31, 2010, we enlisted the assistance of an independent valuation consultant to determine the values of our intangible assets and goodwill.
The remaining estimated fair value of our goodwill could change if the Company is unable to achieve operating results at the levels that have been forecasted, the market valuation of our business decreases based on transactions involving similar companies, or there is a permanent, negative change in the market demand for the services offered by the Company. These changes could result in a impairment of the existing goodwill balance that could require a material non-cash charge to our results of operations.
QUAMTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - RELATED PARTY TRANSACTIONS
Related party advances
From time to time, Steven Ivester, the Company’s former sole shareholder and currently a consultant to the Company through a Consulting Services Agreement with iTella, Inc., has made personal advances to the Company. These advances, formalized under an unsecured revolving promissory note dated March 18, 2010, allow for a maximum principal loan amount of $1,000,000, are repayable upon demand, and are non-interest bearing. Such advances amounted to $614,678 and $758,781 at December 31, 2010 and 2009, respectively. See Note F for the 800 Domain Name transaction involving Mr. Ivester.
Related party consulting fees
Effective August 1, 2009 and subsequently amended, the Company executed a Restated Consulting Services Agreement with iTella, Inc., whereby iTella, Inc. provides, at the reasonable request of the Company’s management, advanced business strategy, financing, product development and marketing advice including but not limited to day to day operations. The initial term of this agreement is for five years, and automatically renews for additional one year terms if approved by both parties. During this agreement’s term and at the Company’s expense, iTella, Inc. will be provided an office and administrative support in Weston, Florida. iTella, Inc.’s compensation shall consist of the following:
1.
Cash payments totaling $8,333 for the first two months, payable monthly;
2.
Cash payments totaling $66,667 for the next four months, payable monthly;
3.
Annual cash payments of $250,000 thereafter, payable monthly;
4.
Nine percent of the Company’s consolidated gross revenue, payable quarterly (except the first two months, in which the rate is one percent of gross revenues), subject to an annual calendar year cap of $800,000;
5.
Employees of Consultant may be eligible for grants of stock options pursuant to the Company’s Equity Incentive Plan, in such amounts as may from time to time be determined by the Company, at its sole discretion; and
6.
Reimbursement of reasonable, related business expenses.
Expenses under the Restated Consulting Services Agreement for the year ended December 31, 2010 were $467,044. Prior to closing the Restated Consulting Services Agreement, Quamtel did not have expertise in the management and financing of a public company, and required the services of iTella, Inc. as outlined in the Restated Consulting Services Agreement. The Restated Consulting Services Agreement is not cancellable by either party in advance of its contractual term, except under a defined change in control.
QUAMTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On August 20, 2009, the Company also executed a one-year consulting agreement with Mr. Warren Gilbert (“Gilbert”), who is the president of Gilder Funding Corp., a shareholder of the Company, whereby Gilbert will provide advice and counsel regarding the Company’s financial management and strategic opportunities. As compensation, Gilbert was issued 300,000 shares of the Company’s common stock, which were registered on a registration statement on Form S-8 on November 9, 2009. The 300,000 common shares were valued at $810,000 based on the traded market per-share market price per share of $2.70 at August 20, 2009, and have been reflected as additional paid-in capital on the company’s consolidated balance sheet, and a noncash charge included in Compensation, consulting and related expenses in the Company’s consolidated statement of operations.
NOTE H - NOTES PAYABLE
At December 31, 2010 and 2009, notes payable consisted of the following:
Estimated aggregate maturities of notes payable as of December 31, 2010 is as follows:
Secured Promissory Note Payable - Shareholder
On December 15, 2009, the Company issued an unsecured $200,000 promissory note (the “2009 Gilbert Note”) to Gilbert for cash. The 2009 Gilbert Note bore interest at 15.9% per year, and unpaid principal and interest was repayable in full on June 15, 2010. Under the terms of the 2009 Gilbert Note, Gilbert was to be paid $40 toward the Gilbert Note for each Data Jack unit sold, plus a $5.00 bonus payment (in addition to interest) on each Data Jack unit sold up to 5,000 units. No such payments were due or made. The 2009 Gilbert Note, with accrued interest, was repaid in full on February 27, 2010 from proceeds of the 2010 Secured Gilder Note (defined below).
QUAMTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On February 27, 2010, the Company executed a $1,000,000 Senior Secured Promissory Note payable to Gilder Funding Corp. (“Gilder”), a company that is a shareholder of the Company and controlled by Gilbert (the “2010 Secured Gilder Note”) for cash. The proceeds of the 2010 Secured Gilder Note were used, in part, to repay the 2009 Gilbert Note, with accrued interest. Interest on the 2010 Secured Gilder Note is 15% per annum, and beginning April 5, 2010, the Company was required to make monthly payments on the 2010 Gilder Note in the amount of $23,789.93 per month, with any remaining outstanding principal and any accrued but unpaid interest due on or before February 27, 2016. The 2010 Secured Gilder Note is secured by substantially all of the Company’s assets. Effective May 24, 2010, the Company and Gilder amended the 2010 Secured Gilder Note to increase the principal amount to $1,250,000, with the Company receiving the additional $250,000 in cash. Effective June 15, 2010, monthly payments were increased to $27,000; and the maturity date was changed to February 27, 2015. The Company made three monthly payments of $27,000 under the 2010 Secured Gilder Note and has since begun making monthly payments of $11,000. Because of this reduced monthly payment, the Company is in default of the terms of the 2010 Secured Gilder Note and, as such, at the option of Gilder, the entire unpaid principal balance and the accrued and unpaid interest are due and payable on demand, with past due principal bearing interest from the date of default at the maximum rate allowed by law. Gilder, under a security agreement with the Company, holds a first priority lien and security interest in all of the assets of the Company, which secures the performance of the Company’s obligations under the 2010 Secured Gilder Note.
The Company has requested a waiver from Gilder of the default provisions of the 2010 Secured Gilder Note and has received oral commitments to such waiver, subject to negotiations. The Company cannot provide assurance, however, that the terms of such waiver will be acceptable to it. Even if the terms of such waiver are acceptable, the Company may not be able to satisfy those terms in the future or be able to pursue its strategies within the constraints of that agreement. These circumstances could materially and adversely impair the Company’s liquidity and, among other factors, raise substantial doubt regarding its ability to continue as a going concern.
At December 31, 2010, the outstanding principal and interest on the 2010 Secured Gilder Note was $1,247,595.
Unsecured promissory note payable
On December 13, 2010, the Company issued an unsecured $250,000 promissory note to Gerald and Seena Sperling (the “2010 Sperling Note”), together a shareholder of the Company (the “Sperlings”), for cash. The 2010 Sperling Note bore interest at 3% per year and was payable in full, with interest, on February 25, 2012. At December 31, 2010, the outstanding principal and interest on the 2010 Sperling Note was $250,349.
On March 10, 2011, the Company replaced and cancelled the 2010 Sperling Note with a new note (the “2011 Sperling Note”) in the amount of $500,000 in exchange for an additional $250,000 in cash from the Sperlings. As a result of this transaction, the 2010 Sperling Note was deemed extinguished. The 2011 Sperling Note bears interest at 3% per year and is payable in full, with interest, on March 10, 2013.
QUAMTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On December 16, 2010, the Sperlings made a short term loan to the Company of $75,000. This loan was made pursuant to an oral agreement, bore no interest and was repaid in full prior to the end of the year.
During the year ended December 31, 2010, the Company obtained short-term unsecured advances from four shareholders. The unsecured advances no not accrue interest. At December 31, 2010, the outstanding principal on these advances was $516,990.
Note payable - Abundance Partners LLC
As a result of the August 18, 2010 acquisition of Syncpointe LLC, the Company entered into an agreement effective November 4, 2010 with Abundance Partners LP (“Abundance”) and Syncpointe relating to the $80,000 principal balance on a secured $100,000 loan, bearing interest at 6% per annum, that Abundnace made to Syncpointe LLC on June 3, 2010 (the “Abundance Loan”). Pursuant to the terms of this agreement, the Company issued to Abundance 25,000 shares of its unregistered common stock in lieu of an equity interest in Syncpointe and paid a $25,000 default fee due under the Abundance Loan which went into default on July 3, 2010. Additionally, Syncpointe agreed to apply 15% of the cash proceeds to Syncpointe or the Company from any loan or sale of equity towards paying down the balance of the loan plus accrued but unpaid interest (the “Required Payments”), and agreed to pay off the balance of the Abundance Loan, plus interest, on or before March 31, 2011 (the “Maturity Date”). Abundance agreed to reduce the 18% default interest rate to 12%, retroactive to July 3, 2010, and the parties further agreed that if the Abundance Loan went into default again, the interest rate would increase to 18%, retroactive to July 3, 2010. The Company agreed that its Collateral (as that term is defined in the original Abundance Loan agreement) would be included with the Syncpointe Collateral as part of the security interest under that agreement and that such security interest would be subordinated to the first priority interest granted under the 2010 Secured Gilder Note (defined below). Because the Required Payments were not made and the Abundance Loan was not repaid in full by the Maturity date, the Abundance Loan is currently in default.
The Company has requested a waiver from Abundance of the default provisions of the Abundance Loan and has received oral commitments to such waiver, subject to negotiations. The Company cannot provide assurance, however, that the terms of such waiver will be acceptable to it. Even if the terms of such waiver are acceptable, the Company may not be able to satisfy those terms in the future or be able to pursue its strategies within the constraints of that agreement. These circumstances could materially and adversely impair the Company’s liquidity and, among other factors, raise substantial doubt regarding its ability to continue as a going concern.
QUAMTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Other Notes Obligations
The CIT bank notes are associated with computer purchases in 2007, are repayable in 36 equal monthly payments through August and September 2010, and bear interest at 24.49% per year.
The American Honda Finance Corporation note is related to an automobile purchase in 2008, is repayable in 60 equal monthly payments through June 2013, is secured by the automobile, and bears interest at 9.45% per year.
The Total Bank note is associated with an insurance policy, is repayable in equal monthly payments of $1,283 through July 2010, is unsecured, and bears interest at 10.34% per year.
On August 20, 2009, the Company issued and sold $300,000 in principal amount of an unsecured convertible note to Gilbert, receiving net proceeds of $300,000. This note bore interest at 18% and was converted into 115,000 shares of the Company’s common stock at a conversion price of $2.70 per share on September 10, 2009. In connection with his purchase of this convertible note, on August 20, 2009, Gilbert also received six-year warrants to purchase 54,000 shares of the Company’s common stock exercisable at a price of $2.70 per share. On May 9, 2011, Gilbert signed an agreement with the Company rescinding and cancelling these warrants as of their issue date, August 20, 2009.
NOTE I - CAPITAL STOCK
The Company has authorized 50,000,000 shares of preferred stock, with a par value of $0.001 per share. The Company has authorized 200,000,000 shares of common stock, with a par value of $0.001 per share. As of December 31, 2010 and 2009, the Company has issued 23,312,237 and 18,662,175, respectively.
On March 25, 2010, the Company entered into an agreement to repurchase 100,000 common shares for $100,000.
During the years ended December 31, 2010 and 2009, the Company issued 1,573,624 and 300,000 shares of common stock for services rendered valued at $3,377,717 and $810,000, respectively.
The following are private placement common stock transactions which occurred during the year ended December 31, 2010 and 2009:
QUAMTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On September 30, 2009, 150,000 shares of the Company’s common stock were issued for $60,000 cash. On December 29, 2009, 100,000 shares of the Company’s common stock were issued for $100,000 cash. Prior to the Exchange, $20,000 was invested in pre-merger shareholders’ equity.
On December 16, 2010, the Sperlings invested an additional $500,000 in the Company and received 1,300,000 shares for $325,000 of that investment, or $0.25 per share. The Sperlings will receive an additional 700,000 shares for the remaining $175,000 of their investment. As of December 31, 2010, the 700,000 shares have not been issued.
During the year ended December 31, 2010, the Company completed private placements with eight investors for aggregate gross proceeds of $864,975. Pursuant to the private placements, the Company issued 965,000 shares of common stock valued at $0.38 per share.
NOTE J - EQUITY INCENTIVE PLAN
The Company’s 2009 Equity Incentive Plan (the “Plan”) allows for the issuance of options to purchase, and other stock-based awards of, up to 5,000,000 shares of the Company’s common stock to selected employees, outside directors and consultants of Quamtel, Inc. and its affiliates, at the sole discretion of, and with terms determined by, the Company’s Board of Directors. All of the 5,000,000 shares issuable under the Plan have been registered on a Form S-8 registration statement filed with the SEC on November 9, 2009. No options have been granted under the Plan through December 31, 2010, however, awards totaling 639,000 shares of the Company’s registered common stock have been granted under the Plan.
QUAMTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - INCOME TAXES
The components of the Company's income tax expense (benefit) are as follows:
The Company's income tax expense (benefit) at the statutory rate was substantially equal to the reported income tax expense (benefit). The Company is only subject to federal income taxes.
At December 31, 2010, the Company's net deferred tax asset consisted of the following:
The Company's net operating loss carryforward for federal income tax purposes was approximately $8,257,781 as of December 31, 2010, expiring beginning in 2022. In accordance with Internal Revenue Code Section 382, the Company may be limited in its ability to recognize the benefit of future net operating loss carry-forwards. Consequently, the Company did not recognize a benefit from operating loss carry-forwards.
The Company has filed corporate income tax returns through 2009 and has filed an extension for 2010.
NOTE L - COMMITMENTS AND CONTINGENCIES
Leases
The Company is obligated under two non-cancelable operating leases for its primary office facilities, located in Dallas, TX and Fort Lauderdale, FL. The leases expire on February 28, 2015 and February 28, 2013, respectively. Future minimum lease payments under operating leases as of December 31, 2010 are $229,426, payable at the rate of $62,870 in 2011, $75,644 in 2012, $45,328 in 2013, $39,072 in 2014, and $6,512 in 2015 .
Rent expense for these operating leases (net of a month-to-month sublease for a small portion of the primary office premises) for the years ended December 31, 2010 and 2009 was $68,459 and $70,727, respectively.
QUAMTEL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Commitments for minimum rentals under non cancelable leases at December 31, 2010 are as follows:
Consulting Agreements
See Note G for a discussion of the Consulting Services Agreement with iTella, Inc. and the Consulting Agreement with Mr. Warren Gilbert.
Letter of Credit
As of December 31, 2011, the Company has an outstanding standby letter of credit in the amount of $150,000 for the benefit of the one of the Company’s vendors, Sprint Spectrum, L.P. This letter of credit is secured by a certificate of deposit, which at March 31, 2011, is classified as restricted cash, a non-current asset.
NOTE M - SUBSEQUENT EVENTS
From January 1, 2011 through April 30, 2011, the Company sold 1,455,000 shares of its common stock in private transactions to a number of investors at an average price of $0.25 per share.