ITEM 1. BUSINESS
OVERVIEW
DataJack, Inc. (formerly Quamtel, Inc.) (“DataJack,” “we,” “us,” “our” or the “Company”), incorporated in 1999 under the laws of Nevada, is a communications company offering, through its subsidiaries, a comprehensive range of mobile broadband products and services that are designed to meet the needs of individual consumers, businesses, government subscribers and resellers. Our operations are organized to meet the needs of our targeted subscriber groups through focused communications solutions that incorporate the capabilities of our mobile broadband services. Our common stock trades on the OTC Bulletin Board (OTCBB) under the symbol “DJAK.”
Products and Services
Mobile Broadband
We offer secure nationwide mobile broadband wireless data transmission services primarily under the DataJack brand. We offer low cost, no contract, mobile broadband with data plans. Customers can pick the data plan that best meets their particular needs. Plans from 200MB up to 5GB of Mobile Broadband data are available, as well as pay as you go plans. Our low cost broadband plans give more people the opportunity to experience the benefits of broadband on the go. Our DataJack service is offered primarily through two devices - the DataJack WiFi Mobile Hotspot that can connect up to 8 Wi-Fi enabled devices and the DataJack USB, a Plug and Play USB Device.
Communications
Our communications product mix included an international calling service delivered under the brand WQN, through our subsidiary, WQN, Inc. (“WQN”). Effective June 5, 2013, we sold substantially all of the assets of WQN which included WQN, Easy Talk, Premium, Value, Easy Talk Mexico, Easy Talk Cuba and India Easy Talk telecommunications services, prepaid products and related technology to iTalk, Inc. for $300,000. WQN accounted for approximately 47% of the Company’s consolidated revenues in 2012.
Wireless Network Technologies
We deliver mobile broadband wireless data transmission services primarily under the DataJack brand to subscribers through our mobile virtual network operator (MVNO) contract with Sprint, on Sprint’s nationwide network that utilizes third generation (3G) and fourth generation (4G) code division multiple access (CDMA) technologies. We plan to integrate and launch long term evolution (LTE) during 2014.
Sales, Marketing and Customer Care
We focus on the marketing and sales of prepaid mobile broadband services to targeted groups of retail subscribers: individual consumers, businesses, and government.
We use a variety of sales channels to attract new subscribers of mobile broadband services, including:
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direct telesales through representatives whose efforts focus on marketing and selling to consumers, businesses, and government;
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major distribution network partners, brick and mortar retail stores, local and national non-affiliated dealers, independent contractors, focusing on sales to the consumer market and businesses; and
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subscriber convenient channels, such as web sales, with a focus on commission based programs through affiliate marketing, email marketing, and strategic partnerships.
We are able to provide value driven mobile broadband services via our sophisticated internal network. We market our mobile broadband prepaid services under the DataJack™ brand. We offer these prepaid mobile broadband services without a contract or credit check.
Our Marketing efforts also involve traditional print and television advertising, as well as web-based strategies such as Search Engine Optimization (SEO), Search Engine Marketing (SEM), Cost Per Mile (CPM) advertising, Pay Per Click (PPC) advertising, paid placements, email marketing, and social media advertising. We continue to expand and maintain top tier strategic partnerships, reseller and affiliate relationships, public relations, and online marketing efforts to promote our lines of business.
Our customer care professionals continue to improve customer experience, providing quality service with the goal of resolving customer issues and retaining a loyal customer base. We proactively address customers' needs, and we offer live, in-house call center phone support, online chat support, and email support.
Competition
The market for broadband services is highly competitive. We compete with a number of prepaid mobile broadband carriers, including those providing 4G services and those who own and operate their own networks. We believe that the market for prepaid mobile broadband services has been and will continue to be characterized by strong competition on the basis of price, devices offered and quality of service.
Legislative and Regulatory
Our services are regulated by the Federal Communications Commission (the “FCC”). The FCC’s regulations distinguish between dominant and non-dominant providers of services. The Company is considered a non-dominant provider of services. As such, we are subject to minimal regulation and oversight.
Patents, Trademarks and Licenses
We own two service marks, trademarks and other intellectual property in the United States including “DataJack”. Generally, our trademarks and service marks endure and are enforceable so long as they continue to be used.
Employee Relations
As of December 31, 2013, we had 20 employees, consisting of 2 in corporate management, 4 in technical support, 11 in customer service, 1 in marketing and 2 in administration. 3 additional people provided services as independent contractors, including the Chief Executive Officer.
Available Information
We file annual, quarterly, current and special reports and other information with the Securities and Exchange Commission (the “SEC”). You may read and obtain copy of any reports, statement or other information that we file with the SEC at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at (202) 551-8090 for further information on the public reference room. These SEC filings are also available to the public from commercial document retrieval services and at the Internet site maintained by the SEC at http://www.sec.gov.
Additionally, on our corporate website, www.DataJack.com, we make available, free of charge, our annual, quarterly and current reports (including all amendments to such reports), changes in the stock ownership of our directors and executive officers, our code of ethics, and other documents filed with, or furnished to, the SEC, as soon as reasonably practicable after such documents are filed with, or furnished to, the SEC. Additional information about us and our product offerings may be found on our website www.DataJack.com.
Company History
DataJack, Inc., formerly known as Quamtel, Inc. and before that Atomic Guppy, Inc., was incorporated on November 16, 1999 under the laws of the State of Nevada. On July 28, 2009, Quamtel and WQN, a Texas corporation organized in June 2007, consummated a share exchange pursuant to which the shareholders of WQN received a total of 15,000,000 shares of our common stock in exchange for all of their shares of WQN stock. As a result of this share exchange, the shareholders of WQN owned approximately 91% of our then outstanding common stock, and WQN became our wholly-owned subsidiary, through which our primary operations were conducted thru June 5, 2013.
On December 9, 2009, we acquired all of the outstanding membership interests of Mobile Internet Devices, LLC, a Florida limited liability company. We reorganized this company as a Texas corporation named DataJack, Inc. (“DataJack”). Effective June 6, 2013, our primary operations are conducted thru this entity.
Effective March 13, 2012, we sold substantially all of our RocketVoip assets for $100,000. As a result of this sale, we are no longer in the retail, subscriber based voice over IP (VoIP) business.
Effective June 5, 2013, we sold substantially all of the assets of our wholly owned subsidiary WQN which included WQN, Easy Talk, Premium, Value, Easy Talk Mexico, Easy Talk Cuba and India Easy Talk telecommunications services, prepaid products and related technology to iTalk, Inc. for $300,000. WQN accounted for approximately 47% of the Company’s consolidated revenues in 2012.
Effective November 21, 2013, ITG, Inc, (formerly WQN, Inc.) sold, transferred and delivered all its issued and outstanding common stock shares, with $0.01 par value, to WW Courier, Inc. for $500 and 10% of future revenue. All remaining outstanding liabilities related to WQN, Inc. were transferred with the stock sale.
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 April 14, 2014, our independent registered public accounting firm stated that our consolidated financial statements for the year ended December 31, 2013 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 deficit of $25,422,962 as of December 31, 2013 including a net loss of $2,226,286 for the year ended December 31, 2013. We also had a working capital deficit of $3,730,735 at December 31, 2013, and cash on hand of $21,799. We also expect to incur additional losses for at least the first quarter of 2014.
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 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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 customer service hours 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. 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. In-house fraud specialists also monitor traffic reports and usage patterns to identify and investigate suspicious data usage 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 data 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:
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implement customer orders for services;
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provision, install and deliver these services; and
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bill monthly for these services
Because our business provides for continued rapid growth in our number of customers and 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:
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growing number of customers;
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development and launching of new services;
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increased demands by customers to transmit larger amounts of data
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changes in customers’ service requirements;
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technological advances by competitors; and
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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, 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 communications providers have been able to charge for certain services have decreased. This decrease results from downward market pressure and other factors, including:
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increased transmission capacity by communications companies on their existing and new networks;
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customer agreements containing volume-based pricing or other contractually agreed upon price decreases during the term of the agreement; and
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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.
Increased scrutiny of financial disclosure, particularly in the communications 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 communications 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 communications 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 communications industry may be impeded by participants with greater resources and a greater number of existing customers.
The communications 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:
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the consolidation in the industry led by AT&T and Verizon in the United States;
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allowing foreign carriers to compete in the U.S. market;
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further technological advances; and
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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:
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that a broker or dealer approve a person’s account for transactions in penny stocks; and
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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:
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obtain financial information and investment experience and objectives of the person; and
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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:
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sets forth the basis on which the broker or dealer made the suitability determination; and
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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:
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quarterly variations in our operating results;
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interest rate changes;
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changes in the market’s expectations about our operating results;
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our operating results failing to meet the expectation of investors in a particular period;
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operating and stock price performance of other companies that investors deem comparable to us;
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news reports relating to trends in our markets;
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changes in laws and regulations affecting our business;
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material announcements by us or our competitors;
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sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur; and
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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’ deficiency in Item 8, we issued 3,606,024 and 2,761,034 shares of common stock in 2013 and 2012, respectively, with per-share issuance prices as low as $0.01. We will continue to 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.
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 370 Dallas, Texas 75254 and its telephone number is 972-361-1980. The Company leases approximately 2,224 square feet of office space, which lease expires in February 2015. On March 7, 2013 the Company began leasing approximately 2,761 square feet of office space located at 2400 West Cypress Creek Road, Fort Lauderdale, Florida 33309. The lease expires in March 2016. The monthly rental of these leases are as follows:
(1) The monthly base rent at Ft. Lauderdale, FL increases annually from $2,761 in the first year, to $2,991 in the second year to $3,221 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 aware of and a party to the following legal proceedings or claims that we believe will not have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results:
DataJack, Inc. was a defendant in litigation titled St George Investments LLC v. Quamtel, Inc. and Transfer Online, Inc., Case No. 1:12-cv-09186, pending in the United States District Court for the Northern District of Illinois, Eastern Division (the “St George Litigation”). The St. George Litigation was commenced on November 15, 2012, and amended on January 29, 2013. Generally, the Amended Complaint alleges that DataJack failed to pay a purported debt to Plaintiff as and when due and that DataJack and its transfer agent failed to honor a notice from the Plaintiff to exercise its claimed contractual right to convert $20,000 of the alleged debt to shares of stock in DataJack. The Amended Complaint alleges that DataJack is indebted to the Plaintiff in the amount of $391,704, plus penalties, interest, attorney’s fees and costs. The Amended Complaint also seeks injunctive relief and unspecified amounts of compensatory, consequential, indirect and punitive damages. DataJack has disputed its alleged liability to the Plaintiff, and the Company has responded to the Amended Complaint. A settlement agreement has been reached and is dated January 16, 2014, which includes dismissal of the lawsuit. An initial payment is due on January 16, 2014, with a final payment for the balance due on February 15, 2014. An amended agreement was reached and dated February 14, 2014, which states the initial payment was made on or prior to January 16, 2014 and the balance is to be paid on February 18, 2014 and March 18, 2014. The Company has made the February 18, 2014 payment. An extension was granted on March 17, 2014 for the final payment to be made on or before April 25, 2014. An issuance of 60,000 shares was made on March 17, 2014 as an extension fee.
The Company is a defendant in an action styled Robert Picow vs. Quamtel, Inc. and Steven Ivester, in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida. Picow asserts he is entitled to damages as a consequence of an alleged breach of a consulting agreement and for an alleged interference with his ability to trade his Quamtel shares. A settlement agreement was reached and we paid the claim January 30, 2014.
The Company is a defendant in an action styled The Balancing Act TV, LLC vs. Quamtel, Inc., filed on July 24, 2012 in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida. The Balancing Act TV, LLC asserts that it is entitled to damages in the amount of approximately $50,000 as a consequence of an alleged breach by us of a contract with us. A settlement agreement has been reached and is dated January 16, 2014. The agreed settlement was paid January 30, 2014.
DataJack, Inc. was a defendant in litigation titled RFP Mainstreet Park / Cypress, LLC v. Quamtel, Inc., Case No. 12-034366, pending in the Seventeenth Judicial Court Circuit of Florida. RFP Mainstreet Park / Cypress, LLC alleged DataJack failed to pay for office space leased. A settlement agreement was reached and dated October 24, 2013, which includes dismissal of the lawsuit. The agreement requires the Company to pay the settlement amount over twelve months commencing in November 2013. The Company has been making the monthly payments during 2014.
The Company entered into a debt settlement agreement with Windell Thelusma on November 26, 2013. Windell Thelusma had provided a loan to DataJack. The agreement provides for the extinguishment of all outstanding amounts owed in exchange for a cash payment upon signing of the agreement. The settlement was paid January 3, 2014.
The Company entered into a release and settlement agreement with Ran Birkins on July 15, 2013. The settlement provided for the extinguishment of all alleged amounts owed to Ran Birkins with the issuance of 1,000,000 restricted shares. The shares were issued to Ran Birkins on September 5, 2013.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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 DJAK. 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 March 31, 2014, there were 24,260,405 shares of our common stock outstanding held by approximately 887 shareholders of record, not including 5,000 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 DataJack 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, 2013, however, awards totaling 4,994,000 shares of the Company’s registered common stock have been granted under the Plan.
The following table sets forth information about the Company’s equity compensation plans as of December 31, 2013:
Recent Sales of Unregistered Securities
Except as previously disclosed in Quarterly Reports on Form 10-Q or Current Reports on Form 8-K that we have filed, or otherwise set forth below, during the period covered by this Report we have not sold any of our equity securities that were not registered under the Securities Act.
During the fourth quarter of 2013, the Company issued 2,184,650 shares of common stock valued at $411,070 as follows:
·
125,000 shares were issued and sold to an accredited investor for net proceeds of $2,480;
·
275,000 shares valued at $10,500 were issued on behalf of a related party consultant as partial compensation for their consulting agreement in 2013; and,
·
1,784,650 shares valued at $398,090 were issued to five debt holders in settlement of debt;
All of the sales and issuances itemized above were exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof as transactions not involving a public offering. These issuances did not involve any underwriters, underwriting discounts or commissions or any general solicitations and certificates evidencing these shares contain restrictive legends.
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 the federal securities laws, 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.
Overview
DataJack, Inc. (“DataJack,” “we,” “us,” “our” or the “Company”), incorporated in 1999 under the laws of Nevada, is a communications company offering, through its subsidiaries, a comprehensive range of mobile broadband and communications products and services that are designed to meet the needs of individual consumers, businesses, government subscribers and resellers. Our operations are organized to meet the needs of our targeted subscriber groups through focused communications solutions that incorporate the capabilities of our mobile broadband and communications services. Our common stock trades on the OTC Bulletin Board (OTCBB) under the symbol “DJAK.”.
We offer secure nationwide mobile broadband wireless data transmission services primarily under the DataJack brand. We offer low cost, no contract, mobile broadband with data plans. Customers can pick the data plan that best meets their needs - they can choose from a $4.99 pay as you go plan, a $9.99 per month entry plan with 50MB of Mobile Broadband data, $29.99 with 2GB of Mobile Broadband data, or our Premier Plan $49.99 with 5GB of Mobile Broadband data. Our low cost broadband plans give more people the opportunity to experience the benefits of broadband on the go.
Our DataJack service is offered primarily through two devices - the DataJack WiFi Mobile Hotspot that can connect up to 8 Wi-Fi enabled devices and the DataJack USB, a Plug and Play USB Device. Approximately $1,247,708 and $1,340,552 of revenue and a net loss of approximately $1,451,296 and $445,948 were generated from our DataJack entity in 2013 and 2012, respectively.
Our communication products included an international calling service delivered under the brand WQN, through our subsidiary, WQN, Inc. (“WQN”), and an enhanced toll free service delivered under the brand “800.com.” Our prepaid international calling service, “EasyTalk,” focuses on convenient features and the delivery of low cost international calls to consumers and businesses. WQN’s global network offered customers secure, instant activation and immediate access to the service while eliminating the need to use a PIN or switch long distance carriers.
Effective June 5, 2013, DataJack, Inc. sold substantially all of the assets of WQN, Inc., our wholly-owned subsidiary, to iTalk, Inc., a Nevada corporation (the “WQN Asset Sale”). The assets included in the sale included all intellectual rights of WQN, including trade names and trademarks, and all rights and interests to and in the all customers of the International Long Distance division of DataJack , Inc., including but without limitation all the customers and/or subscribers of the following products: My WQN, Easy Talk, Premium and ValuComm and also including all current and previously registered Customers as well as all databases. The purchase price was $300,000. WQN accounted for approximately 47% of the Company’s consolidated revenues in 2012.
Effective November 21, 2013, ITG, Inc, (formerly WQN, Inc.) sold, transferred and delivered all its issued and outstanding common stock shares, with $0.01 par value, to WW Courier, Inc. for $500 and 10% of future revenue. All remaining outstanding liabilities related to WQN, Inc. were transferred with the stock sale.
Results of Operations for the Year Ended December 31, 2013 Compared to the Same Period in 2012
Revenues
Our revenues for the years ended December 31, 2013 and 2012 were $1,686,767 and $2,522,055, respectively; a decrease of $835,288. DataJack revenues decreased by $92,844 and the WQN Asset Sale caused revenues to drop substantially during 2013.
Cost of Sales and Gross Profit
Cost of sales was $1,253,781 and $2,025,682 for the years ended December 31, 2013 and 2012, respectively. This resulted in gross profit of $432,986 (26%) and $496,373 (20%) for the respective 2013 and 2012 periods. The decrease in cost of sales and the increase gross margin in 2013 were a result of the WQN Asset Sale.
Operating Expenses
Operating expenses were $2,853,549 and $5,876,977 for the years ended December 31, 2013 and 2012, respectively. Operating expenses in 2012 included intangible asset impairment charges of $749,642, as more fully described in Note E to our consolidated financial statements. The decrease in operating expenses in 2013, were a result of the WQN Asset Sale.
Other Income and Expense
Total other income was $194,277 for the year ended December 31, 2013, compared to other expense was $1,337,972 for the year ended December 31, 2012. Our 2013 income included a gain on the WQN Asset Sale $575,829, net gain on settlement of debt $106,912, gain on derivative liability $219,059, amortization of debt $525,229 and interest expense $182,294. Our 2012 expenses included amortization of debt of $566,537, penalties related to debt conversion of $212,090 and a loss from derivate liability of $616,519, all primarily associated with the Company’s debt issuances in 2012, as more fully described in Notes G and H to our consolidated financial statements included herein.
Net Loss
The decrease in operating expenses, combined with the decrease in other expenses noted above, resulted in a decrease in our net loss from $6,718,576 in 2012 to $2,226,286 in 2013, respectively.
Liquidity and Capital Resources
Cash and cash equivalents were $21,799 and $23,886 at December 31, 2013 and 2012, respectively. Our net cash used in operating activities for the years ended December 31, 2013 and 2012 were $889,594 and $2,245,012, respectively, due primarily to our cash-based net loss during this period. Our primary source of funding, as needed, has been through promissory note issuances, sales of common stock for cash and sale of business assets.
Our working capital increased by $509,065 during the year ended December 31, 2013 from a working capital deficit of $4,239,800 at December 31, 2012 to a working capital deficit of $3,730,735 at December 31, 2013.
During the years ended December 31, 2013 and 2012, we raised $762,659 and $2,149,917, respectively, through the sale of debt and equity securities in private placements to accredited investors.
Additionally, on March 13, 2012, we raised $100,000 in cash through the sale of our RocketVOIP assets. In 2013 approximately $67,201 was raised thru the sale of fixed assets.
We believe that anticipated cash ﬂows from operations will be insufficient to satisfy our ongoing capital requirements. Our ability to meet our obligations and continue to operate as a going concern is highly dependent on our ability to obtain new loans and/or successfully enter into settlement agreements with our vendors. We cannot predict whether this additional financing will be in the form of equity or debt, or be in another form. We 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, we may be unable to implement our current plans which circumstances would have a material adverse eﬀect on our business, prospects, financial condition and results of operations.
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 and has an accumulated deficit of $25,422,962 and $23,196,676 through December 31, 2013 and 2012, respectively, 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 certainty 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 years ended December 31, 2013 and 2012, 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.
Capital Expenditure Commitments
We did not have any substantial outstanding commitments to purchase capital equipment at December 31, 2013.
Capital Needs
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 $2,500 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. In 2012, the Company recognized related impairment charges of $749,642 in its consolidated statement of operations. No additional impairment charges were recognized in 2013.
2.
During 2012, our revenues were primarily derived from fees charged to carry 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.
3.
The Company has identified embedded derivatives related to certain of its notes payable. These embedded derivatives include certain conversion features and reset provisions. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of the above described Convertible Note Payable and to fair value as of each subsequent reporting date. In 2013 and 2012, the Company recognized related derivative mark-to-market income (charges) of $219,059 and ($616,519), respectively, in its consolidated statement of operations.
4.
The amount of cash paid and the value of common stock issued that are related to contract renegotiations and debt issuances are capitalized, and classified as a noncurrent deferred cost on the Company’s consolidated balance sheet. These deferred costs are amortized to expense over the term of the underlying contracts or debt instruments.
5.
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 costs are recognized over the period that an employee provides service in exchange for the award.
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.
ITEM 9.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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 of 1934, as amended (the “Exchange Act”), as of December 31, 2013, 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, 2013.
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, 2013. Our Chief Executive Officer, 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.
Our management concluded an evaluation of the effectiveness of internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our Certifying Officer concluded that our disclosure controls and procedures were ineffective as of December 31, 2013.
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.
This annual report does not include an attestation report of the Company’s independent 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
None.
PART III
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, with one vacancy. 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. During the 2012 fiscal year, there were three Board of Directors meetings, one of which was conducted by telephone, and several actions by unanimous written consent. There were four meetings were held during 2013. Board meetings have been held in January and February 2014.
Biographical resumes of each officer, director and significant employee are set forth below.
Stuart Ehrlich is President, Chief Executive Officer and a director. He also serves as the Company’s acting principal financial officer. Prior to his position with the Company, 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.
Peter Sperling joined the Company as Secretary and a Board member in December 2012. Mr. Sperling has an Associate’s Degree in Network Administration, and is a Microsoft Certified Professional Director of Information Technologist. His past employment services include Director of Information Technology Services for a Boca Raton based Real Estate company. He is employed at DataJack, Inc. as a key part of the management team in charge of fulfillment services, procurement and Business Development.
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 years ended December 31, 2013 and 2012.
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, and 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 DataJack, Inc. 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 serves as the Company’s principal financial officer.
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. While terms of such an agreement have not yet been set, the Company paid Mr. Ehrlich a consulting fee of $39,912 and $26,100 in cash during 2013 and 2012, respectively, plus 150,000 shares of the Company’s unregistered common stock during 2012. We valued those shares at $10.00 per share, the average of the weighted average price of our common stock on the OTCBB for the year ended December 31, 2012 and the weighted average price of our common stock that we sold in private placements during 2012.
Consulting Agreements
From time to time, Steven Ivester, the Company’s former sole shareholder, who is currently the Assistant Secretary of and also a consultant to the Company through a Consulting Services Agreement with iTella, Inc., has made personal advances to the Company under an Unsecured Revolving Promissory Note (the "Unsecured Note"). The Unsecured Note has a maximum amount of $1,000,000, is repayable upon demand, is non-interest bearing and is unsecured. Advances under the Unsecured Note amounted to $181,007 and $53,650 at December 31, 2013 and 2012, respectively, which are included in advances from related parties in the Company’s consolidated balance sheet.
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 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 consists of the following:
1.
Annual cash payments of $250,000, payable monthly;
2.
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), and subject to an annual calendar year cap of $800,000
3.
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
4.
Reimbursement of reasonable, related business expenses.
Effective April 1, 2012 and subsequently amended on June 7, 2012, 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 annual payout of the contract was reduced from $250,000 to $150,000. Also, the revenue sharing provision of the previous consulting agreement was terminated. In consideration of the reductions of compensation, the Company accrued a $280,000 payable to the Consultant. Also, in consideration of the reduction of compensation the Company issued 8,000,000 of restricted shares. The shares were recorded on the Company’s balance sheet at a value of $720,000. The $1,000,000 combined total of the $280,000 payable and the $720,000 of restricted stock issuance are recorded on the Company’s balance sheet as a deferred cost. The Consultant can call the $280,000 payable on demand. For the years ended December 31, 2013 and 2012, the Company amortized $444,444 and $259,259, respectively, of this deferred cost to consulting expense.
The initial term of this agreement is for five years, and 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 consists of the following:
1.
Annual cash payments of $150,000, payable monthly;
2.
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
3.
Reimbursement of reasonable, related business expenses.
Expenses under the Restated Consulting Services Agreement (excluding the amortization of deferred costs referred to above) for years ended December 31, 2013 and 2012, respectively, were $150,000 and $233,804 in consulting expense. In addition, health and insurance benefits were paid by the Company on behalf of Steven Ivester, which totaled approximately $11,227 and $10,285 for the year ended December 31, 2013 and 2012.
As of December 31, 2013 and 2012, advances from iTella (a related party) were $181,007 and $175,729, respectively, which are included in advances from related parties in the Company’s consolidated balance sheet.
Effective June 21, 2012, the Company sold the 800.com domain and all of its assets to Steven Ivester, the Company’s former sole shareholder, who is currently the Assistant Secretary of and also a consultant to the Company through a Consulting Services Agreement with iTella, Inc., for $850,000. The Company did not receive any cash in the transaction. As consideration for the sale of the 800.com, the Company reduced a liability payable to Steven Ivester by $850,000 and the gain on the sale of the domain of $618,945was credited to additional paid in capital.
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 a salary of $10,929 and $24,230 in 2013 and 2012 for her services as a director of the Company. In addition, health and insurance benefits were paid by the Company on behalf of Gladys Perez, which totaled approximately $11,227 and $2,284 for the year ended December 31, 2013 and 2012.
Marc Moore was issued 6,000 shares of our common stock valued at $48,000 for his services as a director of the Company during 2012. No compensation was paid or shares issued to Marc Moore for his services as a director during 2013.
Peter Sperling was paid $35,736 and $34,996 in 2013 and 2012 for his services as an employee (not as a Director) of the Company.
The following table sets forth information regarding compensation paid or accrued to our directors for the year ended December 31, 2013.
Director Compensation
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Beneficial Ownership
The following table sets forth information as of March 31, 2014, except as otherwise noted, with respect to the beneficial ownership of our common stock and is based on 24,260,405 shares of common stock issued and outstanding as of March 31, 2014:
·
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 DataJack, Inc., 14911 Quorum Drive, Suite 370, Dallas, Texas 75254.
(1) Includes 145,000 shares owned by Nathan Ehrlich.
(2) Includes 5,629,773 shares held by the Sperling Family Trust and 250,000 shares owned by Seena Sperling.
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 DataJack 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, 2013; however, in 2011, the Company did issue grants of stock under the Plan totaling 4,994,000 registered shares.
Description of the Plan
The total number of shares of common stock that may be subject to Awards under the Plan will not exceed five million (5,000,000) shares (subject to customary adjustments as provided in the Plan). Such number of shares is subject to adjustment by the committee established to administer the Plan or by the Board of Directors if there are no independent directors (the “Committee”), in the event of a recapitalization, stock split, stock dividend or similar corporate transaction. Such shares may be either authorized or unissued shares or shares held in treasury.
The Plan is generally designed to meet the requirements of Section 162(m) of the Code, in order to preserve the Company’s ability to take compensation expense deductions in connection with the exercise of options granted and the vesting of performance-based restricted stock under the Plan in certain circumstances. Under Code Section 162(m), a publicly held corporation is not permitted to take a federal income tax deduction for compensation recognized by certain executive officers in any year in excess of $1,000,000, unless such compensation meets the stockholder approval and other requirements of Code Section 162(m).
The Plan is administered by the Committee, which must be comprised of not less than two individuals appointed by the Board of Directors, each of whom is (1) to the extent required by Rule 16b-3 and the Exchange Act, a “non-employee director,” and (2) to the extent required by Code Section 162(m), an “outside director”. Until the Company has independent directors, the whole Board of Directors will make such rules and regulations and establish such procedures for the administration of the Plan as it deems advisable.
The Committee may grant Awards under the Plan to eligible participants. The Committee has the discretion, in accordance with the provisions of the Plan, to determine the terms of the Award, to whom an Award is granted and the number of shares of stock subject to the Award.
Stock Options
An option granted under the Plan may be an incentive stock option (an “ISO”) or may be a non-qualified stock option (a “Non-ISO”), as determined at the time of grant. In certain circumstances, the grant of Non-ISOs, as opposed to ISOs, can result in federal income tax advantages to the Company.
The exercise price for options may not be less than the fair market value of the stock on the date of the grant of the options. The Plan provides that optionees may pay the exercise price: (1) in cash, (2) by delivery to the Company of shares of the Company’s common stock owned by the participant, (3) with other securities, (4) with other Awards, (5) with other property, or (6) in any combination of the above, in each case on such other terms and conditions as may be acceptable to the Committee (which may include payment in installments or on a deferred basis).
An option granted under the Plan may not be exercised later than the date specified by the Committee, which will be a maximum of 10 years from the date of the grant.
Restricted Stock
The Committee may award “restricted” shares of the Company’s common stock and restricted stock units, which are grants of common stock or Awards designated in shares of restricted stock that are subject to risk of forfeiture or other restrictions. Shares of restricted stock and restricted stock units will be subject to such restrictions as the Committee may impose (including, without limitation, any limitation on the right to receive any dividend or other right or property), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise, as the Committee may deem appropriate.
Except as otherwise determined by the Committee, upon termination of employment (as determined under criteria established by the Committee) for any reason during the applicable restriction period, all shares of restricted stock and all restricted stock units still, in either case, subject to restriction, shall be forfeited and reacquired by the Company; provided, however, that the Committee may, when it finds that a waiver would be in the best interests of the Company, waive in whole or in part any or all remaining restrictions with respect to shares of restricted stock or restricted stock units.
Stock Appreciation Rights
The Committee is authorized to grant eligible participants stock appreciation rights. A stock appreciation right gives the recipient a right to receive, upon exercise of the stock appreciation right, the excess of (1) the fair market value (as determined by the Committee) of one share of common stock on the date of exercise or, if the Committee determines in the case of any such right other than one related to any ISO, at any time during a specified period before or after the date of exercise over (2) the grant price of the right, as specified by the Committee. The grant price, term, methods of exercise, methods of settlement, and any other terms and conditions of any stock appreciation right are determined by the Committee. The Committee may impose such conditions or restrictions on the exercise of any stock appreciation right as it may deem appropriate.
Performance Awards
The Committee is authorized to grant eligible participants performance awards. A performance award granted under the Plan (1) may be denominated or payable in cash, shares of common stock (including, without limitation, restricted stock), other securities, other Awards, or other property and (2) confer on the recipient rights valued as determined by the Committee and payable to, or exercisable by, the recipient, in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee shall establish. The performance goals to be achieved during any performance period, the length of any performance period, the amount of any performance award granted, and the amount of any payment or transfer to be made pursuant to any performance award shall be determined by the Committee. The goals established by the Committee will be based on any one, or combination of, earnings per share, return on equity, return on assets, total stockholder return, net operating income, cash flow, revenue, economic value added, increase in the price of the Company’s common stock, cash flow return on investment, or any other measure the Committee deems appropriate. Partial achievement of the goal(s) may result in a payment or vesting corresponding to the degree of achievement.
Dividend Equivalents
The Committee is authorized to grant Awards under which the recipients are entitled to receive payments equivalent to dividends or interest with respect to a number of shares of common stock determined by the Committee, and the Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional shares of common stock or otherwise reinvested. Such Awards may have such terms and conditions as the Committee determines.
Other Stock-Based Awards
The Committee is also authorized to grant other Awards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, shares of common stock (including, without limitation, securities convertible into shares of common stock), as are deemed by the Committee to be consistent with the purposes of the Plan. The Committee determines the terms and conditions of such Awards.
Miscellaneous
Awards granted under the Plan generally are not transferable, except that the Committee may, in its sole discretion and subject to certain limitations, permit the transfer of Non-ISOs at the time of grant or thereafter for estate planning purposes. No Awards may be granted under the Plan after May 31, 2018.
The number of Awards that may be granted under the Plan to executive officers is not determinable at this time.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Other than as disclosed below and in this Annual Report, there have been no transactions, since January 1, 2013, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeds the lesser of $120,000 or 1% of the average of our total assets at year end for the last two completed fiscal years and in which any of our directors, executive officers or beneficial holders of more than 5% of our outstanding common stock, or any of their respective immediate family members, has had or will have any direct or material indirect interest.
From time to time, Steven Ivester, the Company’s former sole shareholder, who is currently the Assistant Secretary of and also a consultant to the Company through a Consulting Services Agreement with iTella, Inc., has made personal advances to the Company under an Unsecured Revolving Promissory Note (the "Unsecured Note"). The Unsecured Note has a maximum amount of $1,000,000, is repayable upon demand, is non-interest bearing and is unsecured. Advances under the Unsecured Note amounted to $181,007 and $53,650 at December 31, 2013 and 2012, respectively, which are included in advances from related parties in the Company’s consolidated balance sheet.
On January 20, 2012, Warren Gilbert purchased from us 100,000 restricted shares of our common stock in a private placement for $100,000.
On January 20, 2012, the Sperlings purchased from us 100,000 restricted shares of our common stock in a private placement for $100,000. On that date, we issued an additional 1,000,000 restricted shares of our common stock valued at $190,000 to Mr. Sperling for services rendered to us under a consulting agreement with Mr. Sperling.
Effective October 1, 2012 the Company issued and sold $700,000 in secured notes Mr. Sperling and Mr. Gilbert in a private placement, for a cash purchase price of $700,000. These investors also received 750,000 shares of the Company's common stock on April 29, 2013.
On March 30, 2012, the Company entered into a convertible promissory note with St. George Investments (the “St George Note”) for a principal balance of $465,000. The note was originally a short-term note payable to Warren Gilbert, one of the primary shareholders of the Company. On March 30, 2012, Warren Gilbert sold the note to St. George Investments for an amount which was not disclosed to the Company. The St George Note was convertible into common stock, at St George Investments’ option, at a fixed conversion price of $0.375 per share from March 30, 2012 until September 1, 2012, and commencing September 2, 2012 the conversion price is 65% of the average of the three
lowest closing bid prices of the common stock during the 10 trading day period prior to conversion. Upon the occurrence of an event of default, (i) the outstanding balance shall increase to 112.5% of the outstanding balance immediately prior to the occurrence of such event of default; provided, however, that such increase may not be applied more than twice, and (ii) this St George Note shall accrue interest until the outstanding balance is repaid in full at the rate of 1% per month (or 12% per annum), compounding daily, whether before or after judgment.
On March 11, 2013 the Company converted $1,875 due to iTella Consulting, which is owned by Steven Ivester, into 62,500 shares. The effective issuance price per share was $0.03. On November 20, 2013, the Company converted an additional $9,500 due to iTella Consulting into 250,000 shares. On December 27, 2013, the Company converted $1,000 due to iTella Consulting into 25,000 shares.
On April 18, 2013, the Company converted $7,000 in unsecured notes with Steven Ivester into 17,500 shares. On April 29, 2013 the Company converted an additional $3,000 in unsecured notes with Steven Ivester into 5,000 shares.
On November 20, 2013, the Company converted $240,000 in unsecured notes with Mr. Sperling and Mr. Gilbert into 700,000 shares.
On December 21, 2013, the Company sold computer network equipment to Steven Ivester, the Company’s former sole shareholder, in the amount of $48,000. The sale amount was deducted from the amount the short term loan balance, which the Company owes Steven Ivester. The assets net book value at the time of sale was $4,358, which resulted in a gain on the sale of assets of $43,642.
At various times during 2013, Mr. Sperling, Mr. Gilbert and Steven Ivester have provided unsecured notes and cash advances to the Company. The balance of these unsecured notes and cash advances as of December 31, 2013 is $366,357.
Thoughout 2013, iTella Consulting or Mr. Ivester, provided services to DataJack and the consulting fees were accrued. As of December 31, 2013, fees accrued and due iTella consulting amounted to $239,704 which is included in advances from related parties in the Company’s consolidated balance sheet.
Director Independence
Our Board of Directors has considered the independence of its directors in reference to the definition of “independent director” established by the NASDAQ Marketplace Rule 5605(a)(2). In doing so, the Board has reviewed all commercial and other relationships of each director in making its determination as to the independence of its directors. After such review, the Board has determined that Marc Moore qualifies as independent under the requirements of the NASDAQ listing standards.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
On July 31, 2013, the Company engaged Liggett, Vogt & Webb P.A. (“LVW”). RBSM, LLP (“RBSM”) was the Company’s previous auditor.
The following table shows the fees that we were billed by LVW and RBSM for audit and other services provided by our independent auditors during the years ended December 31, 2013 and 2012:
(1)
Audit fees - These are fees billed for professional services performed by LVW and RBSM 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 LVW and/or RBSM, as applicable that are reasonably related to the performance of the audit or review of our financial statements. 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 LVW and/or RBSM, 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 LVW and/or RBSM, as applicable.
All services to be performed for the Company by independent public accountants, including those fees outlined above for 2013 and 2012, 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 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.
(10)
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.
(11)
Filed with the SEC on November 17, 2011, 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.
(12)
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.
(13)
Filed with the SEC on November 21, 2012, 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.
(14)
Filed with the SEC on April 16, 2013, 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.
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.
DATAJACK, INC.
Date: April 14, 2014
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
April 14, 2014
Stuart Ehrlich
/s/ Gladys Perez
Director
April 14, 2014
Gladys Perez
/s/ Marc Moore
Director
April 14, 2014
Marc Moore
/s/ Peter Sperling
Director; Secretary
April 14, 2014
Peter Sperling
CONSOLIDATED FINANCIAL STATEMENTS
DataJack, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
DataJack, Inc.
We have audited the accompanying consolidated balance sheet of DataJack, Inc. as of December 31, 2013 and the related consolidated statements of operations, shareholders’ 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 circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of DataJack, Inc. as of December 31, 2013 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/ Liggett, Vogt & Webb, P.A.
New York, New York
April 14, 2014
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Data Jack, Inc.
We have audited the accompanying consolidated balance sheet of Data Jack, Inc., formerly Quamtel, Inc. (the “Company”) as of December 31, 2012 and the related consolidated statements of operations, changes in shareholders’ deficit, 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. We were not 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 circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Data Jack, Inc. (formerly Quamtel, Inc.) as of December 31, 2012 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 recurring net loss 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
April 16, 2013
DataJack, Inc.
Consolidated Balance Sheets
As of December 31, 2013 and 2012
The accompanying notes are an integral part of these consolidated financial statements.
DataJack, Inc.
Consolidated Statement Of Operations
For the Years Ended December 31, 2013 and 2012
The accompanying notes are an integral part of these consolidated financial statements.
DataJack, Inc.
Consolidated Statements of Shareholders' Deficiency
For the Years Ended December 31, 2013 and 2012
The accompanying notes are an integral part of these consolidated financial statements.
DataJack, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2013 and 2012
The accompanying notes are an integral part of these consolidated financial statements.
DataJack, Inc.
Notes To The Consolidated Financial Statements
December 31, 2013 and 2012
NOTE A - DESCRIPTION OF BUSINESS
DataJack, Inc. (formerly Quamtel, Inc.) and its subsidiaries (the “Company”) was incorporated in 1999 under the laws of Nevada as a communications company offering, a comprehensive range of mobile broadband and communications products.
The Company offers secure nationwide mobile broadband wireless data transmission services primarily under the DataJack brand. Through DataJack, the Company offers low cost, no contract, mobile broadband with various data plans. The Company’s DataJack service is offered primarily through two devices - the DataJack WiFi Mobile Hotspot that can connect up to 8 Wi-Fi enabled devices and the DataJack USB, a Plug and Play USB Device.
The Company’s communications product mix included an international calling service delivered under the brand WQN, through our subsidiary, WQN, Inc. (“WQN”). Effective June 5, 2013, we sold substantially all of the assets of WQN which included WQN, Easy Talk, Premium, Value, Easy Talk Mexico, Easy Talk Cuba and India Easy Talk telecommunications services, prepaid products and related technology to iTalk, Inc. for $300,000. WQN accounted for approximately 47% of the Company’s consolidated revenues in 2012.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of DataJack, Inc. and its wholly owned subsidiaries WQN Inc. and DataJack, 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 consolidated 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.
DataJack, Inc.
Notes To The Consolidated Financial Statements
December 31, 2013 and 2012
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, 2013 and 2012 was zero.
Inventories
Inventories consist of DataJack’s proprietary USB devices which provide customers the ability to deliver nationwide mobile 3G and 4G data coverage. Inventories are stated at the lower of cost or market determined by the first in, first out (FIFO) method.
Prepaid Expenses and Deposits
At December 31, 2013 and 2012, 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.
DataJack, Inc.
Notes To The Consolidated Financial Statements
December 31, 2013 and 2012
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.
Items recorded or measured at fair value on a recurring basis in the accompanying consolidated financial statements consisted of the following items as of December 31, 2013 and 2012:
The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities (derivative liability) for the year ended December 31, 2013.
DataJack, Inc.
Notes To The Consolidated Financial Statements
December 31, 2013 and 2012
Level 3 Liabilities were comprised of our bifurcated convertible debt features on our convertible notes.
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.
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, 2013 and 2012, the Company recorded unearned revenue of $0 and $153,930, 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.
DataJack, Inc.
Notes To The Consolidated Financial Statements
December 31, 2013 and 2012
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.
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.
Deferred Costs
The amount of cash paid and the value of common stock issued that are related to contract renegotiations and debt issuances are capitalized, and classified as a noncurrent deferred cost on the Company’s consolidated balance sheet. These deferred costs are amortized to expense over the term of the underlying contracts or debt instruments.
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.
DataJack, Inc.
Notes To The Consolidated Financial Statements
December 31, 2013 and 2012
Embedded Derivatives
The Company has identified embedded derivatives related to certain of its notes payable. These embedded derivatives include certain conversion features and reset provisions. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of the above described Convertible Note Payable and to fair value as of each subsequent reporting date.
Recent Accounting Pronouncements
Recent accounting pronouncements issued by the FASB (including Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.
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 $2,226,286 and $6,718,576 for the years ended December 31, 2013 and 2012, respectively. As of December 31, 2013, the Company has reported an accumulated deficit of $25,422,962 and a working capital deficit of $3,730,735, 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 - PROPERTY AND EQUIPMENT, NET
At December 31, 2013 and December 31, 2012, respectively, property and equipment consisted of the following:
Depreciation expense for the years ended December 31, 2013 and 2012 amounted to $86,612 and $102,408, respectively.
NOTE E - GOODWILL AND OTHER INTANGIBLES
At December 31, 2013 and December 31, 2012 respectively, intangible assets consisted of the following:
DataJack, Inc.
Notes To The Consolidated Financial Statements
December 31, 2013 and 2012
Amortization expense for the years ended December 31, 2013 and 2012 amounted to $3,139 and $31,990, respectively. In 2012, the Company recognized impairment charges of $749,642 related to its goodwill and other intangibles. No additional impairment charges were recognized during 2013.
Effective June, 2012, the Company sold the 800.com domain and all of its assets to Steven Ivester. The Company recorded a gain on sale of assets in the amount of $618,945 as a result of this asset sale by crediting to additional paid in capital.
The goodwill amount of $669,957 was recorded with the DataJack acquisition in December, 2009, and was fully impaired at December 31, 2012 based on management’s annual assessment as described in Note B, pursuant to the Company’s losses.
NOTE F - RELATED PARTY TRANSACTIONS
From time to time, Steven Ivester, the Company’s former sole shareholder, who is currently the Assistant Secretary of and also a consultant to the Company through a Consulting Services Agreement with iTella, Inc., has made personal advances to the Company under an Unsecured Revolving Promissory Note (the "Unsecured Note"). The Unsecured Note has a maximum amount of $1,000,000, is repayable upon demand, is non-interest bearing and is unsecured. Advances under the Unsecured Note amounted to $181,007 and $53,650 at December 31, 2013 and 2012, respectively, which are included in advances from related parties in the Company’s consolidated balance sheet.
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 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 consists of the following:
1.
Annual cash payments of $250,000, payable monthly;
2.
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), and subject to an annual calendar year cap of $800,000
3.
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
4.
Reimbursement of reasonable, related business expenses.
DataJack, Inc.
Notes To The Consolidated Financial Statements
December 31, 2013 and 2012
Effective April 1, 2012 and subsequently amended on June 7, 2012, 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 annual payout of the contract was reduced from $250,000 to $150,000. Also, the revenue sharing provision of the previous consulting agreement was terminated. In consideration of the reductions of compensation, the Company accrued a $280,000 payable to the Consultant. Also, in consideration of the reduction of compensation the Company issued 8,000,000 of restricted shares. The shares were recorded on the Company’s balance sheet at a value of $720,000.The $1,000,000 combined total of the $280,000 payable and the $720,000 of restricted stock issuance are recorded on the Company’s balance sheet as a deferred cost. The Consultant can call the $280,000 payable on demand. For the years ended December 31, 2013 and 2012, the Company amortized $444,444 and $259,259, respectively, of this deferred cost to consulting expense.
The initial term of this agreement is for five years, and 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 consists of the following:
1.
Annual cash payments of $150,000, payable monthly;
2.
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
3.
Reimbursement of reasonable, related business expenses.
Expenses under the Restated Consulting Services Agreement (excluding the amortization of deferred costs referred to above) for years ended December 31, 2013 and 2012, respectively, were $150,000 and $233,804 in consulting expense. In addition, health and insurance benefits were paid by the Company on behalf of Steven Ivester, which totaled approximately $11,227 and $10,285 for the year ended December 31, 2013 and 2012.
As of December 31, 2013 and 2012, advances from iTella (a related party) were $239,704 and $122,079, respectively, which are included in advances from related parties in the Company’s consolidated balance sheet.
Effective June 21, 2012, the Company sold the 800.com domain and all of its assets to Steven Ivester, the Company’s former sole shareholder, who is currently the Assistant Secretary of and also a consultant to the Company through a Consulting Services Agreement with iTella, Inc., for $850,000. The Company did not receive any cash in the transaction. As consideration for the sale of the 800.com, the Company reduced a liability payable to Steven Ivester by $850,000 and the gain on the sale of the domain of $618,945 was credited to additional paid in capital.
On January 20, 2012, Warren Gilbert purchased from the Company 100,000 restricted shares of the Company’s common stock in a private placement for $100,000.
On January 20, 2012, the Sperlings purchased from the Company 100,000 restricted shares of the Company’s common stock in a private placement for $100,000. On that date, the Company issued an additional 1,000,000 restricted shares of the Company’s common stock valued at $190,000 to Mr. Sperling for services rendered to the Company under a consulting agreement with Mr. Sperling.
Effective October 1, 2012 the Company issued and sold $700,000 in secured notes Mr. Sperling and Mr. Gilbert in a private placement, for a cash purchase price of $700,000. These investors also received 750,000 shares of the Company's common stock on April 29, 2013.
DataJack, Inc.
Notes To The Consolidated Financial Statements
December 31, 2013 and 2012
On March 30, 2012, the Company entered into a convertible promissory note with St. George Investments (the “St George Note”) for a principal balance of $465,000. The note was originally a short-term note payable to Warren Gilbert, one of the primary shareholders of the Company. On March 30, 2012, Warren Gilbert sold the note to St. George Investments for an amount which was not disclosed to the Company. The St George Note was convertible into common stock, at St George Investments’ option, at a fixed conversion price of $0.375 per share from March 30, 2012 until September 1, 2012, and commencing September 2, 2012 the conversion price is 65% of the average of the three lowest closing bid prices of the common stock during the 10 trading day period prior to conversion. Upon the occurrence of an event of default, (i) the outstanding balance shall increase to 112.5% of the outstanding balance immediately prior to the occurrence of such event of default; provided, however, that such increase may not be applied more than twice, and (ii) this St George Note shall accrue interest until the outstanding balance is repaid in full at the rate of 1% per month (or 12% per annum), compounding daily, whether before or after judgment.
On March 11, 2013 the Company converted $1,875 due to iTella Consulting, which is owned by Steven Ivester, into 62,500 shares. The effective issuance price per share was $0.03. On November 20, 2013, the Company converted an additional $9,500 due to iTella Consulting into 250,000 shares. On December 27, 2013, the Company converted $1,000 due to iTella Consulting into 25,000 shares.
On April 18, 2013, the Company converted $7,000 in unsecured notes with Steven Ivester into 17,500 shares. On April 29, 2013 the Company converted an additional $3,000 in unsecured notes with Steven Ivester into 5,000 shares.
On November 20, 2013, the Company converted $240,000 in unsecured notes with Mr. Sperling and Mr. Gilbert into 700,000 shares.
On December 21, 2013, the Company sold computer network equipment to Steven Ivester, the Company’s former sole shareholder, in the amount of $48,000. The sale amount was deducted from the amount the short term loan balance, which the Company owes Steven Ivester. The assets net book value at the time of sale was $4,358, which resulted in a gain on the sale of assets of $43,642.
At various times during 2013, Mr. Sperling, Mr. Gilbert and Steven Ivester have provided unsecured notes and cash advances to the Company. The balance of these unsecured notes and cash advances as of December 31, 2013 is $347,409
NOTE G - NOTES PAYABLE
At December 31, 2013 and 2012, notes payable consisted of the following:
DataJack, Inc.
Notes To The Consolidated Financial Statements
December 31, 2013 and 2012
Promissory Notes Payable - Shareholders
As of December 31, 2013 and 2012, the Company had short-term unsecured promissory notes from various shareholders totaling $347,409 and $497,803, respectively. These unsecured advances do not accrue interest.
Secured Note Payable - Gilbert/Sperling
Effective October 1, 2012, the Company issued and sold $700,000 in secured notes to two accredited investors in a private placement, for a cash purchase price of $700,000. The investors also received 750,000 shares of the Company's common stock. These notes are secured by substantially all of the Company's assets, bear interest at 12%, and are due in equal weekly installments through October 1, 2015. The 750,000 shares were recorded at a value of $700,000, and are classified on the Company’s balance sheet as debt discount. For the years ended December 31, 2013 and 2012, the Company amortized $233,333 and $75,000 of this debt discount to interest expense. During 2013, an additional $202,451 was amortized to recognize an additional cost for the early conversion of the loan balances to stock during the first quarter of 2014.
Convertible Notes Payable - St George Investments
On March 30, 2012, the Company entered into a convertible promissory note with St George Investments (the “St George Note”) for a principal balance of $465,000. The note was originally a short-term note payable to Warren Gilbert, one of the primary shareholders of the Company. On March 30, 2012, Warren Gilbert sold the note to St. George Investments for an amount which was not disclosed to the Company. The St George Investments note conversion notice contains a Beneficial Conversion Feature (BCF). The Company accordingly recorded a BCF of $298,077, as a credit to additional paid in capital with offsetting amounts of $187,500 to other expense and $110,577 to debt discount, a contra liability account, which was written off by September 30, 2012, the maturity date of the St George Note. The Company also recognized an additional original-issue debt discount of $135,127, which was charged to other expense by September 30, 2012.
The St George Note bears interest at the rate of 8% per annum, compound daily. All interest and principal was due on September 30, 2012. The St George Note was convertible into common stock, at St George Investments’ option, at a fixed conversion price of $0.375 per share from March 30, 2012 until September 1, 2012, and commencing September 2, 2012 the conversion price is 65% of the average of the three lowest closing bid prices of the common stock during the 10 trading day period prior to conversion. Upon the occurrence of an event of default, (i) the outstanding balance shall increase to 112.5% of the outstanding balance immediately prior to the occurrence of such event of default; provided, however, that such increase may not be applied more than twice, and (ii) this St George Note shall accrue interest until the outstanding balance is repaid in full at the rate of 1% per month (or 12% per annum), compounding daily, whether before or after judgment.
St George Investments shall have the option, in its sole discretion, to return all or any part of the conversion shares or cancelled shares to the Company by providing one or more written notices thereof to the Company but not exceed 47,692 shares. The St George Investments converted a total of $426,206 of accrued interest, penalty and principal amount during the year ended December 30, 2012 and returned $58,486 or 47,692 shares of conversion made in September 2012.
Convertible Notes Payable - JMJ Financial
On August 22, 2012, the Company entered into a convertible promissory note with JMJ Financial (the “JMJ Note”) for a principal balance of $220,000. The principal sum of the note consisted of $200,000 of consideration paid, plus a $20,000 original issue discount (OID) or 10% OID. The note has a provision which allows the Company to draw down the available principal over time. At December 31, 2013 and 2012, the Company had drawn down $0 and $55,000, respectively.
DataJack, Inc.
Notes To The Consolidated Financial Statements
December 31, 2013 and 2012
The JMJ Note bears a one-time interest charge of 10% of the principal amount. The maturity date is one year from the Effective Date of each payment received by the Company and is the date upon which the principal sum of this JMJ Note, as well as any unpaid interest and other fees, shall be due and payable. The JMJ Note is convertible into common stock, at JMJ Financial’s option at any time after the Effective Date, at the conversion price of lesser of $0.07 per share or 70% of the lowest trade price in the 25 trading days prior to the conversion. In the event of any default, the outstanding principal amount of this JMJ Note, plus accrued but unpaid interest, liquidated damages, fees and other amounts owing in respect thereof through the date of acceleration, shall become, at JMJ Financial’s election, immediately due and payable in cash at the Mandatory Default Amount.
The Company has identified embedded derivatives related to the JMJ Note. These embedded derivatives include certain conversion features and reset provisions.
On December 11, 2013, the Company entered an amended Debt Settlement agreement with JMJ for settlement of the outstanding $88,174 balance on the promissory note.
Note Payable - Vanderbur
On June 22, 2012, the Company entered into a $25,000, zero percent, note payable with Gene and Lois Vanderbur. The principal of the note was due and payable on December 22, 2012. The Company was required to pay a $5,000 participation fee to execute the note and the Company issued the bearer 3,125 shares of DataJack common stock as additional cost of entering the note. The terms of the note will allow the Company to add additional $25,000 tranches of debt up to a maximum of $100,000. The total loan cost of $8,750 was capitalized to deferred cost, all of which amortized to non-interest expenses by December 31, 2012.
On September 7, 2012, the Company entered into a $15,000, zero percent, note payable with Gene and Lois Vanderbur. The principal of the note was due and payable on October 20, 2012. The Company has committed to pay a $5,000 participation fee to execute the note and the Company issued the bearer 1,000 shares of DataJack common stock as additional cost of entering the note.
On December 31, 2013, the Company entered into a Debt Settlement agreement with Gene and Lois Vanderbur.
Note Payable - LG Capital
On June 19, 2013, the Company entered into a $32,000, 8% note payable with LG Capital Funding. The principal and interest of the note is due and payable on March 19, 2014. The note has a conversion feature which commences 180 days prior to the maturity date. LG Capital Funding can convert the loan for common stock at a conversion price of 51% of the market price which is calculated utilizing the two lowest trading places. The outstanding principal balance as of December 31, 2013 is $21,067.
Other Note Obligations
The AFS/IBEX note is associated with an insurance policy, is repayable in equal monthly payments of $2,128 through June 2013, is unsecured, and bears interest at 8.3% per year. There were no balances outstanding as of December 31, 2013.
On January 23, 2012, the Company settled the outstanding note payable due to Abundance Partners LP by issuing 10,000 shares of its common stock.
The Dell Financial note is related to a disputed computer purchase in 2007. There was no balance outstanding as of December 31, 2013.
DataJack, Inc.
Notes To The Consolidated Financial Statements
December 31, 2013 and 2012
NOTE H - DERIVATIVE LIABILITIES
The Company’s JMJ Note can be convertible into the Company’s common shares, at the holders’ option, at the conversion rates of: (a) 65% of the average of the three lowest closing bid prices of the common stock during the 10 trading day period prior to conversion for the St George Note; and (b) at the lesser of $0.07 per share or 70% of the lowest trade price in the 25 trading days prior to the conversion for the JMJ Note.
The Company has identified the embedded derivatives related to these convertible notes. These embedded derivatives included certain conversion features and reset provisions, requiring the Company to record the fair value of the derivatives as of the inception date of these convertible notes, and to fair value as of each subsequent reporting date.
At the inception of these convertible notes, the Company determined the aggregate fair value of $467,725 of embedded derivatives. The fair values of the embedded derivatives were determined using the Black Scholes Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 151% to 259%, (3) weighted average risk-free interest rate of 0.08 % to 0.19%, (4) expected life of 0.08 to 0.99 year, and (5) estimated fair value of the Company’s common stock of $0.065 to $0.125 per share.
The determined fair value of these debt derivatives of $467,725 at inception dates were charged as a debt discount up to the net proceeds of the convertible note with the remainder of $222,598 and $115,000 charged to the operations during 2013 and 2012 as non-cash interest expense, respectively.
At December 31, 2013 and 2012, the Company marked to market the fair values of these debt derivatives and determined a fair value of $854,685 and $916,646. The Company recorded a gain (loss) from change in fair value of debt derivatives of $219,059 and ($616,519) as of December 31, 2013 and 2012, respectively. The fair values of the embedded derivatives were determined using Black Scholes Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 158% to 299%, (3) weighted average risk-free interest rate of 0.13% to 0.17%, (4) expected life of 0.00 to 1 year, and (5) estimated fair value of the Company’s common stock of $0.0085 to $0.015 per share.
NOTE I - LEGAL SETTLEMENT OBLIGATIONS
The Company has entered into settlement agreements with note holders, former employees and vendors. As of December 31, 2013 and 2012, the legal settlement obligation was $328,574 and $0, respectively. The following is a summary of the recent settlement transactions:
DataJack, Inc. was a defendant in litigation titled St George Investments LLC v. Quamtel, Inc. and Transfer Online, Inc., Case No. 1:12-cv-09186, pending in the United States District Court for the Northern District of Illinois, Eastern Division (the “St George Litigation”). The St. George Litigation was commenced on November 15, 2012, and amended on January 29, 2013. Generally, the Amended Complaint alleges that DataJack failed to pay a purported debt to Plaintiff as and when due and that DataJack and its transfer agent failed to honor a notice from the Plaintiff to exercise its claimed contractual right to convert $20,000 of the alleged debt to shares of stock in DataJack. The Amended Complaint alleges that DataJack is indebted to the Plaintiff in the amount of $391,704, plus penalties, interest, attorney’s fees and costs. The Amended Complaint also seeks injunctive relief and unspecified amounts of compensatory, consequential, indirect and punitive damages. DataJack has disputed its alleged liability to the Plaintiff, and the Company has responded to the Amended Complaint. A settlement agreement has been reached and is dated January 16, 2014, which includes dismissal of the lawsuit. An initial payment is due on January 16, 2014, with a final payment for the balance due on February 15, 2014. An amended agreement was reached and dated February 14, 2014, which states the initial payment was made on or prior to January 16, 2014 and the balance is to be paid on February 18, 2014 and March 18, 2014. The Company has made the February 18, 2014 payment. An extension was granted on March 17, 2014 for the final payment to be made on or before April 25, 2014. An issuance of 60,000 shares was made on March 17, 2014 as an extension fee.
DataJack, Inc.
Notes To The Consolidated Financial Statements
December 31, 2013 and 2012
The Company is a defendant in an action styled Robert Picow vs. Quamtel, Inc. and Steven Ivester, in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida. Picow asserts he is entitled to damages as a consequence of an alleged breach of a consulting agreement and for an alleged interference with his ability to trade his Quamtel shares. A settlement agreement was reached and we paid the claim in January 2014.
The Company is a defendant in an action styled The Balancing Act TV, LLC vs. Quamtel, Inc., filed on July 24, 2012 in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida. The Balancing Act TV, LLC asserts that it is entitled to damages in the amount of approximately $50,000 as a consequence of an alleged breach by us of a contract with us. A settlement agreement has been reached and is dated January 16, 2014. The agreed settlement was paid in January 2014.
DataJack, Inc. was a defendant in litigation titled RFP Mainstreet Park / Cypress, LLC v. Quamtel, Inc., Case No. 12-034366, pending in the Seventeenth Judicial Court Circuit of Florida. RFP Mainstreet Park / Cypress, LLC alleged DataJack failed to pay for office space leased. A settlement agreement was reached and dated October 24, 2013, which includes dismissal of the lawsuit. The agreement requires the Company to pay the settlement amount over twelve months commencing in November 2013. The Company has been making the monthly payments during 2014.
The Company entered into a debt settlement agreement with Windell Thelusma on November 26, 2013. Windell Thelusma had provided a loan to DataJack. The agreement provides for the extinguishment of all outstanding amounts owed in exchange for a cash payment upon signing of the agreement.
The Company entered into a release and settlement agreement with Ran Birkins on July 15, 2013. The settlement provided for the extinguishment of all alleged amounts owed to Ran Birkins with the issuance of 1,000,000 restricted shares. The shares were issued to Ran Birkins on September 5, 2013.
NOTE J - EQUITY
Reverse Stock Split
On January 24, 2014, the Company filed FORM DEF 14C announcing an amendment to our current articles of incorporation to effect a reverse split of the Company’s common stock at a ratio of twenty (20) to one (1). Neither the (i) number of authorized shares nor the par value of the shares of the Company’s common stock nor (ii) number of authorized shares or the par value of the shares of the Company’s preferred stock will be changed in connection with any such reverse split. The information contained within this Form 10-K is shown as if the reverse stock split had already occurred. All share and per share data have been retroactively restated to reflect the reverse split.
Financing and Other Transactions
During the year ended December 31, 2012, the Company issued 192,250 shares of common stock for services rendered valued at $1,693,349. No shares were issued during 2013 for services.
During the years ended December 31, 2013 and 2012, the Company completed private placements with a number of investors for aggregate gross proceeds of $121,580 and $691,908, representing 454,000 and 736,067 restricted common shares, respectively.
During the years ended December 31, 2013 and 2012, the Company issued 2,051,400 and 546,285 of its common shares to convert outstanding debt in the amount of $673,103 and $676,950, respectively.
During the ended December 31, 2013, the Company issued an additional 1,100,625 shares of common stock valued at $984,876, as follows:
·
300,625 shares valued at $35,876 were issued to a related party for prepaid consulting expenses;
·
750,000 shares valued at $900,000 were issued to three shareholders to reduce the stock payable liability.
·
50,000 shares valued at $49,000 were issued to a related part for settlement of domain name purchase
DataJack, Inc.
Notes To The Consolidated Financial Statements
December 31, 2013 and 2012
During the ended December 31, 2012, the Company issued an additional 1,276,406 shares of common stock valued at $1,740,054, as follows:
·
442,600 shares valued at $192,725 were issued to a related party for prepaid consulting expenses;
·
400,000 shares valued at $720,000 were issued to a related party for restructuring a consulting agreement;
·
433,807 shares valued at $827,329 were issued to eight shareholders to reduce the stock payable liability.
Stock Payable
At December 31, 2013 and 2012, the Company recorded a stock payable of $0 and $985,153, respectively. The stock payable represents amounts that the Company has an obligation to issue common shares for in the future. 750,000 shares valued at $900,000 were issued in 2013 in settlement of the stock payable.
NOTE K - 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 DataJack, 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, 2013, however, awards totaling 4,994,000 shares of the Company’s registered common stock have been granted under the Plan.
NOTE L - INCOME TAXES
The components of the Company's income tax expense (benefit) are as follows:
Significant components of deferred tax assets and liabilities are as follows:
The actual tax benefit differs from the expected tax benefit for the years ended December 31, 2013 and 2012 (computed by applying the U.S. Federal Corporate tax rate of 34% to income before taxes) are as follows:
The Company has not filed corporate income tax returns for the year ended December 31, 2010 and years subsequent.
The Company has net operating loss carry forward of approximately $20.4 million for federal income tax purposes which will expire by 2033. 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.
DataJack, Inc.
Notes To The Consolidated Financial Statements
December 31, 2013 and 2012
NOTE M - 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. These leases expire on February 28, 2015 and March 31, 2016, respectively.
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, 2013 and 2012 was $92,954 and $75,644, respectively.
Commitments for minimum rentals under non-cancelable leases at December 31, 2013 are as follows:
The Dallas, TX lease is currently in default due to non-compliance with lease terms. The Company is not currently carrying property, auto or workers compensation insurance, as required by the terms of the lease agreement.
Letter of Credit
As of December 31, 2013 and 2012, 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 December 31, 2013 and 2012, is classified as restricted cash, a non-current asset.
Litigation
In the ordinary course of business, the Company is involved in numerous lawsuits. The costs that may result from these lawsuits are only accrued for when it is more likely than not that a liability, resulting from past events, will be incurred and the amount of that liability can be quantified or estimated within a reasonable range.
Sale of ITG, Inc.
The Company disposed of its ITG, Inc..(formerly WQN, Inc) subsidiary effective November 21, 2013. In accordance with the Stock Purchase Agreement related to the sale of ITG, Inc. the purchaser assumed certain liabilities totaling $275,548 as of the date of the transaction. The purchaser has not indemnified the Company against any future claims by third party creditors or others. Management does not consider it likely that these claims will materialize and accordingly no provision has been made for these contingent liabilities.
NOTE N - GAIN ON DISPOSAL OF ASSETS
Effective June 5, 2013, the Company sold substantially all of the assets of WQN which included WQN, Easy Talk, Premium, Value, Easy Talk Mexico, Easy Talk Cuba and India Easy Talk telecommunications services, prepaid products and related technology to iTalk, Inc. for $300,000.
Effective November 21, 2013, ITG, Inc, (formerly WQN, Inc.) sold, transferred and delivered all its issued and outstanding common stock shares, with $0.01 par value, to WW Courier, Inc. for $500 and 10% of future revenue. All remaining outstanding liabilities related to WQN, Inc. were transferred with the stock sale. No provision has been made for any future consideration due to the uncertainty thereof.
DataJack, Inc.
Notes To The Consolidated Financial Statements
December 31, 2013 and 2012
As a result of these two transactions, the Company recorded a gain on disposal of assets in the amount of $575,829.
The gain on disposal of assets comprised of the following:
The gain on the sale of WQN assets comprised of the following:
The gain on disposal of the ITG, Inc..(formerly WQN, Inc) comprised of the following:
DataJack, Inc.
Notes To The Consolidated Financial Statements
December 31, 2013 and 2012
NOTE O - SUBSEQUENT EVENTS
On January 7, 2014, the Company entered into a debt settlement agreement with Gottbetter & Partners, LLP. The Company had received legal services from Gottbetter & Partners, LLP for its public filings, in the normal course of business. The agreement provides for the extinguishment of all outstanding amounts owed in exchange for the issuance of stock after the completion of the reverse stock split. Stock was issued to Gottbetter & Partners, LLP on March 19, 2014.
On January 9, 2014, the Company entered into a debt settlement agreement with RBSM, LLP. The agreement provides for the extinguishment of all outstanding amounts owed in exchange for a cash payment within 30 days of the agreement and after the completion of this filing. A partial payment of the settlement was completed on January 29, 2014.
On January 10, 2014, the Company entered into a debt settlement agreement with Issuer Direct Corp. The Company had received filing services from Issuer Direct Corp. for its public filings, in the normal course of business. The agreement provides for the extinguishment of all outstanding amounts owed in exchange for a cash payment within 45 days of the agreement and the issuance of stock after the completion of the reverse stock split. The cash payment was completed on January 29, 2014 and the shares were issued on March 25, 2014.
On January 15, 2014, the Company entered into a debt settlement agreement with Novak and Macey, LLP. The Company had received legal services from Novak and Macey, LLP in the St. George Investments litigation. The agreement provides for the extinguishment of all outstanding amounts owed in exchange for a cash payment on February 15, 2014 and the issuance of shares on the same date. A partial cash payment was completed on February 18, 2014 with a balance still owing as of the date of this filing. The shares were issued to Novak and Macey, LLP on March 25, 2014.
On February 14, 2014, Barry Ahron, a stockholder, provided an unsecured, noninterest bearing, short term advance to the Company in the amount of $45,000.
On March 31, 2014, the Company converted $119,300 in accrued consulting fees owed to Warren Gilbert into 596,500 shares. In addition, the outstanding loan principal and interest balance of $316,665 owed to Warren Gilbert was also converted and 1,583,323 shares were issued. The Company also converted Gerry Sperling’s loan with an outstanding principal and interest balance of $332,977 into 1,583,323 shares.
On March 31, 2014, Steve Ivester requested the conversion of $281,308 in short term loans to be converted into 5,829,773 shares, which the Company honored and issued. In addition, iTella requested the conversion of $162,500 of amounts due to iTella to be converted into 3,225,000 shares, which the Company honored and issued.
On March 31, 2014, the Company issued shares to the board of directors as compensation for 2014. The shares were granted and issued as follows: Marc Moore 243,750 shares, Gladys Perez 240,000 shares and Peter Sperling 100,000. In addition, the Company issued 750,000 shares to Andrea Munoz as a 2014 bonus.
From January thru March 2014, Gerry Sperling has provided additional unsecured, noninterest bearing, short term advances to the company totaling $245,000. Steve Iverson has also provided additional unsecured, noninterest bearing, short term advances to the Company totaling $99,485.