CALCULATION
OF REGISTRATION FEE
|
Title
of each class of
securities
to be registered
|
|
Amount
being registered (1)
|
|
Proposed
maximum offering price per share
|
|
|
Proposed
maximum aggregate offering price
|
|
Amount
of registration
fee
|
|
|
Common
Stock, par value $.001 per share (“Common Stock”)(2)
|
|
|
12,500,000
|
|
$
|
1.35
|
(3)
|
|
$
|
16,875,000
|
|
$
|
518.07
|
|
|
Common
Stock (4)
|
|
|
6,250,000
|
|
$
|
1.25
|
(5)
|
|
$
|
7,812,500
|
|
$
|
239.85
|
|
|
Common
Stock (6)
|
|
|
5,000,000
|
|
$
|
1.80
|
(5)
|
|
$
|
9,000,000
|
|
$
|
276.30
|
|
|
Total
Registration Fee
|
|
|
—
|
|
|
|
|
|
|
|
|
$
|
1,034.22
|
|
|
(1)
|
This
registration statement shall also cover any additional shares of
common
stock that shall become issuable by reason of any stock dividend,
stock
split, recapitalization or other similar transaction effected without
the
receipt of consideration that results in an increase in the number
of the
outstanding shares of common stock.
|
|
(2)
|
Represents
shares of common stock issuable upon conversion of series A convertible
preferred stock.
|
|
(3)
|
Estimated
solely for the purpose of calculating the registration fee pursuant
to
Rule 457(c) under the Securities Act of 1933, as amended, based upon
the
average of the high and low prices of the registrant’s common stock on the
OTC Bulletin Board on December 4,
2007.
|
|
(4)
|
Represents
shares of common stock issuable upon exercise of warrants at an exercise
price of $1.25 per share.
|
|
(5)
|
Calculated
pursuant to Rule 457(g).
|
|
(6)
|
Represents
shares of common stock issuable upon exercise of warrants at an exercise
price of $1.80 per share.
|
THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
The
information in this prospectus is not complete and may be changed. Our selling
stockholders may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities, and it is not soliciting offers
to buy
these securities in any state where the offer or sale is not
permitted.
SUBJECT
TO COMPLETION, DATED DECEMBER 7, 200
7
INTELLIGENTIAS,
INC.
23,750,000
Shares
Common
Stock
This
prospectus relates to the sale of up to 23,750,000 shares of our common stock
by
the selling stockholders listed in this prospectus. The shares offered by this
prospectus include 12,500,000 shares of common stock issuable upon conversion
of
series A convertible preferred stock and 11,250,000 shares of common stock
issuable upon exercise of warrants to purchase common stock. These shares may
be
sold by the selling stockholders from time to time in the over-the-counter
market or other national securities exchange or automated interdealer quotation
system on which our common stock is then listed or quoted, through negotiated
transactions or otherwise at market prices prevailing at the time of sale or
at
negotiated prices.
Pursuant
to a registration rights agreement with the selling stockholders, we are
obligated to register these shares issuable upon conversion of series A
convertible preferred stock and exercise of the warrants. The distribution
of
the shares by the selling stockholders is not subject to any underwriting
agreement or lock-up agreement limiting the number of shares they may sell.
We
will receive none of the proceeds from the sale of the shares by the selling
stockholders, except upon exercise of the warrants. We will bear all expenses
of
registration incurred in connection with this offering, but all selling and
other expenses incurred by the selling stockholders will be borne by
them.
Our
common stock is quoted on the OTC Bulletin Board under the symbol ITLI. The
high
and low bid prices for shares of our common stock on December 4, 2007, were
$1.38 and $1.32 per share, respectively, based upon bids that represent prices
quoted by broker-dealers on the OTC Bulletin Board. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commissions, and
may
not represent actual transactions.
The
selling stockholders may be deemed, and any broker-dealer executing sell orders
on behalf of the selling stockholders will be considered, “underwriters” within
the meaning of the Securities Act of 1933. Commissions received by any
broker-dealer will be considered underwriting commissions under the Securities
Act of 1933.
An
investment in these securities involves a high degree of
risk.
Please
carefully review the section titled
“Risk
Factors” beginning on page 7.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The
date of this prospectus is _____ __, 200_.
In
considering the acquisition of the common stock described in this prospectus,
you should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell, or a
solicitation of an offer to buy, shares of common stock in any jurisdiction
where offers and sales would be unlawful. The information contained in this
prospectus is complete and accurate only as of the date on the front cover
of
this prospectus, regardless of the time of delivery of this prospectus or of
any
sale of the shares of common stock.
TABLE
OF CONTENTS
|
|
|
Page
|
|
SUMMARY
|
|
5
|
|
THE
OFFERING
|
|
9
|
|
RISK
FACTORS
|
|
10
|
|
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
|
|
21
|
|
WHERE
YOU CAN FIND MORE INFORMATION
|
|
21
|
|
USE
OF PROCEEDS
|
|
22
|
|
MARKET
FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
|
|
22
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
|
|
24
|
|
MANAGEMENT
|
|
51
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
|
60
|
|
SELLING
STOCKHOLDERS
|
|
61
|
|
PLAN
OF DISTRIBUTION
|
|
63
|
|
DESCRIPTION
OF SECURITIES
|
|
65
|
|
SHARES
ELIGIBLE FOR FUTURE SALE
|
|
69
|
|
LEGAL
MATTERS
|
|
70
|
|
EXPERTS
|
|
70
|
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
|
70
|
|
INDEX
TO CONSOLIDATED FINANCIAL INFORMATION
|
|
F-1
|
SUMMARY
You
should read the following summary together with the more detailed information
contained elsewhere in this prospectus, including the section titled “Risk
Factors,” regarding us and the common stock being sold in this
offering.
Overview
of Our Business
Intelligentias
is positioned to be a leading provider of forensic
data
retention
software
for telecommunications companies, Internet service providers (ISPs), businesses
and law enforcement agencies. Data forensics is the near real-time analysis
of
massive data pools suitable for courts of law, equity or arbitration forums.
Currently, telecom-service providers use our software - which we call our Data
Retention Suite, or DRS - to keep track of the telephone calls made by their
customers, ISPs use it to keep track of the Internet activities (such as
websites visited) of their subscribers, and law enforcement agencies use it
to
detect criminal activities and aid in the prosecution of perpetrators. Our
software, which has been developed, tested and continually enhanced over the
last eight years, is already successfully capturing and storing tens of billions
of data transactions every day. With our recent acquisition of Datakom GmbH,
we
also provide lawful interception and network monitoring software solutions
throughout Europe to government agencies and major corporations.
In
response to law enforcement concerns, governments around the world are enacting
strict data retention and related legislation to aid in the monitoring and
apprehension of criminals. Driven by the terrorist attacks in New York and
Washington, D.C. on September 11, 2001, in Madrid in March 2004 and in London
in
July 2005, this trend continues to be strengthened in order to ensure national
security and aid in the seizure and arrest of terrorists. In May 2006, the
European Union enacted new Directive 2006/24/EC (the E.U. Data Retention
Directive) that mandates the retention of all data traffic generated by fixed
and mobile telephony communication, as well as Internet access, Internet
telephony and Internet messaging for a period of a minimum of six months to
a
maximum of two years. The aim of the E.U. Data Retention Directive and other
legislation is to enable law enforcement agencies to quickly investigate and
prosecute terrorists, pedophiles, drug dealers and other criminals.
European
telecom companies and ISPs will need to comply with the obligations contained
within the E.U. Data Retention Directive once E.U. member states have
enacted the legislation into domestic law.
E.U.
member states
had
until
September 15, 2007 to enact the legislation. Fixed and mobile telephony data
retention must be implemented by March 15, 2008. There is an optional deadline
to further enact the provisions regarding Internet access, Internet telephony
and e-mail until March 15, 2009.
Failure
to comply may result in serious consequences for communications providers.
In
the
United States, the latest data retention initiative is part of the Internet
Stopping Adults Facilitating the Exploitation of Today’s Youth Act of 2007 (the
SAFETY Act), introduced in the U.S. Congress by Rep. Lamar Smith (R-Texas)
in
February 2007. If enacted as proposed, the SAFETY Act would require ISPs to
retain records on subscribers and give the U.S. Attorney General powers to
establish retention regulations on subscriber data, with possible fines and
prison terms for noncompliance. The data retention trend has also affected
the
corporate world. In the United States, new Federal Rules of Civil Procedure
guidelines went into effect as of December 1, 2006. The rules, set by the U.S.
Supreme Court, expand the types of electronically-stored information that
companies could be required to produce in a lawsuit. In the future, we believe
companies that do not properly monitor and archive PDAs, e-mails, instant
message conversations and other forms of electronic data may be disadvantaged
in
civil lawsuits.
For
our
DRS software, we employ a software licensing model that includes an upfront
license fee, installation and customization fees and maintenance fees. We also
utilize pricing tiers that are based on the number of data transactions to
be
processed and stored. In the future, we expect that our average new licensing
contract will generate a $2.0 million initial fee, and that new contracts will
range from $1.0 million to $7.0 million.
Because
of the E.U. Data Retention Directive mandate, our immediate target customers
are
domiciled in the European Union countries. They are medium (5 million
subscribers) to large (10 to 15 million plus subscribers) telecom operators
and
medium (1 million subscribers) to larger (2 to 5 million subscribers) ISPs.
We
are also seeking to sell DRS through large system integrators. These companies
integrate our DRS software into telecom-service providers and ISPs. DRS is
already in use by several telecom-service providers and ISPs including Telecom
Italia SpA and FastWeb SpA, and by Ferrovie Dello Stato (the Italian railroad)
and the Italian Ministry of Defense. As more stringent data retention laws
are
enacted in the United States, Latin America and throughout Asia, we intend
to
target customers with similar profiles in these regions.
We
operate within our industry under the trade name Intelligentias and through
our
current wholly-owned operating subsidiaries: Retentia, Inc. and Interceptia,
Inc. Retentia provides homeland security, data retention and forensics software
and services. Interceptia is our lawful intercept company, focusing on lawful
interception (wiretapping) of telecommunications by law enforcement authorities
and intelligence services.
During
2008 and 2009, we also expect to launch operations through our wholly-owned
subsidiaries Investigatia, Inc., Spectia, Inc., Discoveria, Inc., Offendia,
Inc.
and Recoveria, Inc. Investigatia will focus on fraud detection, identity theft
mitigation, identity authentication and verification. Spectia will focus on
video surveillance by law enforcement authorities and intelligence services.
Discoveria will focus on e-discovery within the small and medium-sized business
market. Recoveria will focus on e-recovery within the small and medium-sized
business market, and Offendia will focus on the identification and prosecution
of sexual offenders in the social networking market.
Our
Growth and Expansion Strategy
Our
current focus is to expand Retentia’s business and the penetration of our DRS
software in our target markets, notably Europe, the United States, South
America, the Middle East and Southeast Asia, particularly as these populated
regions adopt and strengthen their data retention laws. For instance, in the
United States, with a population of approximately 300 million, there are more
than 600 million combined landline, cellular and Internet subscribers. Given
current legislative trends, we view the U.S. market as an equally receptive
environment for our data retention software. We intend to accomplish organic
growth by expanding our sales channel, developing our in-house channel support,
extending our product line, building our industry position, and accelerating
our
sales and marketing efforts.
We
have
also identified several well-positioned companies as potential acquisition
targets. Areas of specific interest to us are data retention, lawful
interception, forensic investigation - to detect anomalous behavior - and
preemptive analysis, such as bank fraud detection and management. The companies
we have identified provide what we believe are complementary software and/or
technology platforms, existing customer bases in various niche or regional
markets and trained professional employees. We currently have no commitments
or
agreements with respect to any such acquisitions, and there can be no assurance
that any acquisitions will be successfully completed by us.
Acquisition
of Datakom GmbH
On
June
7, 2007, we acquired all of the outstanding stock and business activities of
Datakom GmbH of Germany for total consideration of $10,500,000 in cash and
14,000,000 restricted shares of our common stock. Of the cash consideration,
$2,000,000 was immediately paid and the remaining $8,500,000 is payable by
June
2008. For more than 20 years, Datakom has specialized in the network monitoring
and intelligence gathering business, with a focus on information sent via
telecommunications systems and the Internet.
Datakom,
along with its wholly-owned subsidiary Gten AG, provides monitoring, network
security and lawful interception (wiretapping) software and services to ISPs,
telecommunications companies, law enforcement agencies and other government
agencies in Germany, Africa and the Middle East. Founded in 1986, Datakom has
deployed its technology in more than 10,000 customer installations. Datakom’s
proprietary and patented technology enables its customers to legally identify,
control, shape, re-direct and duplicate network traffic. Its solutions are
designed to simplify network architecture and support existing protocols with
no
impact on network performance. We intend to market Datakom’s products in Europe,
the Middle East and Africa under the Datakom and Gten brand names and under
our
Interceptia brand in the United States and other parts of the
world.
Our
DRS Software Solution
Our
existing DRS software product provides for data capture, storage and subsequent
forensics examination of multiple data sets, including phone and web-surfing
records. We have engineered and developed our DRS software internally and,
while
it is not currently patented, it is proprietary and protected under
international trade secret laws. DRS is built on a file system-based technology
that uses less storage space and has faster response times than those of
relational database management systems. DRS also uses a distributed architecture
that allows very large scalability. It has near real-time data analysis and
reporting capability, preserves security and access control in complete
accordance with the European Union and other directives, requires less hardware
and takes less time to install and maintain, making it significantly less
expensive than competing systems.
Our
DRS
software is installed in server hardware located within our customers’ data
centers. These data centers are secure facilities and are off limits to
unauthorized personnel. Our software captures, compresses and stores the call
detail records (CDRs) and the Internet protocol detail records (IPDRs) of the
traffic as it passes through our customers’ infrastructure. Telephonic CDRs
include information on who placed the call, who was being called, the physical
location of the call, the length of the call, unanswered calls, and other
related information. CDRs do not include the actual content of the call. IPDRs
track Internet activities (like websites visited), IP address, MAC address
and
other important information.
When
tracking criminal activities and identifying suspects, law enforcement agencies
find that web-surfing and phone records can be especially useful in apprehending
and prosecuting criminals. In the past, service providers only kept these
records for short periods of time, sometimes only hours or days as in the case
of web-surfing records. The lack of historic call and web-surfing information
has been a deterrent to the swift apprehension of criminals and, as a result,
law enforcement agencies have been pushing for laws that lengthen the required
data retention periods.
In
order
for law enforcement agencies to actually view the retained data, they must
first
obtain a court order. That court order is then directed to the service provider
who in turn opens a case within our DRS Workflow Manager interface. Our software
enables an authorized representative from the law enforcement agency to view
the
suspect’s call and web-surfing records via private fax, or in near real-time via
a dedicated and encrypted service line.
Scope
of the New Data Retention Era
Under
the
E.U. Data Retention Directive, communications traffic and location data
generated by almost 500 million people will need to be retained. According
to
the Europe (Western) - Telecoms, Mobile & Broadband Overview and Analysis
2006, the European Union has more than 850 million fixed, mobile and Internet
subscribers. In the near to intermediate future, call detail records for every
telecom customer, and Internet protocol detail records for every Internet user,
will need to be retained and stored in massive databases, with robust search
capabilities and tailored
reporting
functionality. We expect that once the E.U. Data Retention Directive is fully
in
effect, industry data retention requirements will expand exponentially. For
instance, we estimate that a medium-sized landline provider with 5 million
subscribers will have to archive 100 million transactions per day (based on
10
calls per subscriber, and two events - origination and termination - per call).
Over a two-year period, this service provider will amass approximately 73
billion transactions that must be retained for access by law enforcement in
a
specified format and in near real-time.
The
typical wireless carrier is an even larger generator of CDRs. Based on our
experience, mobile telephony providers generate several more daily transactions,
per subscriber, than fixed carriers. The reasons for the larger transaction
volume include the movement of subscribers (from cell to cell) and increased
service options, including text messaging. While cellular voice calls and text
messaging sessions may last only a couple of minutes, they generate many
incremental transactions that require retention, such as initiation of the
call,
location of the caller, movement of the caller from tower to tower,
identification of each incoming and outgoing text message, and termination
of
the call.
Even
though the data retention requirements of fixed and mobile telephony carriers
are vast, they are
overshadowed
by the
transaction volume associated with ISPs. Web surfing, e-mail communications,
blogging, voice-over-Internet and instant messaging activities all contribute
to
the data that must be retained. When a user accesses a particular web page,
that
page may contain 20 or 30 different links to other websites. The new European
Union legislation requires an ISP to effectively recreate the links within
a
particular web page, as of the moment in time it was visited by the user.
Therefore, an active Internet surfer may generate thousands of transactions
(each individual web page link is considered an event or transaction) per day.
For illustration purposes, the Yahoo! Finance home page is composed of 39
links.
With
respect to e-mail traffic, the time, date, sender address and receiver address
must be tracked. Each sent e-mail message is considered three distinct
transactions: identification of the sender’s server, the receiver’s server and
the receiver’s e-mail address. With respect to instant messaging (IM), each
message is considered a transaction. During the course of an IM session,
multiple transactions usually occur. At the present time, our largest customer
in terms of transaction volume per day is FastWeb SpA, Italy’s second largest
Internet broadband provider and one of the country’s largest fixed-line phone
providers with an estimated 13 million subscribers. At its current run rate,
FastWeb is generating 12 billion transactions per day and since becoming a
customer about one year ago has produced more than 2.0 trillion data records.
By
comparison, Google’s “purpose built” search solution has indexed approximately
25 billion web pages over the last eight years. Given the sheer magnitude of
the
new data storage, indexing and quick retrieval requirements, we believe that
our
DRS software is the only comprehensive solution that meets all of the European
Union mandates, giving us a first mover
advantage
is this emerging field.
Corporate
Information
Our
corporate headquarters are located at 303 Twin Dolphin Drive, 6
th
Floor,
Redwood City, California 94065, and our telephone number is (650) 632-4526.
We
also have offices in Rome, Italy, and our Datakom subsidiary has offices in
Munich, Bremen and Pyrmont, Germany. We maintain corporate websites at
www.intelligentias.com and www.retentia.com. The contents of these websites
are
not part of this prospectus and should not be relied upon with respect to this
offering.
About
this Prospectus
This
prospectus relates to the public offering, which is not being underwritten,
of
up to 23,750,000 shares of our common stock by the selling stockholders listed
in this prospectus. The shares offered by this prospectus include 12,500,000
shares of common stock issuable upon conversion of series A convertible
preferred stock and 11,250,000 shares of common stock issuable upon exercise
of
warrants to purchase common stock. These shares may be sold by the selling
stockholders from time to time in the over-the-counter market or other national
securities exchange or automated interdealer quotation system on which our
common stock is then listed or quoted, through negotiated transactions or
otherwise at market prices prevailing at the time of sale or at negotiated
prices. We will receive none of the proceeds from the sale of the shares by
the
selling stockholders, except upon exercise of the warrants. We will bear all
expenses of registration incurred in connection with this offering, but all
selling and other expenses incurred by the selling stockholders will be borne
by
them.
The
shares of common stock being offered by this prospectus relate to our October
19, 2007 private placement, in which we raised aggregate gross proceeds of
$10,000,000 through the sale of our series A convertible preferred stock and
warrants to purchase common stock to three affiliated funds managed by Kingdon
Capital Management, LLC.
For a
more detailed discussion regarding this private placement, please see “Selling
Stockholders - Kingdon Capital Private Placement.”
The
number of shares being offered by this prospectus represents 100% of our total
outstanding preferred stock, approximately 21% of our total outstanding common
stock and approximately 17% of our total combined outstanding voting common
and
preferred stock, as of December 6, 2007. The number of shares issuable upon
the
conversion of series A convertible preferred stock and exercise of the warrants
presents dilution to our current stockholders and may have an adverse effect
on
the market price of our common stock.
THE
OFFERING
|
Common
stock offered by the selling stockholders:
·
Maximum
number of shares that may be issued upon conversion of series A
convertible preferred stock
·
Maximum
number of shares that may be issued upon exercise of warrants
Total
|
|
12,500,000
shares
11,250,000
shares
23,750,000
shares
|
|
Common
stock outstanding
|
|
114,555,468
shares (1)
|
|
|
|
|
|
Use
of proceeds
|
|
We
will receive none of the proceeds from the sale of the shares by
the
selling stockholders, except cash from the exercise price upon exercise
of
the warrants, which would be used for working capital
purposes.
|
|
|
|
|
|
OTC
Bulletin Board symbol
|
|
ITLI
|
|
(1)
|
As
of December 6, 2007. Does not include 12,500,000 shares of common
stock
issuable upon conversion of shares of our series A convertible preferred
stock, and 26,025,595 shares of our common stock that are reserved
for
issuance pursuant to outstanding
warrants.
|
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should
carefully consider the following material risks, together with the other
information contained in this prospectus, before you decide to buy our common
stock. If any of the following risks actually occur, our business, results
of
operations and financial condition would likely suffer. In these circumstances,
the market price of our common stock could decline, and you may lose all or
part
of your investment.
Risks
Related to Our Business and Industry
We
only recently acquired the full business operations of Systeam Italy and
Datakom, and are currently transitioning them; as a result, we may be subject
to
some or all of the risks inherent in the establishment of a new business
enterprise. An investment in our company will be more difficult to evaluate
than
an investment in other companies.
We
only
recently acquired the full business operations of Systeam Italy and Datakom,
and
are currently transitioning those operations to our own. Through the date of
this prospectus, however, we have had limited operations. As a result of this
recent change, we believe our operations may be subject to some or all of the
risks inherent in the establishment of a new business enterprise. The likelihood
of our success must be considered in light of the problems, expenses,
difficulties, complications and delays frequently encountered in connection
with
the formation of a new business with worldwide operations, the commencement
of
full-scale operations and the competitive security environment in which we
intend to operate. For the year ended December 31, 2006, Systeam Italy and
Datakom had revenues of $1.6 million and $7.1 million, respectively, and net
losses of $1.9 million and $90,000, respectively. We can give no assurance
that
we will have profitable operations this year or in future years, on an actual
basis.
If
we do not obtain at least $8,500,000 in net proceeds from subsequent financings,
we may not be able to make the contractually required payment to Datakom and
we
may be forced to unwind the Datakom acquisition and slow down our expansion
plans, which could cause our results of operations to be stagnant for an
indefinite period of time.
Our
funding needs are significant in order to make the contractually required
payment to Datakom GmbH. We are required to pay $8,500,000 in cash pursuant
to
the terms of our agreement to acquire Datakom. Our existing cash reserves and
expected cash receipts will not provide all the funds necessary for the
remaining cash portion of the acquisition. We will require additional funds
to
complete the Datakom acquisition. In the event of our default on the additional
cash payment of $8,500,000 to Datakom, the acquisition can be “unwound,” at
Datakom’s option, and we will lose $1,000,000 in liquidated damages and the
14,000,000 restricted shares of common stock previously paid will not be
returned. There can be no assurance that any subsequent financing will occur
or
result in significant proceeds for us. If we do not obtain at least $8,500,000
in net proceeds from subsequent financings (or otherwise), we may not be able
to
make the contractually required payment to Datakom and we may be forced to
unwind the Datakom acquisition and slow down our expansion plans, which could
cause our results of operations to be stagnant for an indefinite period of
time.
If
we
are unable to develop new and enhanced products and services that achieve
widespread market acceptance, or if we are unable to continually improve the
performance, features and reliability of our existing products and services,
our
business and operating results could be adversely
affected.
Our
future success depends on our ability to respond to the rapidly changing needs
of our customers by developing or introducing new products, product upgrades
and
services on a timely basis. We have in the past incurred, and will continue
to
incur, significant research and product development expenses as we strive to
remain competitive. New product development and introduction involves a
significant commitment of time and resources and is subject to a number of
risks
and challenges including:
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managing
the length of the development cycle for new products and product
enhancements, which has frequently been longer than we originally
expected,
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adapting
to emerging and evolving industry standards and to technological
developments by our competitors and customers,
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extending
the operation of our products and services to new platforms and operating
systems,
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entering
into new or unproven markets with which we have limited experience,
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managing
new product and service strategies,
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incorporating
acquired products and technologies, and
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developing
or expanding efficient sales channels.
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If
we are
not successful in managing these risks and challenges, or if our new products,
product upgrades and services are not technologically competitive or do not
achieve market acceptance, we could have expended substantial resources and
capital without realizing sufficient revenues in return, and our business and
operating results could be adversely affected.
Fluctuations
in demand for our products and services are driven by many factors and a
decrease in demand for our products could adversely affect our financial
results.
We
are
subject to fluctuations in demand for our products and services due to a variety
of factors, including competition, product obsolescence, technological change,
budget constraints of our actual and potential customers, level of phone and
Internet usage, and other factors. While such factors may, in some periods,
increase product sales, fluctuations in demand can also negatively impact our
product sales. For example, we expect to experience a higher than expected
rate
of growth in sales of our DRS software that we believe is being spurred by
new
E.U. data retention directives. If these laws are repealed or terrorist and
other threats fluctuate, the growth rates in sales of our software may be
impacted.
If
demand
for our products declines, our revenues and gross margins could be adversely
affected.
We
operate
in
a highly competitive security software environment, and our potential
competitors may gain market share in the markets for our products that could
adversely affect our business and cause our revenues to
decline.
We
operate in intensely competitive markets that experience rapid technological
developments, changes in industry standards, changes in customer requirements
and frequent new product introductions and improvements. If we are unable to
anticipate or react to these competitive challenges or if existing or new
competitors gain market share in any of our markets, our competitive position
could weaken and we could experience a drop in revenues that could adversely
affect our business and operating results. To compete successfully, we must
maintain a successful research and product development effort to develop new
products and services and enhance existing products and services, effectively
adapt to changes in the technology or product rights held by our competitors,
appropriately respond to competitive strategy, and effectively adapt to
technological changes. If we are unsuccessful in responding to our competitors
or to changing technological and customer demands, we could experience a
negative effect on our competitive position and our financial
results.
Our
potential
competitors may include independent software vendors that offer software
products which directly compete with our product offerings.
In
addition to competing with independent software vendors directly for sales
to
end-users of our products, we compete with them for the opportunity to have
our
products bundled with the product offerings of our strategic partners such
as
network equipment providers and system integrators. Our competitors could
gain
market share from us if any of these strategic partners replace our products
with the products of our competitors or if they more actively promote our
competitors’ products than our products. In addition, software vendors who have
bundled our products with theirs may choose to bundle their software with
their
own or other vendors’ software or may limit our access to standard product
interfaces and inhibit our ability to develop products for their platform.
Many
of our potential competitors have greater financial, technical, sales, marketing
and other resources than we do and consequently may have an ability to influence
customers to purchase their products instead of ours.
We
may
also face competition from many smaller companies that specialize in particular
segments of the markets in which we compete. If we fail to manage our sales
and
distribution channels effectively or if our strategic partners choose not to
market and sell our products to their customers, our operating results could
be
adversely affected.
We
sell our products to telecommunication companies, ISPs and other businesses
around the world through sales and distribution networks. Sales through these
different channels involve distinct risks, including the loss of our indirect
sales channel partners or their inability to generate significant revenue for
us, as well as the following:
Direct
Sales.
A
significant portion of our revenues may be derived from our direct sales
approach to end-users. Special risks associated with this sales channel include:
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longer
sales cycles associated with direct sales efforts,
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difficulty
in hiring, retaining and motivating our direct sales force,
and
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substantial
amounts of training for sales representatives to become productive,
including regular updates to cover new and revised
products.
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Indirect
Sales Channels.
A
significant portion of our revenues may be derived from sales through indirect
channels, including network equipment providers and system integrators that
may
sell our products to end-users. This channel involves a number of risks,
including:
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our
lack of control over the timing of delivery of our products to
end-users,
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our
resellers and distributors are not subject to minimum sales requirements
or any obligation to market our products to their customers,
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our
reseller and distributor agreements are generally non-exclusive and
may be
terminated at any time without cause,
and
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in
the future, our channel partners may distribute competing products
and
may, from time to time, place greater emphasis on the sale of these
products due to pricing, promotions and other terms offered by our
potential competitors.
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A
significant portion of our revenue is concentrated among our largest customers;
a decision by one or more of them to discontinue or limit their relationship
with us could result in a significant loss of revenue to us.
A
significant portion of our revenue is earned in connection with the sale of
our
data retention software to Isilon Systems, Inc. In the nine months ended
September 30, 2007, revenues attributable to Isilon Systems represented
approximately 80% of our data retention revenues and 24% of our total revenues.
Inanna Group and Deutsche Telecom also accounted for a significant portion
of
our revenue in connection with the sale of Datakom’s lawful interception and
network monitoring software. In the nine months ended September 30, 2007,
they accounted for approximately 60% of our lawful interception and network
monitoring revenues and 24% and 18% of our total revenues, respectively.
Overall, approximately 66% of our revenues in the nine months ended September
30, 2007, were attributable to Isilon Systems, Inanna Group and Deutsche
Telecom. A decision by one or more of these customers to discontinue or limit
its relationship with us could result in a significant loss of revenue to
us.
If
the E.U. data retention directives and other laws and regulations that are
driving sales of our DRS software are not implemented as expected, or are
modified or repealed, or terrorist and other threats subside, the growth in
sales of our software may be impacted.
If
demand for our products declines, our revenues and gross margins will likely
be
adversely affected.
The
governments of E.U. member states had until September 15, 2007 to transpose
the
E.U. Data Retention Directive into national legislation. It is not uncommon
for
some E.U. member states not to implement national legislation within the
required time frame. In that event, communications providers may not be obliged
to comply with the E.U. Data Retention Directive within these jurisdictions
until a later date. In addition, the E.U. Data Retention Directive contains
a
provision which allows each E.U. member state to postpone the application of
the
directive to the retention of Internet communications data until March 15,
2009.
In 16 of the 27 E.U. member states, the data retention obligations will not
apply to Internet communication data until March 15, 2009. This legislation
was
also the subject of some controversy during the adoption procedure within the
E.U. institutions. Two member states (Ireland and Slovakia) voted against the
adoption of the E.U. Data Retention Directive. Ireland has subsequently brought
an action against the European Council and Parliament for the E.U. Data
Retention Directive to be annulled on the basis that it was adopted under the
wrong legal basis. No date has been set for the case to be heard by the European
Court of Justice. If the E.U. Data Retention Directive is annulled by the
European Court of Justice, it may be the case that certain E.U. member states
may decide not to implement national regulations or, if national regulations
have already been adopted, they may be repealed. In the United States, with
respect to the Internet Stopping Adults Facilitating the Exploitation of Today’s
Youth Act of 2007 (the SAFETY Act) introduced in the U.S. Congress by Rep.
Lamar
Smith (R-Texas) in February 2007, there is no guarantee that the proposed
legislation will be enacted as proposed, or even enacted at all. Similar
legislation has been introduced previously and has not made it to the floor
for
a vote in the U.S. Congress or been enacted. If the new E.U. data retention
directives and other laws and regulations that are driving sales of our DRS
software are not implemented as expected, or are modified or repealed, or
terrorist and other threats subside, the growth in sales of our software may
be
impacted.
If
demand
for our products declines, our revenues and gross margins will likely be
adversely affected.
We
have
grown, and may continue to grow, through acquisitions that give rise to unique
risks and challenges that could adversely affect our future financial
results.
We
have
in the past acquired, and we expect to acquire in the future, other businesses,
products and technologies. Acquisitions involve a number of special risks and
challenges, including:
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complexity,
time and costs associated with the integration of acquired business
operations, workforce, products and technologies into our existing
business, sales force, employee base, product lines and
technology,
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diversion
of management time and attention from our existing business and other
business opportunities,
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loss
or termination of employees, including costs associated with the
termination or replacement of those
employees,
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assumption
of debt or other liabilities of the acquired business, including
litigation related to alleged liabilities of the acquired
business,
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the
incurrence of acquisition-related debt, as well as increased expenses
and
working capital requirements,
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dilution
of stock ownership of existing stockholders, or earnings per share,
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increased
costs and efforts in connection with compliance with Section 404
of the
Sarbanes-Oxley Act,
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substantial
accounting charges for restructuring and related expenses, write-off
of
in-process research and development, impairment of goodwill, amortization
of intangible assets and stock-based compensation expense,
and
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integrating
acquired businesses has been and will continue to be a complex,
time-consuming and expensive process, and can impact the effectiveness
of
our internal controls over financial
reporting.
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If
integration of our acquired businesses is not successful, we may not realize
the
potential benefits of an acquisition or undergo other adverse effects that
we
currently do not foresee. To integrate acquired businesses, we must implement
our technology systems in the acquired operations and integrate and manage
the
personnel of the acquired operations. We also must effectively integrate the
different cultures of acquired business organizations into our own in a way
that
aligns various interests, and may need to enter new markets in which we have
no
or limited experience and where competitors in such markets have stronger market
positions.
Any
of
the foregoing, and other factors, could harm our ability to achieve anticipated
levels of profitability from acquired businesses or to realize other anticipated
benefits of acquisitions. In addition, because acquisitions of technology
companies are inherently risky, no assurance can be given that our previous
or
future acquisitions will be successful and will not adversely affect our
business, operating results or financial condition.
Our
European and international
operations
involve risks, including coordination of resources across borders, potential
political changes and local economic conditions, that could increase our
expenses, adversely affect our operating results and require increased time
and
attention of our management.
We
derive
a substantial portion of our revenues from customers located outside of the
United States and we have significant operations outside of the United States,
including engineering, sales, customer support and production. We plan to expand
our international operations, but such expansion is contingent upon the
financial performance of our existing international operations, as well as
our
identification of growth opportunities. Our international operations are subject
to risks in addition to those faced by our domestic operations,
including:
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potential
loss of proprietary information due to misappropriation or laws that
may
be less protective of our intellectual property rights,
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requirements
of foreign laws and other governmental controls, including trade
and labor
restrictions and related laws that reduce the flexibility of our
business
operations,
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regulations
or restrictions on the use, import or export of encryption technologies
that could delay or prevent the acceptance and use of encryption
products
and public networks for secure communications,
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central
bank and other restrictions on our ability to repatriate cash from
our
international subsidiaries or to exchange cash in international
subsidiaries into cash available for use in the United States,
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fluctuations
in currency exchange rates and economic instability such as higher
interest rates in the United States and inflation that could reduce
our
customers’ ability to obtain financing for security software products or
that could make our products more expensive in certain countries,
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limitations
on future growth or inability to maintain current levels of revenues
from
international sales if we do not invest sufficiently in our international
operations,
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longer
payment cycles for sales in foreign countries and difficulties in
collecting accounts receivable,
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difficulties
in staffing, managing and operating our international operations,
including difficulties related to administering our stock option
plan in
some foreign countries,
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difficulties
in coordinating the activities of our geographically dispersed and
culturally diverse operations,
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seasonal
reductions in business activity in the summer months in Europe and
in
other periods in other countries,
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costs
and delays associated with developing software in multiple languages,
and
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political
unrest, war or terrorism.
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A
significant portion of
our
transactions are effected outside of the United States and are denominated
in
foreign currencies, which subjects us to foreign currency exchange
risk.
A
significant portion of our present transactions are effected outside of the
United States and denominated in foreign currencies, especially the euro. We
expect our future operating results will continue to be subject to fluctuations
in foreign currency rates. We do not conduct any foreign exchange hedging
activities to protect against these risks at the present time.
We
have past-due income and social security taxes related to 2005, 2006 and 2007
payable to the Italian tax authorities. If we do not successfully reach a
settlement with the Italian tax authorities with respect to these tax
liabilities, we may incur additional penalties and our operating results could
be adversely affected.
As
a
result of our recently-completed acquisition of Systeam Italy, we incurred
tax
liabilities in the form of past-due income and social security taxes related
to
2005, 2006 and 2007 payable to the Italian tax authorities. We plan to either
negotiate a payment plan with the Italian tax authorities or use proceeds of
subsequent financings to pay these tax liabilities. If we do not successfully
reach a settlement with the Italian tax authorities with respect to these tax
liabilities, we may incur additional penalties and our operating results could
be adversely affected.
Our
products
are complex and operate in a wide variety of infrastructure configurations,
which could result in errors or product failures and harm our customers’
businesses.
Because
we offer very complex products, undetected errors, failures or bugs may occur,
especially when products are first introduced or when new versions are released.
Our products are often installed and used in scale computing environments with
different operating systems, system management software, and equipment and
networking configurations, which may cause errors or failures in our products
or
may expose undetected errors, failures or bugs in our products. Our customers’
infrastructure environments are often characterized by a wide variety of
standard and non-standard configurations that make pre-release testing for
programming or compatibility errors very difficult and time-consuming. In
addition, despite testing by us and others, errors, failures or bugs may not
be
found in new products or releases until after commencement of commercial
shipments. Errors, failures or bugs in products released by us could result
in
negative publicity, product returns, loss of or delay in market acceptance
of
our products, loss of competitive position or claims by customers or others.
Many of our end-user customers use our products in applications that are
critical to their businesses and may have a greater sensitivity to defects
in
our products than to defects in other, less critical, software products. In
addition, if an actual or perceived breach of information integrity or
availability occurs in one of our end-user customer’s systems, regardless of
whether the breach is attributable to our products, the market perception of
the
effectiveness of our products could be harmed. Alleviating any of these problems
could require significant expenditures of capital or other resources and could
cause interruptions, delays or cessation of our product licensing, which could
cause us to lose existing or potential customers and could adversely affect
our
operating results.
We
may not be able to retain our key personnel who we need to succeed and qualified
security software programmers are extremely difficult to
attract.
Our
future success depends upon our ability to recruit and retain our key
management, technical, sales, marketing, finance and other critical personnel.
Our officers and other key personnel are employees-at-will, and we cannot assure
you that we will be able to retain them. Competition for people with the
specific skills that we require is significant. In order to attract and retain
personnel in a competitive marketplace, we believe that we must provide a
competitive compensation package, including cash and equity-based compensation.
The volatility in our stock price may from time to time adversely affect our
ability to recruit or retain employees. Although we expect to adopt a stock
option plan for employees in early 2008, we currently have no such plan at
this
time. If we are unable to hire and retain qualified employees, or conversely,
if
we fail to manage employee performance or reduce staffing levels when required
by market conditions, our business and operating results could be adversely
affected.
The
loss
of any key employee could result in significant disruptions to our operations,
including adversely affecting the timeliness of product releases, the successful
implementation and completion of company initiatives, the effectiveness of
our
disclosure controls and procedures and our internal controls over financial
reporting, and the results of our operations. In addition, hiring, training
and
successfully integrating replacement sales and other personnel could be
time-consuming, may cause disruptions to our operations and may be
unsuccessful.
Our
products employ proprietary information and technology which may infringe on
the
intellectual property rights of third parties.
We
have
no patents on our software and technology. We seek to protect our proprietary
rights through a combination of confidentiality agreements and procedures and
through copyright, trademark and trade secret laws. However, all of these
measures afford only limited protection and may be challenged, invalidated
or
circumvented by third parties. Third parties may copy all or portions of our
products or otherwise obtain, use, distribute and sell our proprietary
information without authorization. Third parties may also develop similar or
superior technology independently. Furthermore, the laws of some foreign
countries do not offer the same level of protection of our proprietary rights
as
the laws of the United States, and we may be subject to unauthorized use of
our
products in those countries. The unauthorized copying or use of our products
or
proprietary information could result in reduced sales of our products. Any
legal
action to protect proprietary information that we may bring or be engaged in
with a strategic partner or vendor could adversely affect our ability to access
software, operating system and hardware platforms of such partner or vendor,
or
cause such partner or vendor to choose not to offer our products to their
customers. In addition, any legal action to protect proprietary information
that
we may bring or be engaged in may distract management from day-to-day
operations, and may lead to additional claims against us, which could adversely
affect our operating results.
Software
products and websites like ours could suffer security and privacy breaches
that
could harm our customers and us, and adversely impact our reputation and future
sales.
Although
we believe we have sufficient controls in place to prevent intentional
disruptions, we expect to be an ongoing target of attacks specifically designed
to impede the performance of our products. Similarly, experienced software
developers may attempt to penetrate our network security or the security of
our
website and misappropriate proprietary information or cause interruptions of
our
services. Because the techniques used to access or sabotage networks change
frequently and may not be recognized until launched against a target, we may
be
unable to anticipate these techniques. Our activities could be adversely
affected and our reputation and future sales harmed if these intentionally
disruptive efforts are successful.
Increased
customer
demands on our technical support services may adversely affect our relationships
with our customers and our financial results.
We
offer
technical support services with our software. We may be unable to respond
quickly enough to accommodate short-term increases in customer demand for
support services. We also may be unable to modify the format of our support
services to compete with changes in support services provided by potential
competitors or successfully integrate support for our customers. Further
customer demand for these services, without corresponding revenues, could
increase costs and adversely affect our operating results. We intend to
outsource a substantial portion of our worldwide customer support functions
to
third-party service providers and our network of system integrators. If these
companies experience financial difficulties, do not maintain sufficiently
skilled workers and resources to satisfy our contracts, or otherwise fail to
perform at a sufficient level under these contracts, the level of support
services to our customers may be significantly disrupted, which could materially
harm our relationships with these customers.
Accounting
charges
may
cause fluctuations in our annual and quarterly financial results, including
as a
result of the Kingdon Capital Private Placement.
Our
financial results may be materially affected by non-cash and other accounting
charges. The preferred stock and warrants covered by this prospectus contain
features that will require us to record in earnings certain changes in fair
value. Other accounting changes we may face are:
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amortization
of intangible assets, including acquired product
rights,
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impairment
of goodwill,
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stock-based
compensation expense, including charges related to Statement of Financial
Accounting Standards No. 123R, Share-Based Payment, which will result
in
significant stock-based compensation expense in our results of operations,
and
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impairment
of long-lived assets.
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The
foregoing types of accounting charges may also be incurred in connection with
or
as a result of business acquisitions. The price of our common stock could
decline to the extent that our financial results are materially affected by
the
foregoing accounting charges. Our effective tax rate may increase, which could
increase our income tax expense and reduce our net income. Our effective tax
rate could be adversely affected by several factors, many of which are outside
of our control, including:
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changes
in the relative proportions of revenues and income before taxes in
the
various jurisdictions in which we operate that have differing statutory
tax rates,
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changing
tax laws, regulations and interpretations in multiple jurisdictions
in
which we operate, as well as the requirements of certain tax rulings,
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changes
in accounting and tax treatment of stock-based compensation,
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the
tax effects of purchase accounting for acquisitions and restructuring
charges that may cause fluctuations between reporting periods,
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tax
assessments, or any related tax interest or penalties, could significantly
affect our income tax expense for the period in which the settlements
take
place, and
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the
price of our common stock could decline to the extent that our financial
results are materially affected by an adverse change in our effective
tax
rate.
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Risks
Related to this Offering
You
could lose your entire investment.
The
common stock offered hereby is highly speculative, involves a high degree of
risk and should not be purchased by any person who cannot afford the loss of
their entire investment. A purchase of our common stock in this offering would
be unsuitable for a person who cannot afford to sustain such a loss.
Our
common
stock
price has fluctuated considerably and may not appreciate in
value.
The
market price of our common stock has experienced significant fluctuations in
the
past and may continue to fluctuate in the future and, as a result, you could
lose the value of your investment. The market price of our common stock may
be
affected by a number of factors, including:
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announcements
of quarterly operating results and revenue and earnings forecasts
by us
that fail to meet or be consistent with our earlier projections or
the
expectations of our investors or securities analysts,
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announcements
by either our competitors or customers that fail to meet or be consistent
with their earlier projections or the expectations of our investors
or
securities analysts,
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rumors,
announcements or press articles regarding our operations, management,
organization, financial condition or financial statements,
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changes
in revenue and earnings estimates by us, our investors or securities
analysts,
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accounting
charges, including charges relating to the impairment of goodwill,
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announcements
of planned acquisitions by us or by our competitors,
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announcements
of new or planned products by us, our competitors or our customers,
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gain
or loss of a significant customer,
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inquiries
by the SEC, FINRA (Financial Industry Regulatory Authority), law
enforcement or other regulatory bodies,
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acts
of terrorism, the threat of war and other crises or emergency
situations,
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economic
slowdowns or the perception of an oncoming economic slowdown in any
of the
major markets in which we operate, and
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the
stock market in general, and the market prices of stocks of technology
companies in particular, have experienced extreme price volatility
that
has adversely affected, and may continue to adversely affect, the
market
price of our common stock for reasons unrelated to our business or
operating results.
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Holders
of series A preferred stock and warrants
issued
in
connection with our October 2007 private placement have anti-dilution and
voting
rights that, if triggered,
could
dilute the interests of, or impair the voting power of, our common
stockholders.
Holders
of series A preferred stock and warrants
issued
in
connection with our October 2007 private placement have anti-dilution and
voting
rights that, if triggered,
could
dilute the interests of, or impair the voting power of, our common
stockholders.
The
conversion price for the series A preferred stock, and the rate at which
the
shares of series A preferred stock may be converted into shares of common
stock,
is subject to adjustment. In the event that we issue any shares of common
stock,
or securities convertible into or exercisable for shares of common stock,
for
cash consideration at a price less than $.80 per share, the conversion rate
will
be that number of shares of common stock equal to $.80 divided by the price
per
share at which we issued common stock in any such private placement. The
series
A preferred stock and warrants also contain full ratchet anti-dilution
provisions for the first 18 months after issuance and weighted average
protection thereafter for issuances of capital stock below the conversion
or
exercise prices, respectively. The triggering of these adjustment or
anti-dilution provisions could result in the issuance of a substantial number
of
additional shares of common stock upon conversion or exercise of the series
A
preferred stock and warrants, respectively, which would dilute the interests
of
our common stockholders. In addition, holders of series A preferred stock
are
entitled to vote their shares on an as-converted to common stock basis, together
with the holders of common stock. Further, written consent of the holders
of at
least a majority of the votes attributable to the then outstanding shares
of
series A preferred stock issued in connection with the private placement
voting
together as a single class is needed to (i) increase or decrease the number
of
authorized shares of series A preferred stock; (ii) authorize or issue any
class
or series of capital stock or securities convertible into capital stock with
equal or superior rights to those of the series A preferred stock; (iii)
alter,
amend or waive any rights, preferences or privileges of the series A preferred
stock, or any provisions of the articles of incorporation or by-laws, in
a
manner adverse to the holders of series A preferred stock; (iv) authorize,
declare or pay any dividend on any share of capital stock (other than dividends
payable solely in common stock); or (v) redeem, purchase or otherwise acquire
for value any of our capital stock or that of our subsidiaries. Exercise
of
these voting rights by holders of series A preferred stock could limit our
ability to complete transactions that would otherwise be to the benefit of
our
common stockholders, including any subsequent financing transactions, on
terms
favorable to us.
The
sale or issuance of a substantial number of our shares will likely negatively
impact the market price of our common stock.
The
future sale of a substantial number of shares of our common stock in the public
market, or the perception that such sales could occur, could significantly
and
negatively affect the market price for our common stock. We expect that we
will
likely issue a substantial number of shares of our capital stock in financing
transactions in order to fund our operations and the growth of our business.
Under these arrangements, we may agree to register the shares for resale soon
after their issuance. We may also pay for certain goods and services with
equity, which would dilute your interest in our business. Also, sales of the
shares issued in this manner could negatively affect the market price of our
stock.
Investors
should not anticipate receiving cash dividends on our common stock.
Any
payment of cash dividends will depend upon our financial condition, results
of
operations, capital requirements and other factors and will be at the discretion
of our board of directors. We do not anticipate paying cash dividends on our
common stock in the foreseeable future. Furthermore, we may incur indebtedness
that may restrict or prohibit the payment of dividends.
The
application
of the
“penny
stock” rules to our common stock could limit the trading and liquidity of the
common stock, adversely affect the market price of our common stock and increase
your transaction costs to sell those shares.
As
long
as the trading price of our common stock is below $5.00 per share, the
open-market trading of our common stock will be subject to the “penny stock”
rules, unless we otherwise qualify for an exemption from the “penny stock”
definition. The “penny stock” rules impose additional sales practice
requirements on certain broker-dealers who sell securities to persons other
than
established customers and accredited investors (generally those with assets
in
excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together
with their spouse). These regulations, if they apply, require the delivery,
prior to any transaction involving a “penny stock,” of a disclosure schedule
explaining the “penny stock” market and the associated risks. Under these
regulations, certain brokers who recommend such securities to persons other
than
established customers or certain accredited investors must make a special
written suitability determination regarding such a purchaser and receive such
purchaser’s written agreement to a transaction prior to sale. These regulations
may have the effect of limiting the trading activity of our common stock,
reducing the liquidity of an investment in our common stock and increasing
the
transaction costs for sales and purchases of our common stock as compared to
other securities.
The
market
price
for our common stock may be particularly volatile given our status as a
relatively unknown company with a limited operating history, which could lead
to
wide fluctuations in our share price. The price at which you purchase the shares
may not be indicative of the price of the common stock that will prevail in
the
trading market. You may be unable to sell your shares at or above the purchase
price.
The
market for our common stock may be characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price could
continue to be more volatile than a seasoned issuer for the indefinite future.
The potential volatility in our share price is attributable to a number of
factors. First, as noted above, our shares of common stock may be sporadically
and thinly traded. As a consequence of this lack of liquidity, the trading
of
relatively small quantities of shares by our stockholders may disproportionately
influence the price of those shares in either direction. The price for our
shares could, for example, decline precipitously in the event that a large
number of our shares of common stock are sold on the market without commensurate
demand, as compared to a seasoned issuer which could better absorb those sales
without adverse impact on its share price. Second, we are a speculative or
“risky” investment due to our limited operating history and uncertainty of
future market acceptance for our products outside of Europe. As a consequence
of
this enhanced risk, more risk averse investors may, under the fear of losing
all
or most of their investment in the event of negative news or lack of progress,
be more inclined to sell their shares on the market more quickly and at greater
discounts than would be the case with the stock of a seasoned issuer. Many
of
these factors will be beyond our control and may decrease the market price
of
our common stock, regardless of our operating performance. We cannot make any
predictions or projections as to what the prevailing market price for our common
stock will be at any time, including as to whether shares of our common stock
will sustain market prices at or near your purchase price, or as to what effect
that the sale of shares or the availability of shares for sale at any time
will
have on the prevailing market price.
Sales
of shares underlying our warrants may depress the price of our common
stock.
We
have
outstanding (a) five-year warrants to purchase up to 6,000,000 shares of common
stock at an exercise price of $.01 per share, seven-year warrants to purchase
up
to 5,500,000 shares of common stock at an exercise price of $2.05 and seven-year
warrants to purchase up to 238,095 shares of common stock at an exercise price
of $1.26, issued to Vision Opportunity Master Fund, Ltd., (b) five-year warrants
to purchase up to 2,587,500 shares of common stock at an exercise price of
$.80
issued to certain investors participating in previous bridge financings, (c)
five-year warrants to purchase up to 6,250,000 shares of common stock at an
exercise price of $1.25 per share, issued as part of our October 19, 2007
private placement, (d) five-year warrants to purchase up to 5,000,000 shares
of
common stock at an exercise price of $1.80 per share issued as part of our
October 19, 2007 private placement and (e) five-year warrants to purchase up
to
200,000 shares of common stock at an exercise price of $1.85 per share issued
to
contractors in lieu of cash for services rendered. The terms on which we may
obtain subsequent financing during the respective periods of the outstanding
warrants may be adversely affected by the existence of such warrants. The
holders of the warrants may exercise them at a time when we might be able to
obtain additional capital through a new offering of securities on terms more
favorable than those provided by the warrants.
We
may engage in subsequent financings that could lead to dilution of existing
stockholders.
We
have
relied on equity and debt financing to carry on our business to date. Any
subsequent financings by us may result in substantial dilution of the holdings
of existing stockholders and could have a negative impact on the market price
of
our common stock. Furthermore, we cannot assure you that such subsequent
financings will be possible.
Our
management and two largest stockholders own a substantial amount of our stock
and will be capable of influencing our affairs.
We
estimate that approximately 90% of our total combined outstanding voting common
stock and preferred stock is owned and controlled by a group of insiders,
including our directors, executive officers and two of our largest stockholders.
Such concentrated control of our company may adversely affect the price of
our
common stock. Our principal stockholders may be able to control matters
requiring approval by our stockholders, including the election of directors,
mergers and other business combinations. Such concentrated control may also
make
it difficult for our stockholders to receive a premium for their shares of
our
common stock in the event we merge with a third party or enter into different
transactions which require stockholder approval. These provisions could also
limit the price that investors might be willing to pay in the future for shares
of our common stock. In addition, certain provisions of Nevada corporate law
could have the effect of making it more difficult or more expensive for a third
party to acquire, or of discouraging a third party from attempting to acquire,
control of us. Accordingly, our existing affiliates together with our directors
and executive officers will have the power to control the election of our
directors and the approval of actions for which the approval of our stockholders
is required. If you acquire shares, you may have no effective voice in the
management of our company.
Failure
to achieve and
maintain
effective internal controls in accordance with Section 404 of the Sarbanes-Oxley
Act of 2002 could prevent us from producing reliable financial reports or
identifying fraud. Shareholders could lose confidence in our financial reporting
which would have an adverse effect on our stock price.
Effective
internal controls are necessary for us to provide reliable financial reports
and
effectively prevent fraud, and a lack of effective controls could preclude
us
from accompanying these critical functions. We will be required to document
and
test our internal control procedures in fiscal 2008 in order to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires
annual management assessments of the effectiveness of our company’s internal
controls over financial reporting and in fiscal 2009 a report by our independent
registered public accounting firm addressing these assessments. Assigned to
accounting issues at present is only our Chief Financial Officer, which may
be
deemed to be inadequate. Although we intend to augment our internal controls
procedures and expand our accounting staff, we cannot guarantee that this effort
will be adequate. As of September 30, 2007, we determined that our current
controls and procedures are not effective to ensure that information included
in
our periodic SEC filings is recorded, processed and summarized within the time
periods specified in SEC rules and forms.
During
the course of our testing, we may identify deficiencies which we may not be
able
to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act
for
compliance with the requirements of Section 404. In addition, if we fail to
maintain the adequacy of our internal accounting controls, as such standards
are
modified, supplemented or amended from time to time, we may not be able to
ensure that we can conclude on an ongoing basis that we have effective internal
controls over financial reporting in accordance with Section 404. Failure to
achieve and maintain an effective internal control environment could cause
us to
face regulatory action and also cause investors to lose confidence in our
reported financial information, either of which could have an adverse effect
on
our stock price.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Included
in this prospectus are “forward-looking” statements, as well as historical
information. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, we can give no assurance that the
expectations reflected in these forward-looking statements will prove to be
correct. Our actual results could differ materially from those anticipated
in
forward-looking statements as a result of certain factors, including matters
described in the section titled “Risk Factors.” Forward-looking statements
include those that use forward-looking terminology, such as the words
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “project,”
“plan,” “will,” “shall,” “should” and similar expressions, including when used
in the negative. Although we believe that the expectations reflected in these
forward-looking statements are reasonable and achievable, these statements
involve risks and uncertainties and no assurance can be given that actual
results will be consistent with these forward-looking statements, Actual results
may be materially different than those described herein. Important factors
that
could cause our actual results, performance or achievements to differ from
these
forward-looking statements include the factors described in the “Risk Factors”
section and elsewhere in this prospectus.
All
forward-looking statements attributable to us are expressly qualified in their
entirety by these and other factors. We undertake no obligation to update or
revise these forward-looking statements, whether to reflect events or
circumstances after the date initially filed or published, to reflect the
occurrence of unanticipated events or otherwise.
WHERE
YOU CAN FIND MORE INFORMATION
We
have
filed a registration statement on Form SB-2 with the U.S. Securities and
Exchange Commission, or the SEC, to register the shares of our common stock
being offered by this prospectus. In addition, we file annual, quarterly and
current reports, proxy statements and other information with the SEC. You may
read and copy any reports, statements or other information that we file at
the
SEC’s public reference facilities at 100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information regarding the
public reference facilities. The SEC maintains a website, http://www.sec.gov,
that contains reports, proxy statements and information statements and other
information regarding registrants that file electronically with the SEC,
including us. Our SEC filings are also available to the public from commercial
document retrieval services. Information contained on our website should not
be
considered part of this prospectus.
You
may
also request a copy of our filings at no cost by writing or telephoning us
at:
Intelligentias,
Inc.
303
Twin
Dolphin Drive, 6
th
Floor
Redwood
City, California 94065
Attention:
Mr. Luigi Caramico
President
(650)
632-4526
USE
OF PROCEEDS
This
prospectus relates to shares of our common stock that may be offered and sold
from time to time by the selling stockholders who will receive all of the
proceeds from the sale of the shares. We will not receive any proceeds from
the
sale of shares of common stock in this offering except upon the exercise of
outstanding warrants. We could receive up to $16,812,500 from the cash exercise
price upon exercise of the warrants held by selling stockholders. We expect
to
use the proceeds received from the exercise of the warrants, if any, for working
capital and general corporate purposes. We will bear all expenses of
registration incurred in connection with this offering, but all commissions,
selling and other expenses incurred by the selling stockholders to underwriters,
agents, brokers and dealers will be borne by them. We estimate that our expenses
in connection with the filing of the registration statement of which this
prospectus is a part will be approximately $70,000.
MARKET
FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
shares of common stock are currently quoted and listed for trading on the OTC
Bulletin Board under the symbol ITLI. Our shares began trading following the
closing of our reverse merger transaction on December 15, 2006. As a result,
the
range of high and low bid information for shares of common stock for each full
quarterly period within the two most recent fiscal years is not available.
The
following table sets forth the high and low closing prices for our common stock
for the periods indicated as reported by the OTC Bulletin Board:
|
|
|
Year
ended December 31,
|
|
|
Quarter
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
First
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
$
|
2.15
|
|
$
|
.76
|
|
|
Second
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.13
|
|
|
.66
|
|
|
Third
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.55
|
|
|
.86
|
|
|
Fourth
(through December 4, 2007)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.41
|
|
|
1.11
|
|
|
Fourth
(beginning on December 18, 2006)
|
|
|
|
|
|
|
|
$
|
1.04
|
|
$
|
.60
|
|
|
|
|
|
|
|
On
December 4, 2007, the closing price of our common stock, as reported by the
OTC
Bulletin Board, was $1.34 per share.
These
bid
prices represent prices quoted by broker-dealers on the OTC Bulletin Board.
The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commissions, and may not represent actual transactions.
As
of
December 6, 2007, there were 114,555,468 shares of our common stock outstanding,
without giving effect to the conversion of our series A convertible preferred
stock, and approximately 1,430 holders of our common stock. We believe that
there are significantly more beneficial holders of our common stock as many
beneficial holders hold their stock in “street name.”
This
prospectus covers 23,750,000 shares of our common stock offered for sale by
the
selling stockholders, which includes 12,500,000 shares of our common stock
issuable upon conversion of our series A convertible preferred stock and
11,250,000 shares of our common stock issuable upon exercise of outstanding
warrants to purchase common stock.
Dividend
Policy
We
do not
expect to pay a dividend on our common stock in the foreseeable future.
The payment of dividends on our common stock is within the discretion of
our
board
of
directors
,
subject
to our
certificate
of
incorporation
.
We
intend to retain any earnings for use in our operations and the expansion of
our
business. Payment of dividends in the future will depend on our future earnings,
future capital needs and our operating and financial condition, among other
factors.
Equity
Compensation Plan Information
The
following table provides information as of December 6, 2007, with respect to
the
shares of common stock that may be issued under our existing equity compensation
plan.
Equity
Compensation Plan Information
|
Plan
category
|
|
Number
of shares of common stock to be issued upon exercise of outstanding
options, warrants and rights
(a)
|
|
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
|
|
|
Equity
compensation plans approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
You
should read the following description of our financial condition and results
of
operations in conjunction with the financial statements and accompanying notes
included in this prospectus beginning on page
F-1.
Forward-Looking
Statements
This
section of the prospectus contains forward-looking statements about our
business, financial condition and prospects that reflect our management’s
assumptions and beliefs based on information currently available. We can give
no
assurance that the expectations indicated by such forward-looking statements
will be realized. If any of our assumptions should prove incorrect, or if any
of
the risks and uncertainties underlying such expectations should materialize,
our
actual results may differ materially from those indicated by the forward-looking
statements.
The
key
factors that are not within our control and that may have a direct bearing
on
operating results include, but are not limited to, acceptance of our services,
our ability to establish a customer base, management’s ability to raise capital
in the future, the retention of key employees and changes in the regulation
of
our industry.
There
may
be other risks and circumstances that management may be unable to predict.
When used in this section , words such as “believes,” “expects,”
“intends,” “plans,” “anticipates,” “estimates”
and
similar expressions are intended to identify and qualify forward-looking
statements, although there may be certain forward-looking statements not
accompanied by such expressions.
Organizational
and Financing Background
Founding
of Systeam Italy.
In
1989,
Luigi Caramico, our President, co-founded Systeam Italy SpA in Rome and
commenced development of an early version of a software product with data
retention and carrier interconnection billing applications for the
telecommunications industry. In August 2003, Systeam Italy was acquired by
Xalted, Inc., a company controlled by a private equity firm based in India,
through a newly-created California subsidiary, SysteamUS, Inc. Xalted’s primary
interest in Systeam Italy was its carrier interconnection billing software.
At
the same time, Mr. Caramico and the Systeam Italy software development team,
capitalizing on corporate opportunities in the homeland security industry,
continued to develop a full suite of security software products that now
addressed homeland security, data retention and forensics applications. In
2005
and 2006, Mr. Caramico and representatives of Xalted discussed the possibility
of splitting up the Systeam intellectual property along these two lines of
business.
Merchandise
Creations as Successor.
During
mid-2006, Mr. Caramico assembled a group of investors and operational staff,
including Ian Rice, our Chairman and Chief Executive Officer, to acquire (and
finance the acquisition of) SysteamUS’s security software assets. Based on a
review of possible acquisition and financing structures, it was determined
that
Merchandise Creations, Inc., a small publicly-held company in which certain
of
Mr. Caramico’s investors held minority interests, would serve as the acquisition
vehicle for the security software assets. Merchandise Creations was incorporated
in the state of Nevada in October 2004, went public in January 2006, and was
originally engaged in the music merchandising and distribution
business.
Acquisition
of Security Software Assets.
On
December 9, 2006, Merchandise Creations and SysteamUS entered into a Limited
Asset Purchase Agreement, pursuant to which Merchandise Creations acquired
all
of SysteamUS’s right, title and interest in and to its intangible assets
associated with SysteamUS’s security software, including the source codes,
patents, trademarks, service marks, copyrights, documentation and technical
specifications and related intellectual property, along with written
descriptions of the security software. Merchandise Creations paid SysteamUS
$5,850,000 in cash for these assets. Merchandise Creations filed a current
report on 8-K dated December 9, 2006, with the SEC reporting the Systeam
security software purchase transaction and attaching a copy of the Purchase
Agreement.
Vision
Opportunity Financing.
To
finance the acquisition of the security software assets, on December 7, 2006,
Merchandise Creations sold an $8,000,000 senior secured convertible promissory
note to Vision Opportunity Master Fund, Ltd., and issued Vision a four-year
warrant to purchase 9,000,000 shares of common stock at an exercise price of
$.01 per share. The Note and Warrant Purchase Agreement with Vision provided
for, among other things, (i) a final maturity date of December 7, 2009, (ii)
annual interest at 5% per year, payable in cash quarterly, (iii) conversion
at
any time prior to maturity into Merchandise Creations’ common stock at $.44 per
share, and (iv) a security interest in all of Merchandise Creations’ accounts
receivable, personal and fixed property, and general intangibles. Merchandise
Creations filed a current report on Form 8-K/A dated December 19, 2006, with
the
SEC reporting the Vision financing transaction and attaching copies of the
relevant loan documents.
Approximately
$2,000,000 of the proceeds from the Vision financing were loaned to Systeam
Italy in order for Systeam to satisfy tax liabilities, inter-company payables
and other outstanding liabilities.
Transition
to Intelligentias.
Following
the security software acquisition, Robert Turner, who was then the sole member
of Merchandise Creations’ board of directors, determined to change the company’s
business focus from its historical music merchandising activities to the
development of a security software business. Pursuant to board and stockholder
action, on December 15, 2006, Merchandise Creations filed an amendment to its
Articles of Incorporation in the state of Nevada, changing its corporate name
to
Intelligentias, Inc. Due to the change in business, year-to-year comparisons
are
not significant and are not a reliable indicator of future prospects;
accordingly, they are not presented in this prospectus.
On
December 11, 2006, Merchandise Creations effected a 20-for-1 forward stock
split
of its outstanding shares of common stock, resulting in 211,860,000 outstanding
shares. Mr. Turner, the beneficial owner of 200,000,000 such shares, sold a
total of 63,000,000 shares to (i) Lusk Family Trust (40,700,000 shares, of
which
10,000,000 shares were subsequently transferred to Vision Opportunity Master
Fund, Ltd.), (ii) Kattegat, Inc. (9,000,000 shares), the owners of which include
Luigi Caramico and Mario Mené, our executive officers and members of our board,
(iii) Vision Opportunity Master Fund, Ltd. (9,000,000 shares), and (iv) Ian
Rice, our Chairman and Chief Executive Officer (4,300,000 shares). The remaining
125,000,000 shares retained by Mr. Turner were redeemed by Merchandise Creations
in consideration for Mr. Turner re-acquiring the historical music distribution
business of Merchandise Creations and $20,000 in cash, and such shares were
cancelled.
On
December 19, 2006, Mr. Turner resigned as our President and sole director,
and
Ian Rice became our Chairman and Chief Executive Officer, Luigi Caramico became
our President and Mario Mené became our Chief Technical Officer. On March 16,
2007, Messrs. Caramico and Mené joined our board of directors.
During
the first quarter of 2007, we transitioned into a publicly-held and reporting
company, and established a corporate headquarters in Redwood City, California.
Conversion
of Vision Opportunity Note.
On
March
19, 2007, as a result of negotiations with Vision Opportunity Master Fund,
Vision converted the full outstanding balance under its senior secured
convertible promissory note, receiving 18,181,818 shares of our common stock.
As
an inducement for such early conversion, on March 16, 2007, we also issued
1,750,000 shares of common stock to Vision. Additionally, Vision exercised
a
portion of its warrant and received 3,000,000 shares of common stock. The
remaining 6,000,000 shares of common stock underlying the warrant are
exercisable through December 2011. Finally, as part of this transaction, Vision
waived its registration rights in respect of the shares issued or issuable
upon
conversion of its note and exercise of its warrant. We filed a current report
on
Form 8-K dated March 16, 2007, with the SEC reporting the conversion of the
Vision note and attaching the related letter agreement.
Intelligentias
Bridge Financing.
From
January through August 2007, we raised $1,770,000 from a small group of
accredited investors through the issuance of 10% unsecured bridge promissory
notes. The principal and accrued interest under the notes are due and
payable upon the earlier of one year after issuance or from the net proceeds
of
our next debt or equity financing, but only at such time after a minimum of
$4,000,000 in gross proceeds have been received by us, and then at a rate of
$.50 for every $1.00 raised above such level. In connection with the
issuance of the bridge promissory notes, we also issued warrants to purchase
2,212,500 shares of our common stock, with an exercise price of $0.80 per share,
for a period of five years. The proceeds of the bridge financing were used
primarily for working capital and general corporate purposes.
On
September 25, 2007, we raised an additional $400,000 from a small group of
accredited investors through the issuance of 10% bridge promissory notes. The
principal and accrued interest under the notes are due and payable upon the
earlier of six months after issuance or from the net proceeds of a $20,000,000
private placement of common stock and warrants after a minimum of $4,000,000
in
gross proceeds have been received by us, and then at a rate of $.50 for every
$1.00 raised above such level. The notes may be prepaid at any time without
penalty. We agreed to pay an additional fee of 10% upon repayment of the notes
or at maturity. The notes are secured by 1,000,000 shares of common stock placed
in escrow by Lusk Family Trust, a significant shareholder of ours. As part
of
the financing, we issued warrants to purchase 500,000 shares of our common
stock, with an exercise price of $0.80, for a period of five years. The proceeds
of the bridge financing are being used primarily for working capital and general
corporate purposes including development and maintenance costs for our security
software intellectual property and payment of year-end public reporting costs
and related professional fees.
The
bridge promissory notes were repaid in October 2007, following the Kingdon
Capital private placement described below.
Acquisition
of Full Systeam Italy Operations.
On
April
26, 2007, we entered into an agreement to purchase all of the outstanding stock
of Systeam Italy from SysteamUS for a total purchase price of 2,095,000 euros
(or approximately $2,504,720) by assuming inter-company indebtedness for
services rendered in the same amount due from SysteamUS to Systeam Italy.
Systeam Italy conducts the worldwide data intelligence software business that
is
described in this Memorandum. We completed the acquisition of Systeam Italy
on
June 7, 2007. Other than the security software intellectual property that we
already owned, we acquired the full business operations of Systeam Italy,
including its contracts with service providers, strategic alliance partners,
network equipment providers and systems integrators, and its office in Rome.
The
Systeam Italy subsidiary will be operated under the name Retentia. We did not
acquire any material aspect of the carrier interconnection billing business
or
intellectual property from SysteamUS, which Xalted will continue to operate
under a different name. We filed a current report on Form 8-K/A dated April
30,
2007, with the SEC reporting this acquisition and attaching a copy of the
related Stock Purchase Agreement.
Additional
Financing by Vision Opportunity.
On
June
13, 2007, we entered into a Note and Warrant Purchase Agreement with Vision
Opportunity Master Fund, Ltd. Pursuant to that purchase agreement, Vision
purchased a $3,000,000 Senior Secured Promissory Note due on the earlier of
June
13, 2008, or upon receipt of $6,000,000 in net proceeds from our next private
placement. The promissory note bears interest at 12% per annum, is secured
by
our accounts receivable and other personal and fixed assets, may be prepaid
at
any time and contains customary events of default and remedies. As part of
the
financing transaction, we also issued a warrant to Vision to purchase 5,500,000
shares of our common stock, with an exercise price of $2.05 per share, for
a
period of seven years. The warrant contains “full-ratchet” anti-dilution
protection to Vision during the term of the warrant, but excludes certain events
such as issuances of stock in connection with mergers and acquisitions,
strategic license agreements, stock option plans and a subsequent financing
transaction. The net proceeds from the financing, following the payment of
offering-related expenses, were used by us to complete the Datakom acquisition.
We filed a current report on Form 8-K dated June 13, 2007, with the SEC
reporting this additional financing by Vision and attaching the related
transaction documents.
On
September 18, 2007, we amended the June 13
th
financing with Vision. Pursuant to that amendment, Vision purchased an
additional $300,000 senior secured promissory note on the same terms and
conditions as the June 13, 2007 note. As additional consideration, we issued
a
warrant to Vision to purchase 238,095 shares of our common stock, with an
exercise price of $1.26 per share, for a period of seven years. At the maturity
of the note, we will pay Vision an additional fee of $30,000 in connection
with
this amendment.
Kingdon
Capital Private Placement.
On
October 19, 2007, we completed a private placement of equity securities to
three
affiliated funds managed by Kingdon Capital Management, LLC, pursuant to the
terms of a Securities Purchase Agreement. Pursuant to that purchase agreement,
we sold an aggregate of 12,500,000 shares of our series A convertible preferred
stock and received gross proceeds of $10,000,000. The series A convertible
preferred stock is initially convertible into an equal number of shares of
our
common stock and has the rights, preferences and privileges set forth in the
form of Certificate of Designation, Preferences and Rights filed as an exhibit
to our current report on Form 8-K dated October 19, 2007. As part of the
transaction, we issued to the investors warrants to purchase an aggregate of
up
to 6,250,000 shares of common stock at an exercise price of $1.25 per share,
and
warrants to purchase an aggregate of up to 5,000,000 shares of common stock
at
an exercise price of $1.80 per share. The series A convertible preferred stock
and warrants contain full ratchet anti-dilution provisions for the first 18
months after issuance and weighted average protection for issuances of capital
stock below the respective conversion or exercise prices, except in specified
cases.
Revenue
Model and Pricing
For
our
DRS software, we employ a software licensing model that includes an upfront
license fee, installation and customization fees and maintenance fees. Customer
pricing is predicated on the number of data transactions to be processed and
stored. We sell our services in block increments. For voice, the increments
consist of 5 million daily CDRs and, for data, the increments consist of 50
million daily IPDRs. Our software licensing agreement stipulates the initial
transaction volumes. If and when those volumes are exceeded, the customer is
immediately subject to incremental billing. However, we do extend volume
discounts to larger service providers. In the future, we expect that our average
new licensing contract will generate a $2.0 million initial fee, and that new
contracts will range from $1.0 million to $7.0 million, although no assurance
thereof can be given.
Results
of Operations - Nine months ended September 30, 2007 Compared to Nine months
ended September 30, 2006
We
had no
software operations during 2006 and initiated our current business
operations with the acquisition of Systeam Italy SpA and Datakom during
2007.
Revenues
Revenues
for the nine months ended September 30, 2007 were $5,523,759, compared to $0
for
the nine months ended September 30, 2006. We earned revenue in the nine months
ended September 30, 2007 from data retention, lawful interception and network
monitoring operations . We earned no revenue in the nine months ended September
30, 2006.
Direct
Cost of Revenues
Direct
cost of revenues for nine months ended September 30, 2007 was $1,445,026,
compared to $0 for the nine months ended September 30, 2006, a change of
$1,445,026 primarily due to the acquisition of Systeam and Datakom. Direct
cost
of revenues for nine months ended September 30, 2007 reflected the cost of
labor
and materials associated with revenues generated from Systeam and Datakom.
Selling,
General and Administrative
For
the
nine months ended September 30, 2007, selling, general and administrative
expenses were $5,468,948, compared to $0 for the nine months ended September
30,
2006, a change of $5,468,948 primarily due to the acquisition of Systeam and
Datakom. Selling, general and administrative expenses for the nine months ended
September 30, 2007 consisted primarily of employee and other costs related
to
Systeam and Datakom of $1,517,405 and $1,122,618, respectively, accounting,
legal and professional fees of $1,131,798 (of which $370,000 related to the
issuance of common stock to technical consultants for services performed during
the period), marketing expense of $941,129 and executive salaries of $432,713.
Amortization
and
Depreciation
Depreciation
and amortization expense was $4,152,587 for the nine months ended September
30,
2007, compared to $0 for the nine months ended September 30, 2006, a change
of
$4,152,587 primarily due to the acquisition of Systeam and Datakom. Depreciation
and amortization expense was recognized primarily as a result of the
amortization of intangibles acquired in December 2006 in addition to four months
of amortization of intangible assets resulting from the acquisitions of Systeam
and Datakom.
Gain
(Loss) on Derivative Warrant Liability
For
the
nine months ended September 30, 2007, loss on the derivative warrant liability
mark-to-market was $4,710,935, compared to $0 for the nine months ended
September 30, 2006, a change of $4,710,935 primarily due to the acquisition
of
Systeam and Datakom. For the nine months ended September 30, 2007, loss on
the
derivative warrant liability mark-to-market was comprised of $4,706,335 related
to the increase in the market price of our common stock from December 31, 2006
compared to August 15, 2007, the date that the December 2006 and June 2007
warrant agreements were amended, resulted in the warrants meeting the requisite
conditions for equity classification. Due to the amendments, we will not be
required to mark the December 2006 and June 2007 warrants to market through
the
income statement in future periods. The remaining $4,600 relates to the day-one
loss on derivative allocation related to the September 2007 bridge
financing.
Interest
Expense
For
the
nine months ended September 30, 2007, interest expense was $12,641,031, compared
to $0 for the nine months ended September 30, 2006, a change of $12,641,031
primarily due to the acquisition of Systeam and Datakom. Interest expense for
the nine months ended September 30, 2007 related primarily to the recognition
of
the remaining unamortized debt discount of $7,948,148 as interest expense due
to
the conversion of convertible long-term debt, recognition of $3,263,801 in
interest expense as a result of the issuance of 1,750,000 shares of common
stock
as an inducement for the conversion of convertible long-term debt and $1,156,843
of amortization of the discount on outstanding debt obligations with the
remaining expense attributed primarily to accrued interest payable.
Loss
from Continuing Operations
We
incurred a loss from continuing operations of $22,894,768 for the nine months
ended September 30, 2007, compared to $0 for the nine months ended September
30,
2006, a change of $22,894,768 primarily due to limited sources of revenues
during the nine months ended September 30, 2007, together with operating
expenses and significant interest expense and derivative warrant liability
charges.
Discontinued
Operations
As
a
result of the Limited Asset Purchase Agreement in December 2006, our board
of
directors made a decision to change the business focus from merchandising
activities toward developing the security software purchased from SysteamUS.
During the nine months ended September 30, 2007, we recognized a net loss
on discontinued operations of $0, compared to $8,606 for the nine months ended
September 30, 2006, a change of $8,606 primarily due to completion of the
disposition of discontinued operations in 2006.
Net
Loss
Our
net
loss for the nine months ended September 30, 2007 was $22,894,768, which
resulted in a net loss per share of $0.23, compared to a net loss of $0 for
the
nine months ended September 30, 2006, which resulted in a net loss per share
of
$0.23, a change of $0.23.
Results
of Operations - Year ended December 31, 2006 Compared to the Year ended December
31, 2005
We
had no
software operations during 2006 and initiated our current business
operations with the acquisition of Systeam Italy SpA and Datakom during
2007.
Revenues
In
the
years ended December 31, 2006 and 2005, we did not generate any revenues related
to our current business objective. Revenues for the year ended December 31,
2006
were $0, compared to $0 for the year ended December 31, 2005.
Selling,
General and Administrative
For
the
year ended December 31, 2006, selling, general and administrative expenses
were
$599,597,
compared
to $0 for the year ended December 31, 2005, a change of $
599,597
primarily due to the acquisition of SysteamUS assets.
Selling,
general and administrative expenses for the year ended December 31, 2006
consisted mainly of $587,627 of professional fees attributable to our
acquisition of assets from SysteamUS. Other costs of $5,000 and $451 were
incurred for advertising and commission costs, respectively.
Amortization
Amortization
expense was $130,239 for the year ended December 31, 2006,
compared
to $0 for the year ended December 31, 2005, a change of $
130,239
primarily due to the acquisition of SysteamUS assets.
Amortization
expense for the year ended December 31, 2006 was recognized as a result of
the
acquisition of $5,850,000 in intellectual property from SysteamUS and $400,000
for website development.
Other
Income and Expenses
For
the
year ended December 31, 2006 and from the period from our inception to December
31, 2006, we recognized interest expense in the amount of $26,301,
compared
to $0 for the year ended December 31, 2005, a change of $
26,301
primarily due to the acquisition of SysteamUS assets.
For the
year ended December 31, 2006, we also recognized $51,852 in amortization expense
relative to the warrant and beneficial conversion feature associated with the
convertible long-term debt. As we continue to pursue our data retention and
security operations, we may issue additional debt securities to provide for
our
costs of operations. Any further debt issuances will increase the amount of
interest we expense. For the year ended December 31, 2006, we recognized $3,733
in interest income earned from the $1,000,000 loan made to a related party
in
December.
Loss
from Continuing Operations
We
incurred a loss from continuing operations of $
4,775,056
for the
year
ended December 31, 2006
,
compared to $0 for
the
year
ended December 31, 2005
,
a
change of $
4,775,056
primarily due to the lack of
any
source of revenues and given that our total operating expenses during the year
ended December 31, 2006 were $729,836, as well as other expenses of
$4,045,220
.
Discontinued
Operations
As
a
result of the Limited Asset Purchase Agreement in December 2006, our board
of
directors made a decision to change our business focus from merchandising
activities toward developing the security software purchased from SysteamUS
and
determined that our existing remaining inventory was not complementary to
expected ongoing operations and should be divested. For the year ended December
31, 2006, we recognized a net loss on discontinued operations in the amount
of
$24,605, consisting of $19,999 in advertising costs incurred prior to the
Purchase Agreement and $5,158 in inventory impairment due to obsolescence offset
by $552 in gross profit on sales. For the year ended December 31, 2005, we
realized a net loss from discontinued operations of $17,872 consisting of
professional fees of $12,692, advertising costs of $2,729, commission expenses
of $3,531, and general and administrative expenses of $4,567, offset by a gain
of $5,647.
Net
Loss
Our
net
loss for the year ended December 31, 2006 was $4,799,661, which resulted in
a
net loss per share of $0.02. During the year ended December 31, 2005, we
incurred a net loss of $17,872, or $0.00 per share. As of December 31, 2006,
our
accumulated deficit since inception was $4,814,924.
Liquidity
and Capital Resources
We
were
in the development stage through March 31, 2007 and began to generate revenues
from operations in the second quarter of 2007. Since inception, we have funded
operations primarily through sales of debt and convertible debt securities,
which, in the aggregate, have made available $13,470,000 to us. Since inception
through September 30, 2007, we have generated an accumulated deficit of
$27,714,693. We have had recurring losses and negative cash flows from our
development and organizational activities and negative working capital of
$20,192,895. As of September 30, 2007, our principal sources of liquidity are
cash and cash equivalents of $1,146,877, which are available as a result of
our
debt financings.
Our
funding needs are significant to make our contractually required payment of
$8,500,000 to Datakom, to repay short-term debt as it comes due and fund working
capital requirements. In order to support our ongoing operations for the next
12
months, we must raise additional funds through debt or equity financings and
we
must generate revenue and operating cash flow. If we do not obtain additional
debt or equity financing we will not have funds sufficient to service our
short-term debt obligations and our working capital requirements. We anticipate
raising additional funds through a private placement of our equity securities
or
through the issuance of convertible debt securities or some combination of
both.
We cannot assure you that any financing can be obtained or, if obtained, that
it
will be on reasonable terms. If we are unable to raise additional funds, we
will
be required to modify our growth and development plans or could be forced to
cease operations. Our independent registered public accounting firm has
expressed substantial doubt about our ability to continue as a going concern
because we have limited operations and have not fully commenced planned
principal operations.
To
date,
as described under “Organizational and Financing Background” above, we have met
our cash flow requirements through the following actions:
On
December 7, 2006, we conducted a private offering of debt securities, in which
we raised $8,000,000 in debt financing from Vision Opportunity Master Fund
Ltd.
(“Vision”). On March 16, 2007, we issued to Vision 1,750,000 shares of common
stock in consideration of Vision agreeing to convert the debt into shares of
common stock. The note was fully converted by Vision on March 19, 2007 into
18,181,818 shares of common stock.
From
January through August 2007, we raised $1,770,000 from a small group of
accredited investors pursuant to 10% unsecured bridge promissory notes. The
principal and accrued interest under the notes are due and payable upon the
earlier of one year after issuance or from the net proceeds of our next private
placement, but only at such time after a minimum of $4,000,000 in gross proceeds
have been received by us, and then at a rate of $.50 for every $1.00 raised
above such level. In connection with the issuance of the bridge promissory
notes, we also issued warrants to purchase 2,212,500 shares of our common stock,
with an exercise price of $0.80 per share, for a period of five years. The
proceeds of the bridge financing were used primarily for working capital and
general corporate purposes. The bridge promissory notes were repaid in October
2007, following the Kingdon Capital private placement.
On
June
13, 2007,
we
entered into a Note and Warrant Purchase Agreement with Vision
.
Pursuant to that purchase agreement, Vision purchased a $3,000,000 Senior
Secured Promissory Note due on the earlier of June 13, 2008 or upon receipt
of
$6,000,000 in net proceeds from our next private placement. The promissory
note
bears interest at 12% per annum, and may be prepaid at any time. As part of
the
financing transaction, we also issued a warrant to Vision to purchase 5,500,000
shares of our common stock, with an exercise price of $2.05 per share, for
a
period of seven years. The net proceeds from the financing, following the
payment of offering-related expenses, were used by us to complete the Datakom
acquisition with the excess used to fund working capital
requirements.
On
September 18, 2007, we amended the June 13, 2007 financing with Vision. Pursuant
to that amendment, Vision purchased an additional $300,000 senior secured
promissory note on the same terms and conditions as the June 13 note. As
additional consideration, we issued a warrant to Vision to purchase 238,095
shares of common stock, with an exercise price of $1.26 per share, for a period
of seven years.. At the maturity of the note, we will pay Vision an additional
fee of $30,000 in connection with this amendment.
On
September 25, 2007, we raised $400,000 from a small group of accredited
investors pursuant to 10% bridge promissory notes. The principal and accrued
interest under the notes are due and payable upon the earlier of six months
after issuance or from the net proceeds of the next private placement after
a
minimum of $4,000,000 in gross proceeds have been received by us, and then
at a
rate of $.50 for every $1.00 raised above such level. The notes may be prepaid
at any time. We agreed to pay an additional fee of 10% upon repayment of the
note or at maturity. The notes are secured by 1,000,000 shares of common stock
placed in escrow by the Lusk Family Trust, a significant stockholder of our
company. As part of the financing, we issued warrants to purchase 500,000 shares
of common stock with an exercise price of $.80 per share for a period of five
years.
On
October 19, 2007, we completed a $10,000,000 private placement of equity
securities to three affiliated funds managed by Kingdon Capital Management,
LLC.
This transaction is described in more detail below under “Selling Stockholders -
Kingdon Capital Private Placement.”
We
currently do not own any significant plant or equipment that we would seek
to
sell in the near future.
We
have
not paid for expenses on behalf of any of our directors.
Off-Balance
Sheet Arrangements
There
are
no off-balance sheet arrangements between us and any other entity that have,
or
are reasonably likely to have, a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to stockholders.
Critical
Accounting Policies and Estimates
The
preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to exercise its judgment. We exercise considerable judgment
with respect to establishing sound accounting polices and in making estimates
and assumptions that affect the reported amounts of our assets and liabilities,
our recognition of revenues and expenses, and disclosures of commitments and
contingencies at the date of the financial statements.
On
an
ongoing basis, we evaluate our estimates and judgments. Areas in which we
exercise significant judgment include, but are not necessarily limited to,
measurement of the valuation allowance relating to deferred tax assets and
future cash flows associated with long-lived assets. We have adopted certain
polices with respect to our recognition of revenue that we believe are
consistent with the guidance provided under Securities and Exchange Commission
Staff Accounting Bulletin No. 104
We
base
our estimates and judgments on a variety of factors including our historical
experience, knowledge of our business and industry, current and expected
economic conditions, the composition of our products and the regulatory
environment. We periodically re-evaluate our estimates and assumptions with
respect to these judgments and modify our approach when circumstances indicate
that modifications are necessary.
While
we
believe that the factors we evaluate provide us with a meaningful basis for
establishing and applying sound accounting policies, we cannot guarantee that
the results will always be accurate. Since the determination of these estimates
requires the exercise of judgment, actual results could differ from such
estimates.
A
description of significant accounting polices that require us to make estimates
and assumptions in the preparation of our consolidated financial statements
is
as follows:
Revenue
Recognition
Data
Retention (“DR”).
We
derive
our DR revenue from sales of software licenses, installation, customer support
(including maintenance) and consulting services. We have historically been
contracted to perform installation services on every software license sale
and
certain software license sales also include customer support agreements.
Customer support agreements vary and may provide customers with rights to
unspecified software updates, maintenance releases and patches released during
the term of the support period, telephone support and support personnel during
the term of the support period. We do not have standard pricing associated
with
our customer support agreements due to the varying nature of the services
provided.
We
recognize revenue pursuant to the requirements of American Institute of
Certified Public Accountants Statement of Position 97-2, “Software
Revenue Recognition,” as amended. We have not yet established vendor specific
objective evidence (“VSOE”) for the fair value of the software license,
installation and customer support elements. As a result, we recognize all
revenue for multiple element arrangements ratably over the period of
installation and customer support, typically 3 to 24 months.
Revenues
for DR consulting services are generally recognized as the services are
performed. If there is a significant uncertainty about the project completion
or
receipt of payment for the consulting services, revenue is deferred until the
uncertainty is sufficiently resolved. Consulting services primarily comprise
integrating and customizing software previously installed to address changes
in
a customer’s needs or information systems environment.
Lawful
Interception and Network Monitoring (“LINM”).
We
derive
our LINM revenue from sales of software and services through our subsidiary,
Datakom. Other LINM services include consulting, assessment and design services,
installation services and training. Substantially all of our LINM products
have
been sold in combination with customer support or maintenance. Customer support
or maintenance provides customers with rights to unspecified software updates,
maintenance releases and patches released during the term of the support period,
repair or replacement of hardware (not covered by the standard warranty
coverage) in the event of breakage or failure, telephone support, pro-active
monitoring of customer installed products, internet access to technical
information and support personnel during the term of the support period.
Shipping charges billed to customers are included in product revenue and the
related shipping costs are included in cost of goods sold. Payment terms to
customers generally range from net 30 to 45 days.
LINM
product revenue is recognized once a
legally
binding arrangement with a customer has been evidenced, shipment has occurred,
fees are fixed or determinable and free of contingencies and significant
uncertainties, and collection is probable
.
Customer support or maintenance is recognized ratably over the contract period.
Our fees are considered fixed or determinable at the execution of an agreement,
based on specific products and quantities to be delivered at specified prices.
We recognize LINM revenue upon the completion of installation and training
and
acceptance by our client.
Our
standard agreements with customers do not include rights of return. We assess
the ability to collect from our customers based on a number of factors,
including credit worthiness of the customer and past transaction history of
the
customer. If the customer is deemed not credit-worthy, all revenue from the
arrangement is deferred until payment is received and all other revenue
recognition criteria have been met.
Our
LINM
software is integrated with our hardware and is essential to the functionality
of the integrated system product. We provide unspecified software updates and
enhancements related to our products through service contracts. Accordingly,
we
recognize revenue in accordance with the guidance provided under Statement
of
Position (“SOP”) No. 97-2, Software Revenue Recognition (“SOP 97-2”),
and Statement of Position No. 98-9, Modification of
SOP No. 97-2, Software Revenue Recognition, with Respect to Certain
Transactions (“SOP 98-9”), for all transactions involving the sale of
software. We apply the provisions of SOP 97-2, Software Revenue
Recognition, as amended by SOP 98-4 and SOP 98-9, and related
interpretations to all transactions to determine the recognition of revenue.
We
use
the residual method (as prescribed in SOP 98-9) to recognize revenue when a
product agreement includes one or more elements to be delivered at a future
date
and vendor specific objective evidence (VSOE) of the fair value of all
undelivered elements exists. In virtually all of our contracts, customer support
or maintenance is the element that remains undelivered at the time of delivery
of the product to the customer. Under the residual method, the fair value of
the
undelivered elements is deferred and the remaining portion of the contract
fee
is recognized as product revenue.
We
consider the four basic revenue recognition criteria for each of the elements
as
follows:
|
|
·
|
Persuasive
evidence of an arrangement with the customer exists - It is our customary
practice to have a written purchase order and, in some cases, a written
contract signed by both us and the customer, or other persuasive
evidence
that an arrangement exists prior to recognizing revenue on an
arrangement.
|
|
|
·
|
Shipment or performance has occurred
- Our
products are usually physically shipped from the contract manufacturing
vendor and delivery to our customers is FOB origin. If products that
are
essential to the functionality of the delivered software in an arrangement
have not been delivered, we do not consider delivery to have occurred.
LINM services revenue is recognized when the services are completed,
except for customer support or maintenance, which is recognized ratably
over the term of the customer support or maintenance
agreement.
|
|
|
·
|
Vendor’s fee is fixed or determinable
- The
fee our customers pay for our products, customer support or maintenance
and other professional services is negotiated at the outset of
an
arrangement. The fees are therefore considered to be fixed or determinable
at the inception of the arrangement.
|
|
|
·
|
Collection is probable - We assess
the
probability of collection on a customer-by-customer basis. Credit
reviews
are performed on an as-needed basis to evaluate the customer’s financial
position and ability to pay. If we determine from the outset
of an
arrangement that collection is not probable based upon the review
process,
we recognize the revenue on a cash-collected
basis.
|
Deferred
Multiple-Element Costs.
When
our
products have been delivered, but the product revenue associated with the
arrangement has been deferred as a result of not meeting the revenue recognition
criteria in SOP 97-2, we also defer the related inventory costs for the
delivered items, as unbilled fees and costs, until such time that all other
revenue recognition criteria have been met.
Software
Development Costs.
Research
and development expenditures are charged to operations as incurred.
SFAS No. 86,
Accounting
for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed
,
requires capitalization of certain software development costs subsequent to
the
establishment of technological feasibility. Based on our software development
process, technological feasibility is established upon completion of a working
model, which also requires certification and extensive testing. Costs incurred
by us between completion of the working model and the point at which the product
is ready for general release have been immaterial.
Foreign
Currency Translation.
Our
Systeam and Datakom subsidiaries operate outside the United States and their
local currencies are their functional currencies. The functional currency is
translated into U.S. dollars for balance sheet accounts using the period-end
rates in effect as of the balance sheet date and the average exchange rate
for
revenue and expense accounts for each respective period. The translation
adjustments are deferred as a separate component of stockholders' equity, within
other comprehensive loss, net of tax where applicable. Gains or losses resulting
from transactions denominated in currencies other than our functional currency
are included in selling, general and administrative expenses within the
statements of operations.
Stock-Based
Compensation
.
We
record stock-based compensation in accordance with SFAS No. 123R “Share Based
Payments,” using the fair value method. All transactions in which goods or
services are the consideration received for the issuance of equity instruments
are accounted for based on Emerging Issues Task Force Issue No. 96-18,
“Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction With Selling, Goods or Services” using the fair
value of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements," which enhances existing guidance for measuring assets and
liabilities at fair value. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosure about fair value
measurements. SFAS No. 157 is effective for us beginning in 2008. We are
currently assessing the impact of the adoption of SFAS No. 157, but do not
expect that it will have a significant impact on our financial position or
results of operations.
In
February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial
Assets and Financial Liabilities,” which permits entities to voluntarily choose
to measure many financial instruments and other items at fair value. SFAS No.
159 is effective for fiscal years beginning after November 15, 2007. We are
currently assessing the impact of the adoption of SFAS No. 159, but do not
expect that it will have a significant impact on financial position or results
of operations.
BUSINESS
Overview
and Corporate Structure
We
are
positioned to be a leading provider of forensic
data
retention
software
for telecommunications companies, Internet service providers (ISPs), businesses
and law enforcement agencies. Data forensics is the near real-time analysis
of
massive data pools suitable for courts of law, equity or arbitration forums.
Currently, telecom-service providers use our software - which we call our Data
Retention Suite, or DRS - to keep track of the telephone calls made by their
customers, ISPs use it to keep track of the Internet activities (such as
websites visited) of their subscribers, and law enforcement agencies use it
to
detect criminal activities and aid in the prosecution of perpetrators. Our
software, which has been developed, tested and continually enhanced over the
last eight years, is already successfully capturing and storing tens of billions
of data transactions every day. With our recent acquisition of Datakom GmbH,
we
also provide lawful interception and network monitoring software solutions
throughout Europe and the Middle East to government agencies and major
corporations.
In
response to law enforcement concerns, governments around the world are enacting
strict data retention and related legislation to aid in the monitoring and
apprehension of criminals. Driven by the terrorist attacks in New York and
Washington, D.C. on September 11, 2001, in Madrid in March 2004 and in London
in
July 2005, this trend continues to be strengthened in order to ensure national
security and aid in the seizure and arrest of terrorists. In May 2006, the
European Union enacted new Directive 2006/24/EC (the E.U. Data Retention
Directive) that mandates the retention of all traffic data generated by fixed
and mobile telephony communication, as well as Internet access, Internet
telephony and Internet messaging for a period of a minimum of six months to
a
maximum of two years. The aim of the E.U. Data Retention Directive and other
legislation is to enable law enforcement agencies to quickly investigate and
prosecute terrorists, pedophiles, drug dealers and other criminals.
European
telecom-service providers and ISPs will need to comply with the obligations
contained within the E.U. Data Retention Directive once
E.U. member states have enacted the legislation into domestic
law.
E.U.
member states
have
until September 15, 2007 to enact the legislation. Fixed and mobile telephony
data retention must be implemented by March 15, 2008. There is an optional
deadline to further enact the provisions regarding Internet access, Internet
telephony and e-mail until March 15, 2009.
Failure
to comply may result in serious consequences for communications providers.
In
the
United States, the latest data retention initiative is part of the Internet
Stopping Adults Facilitating the Exploitation of Today’s Youth Act of 2007 (the
SAFETY Act), introduced in the U.S. Congress by Rep. Lamar Smith (R-Texas)
in
February 2007. If enacted as proposed, the SAFETY Act would require ISPs to
retain records on subscribers and give the U.S. Attorney General powers to
establish retention regulations on subscriber data, with possible fines and
prison terms for noncompliance. The data retention trend has also affected
the
corporate world. In the United States, new Federal Rules of Civil Procedure
guidelines went into effect as of December 1, 2006. The rules, set by the U.S.
Supreme Court, expand the types of electronically-stored information that
companies could be required to produce in a lawsuit. In the future, we believe
companies that do not properly monitor and archive PDAs, e-mails, instant
message conversations and other forms of electronic data may be disadvantaged
in
civil lawsuits.
For
our
DRS software, we employ a software licensing model that includes an upfront
license fee, installation and customization fees and maintenance fees. We also
utilize pricing tiers that are based on the number of data transactions to
be
processed and stored. Our software is standardized, which makes it easy to
integrate into the varying infrastructures of our customers, and we can sell
the
same software to multiple customers without incurring additional software
development costs. In the future we expect that our average new licensing
contract will generate a $2.0 million initial fee, and that new contracts will
range from $1.0 million to $7.0 million.
Because
of the E.U. Data Retention Directive mandate, our immediate target customers
are
domiciled in the European Union countries. They are medium (5 million
subscribers) to large (10 to 15 million plus subscribers) telecom operators
and
medium (1 million subscribers) to larger (2 to 5 million subscribers) ISPs.
We
are also seeking to sell DRS through large system integrators. These companies
integrate our DRS software into telecom-service providers and ISPs. DRS is
already in use by several telecom-service providers and ISPs including Telecom
Italia SpA and FastWeb SpA, and by Ferrovie Dello Stato (the Italian railroad)
and the Italian Ministry of Defense. As more stringent data retention laws
are
enacted in the United States, Latin America and throughout Asia, we intend to
target customers with similar profiles in these regions.
We
operate within our industry under the trade name Intelligentias and through
our
current wholly-owned operating subsidiaries: Retentia, Inc. and Interceptia,
Inc. Retentia provides homeland security, data retention and forensics software
and services. Interceptia is our lawful intercept company, focusing on lawful
interception (wiretapping) of telecommunications by law enforcement authorities
and intelligence services. For information relating to our recent acquisition
of
Datakom, please see “- Acquisition of Datakom GmbH” below.
Industry
Overview and Target Markets
In
response to law enforcement concerns, governments around the world have enacted
and are continuing to enact data retention and related legislation to aid law
enforcement agencies in the apprehension of criminals. Spurred by the terrorist
attacks in New York and Washington, D.C. on September 11, 2001, in Madrid in
March 2004 and in London in July 2005, this trend continues to be strengthened
in order to ensure national security and aid in the apprehension of terrorists.
The data retention trend has also affected the corporate world. In the United
States, new Federal Rules of Civil Procedure guidelines went into effect as
of
December 1, 2006. The rules, set by the U.S. Supreme Court, expand the types
of
electronically stored information that companies could be required to produce
in
a lawsuit. In the future, we believe companies that do not properly monitor
and
archive PDAs, e-mails, instant message conversations and other forms of
electronic data may be disadvantaged in civil lawsuits.
These
data retention laws require service providers to retain more data, make them
available in near real-time, and to archive them for far longer periods of
time
than they previously were required. As a result, telecom operators, ISPs and
law
enforcement agencies have been seeking to upgrade their infrastructures to
meet
government mandates.
The
European Union, our major market to date, saw the need to create a framework
harmonizing, across the member states, the obligations of telecom-service
providers and ISPs to retain certain traffic data and make it available to
the
authorities for the purpose of investigating, detecting and prosecuting serious
crimes. They hope to accomplish this harmonizing through the E.U. Data Retention
Directive, discussed more fully under “- Legislation and Government Regulation.”
We expect that the E.U. Data Retention Directive will have a significant impact
on telecommunication companies and ISPs in that market.
Although
most service providers and operators are currently able to fulfill requests
from
law enforcement agencies, the systems they have in place may not comply with
the
requirements of the E.U. Data Retention Directive. We believe many of these
systems cannot accommodate the amount of the data to be stored, their mediation
and data retrieval systems are not secure enough, and/or the data may not be
readily available online to satisfy pressing law enforcement inquiries. In
the
near future, we expect that service providers will be obligated to improve
their
data retention policies.
These
obligations will extend, or have already extended in some countries, to service
providers offering access to electronic communication networks, including
Internet cafés, public libraries, Wi-Fi hotspot providers and hotels. The
systems to be deployed will have to be state-of-the-art, in terms of security,
protection and timely response. Data must be securely stored and protected
from
accidental or unlawful access or destruction and, at the same time, be readily
available for access and transmission to the law enforcement agencies.
Furthermore, in the case of large operators or service providers with operations
in multiple countries that centralize their data retention systems, these
systems will need to be compliant with the legislation in each of the countries
where the company operates. The E.U. Data Retention Directive may be enforced
differently in each country, which may, in turn, add layers of compliance
measures to operators which service subscribers in more than one member
state.
We
estimate that the cost of implementing such systems will be high. Costs related
to increasing storage capacity, making the data available online, integrating
systems and software, and adding solutions that filter and retain Internet
access and traffic data will be significant. In addition, providing the required
speed and analysis power will add to the cost of implementing a compliant
system. Finally, there will be consulting costs associated with aggregating
a
comprehensive solution, especially for large and multi-country operations.
We
believe that our DRS solution is the only one that completely adheres to the
European Union data directives, is currently up and running and processing
billions of transactions a day, and is able to process data retention
transactions for substantially less than legacy relational database systems.
To
date, our customers have consisted of telecommunication companies, ISPs and
law
enforcement agencies, primarily in the European Union. As more stringent data
retention laws are introduced in the United States, Latin America and throughout
Asia, we intend to target customers, with similar profiles, in these regions
of
strong emerging demand.
Under
the
E.U. Data Retention Directive alone, we estimate that communications traffic
and
location data generated by approximately 500 million people will need to be
retained. The U.K.-based Internet Services Provider Association estimates the
costs (in order to comply with the E.U. Data Retention Directive) of storing
the
terabytes of extra data and implementing a quick retrieval system will be
approximately £35 million in the first year and £9 million each subsequent year
for a large ISP with 1 to 2 million customers.
We
are
seeking to sell our data retention, lawful interception and investigation
software to telecommunication companies, ISPs, law enforcement agencies and
corporate enterprises in the European Union, South America and the United
States. We have targeted the telecommunications segment as our initial customer
base. Given our telecommunications experience and our management’s long-standing
industry relationships, we believe that we are positioned to be a leader in
the
telecommunications industry segment, particularly with respect to homeland
security applications. Other attractive target markets include ISPs,
enterprises, vehicle movement detection (via license plate capture) and video
surveillance.
Other
Target Market Segments
In
2008
and 2009, we also expect to enter the e-investigation market through our
Investigatia subsidiary, the e-discovey market through our Discoveria
subsidiary, the e-recovery market through our Recoveria subsidiary, the video
surveillance market through our Spectia subsidiary, and the sexual predator
discovery market through our Offendia subsidiary. However, there can be no
assurance that any of these market activities will result in definitive customer
contracts or project awards, or that entering these markets will be profitable
for us.
E-discovery
(electronic discovery) refers to any process in which electronic data is sought,
located, secured and searched with the intent of using it as evidence in a
civil
or criminal legal case. E-discovery can be carried out offline on a particular
computer or it can be done in a network. The nature of digital data makes it
extremely well-suited to investigation. Digital data can be electronically
searched with ease, whereas paper documents must be scrutinized manually.
Further, digital data is difficult or impossible to completely destroy,
particularly if it gets into a network. This is because the data appears on
multiple hard drives, and because digital files, even if deleted, can often
be
undeleted. The only reliable means of destroying data is to physically destroy
any hard drive where it is found.
In
the
process of e-discovery, data of all types can serve as evidence. This can
include text, images, calendar files, databases, spreadsheets, audio files,
animation, web sites and computer programs. Even malware such as viruses,
trojans and spyware can be secured and investigated. E-mail and instant message
dialogs can be an especially valuable source of evidence in civil or criminal
litigation, because people are often less careful in these exchanges than in
hard copy correspondence such as written memos and postal letters.
Electronic
discovery is the subject of amendments to the Federal Rules of Civil Procedure,
which went into effect on December 1, 2006, and the Sarbanes-Oxley Act that
went
into effect on July 30, 2002. Our e-discovery company Discoveria will address
this market. Our Discoveria solution will likely utilize the Retentia logging
and indexing engine and the Interceptia interception engine. Discoveria intends
to offer its e-discovery product both as a web-based service and as an “on
premise” installed product.
E-recovery
(electronic recovery) refers to making copies of data so that these additional
copies may be used to restore the original after a data-loss event. These
additional copies are typically called “backups.” Backups are useful primarily
for two purposes - to restore a computer to an operational state following
a
disaster (called disaster recovery) and to restore files after they have been
accidentally deleted, destroyed or corrupted.
Due
to a
considerable overlap in technology, backups and backup systems are frequently
confused with archives and fault-tolerant systems. Backups differ from archives
in the sense that archives are the primary copy of data and backups are a
secondary copy of data. Backup systems differ from fault-tolerant systems in
the
sense that backup systems assume that a fault will cause a data loss event
and
fault-tolerant systems assume a fault will not. Backups or e-recovery are
typically that last line of defense against data loss. According to Disaster
Recovery, “despite the number of very public disasters since September 11, 2001,
still only about 50% of companies report having a disaster recovery plan. Of
those that do, nearly half have never tested their plan, which is tantamount
to
not having one at all.” Since a backup system contains at least one copy of all
data worth saving, the data storage requirements are considerable.
Our
e-recovery company Recoveria will address this market. Our Recoveria solution
will likely utilize the Retentia logging and indexing engine and the Interceptia
interception engine. Recoveria intends to offer its e-recovery product both
as a
web-based service and as an “on premise” installed product.
Video
surveillance
(closed-circuit television or CCTV) is the use of video cameras to transmit
a
signal to a specific, limited set of monitors. CCTV is often used for
surveillance in areas that need security, such as banks, casinos, airports
and
military installations. CCTV systems may operate continuously or only as
required to monitor a particular event. The most measurable effect of CCTV
is
not on crime prevention, but on detection and prosecution. After the bombings
in
London on July 7, 2005, CCTV footage was used to identify the bombers.
Our
video
surveillance company Spectia will address this market. Retentia recently
purchased technology for our Spectia solution out of a bankruptcy proceeding
for
approximately $300,000. Our Spectia solution will also likely utilize the
Retentia logging and indexing engine. Spectia intends to offer its video
surveillance product both as a web-based service and as an “on premise”
installed product.
Sexual
offender search engine
.
Sex
offender registration is a system in place in a number of jurisdictions designed
to allow government authorities to keep track of the residence and activities
of
convicted sex offenders, including those who have completed their criminal
sentences. In some jurisdictions (especially in the United States), information
in the registry is made available to the general public via a website or other
means. In many jurisdictions, registered sex offenders are subject to additional
restrictions, including housing. Those on parole or probation may be subject
to
restrictions that do not apply to other parolees or probationers. The purpose
of
such registration and restrictions is to encourage the protection of children
and society by increasing the awareness of the community about the recidivism
risk that sex offenders present upon release from incarceration. Policy makers
and the public who support this intervention also hope that community awareness
will assist in preventing future sex offenses.
In
1947,
California became the first state to have a sex offender registration program.
Community notification of the release of sex offenders from incarceration did
not occur until almost 50 years later. In 1994, a federal statute called the
Jacob Wetterling Act required all states to pass legislation requiring sex
offenders to register with state sex offender registries. Then again in 1996,
based on a set of New Jersey laws called “Megan’s Laws,” the federal government
required states to pass legislation mandating public notification of personal
information for certain sex offenders. The Adam Walsh Child Protection and
Safety Act became law in 2006. This law implements new uniform requirements
for
sex offender registration across the states. Highlights of the law are a new
national sex offender registry, standardized registration requirements for
the
states, and new and enhanced criminal offenses related to sex offenders. In
the
United States, all 50 states have passed laws requiring sex offenders,
especially child sex offenders, to register with police authorities. Sex
offenders report where they live when they leave prison or are convicted of
a
crime. In 2006, California voters passed Proposition 83, which will enforce
“lifetime monitoring of convicted sexual predators and the creation of predator
free zones.”
Our
sex
offender search company Offendia will address this market. Offendia will offer
its sex offender search product via the Offendia website and as a web-based
service accessible from our application programming interface (API). Social
networking sites will be able to utilize our API, a source code interface,
to
access our registry.
Products
and Services
Our
proprietary data retention and forensic software product is known as our Data
Retention Suite. Telecom-service providers use DRS to keep track of the
telephone calls made by their customers. Internet service providers use it
to
keep track of the websites visited by their customers, and law enforcement
agencies use it to detect criminal activities and apprehend perpetrators. Our
DRS software provides for data capture, storage and subsequent forensics
examination of multiple data sets, including phone and web-surfing records.
DRS
is built on our proprietary file system-based technology that uses less storage
space and has faster response times than those of relational database management
systems (RDBMS). It is “purpose-built” and excludes RDBMS technology or
licensing requirements. DRS uses a distributed architecture that allows very
large scalability by using low-end, low-cost servers. It has real-time data
analysis and reporting capability, preserves security and access control in
complete accordance with the European Union and other directives, requires
less
hardware and takes less time to install and maintain, making it significantly
less expensive than competing systems.
DRS
is
designed to address the data retention, call detail records and system
scalability concerns of our target markets. Data retention generally refers
to
the storage call detail records (CDRs) of telephony and Internet traffic and
transaction data by governments and commercial organizations. In the case of
government data retention, the data that are stored are usually those of
telephone calls made and received, e-mails sent and received and websites
visited. Location data are also collected. The new E.U. Data Retention Directive
targets fixed, mobile and Internet telephony, as well as Internet access and
e-mail. Providers of publicly-available electronic communications services
or of
a public communications network must retain essential information such as name,
user identifications (user IDs) and addresses of the individuals initiating
the
communication, as well as those of the targets of such communication. The time
and date of the communication, the mobile equipment used and the geographic
location involved must also be recorded and retained. Retained data must be
securely stored and protected against accidental or unlawful destruction,
alteration or unauthorized access. Furthermore, the framework indicates the
data
should be accessible only to authorized personnel, and the data must be
available to competent authorities in specific cases “without undue delay.” Our
DRS solutions in place today have proven processing power and scalability and
are processing billions of data records every day.
Our
Data
Retention Suite is a complete package of software products that manages the
processing of requests from law enforcement agencies, using a centralized
architecture. DRS is comprised of three products: DRS/wm (workflow management),
DRS/db (database) and DRS/fs (file systems). DRS/wm handles all phases of
warrant execution, including management of incoming requests, the splitting
of
services, the actual intercept, management of storage system interfaces and
multi-repository virtualization. DRS/db and DRS/fs provide for the archiving
and
fast retrieval of traffic stored on database or file systems storage
architecture, in a compressed and encrypted format, to meet our performance
standards under our service agreements. DRS/db is completely convergent and
data
independent, meaning that it accommodates all types of traffic (such as fixed,
mobile, Internet and data). Furthermore, our DRS/fs significantly reduces the
amount of storage that is dedicated to data retention.
To
achieve compliance with the E.U. Data Retention Directive, traditional and
incumbent service providers will likely need to perform major overhauls on
their
call detail systems. Solutions addressing the E.U. Data Retention Directive
will
have to fulfill many requirements and address integration, retention and
analysis. These systems must not only support traditional CDR systems, but
also
must be ready to support Internet access traffic data in the future. Telecom
operators are used to retaining traffic data (and, in some cases, location
data)
for commercial purposes such as billing. However, it is not always the same
with
respect to Internet data. Under the E.U. Data Retention Directive, only the
required information is to be retained, such as the user ID of the sender and
receiver of messages and the calling and called party of Internet telephony.
Appropriate filtering mechanisms therefore must be implemented to avoid
retaining content data.
Additionally,
storage and access systems must be such that there is either a logical
separation of data or a query system to access only allowed data, in accordance
with the E.U. Data Retention Directive. In the case of multiple-country
operations, if the operator implements centralized storage and query systems,
these systems must be able to adapt to the differences in the implementation
of
the E.U. Data Retention Directive. For example, different countries may have
different retention periods and the query system must be aware of such
differences. At the same time, the storage solution must be able to selectively
dispose of data at different intervals. Service providers have to develop
appropriate processes to ensure that lawful requests for retained data are
handled by authorized personnel, and that they are efficiently and
satisfactorily fulfilled. These processes must also address issues such as
inaccessibility of data to unauthorized employees, protection of data that
must
not be disclosed and prevention of accidental disclosure of retained
data.
Traditional
and incumbent operators face another challenge. Many existing CDR systems have
been built over time and as requirements for tracking records were mandated
and
service options were expanded. Consequently, many CDR systems are patchwork
systems, assembled and updated at different times, mostly to fulfill the needs
of the operator’s own business and the need to comply with the regulatory
environment. Many of these systems were originally built in-house and
complemented with third-party systems. The integration process of the CDR
systems is constant for operators. Adapting current CDR systems to comply with
the E.U. Data Retention Directive is possible; however, it will require
important systems integration initiatives, as well as a substantial increase
in
storage capacity to be able to provide timely results. Current systems do not
usually have an inherent segregated data storage capability or extensive
security provisioning. Our DRS solutions in place today have the necessary
data
capture, storage and subsequent forensics examination capabilities for multiple
data sets, including phone and web-surfing records, to meet current CDR system
needs. Our DRS solutions will enable telecommunication companies and ISPs to
preserve their investment in legacy systems and still meet the requirements
of
the E.U. directives
.
Under
the
E.U. Data Retention Directive provisions alone, communication traffic and
location data generated by approximately 500 million people will need to be
retained. Service operators across the European Union will be required to store
much more data than previously and for longer periods. Several studies have
been
conducted by vendors and trade organizations on the amount of data that will
be
required to be retained. This depends, of course, on the types of communication
services offered. Regardless, the industry is in agreement that the data will
range from tens to hundreds of terabytes, depending on the size of the service
provider and the communications services it offers.
Many
service operators rely on conventional RDBMS technology to store this data.
Our
DRS solution is built on our proprietary file system-based technology that
uses
less storage space and has faster response times than those of RDBMS. We
estimate that it requires five times less raw data to be stored than a
traditional RDBMS, which results in a sizable reduction in customers’ storage
requirements and potentially significant cost savings. DRS also uses a
distributed architecture that allows very large scalability by using low-end,
low-cost servers.
Growth
and Expansion Strategy
Our
current focus is to expand Retentia’s business and the penetration of our DRS
software in our target markets, notably Europe, the United States, South
America, the Middle East and Southeast Asia, particularly as these populated
regions adopt and strengthen their data retention laws. For instance, in the
United States, with a population of approximately 300 million people, there
are
more than 600 million combined landline, cellular and Internet subscribers.
Given current legislative trends, we view the U.S. market as a similarly rich
environment for our data retention software. We intend to accomplish organic
growth by expanding our sales channel, developing our in-house channel support,
extending our product line, building our industry position and accelerating
our
sales and marketing efforts.
With
the
launch of Interceptia in mid-2007 with our acquisition of Datakom, and of
Investigatia in 2008, we expect to further broaden our product and service
offerings, and provide additional growth opportunities for our company. Through
Interceptia, we entered the lawful interception product area. Lawful
interception is the actual archiving of the content
of
telephone calls and the recording of websites visited. Through Investigatia,
we
will enter the field of behavioral tracking and data investigation, which
encompasses the monitoring and examination of data streams to determine
malicious behavior and other potential anomalies. It intends to focus on fraud,
identity theft and identity authenticity and verification. In addition, during
2008 and 2009, we expect to launch operations through wholly-owned subsidiaries
Spectia, Inc., Discoveria, Inc., Offendia, Inc. and Recoveria, Inc. Spectia
will
focus on video surveillance by law enforcement authorities and intelligence
services. Discoveria will focus on e-discovery within the small and medium-sized
business market. Recoveria will focus on e-recovery within the small and
medium-sized business market, and Offendia will focus on the identification
and
prosecution of sexual offenders in the social networking market.
Rather
than internally developing software for lawful interception and other product
or
service offerings, we intend to acquire companies that are already established
in these niche markets. As of the date of this prospectus, we have identified
several well-positioned companies as potential acquisition targets. Areas of
specific interest to us are, and will continue to be, data retention, lawful
interception, forensic investigation - to detect anomalous behavior - and
preemptive analysis, such as bank fraud detection and management. The companies
we have identified provide what we believe are complementary software and/or
technology platforms, existing customer bases in various niche or regional
markets and trained professional employees. We currently have no commitments
or
agreements with respect to any such acquisitions, and there can be no assurance
that any acquisition will be successfully completed by us.
On
June
7, 2007, we acquired all of the outstanding stock and business activities of
Datakom GmbH of Germany. We believe that the Datakom acquisition will add
significant value to our company as a result of:
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the
global market potential for Datakom’s European Telecommunications
Standards Institute-compliant products and network monitoring
systems,
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Datakom’s
unique expertise in protocols, topologies and lawful interception
architectures,
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the
high profit margins of Datakom’s proprietary product
suite,
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the
massively flexible and proven architecture of Datakom’s
technology,
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Datakom’s
highly configurable user
interfaces,
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Datakom’s
carrier-grade transaction framework, which is highly
scalable,
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Datakom’s
long-term relationships with telecommunications companies and law
enforcement agencies, and
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Datakom’s
proprietary and patent-protected
technology.
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Acquisition
of Datakom GmbH
On
June
7, 2007, we acquired all of the outstanding stock and business activities of
Datakom GmbH of Germany for consideration of $10,500,000 in cash and 14,000,000
restricted shares of our common stock. Of the cash consideration, $2,000,000
was
immediately paid and the remaining $8,500,000 is payable by June 2008 to
complete the acquisition. For more than 20 years, Datakom has specialized in
the
network monitoring and intelligence gathering business, with a focus on
information sent via telecommunications systems and the Internet.
Datakom,
along with its wholly-owned subsidiary Gten AG, provides monitoring, network
security and lawful interception (wiretapping) software and services to ISPs,
telecommunications companies, law enforcement agencies and other government
agencies in Germany, Africa and the Middle East. Founded in 1986, Datakom has
deployed its technology in more than 10,000 customer installations. Datakom’s
proprietary and patented technology enables its customers to legally identify,
control, shape, re-direct and duplicate network traffic. Its solutions are
designed to simplify network architecture and support existing protocols with
no
impact on network performance. We intend to market Datakom’s products in Europe,
the Middle East and Africa under the Datakom and Gten brand names and under
our
Interceptia brand in the United States and other parts of the
world.
Datakom's
key technology advantage results from a proprietary software application it
has
developed utilizing Deep Packet Inspection (DPI). We believe that our software
gives Datakom a significant competitive advantage over other products in the
marketplace. DPI is a form of computer network packet filtering that examines
the data part of a through-passing packet (e-mail, instant message dialogs,
websites visited, voice calls and other types of network traffic), searching
for
non-protocol compliance or pre-defined criteria to decide if the packet can
pass. This is in contrast to shallow packet inspection (usually called packet
inspection), which just checks the header portion of a packet.
Datakom’s
proprietary technology enables DPI technology to dig deeper into packets to
identify individual items of data out of traffic as it speeds through the
network. This allows telecommunications companies to readily know which packets
of information a person is receiving online from e-mail, to websites visited,
to
sharing of music, video and software downloads and other methods of
communication. A tagged packet can be recorded, indexed, redirected, blocked,
sped up, slowed down, captured, archived and found again at a later time as
directed by Datakom’s customers. DPI is also increasingly being used in security
devices to analyze flows, compare them against policy, and then treat the
traffic appropriately (for example, block, allow, rate limit, tag for priority
or mirror to another device for more analysis or reporting).
Datakom
markets its products to ISPs, telecommunications companies, law enforcement
agencies and other government agencies. These are many of the same types of
customers to which we market our Retentia DRS product. Datakom has deployed
its
proprietary software and other technologies across two main product areas -
network analysis and lawful interception. Network analysis equipment and
services are offered directly through Datakom. Lawful interception equipment,
software and services are offered through Gten.
Network
analysis is a range of techniques employed by engineers and planners to study
the properties of networks including connectivity, capacity and rates of flow.
Network analysis can be used to estimate the capacity of a network or to plan
for additions to an electrical distribution system. In addition, network
forensics is the capture, recording and analysis of network events in order
to
discover the source of security attacks or other problem incidents. Datakom
offers test, analysis and performance management systems for voice and data
networks, as well as training and consulting services. Datakom has product
categories for LAN, WAN, LAN/WAN, VoIP, cellular mobile and network application
performance.
Lawful
interception (also known as wiretapping) is the interception of
telecommunications by law enforcement agencies (LEAs) and intelligence services,
in accordance with local law and following due process and receiving proper
authorization from legal authorities. While the detailed requirements for lawful
interception differ from one jurisdiction to another, the general requirements
are the same - the lawful interception system must provide transparent
interception of specified traffic only, the subject (target) must not be aware
of the interception and the service provided to other users must not be affected
during interception. Gten provides technologies and services for monitoring,
recording and reconstructing telecommunications data for the use of network
operators and LEAs. Gten offers customers a full-service solution which includes
all of the services and systems required for monitoring network communications
as decreed by a court order. Its lawful interception solution is used to assist
in intelligence and evidence gathering and aid in the prosecution of terrorists,
drug traffickers, child pornographers, arms dealers, money launderers,
kidnappers and other serious criminals. Gten has nine major products: the
Siemens Monitoring Center (MC), Gten Poseidon, Top Layer DCFD, GTEN Amado ATM
filter and ATM packet receiver, CloudShield CS-2000, ENDACE Network Monitoring
Interface Cards (NMIC), GTEN P2P Control and Layer IDS Balancer (Intrusion
Detection System).
Lawful
interception is subject to substantial legislation and government regulation.
Many countries worldwide maintain lawful interception requirements similar
to
those in Europe and the United States. In the European Union, the European
Council Resolution of 17 January 1995 on the Lawful Interception of
Telecommunications (Official Journal C 329) mandated lawful interception
measures on a pan-European basis. Although some European Union member states
only reluctantly accepted this resolution for privacy concerns, there appears
now to be general agreement with the resolution. Currently, interception
mandates in Europe are generally more rigorous than those in the United
States.
In
the
United States, two laws cover most of the governance of lawful interception.
The
1968 Omnibus Crime Control and Safe Streets Act, Title III, pertains mainly
to
lawful interception criminal investigations. The second law, the 1978 Foreign
Intelligence Surveillance Act (FISA) governs wiretapping for intelligence
purposes where the subject of the investigation must be a foreign (non-U.S.)
national or a person working as an agent on behalf of a foreign country. During
the 1990s, to help law enforcement more effectively carry out wiretap
operations, especially in view of the emerging digital voice and wireless
networks at the time, the U.S. Congress passed the Communications Assistance
for
Law Enforcement Agencies Act (CALEA) of 1994. This act provides broad guidelines
to network operators on how to assist LEAs in setting up interceptions and
the
types of data to be delivered. See also “- Legislation and Government Regulation
- Data Retention in the United States” below. Most recently, as a response to
the terrorist events of September 11, 2001, the U.S. Congress incorporated
various provisions related to enhanced electronic surveillance in the Uniting
and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism Act (USA Patriot Act). These wiretap provisions are
mainly updates to those expressed under FISA.
Datakom’s
core proprietary technology is protected by a patent. Datakom’s original patent
(DAT-011-DE, DAT-011-PCT) is described as “method and system for monitoring
speech and/or data network connections irrespective of location by commissioning
agency,” and covers interception of telecommunication (including data and voice)
on physical and logical network connections filtering according to different
warrant identification criteria. It includes tagging and time stamping of
intercepted telecommunication and transmission to LEAs via a transit-network,
and interception covers voice and data connections in WAN and/or LAN (V.24,
X.21, V.35, V.36, UTP-5, ISDN-S0, ISDN S2M, E1, E3, DS-1, DS-3, OC3/STM 1,
Ethernet and Token Ring). The patent has been granted in Germany and Europe
(country publication in Austria, Switzerland/Liechtenstein, etc.). In addition,
Datakom is seeking an extended patent (GTE-013-DE, GTE-013-PCT) described as
“method and arrangement for monitoring of voice and/or data network connections
independent of location by authorities,” which covers the content of DAT-011-DE
and, additionally, specifies and improves transmission (for example,
fragmentation and re-assembly) to LEAs via single or multiple transit channels.
This patent is pending in Germany and Europe.
Datakom
is organized as a German limited liability company. Datakom has offices in
Munich, Bremen and Pyrmont, Germany. The Munich office handles management,
administration, sales, marketing, engineering, support and business development.
The Bremen office handles engineering, support and software development. The
Pyrmont office operates as a regional sales office. Datakom maintains corporate
websites at www.datakom.de and www.gten.de. The contents of these websites
are
not part of this prospectus and should not be relied upon with respect to this
offering. Datakom currently employs approximately 25 people.
Retentia
Customers and System Integrators
Our
marketing focus is on telecommunications companies, ISPs, law enforcement
agencies and corporate enterprise customers, primarily in the European Union
initially, with but expanding into the United States and South America. We
are
also seeking to sell DRS through large system. These companies (our direct
customers) integrate our DRS software into telecom-service providers and ISPs
(our indirect customers). Our largest customer footprint is in Italy, and early
adopters of our DRS software include Telecom Italia SpA, FastWeb SpA, Ferrovie
Dello Stato (the Italian railroad) and the Italian Ministry of
Defense.
Isilon
Systems, Inc. accounted for $1,320,000, or approximately 80%, of our data
retention revenues in the nine months ended September 30, 2007. Together with
Siemens AG, Telecom Italia SpA and Telecom Italia Mobile Brazil, the four
companies accounted for 94% of our data retention revenues in this period.
Revenue from Isilon Systems is expected to decline as a percentage of our total
revenues as we expand our operations. A decision by Isilon Systems to
discontinue or limit its relationship with us could result in a significant
loss
of revenue to us.
Inanna
Group and Deutsche Telecom accounted for $2,306,693, or approximately 60%,
of
our lawful interception and network monitoring revenues in the nine months
ended
September 30, 2007. Together with Deutsche Bundesbank, Elaman GmbH and
T-Systems, the five companies accounted for 79% of our lawful interception
and
network monitoring revenues in this period.
Overall,
approximately 66% of our revenues in the nine months ended September 30, 2007,
or approximately $3,626,693, were attributable to Isilon Systems, Inanna Group
and Deutsche Telecom.
Except
for Isilon Systems, Inanna Group and Deutsche Telecom, no single customer
accounted for more than 10% of our revenues during 2007. In 2006, we recognized
no material revenues.
Business
Pipeline
As
compliance with the E.U. Directive has become effective, and as other developed
and populated regions of the world move toward implementation of similar
legislation, our sales opportunities continue to grow. Our prospective customers
include fixed- and wireless-telecommunications companies, ISPs, government
agencies and large business enterprises. We currently have approximately 50
potential licensing opportunities at various stages of development, ranging
from
“under negotiation” to “quoted orders” to “awaiting booking” to “booked,” as
explained below.
“Under
negotiation” signifies that we have met with a prospective customer and are
preparing a bid proposal. “Quoted orders” refer to customers with whom there
have been detailed meetings, a written proposal has been presented, and we
are
awaiting a response. “Awaiting booking” means that we have obtained a verbal
order and are waiting for the arrival of a signed purchase order. Finally,
“booked” indicates that we have received a signed purchase order. The potential
arrangements range in size from $300,000 to $3,000,000, and most of these target
customers are located in the European Union, the Middle East and South America.
We are also pursuing business prospects in North America.
Our
business pipeline consists of many new relationships and “add-on” opportunities
with existing customers. Our typical sales cycle averages four to six months.
We
believe that the cycle will shorten to only a couple of months as we package
our
software with pre-sourced hardware and following the E.U. Data Retention
Directive deadlines.
Sales
and Marketing
We
primarily sell our software through an outside sales channel of network
equipment providers and system integrators, industry consultants, storage and
server providers, and by word of mouth. We support our outside sales channel
with in-house technical and sales assistance. Our in-house sales team has
greater product knowledge than our resellers do, while our resellers have
long-standing relationships with potential customers. We believe that our
channel partnerships promote marketing efficiency and strategic positioning.
Our
current channel partners include network equipment providers and system
integrators. Prospects seeking data retention solutions often make their first
inquiries to companies that manufacture telecommunications equipment or ISP
hardware, or to those performing system integration services.
We
have
developed marketing and sales relationships with major corporations in these
areas. We are seeking to increase the flow of leads from these channels by
offering additional vertical business solutions, such as lawful interception
and
data investigation, beginning in 2008. In addition, the data retention services
market has recognized consultants, who also often act as trusted advisors when
assisting clients in implementing critical systems. We are working to develop
strategic partnerships with these consultants to create business solutions
that
have our DRS as their backbone.
Our
costs
are reduced by the fact that many end-user customers can require the same
solution, which enables us to resell the same software to many customers without
incurring significant additional costs. In our sales channel model, we believe
resellers have no viable competitive product offerings. The captive nature
of
our sales channel partners also applies throughout our business and to the
ultimate end-user as well. Once we have completed the process of provisioning
and deploying our software and equipment and activating a new customer on the
DRS system, it becomes arduous to switch to another service provider.
We
believe that our sales and marketing strategy accomplishes a number of goals,
such as maximizing “feet on the street” with a minimal upfront investment,
shortening the ramp-up for delivering products to the prospective customer
universe, gaining market entry into remote markets, and creating the
“one-to-many” relationships that give our products the widest possible exposure.
We have already identified companies in Europe, South America and the United
States with which we wish to develop sales and marketing relationships, in
order
to drive revenue opportunities in these attractive markets. Additionally, with
our recent acquisition of Datakom, we have added nine major products to our
offerings and deeper contacts within our existing customer base.
Technology
Platform and Intellectual Property
The
technology behind our DRS data retention solution provides for data capture,
storage and subsequent forensic examination of multiple data sets, including
phone and web-surfing records. DRS is built on our proprietary file system-based
technology that uses less storage space and has faster response times than
those
of relational database management systems. It is “purpose-built” and excludes
RDBMS technology or licensing requirements. DRS uses a distributed architecture
that allows very large scalability by using low-end, low-cost servers. It has
real-time data analysis and reporting capability, preserves security and access
control in complete accordance with the European Union and other directives,
requires less hardware and takes less time to install and maintain. In
implementing DRS, we have engaged and continue to engage in technology
partnerships with some of the world’s leading technology companies.
Our
DRS
software was engineered and developed independently. We consider it proprietary
and confidential, and protected under trade secret laws. We have no patents
on
our software or technology. In the past, we have protected our proprietary
and
confidential information through a series of non-compete and non-disclosure
contracts with our employees and other interested parties. The law of protection
of confidential information effectively allows a perpetual monopoly in secret
information, and it does not expire as would a patent. The lack of formal
protection, however, means that a third party is not prevented from
independently duplicating and using the secret information once it is
discovered. We do not consider the grant of patents essential to the success
of
our business.
We
have
filed trademark applications for our use of the marks Intelligentias, Retentia,
Interceptia and Investigatia. We own the dot.com, dot.net and other URLs for
each of our companies. We do not manufacture our own hardware products. Hardware
that we utilize in our data retention solutions is provided by third-party
vendors or directly from manufacturers.
In
terms
of research and the product development, as technology advances and new hardware
equipment becomes available, we develop essential connection software to process
the data that these new units produce. We also continue to improve the software
displays (GUI) of our application layer based on ongoing customer feedback
and
suggestions.
With
the
recent acquisition of Datakom, we also gained access to Datakom’s proprietary
software and technology. Datakom’s core proprietary technology is protected by
an original patent (DAT-011-DE, DAT-011-PCT), described as “method and system
for monitoring speech and/or data network connections irrespective of location
by commissioning agency,” granted in Germany and Europe. Datakom is seeking an
extended patent (GTE-013-DE, GTE-013-PCT), described as “method and arrangement
for monitoring of voice and/or data network connections independent of location
by authorities,” which is pending in Germany and Europe.
Competition
and Competitive Advantages
We
believe that our DRS software product has certain significant competitive
advantages over other products we have come across. Notably, we believe that
DRS
costs less, requires less hardware, takes less time to install and maintain,
has
proven reliability and scalability, enables real-time reporting, is more secure
and meets E.U. Data Retention Directive standards.
Data
retention software is typically priced based on the number of data transactions
processed per day. Our sales strategy is to be the lowest cost provider, and
because our competition uses less efficient software that requires more
databases and hardware, we believe we have a significant pricing advantage.
Our
software requires less hardware for several reasons. We do not require as many
databases to process an equal number of data transactions as compared to our
competitors. Fewer databases translate into less hardware and fewer
administrators. In addition, we compress the data we capture so our solution
requires less storage.
Because
our solution requires fewer databases and, therefore, less hardware, our
solution can be installed and maintained in less time. Our software is already
up and running in carrier class installations and scaling to tens of billions
of
data transactions processed on a daily basis. To comply with the E.U. Data
Retention Directive, ISPs will have to retain and manage web-surfing data.
The
amount of data that they will generate per customer is many times more than
that
captured and stored by telecommunication companies. This means that regardless
of security and privacy-related issues, we believe that it would not be
financially feasible for ISPs to capture and store this amount of data using
traditional or home-grown solutions.
The
E.U.
Data Retention Directive requires reporting, once a law enforcement inquiry
has
been made, “without undue delay.” Our solution returns real-time reports to law
enforcement agencies and completely complies with the directive. Because our
competitors’ software requires more databases, requests from law enforcement
must be queried across multiple databases. In turn, our competitors’ responses
can be more time-consuming to generate.
The
E.U.
Data Retention Directive also mandates that retained data must be “tamperproof
and secure.” Our software is proprietary and highly tuned as a purpose-built
file system. The system is “write once” and “read many,” or “WORM.” This means
that data captured by our software cannot be tampered with or deleted. This
unique ability sets our DRS solution apart and ahead of those that rely on
relational database technology. The data captured by many of our competitors’
products are stored in a database. As such, they can be edited, altered or
deleted by the database administrator who, in turn, can then cover the tracks
by
deleting log files.
Our
only
known direct competitor is Hewlett-Packard Co. (H-P). H-P has much better brand
recognition than we do. However, we believe that its solution does not meet
the
E.U. Data Retention Directive guidelines, is hardware intensive and, therefore,
more expensive than ours. Other companies have offerings that may compete in
some or all aspects of our target market. These competitors, and other possible
new competitors, may have substantially greater financial, personnel and other
resources, greater adaptability to changing market needs, longer operating
histories and more established relationships than we currently have.
Oracle,
EMC and Netapp (Network Appliance) may be considered indirect competitors.
However, while these companies operate in the broad category of data retention
and storage, they do not operate in the subset category of data forensics.
In
order to comply with the E.U. Data Retention Directive, any competitor will
need
to offer data forensic capabilities. Data forensics is the ability to track
the
historical activities of a suspect in real-time and provide tamperproof
court-quality evidence.
Also,
a
number of the companies in our target market have their own in-house database
systems and development teams, which can be competitive to ours. In the past,
many telecommunications companies put together in-house data forensics
solutions, simply by expanding their relational databases and storage
infrastructures. We believe that these are inefficient solutions that became
many times more expensive than ours, accomplish far less and are very cumbersome
to maintain. Due to the E.U. Data Retention Directive regarding data security
and privacy, we believe that it will no longer be practical for
telecommunication companies to use legacy solutions that rely on relational
database technologies. These database systems lack sufficient security and
the
E.U. Data Retention Directive makes it clear that service providers and their
management teams will be liable for lost and/or intentionally deleted data
records.
Legislation
and Government Regulation
The
last
few years have seen increased regulatory focus domestically and abroad in data
retention and various regulatory mandates for accessibility to such data by
law
enforcement agencies, intelligence services and other government agencies.
The
primary aim of this regulatory focus and related data retention legislation
is
to enable law enforcement agencies to quickly investigate and prosecute
terrorists, pedophiles, drug dealers and other criminals.
These
data retention laws require service providers to retain more data, make them
available in near real-time, and to archive them for far longer periods of
time.
As a result of this legislation, we believe telecommunications companies, ISPs,
law enforcement agencies and corporate enterprises will seek to upgrade their
infrastructures to meet government mandates.
In
the
European Union, Directive 2006/24/EC of the European Union (the E.U. Data
Retention Directive) is currently a prime motivating factor behind data
retention initiatives. We expect that more stringent data retention laws will
also proliferate in the United States, Latin America and throughout
Asia.
E.U.
Data Retention Directive
The
key
purpose of adopting the E.U. Data Retention Directive is to harmonize E.U.
member states’ provisions concerning obligations of “communications providers”
(providers of publicly-available electronic communications or public
telecommunications networks) to retain certain data which are generated or
processed by them. The reason for requiring the retention of this data is to
ensure that national security authorities can investigate, detect and prosecute
serious crime and, in particular, terrorist activity.
The
E.U.
Data Retention Directive came into effect on May 3, 2006. The governments of
E.U. member states had until September 15, 2007 to transpose the E.U. Data
Retention Directive into national legislation. If an E.U. member state fails
to
implement the E.U. Data Retention Directive into national legislation within
the
time limit provided, the European Commission may bring action against it within
the European Courts. Once the national legislation is in force, communications
providers will need to comply with it.
Some
E.U.
member states may seek permission from the European Commission to implement
national legislation at a slightly later date (for example, the United Kingdon
has indicated that it will seek permission to bring the U.K. rules into effect
on October 1, 2007, rather than September 15, 2007). It is also not uncommon
for
some E.U. member states not to implement national legislation within the
required time frame. In that event, communications providers may not be obliged
to comply with the E.U. Data Retention Directive within these jurisdictions
until a later date. In addition, the E.U. Data Retention Directive contains
a
provision which allows each E.U. member state to postpone the application of
the
directive to the retention of Internet communications data until March 15,
2009.
E.U. member states intending to postpone the application of the E.U. Data
Retention Directive had to notify the European Commission and Council by way
of
a declaration. The following E.U. member states have made such a declaration:
the Netherlands, Austria, Estonia, the United Kingdon, Cyprus, Greece,
Luxembourg, Slovenia, Sweden, Lithuania, Latvia, Czech Republic, Belgium,
Poland, Finland and Germany. Therefore, in 16 of the 27 E.U. member states,
the
data retention obligations will not apply to Internet communication data until
March 15, 2009.
Several
E.U. member states had previously adopted voluntary codes of practice in
relation to data retention. Communications providers active in the European
Union may well already be complying with these, pending the implementation
of
the E.U. Data Retention Directive at national level in E.U. member states.
This
legislation was also the subject of some controversy during the adoption
procedure within the E.U. institutions. Two member states (Ireland and Slovakia)
voted against the adoption of the E.U. Data Retention Directive. Ireland has
subsequently brought an action against the European Council and Parliament
for
the E.U. Data Retention Directive to be annulled on the basis that it was
adopted under the wrong legal basis. No date has been set for the case to be
heard by the European Court of Justice. If the E.U. Data Retention Directive
is
annulled by the European Court of Justice, it may be the case that certain
E.U.
member states may decide not to implement national regulations or, if national
regulations have already been adopted, they may be repealed.
The
E.U.
Data Retention Directive concerns the following categories of data related
to
mobile or fixed network telephony and Internet communications data (Internet
access, Internet e-mail and Internet telephony):
|
|
·
|
data
necessary to trace and identify the source of a
communication,
|
|
|
·
|
data
necessary to identify the destination of a
communication,
|
|
|
·
|
data
necessary to identify the date, time and duration of a
communication,
|
|
|
·
|
data
necessary to identify the type of
communication,
|
|
|
·
|
data
necessary to identify users’ communication equipment or what purports to
be their equipment, and
|
|
|
·
|
data
necessary to identify the location of mobile communication
equipment.
|
E.U.
member states must ensure that the categories of data specified in the E.U.
Data
Retention Directive are retained by communications providers for a minimum
period of six months and a maximum period of two years from the date of the
communication. The maximum retention period may be extended “for a limited
period” where an E.U. member state faces particular circumstances that warrant
such an extension and the European Commission approves the
extension.
The
E.U.
Data Retention Directive also contains certain provisions in relation to data
protection and data security. E.U. member states must ensure that communications
providers adhere to minimum standards in relation to data security principles
with respect to data retained in accordance with the E.U. Data Retention
Directive.
The
largest impact of the E.U. Data Retention Directive on telecommunication
companies and ISPs (operators) in the European Union is the requirement to
store
extraordinary amounts of data. Operators usually retain traffic data for
marketing and business purposes, such as billing, and purge them as soon as
they
are no longer required. For example, operators do not generally retain data
of
calls completed but not answered, or calls made to free numbers, since these
calls are not charged to the originating number. The data to be stored in
compliance with the data retention regulations are expected to be in the tens
of
terabytes, if not hundreds of terabytes for larger operators, and for much
longer terms.
Data
Retention in the United States
In
the
United States, the latest data retention initiative is part of the Internet
Stopping Adults Facilitating the Exploitation of Today’s Youth Act of 2007 (the
SAFETY Act), introduced in the U.S. Congress by Rep. Lamar Smith (R-Texas)
in
February 2007. If enacted as proposed, the SAFETY Act would require ISPs to
retain records on subscribers and give the U.S. Attorney General powers to
establish retention regulations on subscriber data, with possible fines and
prison terms for noncompliance.
In
1994,
the U.S. Congress passed the Communications Assistance for Law Enforcement
Act
(CALEA) in order “… to make clear a telecommunications carrier’s duty to
cooperate in the interception of communications (wiretapping) for law
enforcement purposes, and for other purposes.” The U.S. Congress passed CALEA to
aid law enforcement in its effort to conduct surveillance of citizens via
digital telephone networks. CALEA obliges telephone companies to make it
possible for law enforcement agencies to tap any phone conversations carried
out
over its networks, as well as making call detail records available. The act
also
stipulates that it must not be possible for a person to detect that his or
her
conversation is being monitored by the respective government
agency.
In
March
2004, the U.S. Department of Justice, Federal Bureau of Investigation and Drug
Enforcement Agency filed a “Joint Petition for Expedited Rulemaking” in which
they requested certain steps to accelerate CALEA compliance. This petition
mainly involved extending the provisions of CALEA to cover citizens’
communications that travel over the Internet. The CALEA compliance deadline
was
May 14, 2007, and applies equally to all facilities-based broadband access
providers and interconnected VoIP service providers.
CALEA
impacts both our Retentia business (DRS can be used for storage and access
of
CDRs ) and our Interceptia business (which focuses on legal
interception/wiretapping of telecommunications by law enforcement authorities
and intelligence services). For additional information concerning the impact
on
Datakom, see “Acquisition of Datakom GmbH” above.
The
data
retention trend has also affected the corporate world. As of December 1, 2006,
new Federal Rules of Civil Procedure guidelines went into effect in the United
States. The rules, set by the U.S. Supreme Court, expand the types of
electronically-stored information that companies could be required to produce
in
a lawsuit. In the future, companies that do not properly monitor and archive
PDAs, e-mails, instant message conversations and other forms of electronic
data
may be disadvantaged in civil lawsuits. According to a recent online survey,
executives are ill-prepared for the new rules. In a November 2006 study by
Deloitte Financial Advisory Services, almost 70% of respondents said they
require more training on their own corporate record retention policies and
procedures. The respondents included many chief financial officers, tax
directors, finance directors, attorneys and controllers.
We
believe that the new Federal Rules of Civil Procedure guidelines impact both
our
Retentia business (DRS can be used for storage and access of corporate
enterprise communications) and our Investigatia business (which will focus
on
fraud detection, identity theft mitigation, identity authentication and
verification).
Facilities
We
lease
approximately 1,000 square feet of space in San Francisco, California, 7,000
square feet of office space in Rome, Italy, and 1,000 square feet of space
in
London, England. We pay approximately $3,000, $20,000 and $3,000 per month,
respectively, in rent under these leases, which expire in August 2008, February
2010 and February 2008, respectively. We believe these facilities are adequate
for our present level of operations.
With
the
recent acquisition of Datakom, we will have additional executive and sales
offices in Munich, Bremen and Pyrmont, Germany. See “Acquisition of Datakom
GmbH” above.
Employees
We
currently have approximately 75 full-time employees, and believe that our
relations with employees are excellent. With the recent acquisition of Datakom,
we expect our number of full-time employees to grow to approximately 100. See
“Acquisition of Datakom GmbH” above.
Legal
Proceedings
We
are
not involved in any pending or threatened legal proceedings.
MANAGEMENT
Directors
and Executive Officers
The
names
and ages of our directors and executive officers, and their positions with
us,
are as follows:
|
NAME
|
|
AGE
|
|
POSITION
|
|
|
|
|
|
|
|
Ian
W. Rice
|
|
67
|
|
Chairman
of the Board of Directors and Chief Executive Officer
|
|
|
|
|
|
|
|
Luigi
Caramico
|
|
41
|
|
President
and Director
|
|
|
|
|
|
|
|
Mario
Mené
|
|
41
|
|
Chief
Technical Officer and Director
|
|
|
|
|
|
|
|
Thomas
A. Spanier
|
|
61
|
|
Chief
Financial Officer, Secretary and Treasurer
|
|
|
|
|
|
|
|
Royston
Hoggarth
|
|
45
|
|
Director
|
|
|
|
|
|
|
|
Paul
Hoffmann
|
|
58
|
|
Co-Chairman
of the Board of Directors designee
|
The
principal occupations for the past five years (and, in some instances, for
prior
years) of each of our directors and executive officers are as
follows:
Ian
W. Rice - Chairman of the Board of Directors and Chief Executive
Officer
Ian
W.
Rice has been our Chairman of the Board of Directors and Chief Executive Officer
since December 2006. For more than 25 years, Mr. Rice has been involved in
the
funding, development and management of early-stage companies. Since November
1985, he has been a consultant to Sigma Limited S.A., a Swiss investment firm
that concentrates on development-phase technology companies. He was a founder
of
Oxley Energy Inc., a natural gas exploration and production company with assets
in Texas and South Africa, in December 2003. Mr. Rice was the Chairman of Wall
Street Strategies Corporation in New York, a distributor of financial advice,
from June 1999 to November 2000. From June 1997 to August 2001, Mr. Rice was
Chairman of Ikon Ventures, an Italian manufacturer of environmentally-friendly
chemicals for the detergent industry. Mr. Rice was a founder and a director
of
the Irish company, Navan Resources PLC, from 1987 until 1993. From 1979 to
1983,
Mr. Rice was President of the Carlton Football Club, which won the Australian
Rules Football Premiership in 1981 and 1982. In 1972, he founded Dairy Bell
Ice
Cream, a national manufacturer and distributor of ice cream in Australia, and
served as its Chairman until 1980. From 1969 to 1972, Mr. Rice was a major
franchisee of Kentucky Fried Chicken in Australia.
Luigi
Caramico - President and Director
Luigi
Caramico has been our President since December 2006 and a member of the board
of
directors since March 2007, and was the co-founder of the predecessor of
Retentia, Inc., Systeam Italy SpA, in 1989. Mr. Caramico is responsible for
corporate strategy focusing primarily on business development. From 2003 to
2006, he was the President and Chief Executive Officer of SysteamUS, Inc.,
the
holding company of Systeam Italy SpA. From 1998 to 2003, he was Chief Technical
Officer and a board member of Systeam Italy SpA. Mr. Caramico has expertise
in
advertising systems, DVD technologies, broadband and digital video processing.
Mr. Caramico successfully patented a video-on-demand server and a DVD archiving
system. In 1995, Mr. Caramico joined Stream SpA, a leading Italian pay-TV
company. There, he was responsible for a joint project with Microsoft Corp.
for
the localization and implementation of the Microsoft Interactive TV Platform
(MiTV) working out of its Redmond, Washington campus. In 1984, he was
co-founder, partner and technical director of Studio Sistemi Grafici srl, a
computer graphics company that created on-screen highlights and statistics
for
the Sunday afternoon soccer games, and other programs for the Italian
Broadcasting Companies. He is a member of IEEE (Institute of Electrical and
Electronics Engineers, Inc.) and the New York Academy of Sciences.
Mario
Mené - Chief Technical Officer and Director
Mario
Mené has been our Chief Technical Officer since December 2006 and a member of
our board of directors since March 2007, and was the Chief Technical Officer
of
the predecessor of Retentia, Inc., our wholly-owned subsidiary, since 1992.
He
is responsible for our technical vision and for the design and implementation
of
all of our products. From 2001 to 2002, Mr. Mené was technology advisor for
Acantho SpA, one of the leading IPTV broadband network operators in Italy,
where
he co-created its business and operations plan. From 1999 to 2000, he was Chief
Technology Officer and a board member of SysteamUS, Inc. In 1999, Mr. Mené was
DVB area manager for Systeam, for the design and integration of digital
television systems. He coordinated Systeam’s participation at the European pool
for the delivery of DVD authoring systems to VideoCentro, an Italian-based
company. He designed the satellite platform for the delivery of digital
television services for Stream SpA, a leading Italian pay-TV company.
Additionally, Mr. Mené participated in the creation of the Conditional Access
System for Digital Television coordinating the Systeam workgroup in
Irdeto/Mindport (Netherlands). Mr. Mené obtained a degree in Electronic
Engineering from the Universita La Sapienza in Rome, Italy. He was a Research
Assistant at the University of Adelaide, Australia and at ENEA, the Italian
National Agency for New Technologies, Energy and Environment.
Thomas
A. Spanier - Chief Financial Officer, Secretary and
Treasurer
Thomas
A.
Spanier has been our Chief Financial Officer, Secretary and Treasurer since
September 2007. From August 2005 to February 2007, Mr. Spanier was Chief
Financial Officer of Xalted Networks, Inc., holding company of SysteamUS, Inc.
From April 2004 to June 2005, Mr. Spanier was Chairman and CEO of Digital Video
Systems, Inc, a developer and manufacturer of DVD loaders and players with
operations in Korea, China and India. From May 2003 to March 2004, Mr. Spanier
was engaged by Maple Optical Systems, Inc., a venture backed, development stage
telecom equipment developer, to close the company. From October 2001 to April
2003, Mr. Spanier served as Senior Vice President, Finance and Operations,
of
Cradle Technologies, a development stage, venture backed fabless semiconductor
company. In 2000, Mr. Spanier joined UptimeOne, Inc., a start-up application
service provider of extranet services to the food industry, as President and
Chief Operating Officer. In 1998, the California Culinary Academy (CCA) retained
Mr. Spanier as Executive Vice President and Chief Financial Officer, and then
as
Chief Operating Officer until the company was sold in 2000. From 1992 until
1998, Mr. Spanier provided consulting and interim management services to a
broad
range of companies in the high technology, service, and manufacturing
industries. In 1990, he was retained to help California Culinary Academy launch
its initial public offering and served as Executive Vice President and Chief
Operating Officer until 1992. He served as turn-around Chief Executive Officer
of Sullivan Co., a manufacturing, retail and contracting business, from 1988
to
1990. In 1975, Mr. Spanier founded Sullivan Industries, and served as Chief
Executive Officer until 1987. Sullivan Industries developed, manufactured and
marketed stealth materials and systems for U.S. and foreign defense agencies.
Mr. Spanier earned a B.S. degree (Phi Beta Kappa) in Business from the
University of California, Berkeley, and an M.B.A from Harvard Graduate School
of
Business.
Royston
Hoggarth - Director
Royston
Hoggarth has been a member of our board of directors since April 2007. Mr.
Hoggarth provides our company with a wealth of experience from senior management
positions in a number of telecommunications, wireless and technology services
companies. From April 2003 to March 2005, he has served as Chief Executive
Officer, UK, EMEA, US for Cable & Wireless PLC, one of the world’s leading
international communications companies, and, from January 1998 to March 2003,
as
Supervisory Managing Director and then Chief Executive Officer, International,
for Logica PLC, a software integration company. From 1985 to 1998, Mr. Hoggarth
held various senior management positions with IBM. Currently, Mr. Hoggarth
serves as Chairman of ANT PLC, a leading provider of embedded software for
IPTV,
since February 2007; a director of Axon Group PLC, a business transformation
consultancy, since June 2006; Managing Director of Strategic Capital Ltd.,
an
investment banking firm focusing on telecommunications and information
technology services, since March 2006; Chairman of IPSL Ltd., the United Kingdon
banking joint venture among HSBC Holdings PLC, LloydsTSB, Barclays PLC and
Unisys Corp. which provides payment processing services, since January 2006;
and
a venture partner of Wellington Partners Venture Capital, based in Munich,
Germany, since March 2005.
Paul
Hoffmann - Co-Chairman of the Board of Directors
Paul
Hoffmann has agreed to become a member of our board of directors and our
Co-Chairman upon final completion of the Datakom acquisition. Mr. Hoffmann,
the
current Managing Partner of Datakom GmbH, founded Datakom in 1986. He began
his
professional career as a quality controller at Philips. Prior to founding
Datakom, Mr. Hoffmann was employed as customer service manager at Litton
Business, as service manager and marketing representative at Wang Computer
and
as manager of marketing, product management and product marketing at Wetronic
Automation. Mr. Hoffmann co-authored, along with Dr. Kornell Terplan, also
of
Datakom, the book entitled “Intelligence Support Systems - Technologies for
Lawful Intercepts,” and is considered by many in the industry to be a worldwide
expert in lawful interception, DPI and network monitoring and analysis
technologies.
All
directors hold office until the next annual meeting of stockholders and the
election and qualification of their successors. Officers are elected annually
by
our board of directors and serve at the discretion of the board. There are
no
family relationships among the directors and officers of our company. We intend
to obtain “key-man” life insurance in the amount of $1,000,000 on the life of
Luigi Caramico.
Proposed
Incentive Compensation Plan
We
intend
to adopt an incentive compensation plan in the first half of 2008. The
provisions of the incentive compensation plan will be determined by our board
of
directors at a later date. The purpose of the incentive compensation plan would
be to enable us to attract, retain and motivate key employees, directors and,
on
occasion, independent consultants, by providing them with stock options and
restricted stock awards. Stock options granted under the incentive compensation
plan may be either incentive stock options to employees, as defined in Section
422A of the Internal Revenue Code of 1986, or non-qualified stock
options.
Employment
Agreements
In
December 2006, we entered into a Consultancy Agreement with Sigma Limited SA,
a
company controlled by the Rice Family Trust, which provides the services of
Ian
Rice, our Chairman and Chief Executive Officer. Under the agreement, Sigma
provides management and consulting services in connection with establishing
corporate strategy and identifying new business opportunities. Sigma receives
a
consulting fee of 10,000 British pounds per month. The agreement extends through
December 15, 2008, subject to earlier termination in the event of a material
breach of the agreement, act of insolvency or change of control of the
company.
We
intend
to enter into an employment agreement with Luigi Caramico, our President, and
Mario Mené, our Chief Technical Officer. Under the terms of these employment
agreements, it is expected that Messrs. Caramico and Mené will receive base
annual salaries of approximately $250,000 and $150,000, respectively, and agree
to devote their full time and attention to the business of our company for
a
term of at least three years. The employment agreements will contain covenants
(i) restricting the executive from engaging in any activities competitive
with the business of our company, (ii) prohibiting the executive from
disclosing confidential information regarding our company and (iii) requiring
that all intellectual property developed by the executive and relating to the
business of our company constitutes our sole and exclusive property. We may
also
enter into employment agreements with certain other key executives.
Board
Committees
We
have
not previously had an audit committee, compensation committee or nominations
and
governance committee. Our board of directors intends to create such committees,
in compliance with established corporate governance requirements, in
2008.
Audit
Committee
.
The
Audit Committee’s duties will be to recommend to the board of directors the
engagement of independent auditors to audit our financial statements and to
review our accounting and auditing principles. The Audit Committee will review
the scope, timing and fees for the annual audit and the results of audit
examinations performed by the internal auditors and independent public
accountants, including their recommendations to improve the system of accounting
and internal controls. The Audit Committee will at all times to be composed
exclusively of directors who are, in the opinion of the board of directors,
free
from any relationship that would interfere with the exercise of independent
judgment as a committee member and who possess an understanding of financial
statements and generally accepted accounting principles.
Compensation
Committee
.
The
Compensation Committee will review and approve our salary and benefits policies,
including compensation of executive officers. The Compensation Committee will
also administers our stock option plans, and recommend and approve grants of
stock options under that plan.
Nominations
and Governance Committee
.
The
purpose of the Nominations and Governance Committee will be to select, or
recommend for our entire board’s selection, the individuals to stand for
election as directors at the annual meeting of stockholders and to oversee
the
selection and composition of committees of our board. The Nominations and
Governance Committee’s duties will also include considering the adequacy of our
corporate governance and overseeing and approving management continuity planning
processes.
Indebtedness
of Directors and Executive Officers
None
of
our directors or executive officers or their respective associates or affiliates
is indebted to us.
Family
Relationships
There
are
no family relationships among our directors and executive officers.
Legal
Proceedings
As
of the
date of this prospectus, there is no material proceeding to which any of our
directors, executive officers, affiliates or stockholders is a party adverse
to
us.
Section 16(a)
Beneficial Ownership Reporting Compliance
We
do not
have securities registered under Section 12 of the Exchange Act and,
accordingly, our directors, officers and affiliates are not required to file
reports under Section 16(a) of the Exchange Act.
Code
of Ethics
Our
board
of directors has adopted a code of ethics, which applies to all our directors,
officers and employees. Our code of ethics is intended to comply with the
requirements of Item 406 of Regulation S-B.
Our
code
of ethics is posted on our Internet website at www.intelligentias.com. We will
provide our code of ethics in print without charge to any stockholder who makes
a written request to: Mr. Luigi Caramico, President, Intelligentias, Inc.,
303
Twin Dolphin Drive, 6
th
Floor,
Redwood City, California 94065. Any waivers of the application, and any
amendments to, our code of ethics must be made by our board of directors. Any
waivers of, and any amendments to, our code of ethics will be disclosed promptly
on our Internet website, www.intelligentias.com.
Executive
Compensation
The
following table sets forth, for the most recent fiscal year, all cash
compensation paid, distributed or accrued, including salary and bonus amounts,
for services rendered to us by our Chief Executive Officer and four other
executive officers in such year who received or are entitled to receive
remuneration in excess of $100,000 during the stated period and any individuals
for whom disclosure would have been made in this table but for the fact that
the
individual was not serving as an executive officer as at December 31,
2006:
Summary
Compensation Table
|
Name
and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive Plan Compensa-tion
(4)
|
|
Nonqualified
Deferred Compen-sation Earnings
($)
|
|
All
Other Compe-nsation ($)
|
|
Total
($)
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
(e)
|
|
(f)
|
|
(g)
|
|
(h)
|
|
(i)
|
|
(j)
|
|
|
Ian
W. Rice, Chairman
|
|
|
2006
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Luigi
Caramico,
President
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mario
Mené, Chief Technical Officer
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas
A. Spanier, Chief Financial Officer
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
Equity Awards at Fiscal Year-End
|
|
|
Option
Awards
|
|
Stock
Awards
|
|
|
Name
|
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
|
Number
of Securities Underlying Unexercised Options (#)
Unexercisable
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options (#)
|
|
Option
Exercise Price
($)
|
|
Option
Expiration Date
|
|
Number
of Shares or Units of Stock That Have Not Vested
(#)
|
|
Market
Value of Shares or Units of Stock That Have Not Vested
($)
|
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other
Rights
That Have Not Vested
(#)
|
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares,
Units or
Other Rights That Have Not Vested
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ian
W. Rice, Chairman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Luigi
Caramico,
President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mario
Mené, Chief Technical Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas
A. Spanier, Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
have
not had a stock option plan or other similar incentive compensation plan for
officers, directors and employees, and no stock options, restricted stock or
SAR
grants were granted and are outstanding at this time.
Compensation
of Directors
Directors
are expected to timely and fully participate in all regular and special board
meetings, and all meetings of committees that they serve on. We expect to
compensate non-management directors through stock options or restricted stock
granted under our proposed incentive compensation plan and a cash stipend for
each meeting attended.
The
table
below summarizes the compensation that we paid to non-management directors
for
the fiscal year ended December 31, 2006.
Director
Compensation
|
Name
|
|
Fees
Earned or Paid in Cash ($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive Plan Compensa-tion
(4)
|
|
Nonqualified
Deferred Compen-sation Earnings
($)
|
|
All
Other Compe-nsation ($)
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royston
Hoggarth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRINCIPAL
STOCKHOLDERS
The
following table sets forth information regarding the number of shares of our
common stock beneficially owned on December 6, 2007, by:
•
each
person who is known by us to beneficially own 5% or more of our common stock,
•
each
of
our directors and executive officers, and
•
all
of
our directors and executive officers as a group.
Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities. Shares of
our common stock which may be acquired upon exercise of stock options or
warrants which are currently exercisable or which become exercisable within
60
days after the date indicated in the table are deemed beneficially owned by
the
optionees. Subject to any applicable community property laws, the persons
or entities named in the table above have sole voting and investment power
with
respect to all shares indicated as beneficially owned by them.
|
Name
and Address of Beneficial Owner
(1)
|
|
Shares
Beneficially
Owned
|
|
Percentage
of
Common
Stock
(2)
|
|
|
Vision
Opportunity
Master
Fund, Ltd. (3)
|
|
|
46,256,708
|
|
|
36.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Lusk
Family Trust
|
|
|
30,950,000
|
|
|
27.0
|
%
|
|
|
|
|
|
|
|
|
|
|
M.
Kingdon Offshore Ltd.
Kingdon
Associates
Kingdon
Family Partnership, L.P. (4)
|
|
|
23,750,000
|
|
|
18.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Paul
Hoffmann (5)
|
|
|
14,000,000
|
|
|
12.2
|
%
|
|
|
|
|
|
|
|
|
|
|
Cyril
Capital LLC (6)
|
|
|
11,400,000
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Luigi
Caramico (7)
|
|
|
9,000,000
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Mario
Men
é
(7)
|
|
|
9,000,000
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Kattegat
Ltd. (7)
|
|
|
9,000,000
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Ian
W. Rice
|
|
|
4,300,000
|
|
|
3.8
|
%
|
|
|
|
|
|
|
|
|
|
|
Thomas
A. Spanier
|
|
|
–
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
Royston
Hoggarth
|
|
|
–
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
All
directors and officers
as
a group
|
|
|
13,300,000
|
|
|
11.7
|
%
|
*
Represents less than 1%.
|
(1)
|
The
address of each person is c/o Intelligentias, Inc., 303 Twin Dolphin
Drive, 6th Floor, Redwood City, California 94065, unless otherwise
indicated.
|
|
(2)
|
The
calculation in this column is based upon 114,555,468 shares of common
stock outstanding on December 6, 2007 (without giving effect to
outstanding shares of series A convertible preferred stock, convertible
into 12,500,000 shares of common stock at any time). The shares of
common
stock underlying stock options and warrants are deemed outstanding
for
purposes of computing the percentage of the person holding such stock
options but are not deemed outstanding for the purpose of computing
the
percentage of any other person.
|
|
(3)
|
Includes
6,000,000 shares of common stock issuable upon the exercise of a
warrant
at $.01 per share through December 2011, 5,500,000 shares of common
stock
issuable upon the exercise of a warrant at $2.05 through June 2014
and
238,095 shares of common stock issuable upon the exercise of a warrant
at
$1.26 through June 2014. The address for Vision Opportunity Master
Fund,
Ltd. is 20 West 55
th
Street, 5
th
Floor, New York, New York 10019.
|
|
(4)
|
Includes
11,250,000 shares of common stock issuable upon the exercise of warrants.
Kingdon Capital Management, LLC acts as investment manager to M.
Kingdon
Offshore Ltd. and investment adviser to Kingdon Associates and Kingdon
Family Partnership, L.P. Mark Kingdon serves as the President of
Kingdon
Capital Management, LLC, which has voting and investment control
with
regard to its three affiliated funds. None of the Kingdon entities
is a
registered broker-dealer. The address for such entities is 152 West
57
th
Street, 50
th
Floor, New York, New York 10019.
|
|
(5)
|
See
“Business - Acquisition of Datakom GmbH” for information with respect to
the shares of common stock issued to Mr.
Hoffmann.
|
|
(6)
|
Robert
B. Turner, a former officer and director of Merchandise Creations,
Inc.,
is the Manager of Cyril Capital
LLC.
|
|
(7)
|
The
three stockholders of Kattegat Ltd. are Luigi Carmico, our President
and a
director, Mario Mené, our Chief Technical Officer and a director, and an
employee of Retentia.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Related
Party Transactions
In
November 2004, we issued 200,000,000 shares of common stock to Robert B. Turner,
the then sole officer and director of Merchandise Creations, in exchange for
cash in the amount of $10,000.
On
December 7, 2006, we conducted a private offering of debt securities, whereby
we
raised $8,000,000 in debt financing from Vision Opportunity Master Fund Ltd.,
a
non-affiliated entity. The note was due on or before December 7, 2009, had
an
interest rate of 5% per annum, payable in cash quarterly, to commence on March
1, 2007 and on the first business day of each subsequent three-month period
and
contain no prepayment penalty. At any time, the note was convertible into such
number of shares of our common stock as determined by dividing that portion
of
the outstanding principal balance under the note as of such date that Vision
elects to convert by the conversion price of $.44 per share. In connection
with
the December 7, 2006 debt offering, Vision was issued warrants to purchase
up to
9,000,000 shares of our common stock, of which 6,750,000 warrants were
immediately exercisable and the remaining 2,250,000 warrants were exercisable
following the date that the note was fully converted or prepaid. The warrants
expire in December 2011.
In
December 2006, we paid a family member of a controlling person of the Lusk
Family Trust approximately $400,000 to develop our website. These costs are
included as intangible assets in our consolidated financial
statements.
On
March
16, 2007, we issued to Vision 1,750,000 restricted shares of common stock in
consideration of the holder agreeing to convert the note into shares of common
stock prior to the maturity date of the note. The note was fully converted
by
Vision on March 19, 2007 into 18,181,818 shares of common stock. In March 2007,
Vision exercised 3,000,000 warrants.
Our
board
of directors has determined that Royston Hoggarth is the only member of our
board of directors who qualifies as an “independent” director under Nasdaq’s
definition of independence.
It
is our
policy that all related party transactions must be approved by a majority of
the
independent and disinterested members of our board of directors, outside the
presence of any interested director and, to the extent deemed necessary or
appropriate by the board of directors, we will obtain fairness opinions or
stockholder approval in connection with any such transaction.
SELLING
STOCKHOLDERS
Kingdon
Capital Private Placement
On
October 19, 2007, we completed a private placement of equity securities to
three
affiliated funds managed by Kingdon Capital Management, LLC, pursuant to the
terms of a Securities Purchase Agreement (the “Purchase Agreement”). Pursuant to
the Purchase Agreement, we sold an aggregate of 12,500,000 shares of our series
A convertible preferred stock and received gross proceeds of $10,000,000. The
series A convertible preferred stock is initially convertible into an equal
number of shares of our common stock and has the rights, preferences and
privileges set forth in the form of Certificate of Designation, Preferences
and
Rights filed as an exhibit to our current report on Form 8-K dated October
19,
2007.
As
part
of the transaction, we issued to the investors warrants to purchase an aggregate
of up to 6,250,000 shares of common stock at an exercise price of $1.25 per
share (the “Market Warrants”) and warrants to purchase an aggregate of up to
5,000,000 shares of common stock at an exercise price of $1.80 per share (the
“Premium Warrants” and, together with the Market Warrants, the “Warrants”). The
Warrants are exercisable for five years, contain customary change of control
buy-out provisions, cashless exercise provisions and are not redeemable. The
Preferred Stock and Warrants also contain full ratchet anti-dilution provisions
for the first 18 months after issuance and weighted average protection for
issuances of capital stock below the respective conversion or exercise prices,
except in specified cases.
The
net
proceeds from the private placement are being used by us to expand our global
sales and marketing team and for general corporate purposes.
Under
the
Purchase Agreement, the investors are entitled to designate one member to our
board of directors, so long as the investors own a majority of the shares of
series A convertible preferred stock then outstanding. No board member has
yet
been designated. Additionally, pursuant to the Purchase Agreement, our executive
officers and directors entered into lock-up letter agreements in which they
agreed not to sell or otherwise dispose, directly or indirectly, any shares
of
our common stock held by them for a period continuing for 180 days after the
effective date of this registration statement.
We
did
not use a placement agent or any broker-dealer in connection with the private
placement.
The
securities sold in the private placement have not been registered under the
Securities Act of 1933, as amended, and were issued and sold in reliance upon
the exemption from registration contained in Section 4(2) of the Securities
Act
and Regulation D promulgated thereunder. These securities may not be offered
or
sold in the United States in the absence of an effective registration statement
or exemption from the registration requirements under the Securities Act.
Selling
Stockholder Table
The
following table sets forth:
·
the
name
of the selling stockholders,
·
the
number of shares of common stock beneficially owned by the selling stockholders
as of December 6, 2007,
·
the
maximum number of shares of common stock that may be offered for the account
of
the selling stockholders under this prospectus, and
·
the
amount and percentage of common stock that would be owned by the selling
stockholders after completion of the offering, assuming a sale of all of the
common stock that may be offered by this prospectus.
Except
as
noted below and elsewhere in this prospectus, the selling stockholders have
not,
within the past three years, had any position, office or other material
relationship with us.
None
of
the selling stockholders is a broker-dealer registered with the Financial
Industry Regulatory Authority, Inc. or is an affiliate of such a broker-dealer.
Any registered broker-dealer would be deemed an underwriter in connection with
this offering.
Beneficial
ownership is
determined
under
the rules of the U.S. Securities and Exchange Commission. The number of shares
beneficially owned by a person includes shares of common stock underlying
warrants, stock options and other derivative securities to acquire our common
stock held by that person that are currently exercisable or convertible within
60 days after December 6, 2007. The shares issuable under these securities
are
treated as outstanding for computing the percentage ownership of the person
holding these securities, but are not treated as outstanding for the purposes
of
computing the percentage ownership of any other person.
|
|
|
Beneficial
Ownership
|
|
Shares
Registered
|
|
Beneficial
Ownership After this Offering (3)
|
|
|
|
|
Prior
to this
|
|
in
this
|
|
Number
of
|
|
|
|
|
Name
|
|
Offering
(1)
|
|
Offering
(2)
|
|
Shares
|
|
Percent
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
M.
Kingdon Offshore Ltd. (5)
|
|
|
16,862,500
|
|
|
16,862,500
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kingdon
Associates (5)
|
|
|
5,973,125
|
|
|
5,973,125
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kingdon
Family Partnership, L.P. (5)
|
|
|
914,375
|
|
|
914,375
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
Stockholders Total
|
|
|
|
|
|
23,750,000
|
|
|
|
|
|
|
|
*
Less
than 1% of outstanding shares.
|
(1)
|
Beneficial
ownership as of December 6, 2007, for all selling stockholders based
upon
information provided by the selling stockholders known to
us.
|
|
(2)
|
The
number of shares in this column includes 12,500,000 shares of our
common
stock issuable upon conversion of series A convertible preferred
stock and
11
,250,000
shares
of common stock issuable upon exercise of warrants to purchase common
stock.
|
|
(3)
|
Assumes
the sale of all shares of common stock registered pursuant to this
prospectus, although the selling stockholders are under no obligation
known to us to sell any shares of common stock at this
time.
|
|
(4)
|
Based
on 114,555,468 shares of common stock outstanding on December 6,
2007,
without giving effect to shares issuable upon conversion of the series
A
convertible preferred stock. The shares issuable under stock options,
warrants and other derivative securities to acquire our common stock
that
are currently exercisable or convertible within 60 days after December
6,
2007, are treated as if outstanding for computing the percentage
ownership
of the person holding these securities, but are not treated as outstanding
for purposes of computing the percentage ownership of any other person.
Unless otherwise indicated, also includes shares owned by a spouse,
minor
children, by relatives sharing the same home, and entities owned
or
controlled by the named person.
|
|
(5)
|
Kingdon
Capital Management, LLC acts as investment manager to M. Kingdon
Offshore
Ltd. and investment adviser to Kingdon Associates and Kingdon Family
Partnership, L.P. Mark Kingdon serves as the President of Kingdon
Capital
Management, LLC, which has voting and investment control with regard
to the three investing funds. None of the Kingdon entities is a
registered broker-dealer. The address for Kingdon Capital Management,
LLC, Kingdon Associates and Kingdon Family Partnership, L.P. is 152
West 57
th
Street, 50
th
Floor, New York, New York 10019. The address for M. Kingdon Offshore
Ltd.
is Gardenia Court, Suite 3307, 45 Market Street, Camana Bay, P.O.
Box 896,
KY1-1103, Cayman Islands.
|
PLAN
OF DISTRIBUTION
The
selling stockholders may, from time to time, sell any or all of their shares
of
common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
|
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer
for its
account;
|
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
|
·
|
privately
negotiated transactions;
|
|
|
·
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or
otherwise;
|
|
|
·
|
broker-dealers
may agree with the selling stockholders to sell a specified number
of such
shares at a stipulated price per
share;
|
|
|
·
|
a
combination of any such methods of sale;
and
|
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved. Any profits on the
resale of shares of common stock by a broker-dealer acting as principal might
be
deemed to be underwriting discounts or commissions under the Securities Act.
Discounts, concessions, commissions and similar selling expenses, if any,
attributable to the sale of shares will be borne by a selling stockholder.
The
selling stockholders may agree to indemnify any agent, dealer or broker-dealer
that participates in transactions involving sales of the shares if liabilities
are imposed on that person under the Securities Act.
The
selling stockholders may from time to time pledge or grant a security interest
in some or all of the shares of common stock owned by them and, if they default
in the performance of their secured obligations, the pledgees or secured parties
may offer and sell the shares of common stock from time to time under this
prospectus after we have filed a supplement to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act of 1933
supplementing or amending the list of selling stockholders to include the
pledgee, transferee or other successors in interest as selling stockholders
under this prospectus.
The
selling stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors
in
interest will be the selling beneficial owners for purposes of this prospectus
and may sell the shares of common stock from time to time under this prospectus
after we have filed a supplement to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act of 1933 supplementing or
amending the list of selling stockholders to include the pledgee, transferee
or
other successors in interest as selling stockholders under this
prospectus.
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares of common stock may be deemed to be "underwriters" within
the
meaning of the Securities Act in connection with such sales. In such event,
any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares of common stock purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
We
are
required to pay all fees and expenses incident to the registration of the shares
of common stock. We have agreed to indemnify the selling stockholders against
certain losses, claims, damages and liabilities, including liabilities under
the
Securities Act.
The
selling stockholders have advised us that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their shares of common stock, nor is there
an underwriter or coordinating broker acting in connection with a proposed
sale
of shares of common stock by any selling stockholder. If we are notified by
any
selling stockholder that any material arrangement has been entered into with
a
broker-dealer for the sale of shares of common stock, if required, we will
file
a supplement to this prospectus. If the selling stockholders use this prospectus
for any sale of the shares of common stock, they will be subject to the
prospectus delivery requirements of the Securities Act.
The
anti-manipulation rules of Regulation M under the Securities Exchange Act of
1934 may apply to sales of our common stock and activities of the selling
stockholders.
DESCRIPTION
OF SECURITIES
Our
authorized capital stock consists of 500,000,000 shares, of which 300,000,000
shares are designated as common stock and 200,000,000 shares are designated
as
preferred stock. Of the preferred stock, 12,500,000 shares have been classified
as series A convertible preferred stock. As of December 6, 2007, there were
issued and outstanding:
|
|
·
|
114,555,468
shares of common stock, without giving effect to 12,500,000 shares
issuable upon conversion of series A convertible preferred
stock,
|
|
|
·
|
warrants
to purchase 6,000,000 shares of common stock at and exercise price
of $.01
per share,
|
|
|
·
|
warrants
to purchase 5,500,000 shares of common stock at an exercise price
of $2.05
per share,
|
|
|
·
|
warrants
to purchase 2,587,500 shares of common stock at an exercise price
of $.80
per share,
|
|
|
·
|
warrants
to purchase 238,095 shares of common stock at an exercise price of
$1.26
per share,
|
|
|
·
|
warrants
to purchase 200,000 shares of common stock at an exercise price
of $1.85
per share,
|
|
|
·
|
warrants
to purchase 6,250,000 shares of common stock at an exercise price
of $1.25
per share, and
|
|
|
·
|
warrants
to purchase 5,000,000 shares of common stock at an exercise price
of $1.80
per share.
|
The
following summary of the
material
provisions
of our
common stock, preferred stock, warrants, certificate of
incorporation
and
by-laws is qualified by reference to the provisions of our certificate of
incorporation and by-laws and the form of warrant included or incorporated
by
reference as exhibits to the registration statement of which this prospectus
is
a part.
Common
Stock
The
holders of our common stock are entitled to one vote per share. The holders
of
common stock are entitled to receive ratably such dividends, if any, as may
be
declared by our board of directors out of legally available funds. However,
the
current policy of our board of directors is to retain earnings, if any, for
the
operation and expansion of our business. Upon liquidation, dissolution or
winding-up, the holders of common stock are entitled to share ratably in all
our
assets which are legally available for distribution, after payment of or
provision for all liabilities and the liquidation preference of any outstanding
preferred stock. The holders of common stock have no preemptive, subscription,
redemption or conversion rights. All issued and outstanding shares of common
stock are, and the common stock reserved for issuance upon exercise of the
warrants described below will be, when issued, fully-paid and
non-assessable.
Kingdon
Series A Preferred Stock
Conversion.
Holders
of series A preferred stock are entitled at any time to convert their shares
of
series A preferred stock into such number of fully paid and nonassessable shares
of common stock as is determined by dividing (i) the original purchase price
by
(ii) the conversion price in effect at the time of the conversion. The
conversion price for the series A preferred stock is initially the original
price. Such conversion price, and the rate at which the shares of series A
preferred stock may be converted into shares of common stock is subject to
adjustment. The number of shares of common stock issuable upon conversion of
the
series A preferred stock is subject to adjustment upon the occurrence of certain
events, including, among others, a stock split, reverse stock split or
combination of common stock; our issuance of common stock or other securities
as
a dividend or distribution on the common stock; a reclassification, exchange
or
substitution of the common stock; a merger or a capital reorganization. In
the
event that we issue any shares of common stock, or securities convertible into
or exercisable for shares of common stock, for cash consideration at a
price less than $.80 per share, the conversion rate will be that number of
shares of common stock equal to $.80 divided by the price per share at which
we
issued common stock in any such private placement. No adjustment in the
conversion price of the series A preferred stock shall be made unless the
consideration per share for any additional shares of common stock issued or
deemed to be issued by our company is less than $.80 per share on the date
of and immediately prior to the issue of such additional shares. The series
A
preferred stock also contains full ratchet anti-dilution provisions for the
first 18 months after issuance and weighted average protection thereafter for
issuances of capital stock below the conversion price.
Voting
Rights
.
Holders
of series A preferred stock are entitled to vote their shares on an as-converted
to common stock basis, together with the holders of common stock. Written
consent of the holders of at least a majority of the votes attributable to
the
then outstanding shares of series A preferred stock issued in connection
with
the private placement voting together as a single class is needed to (i)
increase or decrease the number of authorized shares of series A preferred
stock; (ii) authorize or issue any class or series of capital stock or
securities convertible into capital stock with equal or superior rights to
those
of the series A preferred stock; (iii) alter, amend or waive any rights,
preferences or privileges of the series A preferred stock, or any provisions
of
the articles of incorporation or by-laws, in a manner adverse to the holders
of
series A preferred stock; (iv) authorize, declare or pay any dividend on
any
share of capital stock (other than dividends payable solely in common stock);
or
(v) redeem, purchase or otherwise acquire for value any of our capital stock
or
that of our subsidiaries. Holders of series A preferred stock shall also
have
any voting rights to which they are entitled by law.
Liquidation
Rights
.
In the
event of (i) our voluntary or involuntary liquidation, dissolution or
winding-up, (ii) a sale or transfer of all or substantially all of our assets,
(iii) a merger or consolidation resulting in a change of 50% or more of the
voting power or (iii) a sale or repurchase of shares of capital stock resulting
in a change of 50% or more of the voting power, holders of series A preferred
stock will be entitled to receive out of our assets available for distribution
to stockholders, before any distribution is made to holders of our common
stock,
liquidating distributions in an amount equal to the greater of $.80 per share
or
the amount that would have been received if all shares were converted into
common stock. After payment of the full amount of the liquidating distributions
to which the holders of the series A preferred stock are entitled, holders
of
the series A preferred stock will receive liquidating distributions pro rata
with holders of common stock, based on the number of shares of common stock
into
which the series A preferred stock is convertible at the conversion rate
then in
effect.
Redemption
.
We do
not have the right or obligation to redeem the series A preferred stock at
any
time.
Dividends.
Holders
of series A preferred stock will not be entitled to receive dividends except
to
the extent that dividends are declared on the common stock. Holders of series
A
preferred stock are entitled to receive dividends paid on the common stock
based
on the number of shares of common stock into which the series A preferred stock
are convertible on the record date of such dividend.
Kingdon
Warrants
As
part
of the closing of the private placement, we issued warrants to purchase common
stock to purchase up to 11,250,000 shares of our common stock, 6,250,000 shares
at an exercise price of $1.25 per share, and 5,000,000 shares at an exercise
price of $1.80 per share. The warrants expire on October 19, 2012.
Adjustments
.
The
warrants contain provisions that protect the holders thereof against dilution
by
adjustment of the purchase price in certain events, such as stock splits or
reverse stock splits, stock dividends, recapitalizations or similar events.
The
holders of these warrants will not possess any rights as stockholders unless
and
until they exercise their warrants. These warrants do not confer upon holders
any voting or any other rights as stockholders.
The
warrants also contain full ratchet anti-dilution provisions for the first 18
months after issuance and weighted average protection thereafter for issuances
of capital stock below the exercise price.
Restrictions
on Transfer
.
The
offer and sale of the warrants was not registered under either federal or state
securities laws or the laws of any other country and was made pursuant to claims
of exemption therefrom. Consequently, neither these warrants nor the shares
of
common stock underlying these warrants may be sold or otherwise transferred
absent compliance with the registration or qualification requirements of
applicable securities laws or the exemptive provisions thereof.
Kingdon
Registration Rights
In
connection with the private placement, we agreed with investors in the
private
placement to use our commercially reasonable best efforts to file a shelf
registration statement with the U.S. Securities and Exchange Commission
covering
the resale of all shares of common stock underlying the series A convertible
preferred stock and warrants issued in connection with the private placement
within 30 days after the closing of the private placement. We are obligated
to
maintain the effectiveness of the registration statement from its effective
date
through and until all shares of common stock underlying the series A convertible
preferred stock and warrants issued in connection with the private placement
have been or can be sold publicly under Rule 144 on a single day. We also
agreed
to use our best efforts to have the registration statement declared effective
by
the SEC as soon as possible and to respond to any SEC comments within 10
trading
days after receiving comments. In the event the registration statement
is not
filed with the SEC on or prior to the 30
th
day
after the closing of the private placement or declared effective prior
to the
180
th
day
after the closing of the private placement, or in the event that we do
not keep
the registration statement continuously effective until all shares of common
stock underlying the series A convertible preferred stock and warrants
issued in
connection with the private placement have been or can be sold publicly
under
Rule 144 on a single day, or the exercise rights pursuant to the warrants
issued
in connection with the private placement are suspended, liquidated damages
equal
to 1.0% of the purchase price, subject to a cap of 22.5%, will be paid
to each
named selling stockholder for each month (or portion thereof) that the
registration statement is not filed or exercise rights are
suspended.
Other
Outstanding Warrants
We
currently have outstanding five-year warrants to purchase up to 6,000,000 shares
of common stock at an exercise price of $.01 per share issued in connection
with
our December 2006 convertible debt financing with Vision Opportunity Master
Fund
Ltd., seven-year warrants to purchase up to 5,500,000 shares of common stock
at
an exercise price of $2.05 issued in connection with our June 2007 Senior
Secured Promissory Note with Vision Opportunity Master Fund, Ltd., seven-year
warrants to purchase up to 238,095 shares of common stock at an exercise price
of $1.26 issued in connection with the amendment of our June 2007 Senior Secured
Promissory Note with Vision Opportunity Master Fund, Ltd., five-year warrants
to
purchase up to 2,587,500 shares of common stock at an exercise price of $.80
issued to certain investors participating our bridge financing, and five-year
warrants to purchase up to 200,000 shares of common stock at an exercise price
of $1.85 per share issued to contractors in lieu of cash for services
rendered.
Market
Information
Our
common stock is quoted on the OTC Bulletin Board under the trading symbol ITLI.
The high and low bid prices for our common stock at the close of business on
December 4, 2007, as reported by the OTC Bulletin Board, were $1.38 and $1.32
per share, respectively.
Transfer
Agent
The
transfer agent and registrar for our common stock is Holladay Stock Transfer
and
its address is 2939 North 67
th
Place,
Suite C, Scottsdale, Arizona 85251. We serve as warrant agent for our
warrants.
Limitations
of Liability and Indemnification
Our
articles of incorporation provide that we will indemnify any person who is
or
was a director, officer, employee, agent or fiduciary of our company to the
fullest extent permitted by applicable law. Nevada law permits a Nevada
corporation to indemnify its directors, officers, employees and agents against
liabilities and expenses they may incur in such capacities in connection with
any proceeding in which they may be involved, if (i) such director or officer
is
not liable to the corporation or its stockholders due to the fact that his
or
her acts or omissions constituted a breach of his or her fiduciary duties as
a
director or officer and the breach of those duties involved intentional
misconduct, fraud or a knowing violation of law, or (ii) he or she acted in
good
faith and in a manner reasonably believed to be in or not opposed to our best
interests, or that with respect to any criminal action or proceeding, he or
she
had no reasonable cause to believe that his or her conduct was
unlawful.
In
addition, our bylaws include provisions to indemnify our officers and directors
and other persons against expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred in connection with the action,
suit
or proceeding against such persons by reason of serving or having served as
officers, directors, or in other capacities, if such person either is not liable
pursuant to Nevada Revised Statutes 78.138 or acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of our company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendre or its equivalent will not, of
itself, create a presumption that the person is liable pursuant to Nevada
Revised Statutes 78.138 or did not act in good faith and in a manner which
such
person reasonably believed to be in or not opposed to the best interests of
our
company and, with respect to any criminal action or proceeding, had reasonable
cause to believe that such person’s conduct was unlawful.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, we have
been
advised that in the opinion of the U.S. Securities and Exchange Commission
such
indemnification is against public policy as expressed in such Act and is,
therefore, unenforceable.
SHARES
ELIGIBLE FOR FUTURE SALE
As
of
December 6, 2007, we had outstanding an aggregate of 114,555,468 shares of
our
common stock, without giving effect to 12,500,000 shares of common stock
issuable upon conversion of our series A convertible preferred stock. All shares
sold in this offering will be freely tradeable without restriction or further
registration under the Securities Act, unless they are purchased by our
“affiliates,” as that term is defined in Rule 144 promulgated under the
Securities Act.
The
114,555,468 outstanding shares of our common stock not, as of December 6, 2007,
will be eligible for sale in the public market as follows:
Public
Float
Of
our
outstanding shares, 13,300,000 shares are beneficially owned by executive
officers and directors. The remaining 101,255,468 shares constitute our public
float and are freely tradable without restriction or further registration under
the Securities Act, except as described below.
Rule
144
In
general, under Rule 144, as currently in effect, a person who has beneficially
owned shares of our common stock for at least one year, including the holding
period of prior owners other than affiliates, is entitled to sell within any
three-month period a number of shares that does not exceed the greater
of:
|
|
·
|
1%
of the number of shares of our common stock then outstanding, which
equaled 1,145,555 shares as of December 6, 2007,
or
|
|
|
·
|
the
average weekly trading volume of our common stock on the OTC Bulletin
Board during the four calendar weeks preceding the filing of a notice
on
Form 144 with respect to that sale.
|
Sales
under Rule 144 are also subject to manner-of-sale provisions, notice
requirements and the availability of current public information about us. In
order to effect a Rule 144 sale of our common stock, our transfer agent will
require an opinion from legal counsel. We may charge a fee to persons requesting
sales under Rule 144 to obtain the necessary legal opinions.
As
of
December 6, 2007, 23,360,000 shares of our common stock are eligible for sale
under Rule 144.
Rule
144(k)
Under
Rule 144(k), a person who is not deemed to have been one of our affiliates
at
any time during the three months preceding a sale and who has beneficially
owned
shares for at least two years, including the holding period of certain prior
owners other than affiliates, is entitled to sell those shares without complying
with the manner-of-sale, public information, volume limitation or notice
provisions of Rule 144. Our transfer agent will require an opinion from legal
counsel to effect a Rule 144(k) transaction. We may charge a fee to persons
requesting transactions under Rule 144(k) to obtain the necessary legal
opinions. As of December 6, 2007, no shares of our common stock are eligible
for
transactions under Rule 144(k).
LEGAL
MATTERS
Greenberg
Traurig, LLP, New York, New York, our counsel, will pass upon the validity
of
the shares of common stock offered in this prospectus.
EXPERTS
The
financial statements included in this prospectus have been audited by Ehrhardt
Keefe Steiner & Hoffman P.C., independent registered public accountants to
the extent and for the periods set forth in their report appearing elsewhere
herein and are included in reliance upon such report given upon the authority
of
that firm as experts in auditing and accounting.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
AND FINANCIAL DISCLOSURE
On
July
6, 2007, we dismissed Bagell, Josephs, Levine & Company, L.L.C. as our
independent auditors. The decision to change accountants was approved by our
board of directors. The reports of Bagell, Josephs, Levine & Company, L.L.C.
dated March 26, 2007 and March 21, 2006 on our balance sheets as of December
31,
2006 and 2005, and the related consolidated statements of operations,
stockholders’ equity and cash flows for the years ended December 31, 2006 and
2005, and for the period from October 1, 2004 (date of inception) to December
31, 2006, did not contain an adverse opinion or disclaimer of opinion, or
qualification or modification as to uncertainty, audit scope or accounting
principles. However, both reports contained an explanatory paragraph disclosing
the uncertainty regarding our ability to continue as a going
concern.
During
the two most recent fiscal years ended December 31, 2006 and 2005, and in the
subsequent interim period, there were no disagreements with Bagell, Josephs,
Levine & Company, L.L.C. on any matters of accounting principles or
practices, financial statement disclosure or auditing scope and procedures
which, if not resolved to their satisfaction would have caused them to make
reference to the matter in their report.
Ehrhardt
Keefe Steiner & Hottman P.C. (“EKS&H”) was engaged by us on July 6,
2007, as our independent registered public accounting firm.
During
the fiscal years ended December 31, 2006 and 2005 and through July 6, 2007,
neither we nor anyone on our behalf consulted with EKS&H regarding either
(i) the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered
on
our financial statements, nor has EKS&H provided to us a written report or
oral advice regarding such principles or audit opinion, or (ii) any matter
that
was the subject of a disagreement or reportable events set forth in Item
304(a)(iv) and (v), respectively, of Regulation S-K.
INTELLIGENTIAS,
INC. AND SUBSIDIARIES
INDEX
TO FINANCIAL STATEMENTS
|
|
|
PAGE
|
|
Financial
Statements
|
|
|
|
Report
of Independent Registered Public Accounting Firm - Bagell, Josephs,
Levine
& Company, L.L.C.
|
|
F-2
|
|
Report
of Independent Registered Public Accounting Firm - Ehrhard, Keefe,
Steiner
& Hottman PC
|
|
F-3
|
|
Balance
Sheets
|
|
F-4
|
|
Statements
of Operations
|
|
F-5
|
|
Statement
of Changes in Stockholders’ Equity
|
|
F-6
|
|
Statement
of Cash Flows
|
|
F-7
|
|
Notes
to Financial Statements
|
|
F-8
|
|
|
|
|
|
Financial
Statements (Unaudited)
|
|
|
|
Condensed
Consolidated Balance Sheet
|
|
F-17
|
|
Condensed
Consolidated Statements of Operations and Comprehensive Loss
|
|
F-18
|
|
Condensed
Consolidated Statement of Changes in Stockholders’ Equity
|
|
F-20
|
|
Condensed
Consolidated Statements of Cash Flows
|
|
F-19
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
F-21
|
|
Pro
Forma Condensed Combined Statement of Operations
(Unaudited)
|
|
F-35
|
|
|
|
|
|
System
Italy SpA Financial Statements
|
|
|
|
Independent
Auditors’ Report
|
|
F-38
|
|
Balance
Sheets
|
|
F-39
|
|
Statements
of Operations and Comprehensive Loss
|
|
F-40
|
|
Statements
of Changes in Stockholders’ Deficit
|
|
F-41
|
|
Statement
of Cash Flows
|
|
F-42
|
|
Notes
to the Financial Statements
|
|
F-43
|
|
|
|
|
|
Datakom
GmbH Financial Statements
|
|
|
|
Independent
Auditors’ Report
|
|
F-48
|
|
Consolidated
Balance Sheets
|
|
F-49
|
|
Consolidated
States of Operations and Comprehensive Income (Loss)
|
|
F-50
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
|
F-51
|
|
Consolidated
Statements of Cash Flows
|
|
F-52
|
|
Notes
to Consolidated Financial Statements
|
|
F-53
|
BAGELL,
JOSEPHS, LEVINE & COMPANY, L.L.C.
Certified
Public Accountants
High
Ridge Commons
Suites
400-403
200
Haddonfield Berlin Road
Gibbsboro,
New Jersey 08026
(856)
346-2828 Fax (856) 346-2882
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Stockholders
Merchandise
Creations, Inc.
Plano,
TX
We
have
audited the accompanying balance sheets of Merchandise Creations, Inc., a
development stage company (the “Company”) as of December 31, 2005 and 2004, and
the related statements of operations, changes in stockholder’s equity, and cash
flows for the year ended December 31, 2005 and for the period October 1,
2004
(Inception) through December 31, 2004 with cumulative totals since the Company’s
inception October 1, 2004 for the statements of operations, changes in
stockholder’s equity, and cash flows. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Merchandise Creations, Inc.
as of
December 31, 2005 and 2004, and the results of its operations, and cash flows
for the year ended December 31, 2005 and for the period October 1, 2004
(Inception) through December 31, 2004 for the period then ended with cumulative
totals since inception in conformity with accounting principles generally
accepted in the United States of America.
The
accompanying financial statements have been prepared assuming the Company
will
continue as a going concern. As discussed in Note 2 to the financial statements,
the Company has just begun operations, and is currently developing their
business. They have incurred losses since inception and will be looking to
raise
capital over the next year to assist in funding their operations. These factors
raise substantial doubt about its ability to continue as a going concern.
Management’s operating and financing plans in regards to these matters are also
discussed in Note 2. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
/s/
Bagell Josephs, Levine & Company, L.L.C.
Bagell
Josephs, Levine & Company, L.L.C.
Gibbsboro,
New Jersey
March
21,
2006
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and Stockholders
Intelligentias,
Inc.
303
Twin
Dolphin Drive, 6
th
Floor
Redwood
City, CA 94101
We
have
audited the accompanying balance sheet of Intelligentias, Inc., (formerly
Merchandise Creations, Inc.) (the “Company”), a development stage company, as of
December 31, 2006, and the related statements of operations, stockholders’
deficit, and cash flows for the year then ended with respect to the statements
of operations, changes in stockholders’ equity and cash flows which include
cumulative totals for the period October 1, 2004 (Inception) through December
31, 2006, we did not audit the period from October 1, 2004 (Inception) through
December 31, 2005. Financial statements for the period from October 1, 2004
(Inception) through December 31, 2005 were audited by other auditors whose
report, dated March 21, 1006, expressed an unqualified opinion on those
statements. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. [The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.] An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the 2006 financial statements referred to above present fairly,
in all
material respects, the financial position of Intelligentias, Inc., (formerly
Merchandise Creations, Inc.) a development stage company, as of December
31,
2006, and the results of its operations and its cash flows for the year ended
December 31, 2006 with cumulative totals since inception, October 1, 2004
for
the statements of operations, changes in stockholders’ equity and cash flows in
conformity with accounting principles generally accepted in the United States
of
America.
The
accompanying financial statements have been prepared assuming the Company
will
continue as a going concern. As discussed in Note 2 to the financial statements,
the Company is currently in the development stage. They have incurred losses
since inception. If the Company fails to generate sufficient cash from
operations it will need to raise additional equity or borrow additional funds
to
achieve its objectives. There is no guarantee the Company will be able to
generate revenue or raise capital to support current operations. These matters
raise substantial doubt about the Company’s ability to continue as a going
concern. Management’s plan in regard to these matters is also described in Note
2. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Ehrhardt,
Keefe, Steiner & Hottman PC
Denver,
Colorado
September
10, 2007
INTELLIGENTIAS,
INC.
(formerly
Merchandise Creations, Inc.)
(A
DEVELOPMENT STAGE COMPANY)
BALANCE
SHEETS
DECEMBER
31, 2006 AND 2005
|
|
|
2006
|
|
2005
|
|
|
ASSETS
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
270,527
|
|
$
|
10,785
|
|
|
Accounts
receivable
|
|
|
-
|
|
|
-
|
|
|
Interest
receivable from related party
|
|
|
3,733
|
|
|
-
|
|
|
Due
from related party
|
|
|
1,000,000
|
|
|
-
|
|
|
Current
assets of discontinued operations
|
|
|
-
|
|
|
9,048
|
|
|
Inventory
|
|
|
-
|
|
|
-
|
|
|
Total
current assets
|
|
|
1,274,260
|
|
|
19,833
|
|
|
Intangible
assets, net
|
|
|
6,119,761
|
|
|
-
|
|
|
TOTAL
ASSETS
|
|
$
|
7,394,021
|
|
$
|
19,833
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
125,343
|
|
$
|
-
|
|
|
Accrued
interest
|
|
|
26,301
|
|
|
-
|
|
|
Convertible
long-term debt, net of discount
|
|
|
51,852
|
|
|
-
|
|
|
Derivative
warrant liability
|
|
|
9,280,800
|
|
|
-
|
|
|
Current
liabilities of discontinued operations
|
|
|
19,999
|
|
|
446
|
|
|
Total
current liabilities
|
|
|
9,504,295
|
|
|
446
|
|
|
Total
liabilities
|
|
|
9,504,295
|
|
|
446
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock, $0.0001 par value; 300,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
86,360,000
and 211,860,000 shares issued and outstanding
|
|
|
8,636
|
|
|
21,186
|
|
|
Preferred
stock, $0.0001 par value; 200,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
0
and 0 shares issued and outstanding
|
|
|
-
|
|
|
-
|
|
|
Additional
paid-in capital
|
|
|
2,701,014
|
|
|
18,464
|
|
|
Deficit
accumulated during the development stage
|
|
|
(4,819,924
|
)
|
|
(20,263
|
)
|
|
Total
stockholders' equity
|
|
|
(2,110,274
|
)
|
|
19,387
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
7,394,021
|
|
$
|
19,833
|
|
See
accompanying notes to financial statements.
INTELLIGENTIAS,
INC.
(formerly
Merchandise Creations, Inc.)
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF OPERATIONS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(WITH
CUMULATIVE TOTALS SINCE INCEPTION)
|
|
|
|
|
|
|
Cumulative
Totals
|
|
|
|
|
|
|
|
|
October
1, 2004
through
|
|
|
|
|
2006
|
|
2005
|
|
December
31,
2006
|
|
|
|
|
(Restated)
|
|
|
|
(Restated)
|
|
|
REVENUES
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
599,597
|
|
|
-
|
|
|
599,597
|
|
|
Amortization
|
|
|
130,239
|
|
|
-
|
|
|
130,239
|
|
|
Total
operating expenses
|
|
|
729,836
|
|
|
-
|
|
|
729,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
(LOSS)
|
|
|
(729,836
|
)
|
|
-
|
|
|
(729,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on derivative warrant liability
|
|
|
(3,970,800
|
)
|
|
-
|
|
|
(3,970,800
|
)
|
|
Interest
expense
|
|
|
(78,153
|
)
|
|
-
|
|
|
(78,153
|
)
|
|
Interest
income
|
|
|
3,733
|
|
|
-
|
|
|
3,733
|
|
|
Total
other (expenses)
|
|
|
(4,045,220
|
)
|
|
-
|
|
|
(4,045,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM CONTINUING OPERATIONS BEFORE
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
(4,775,056
|
)
|
|
-
|
|
|
(4,775,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM CONTINUING OPERATIONS
|
|
|
(4,775,056
|
)
|
|
-
|
|
|
(4,775,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM DISCONTINUED OPERATIONS
|
|
|
(24,605
|
)
|
|
(17,872
|
)
|
|
(44,868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS APPLICABLE TO COMMON SHARES
|
|
$
|
(4,799,661
|
)
|
$
|
(17,872
|
)
|
$
|
(4,819,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS PER COMMON SHARE -
BASIC
& DILUTED:
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
PER SHARE - CONTINUING OPERATIONS
|
|
$
|
(0.02
|
)
|
$
|
-
|
|
|
|
|
|
LOSS
PER SHARE - DISCONTINUED OPERATIONS
|
|
|
-
|
|
|
-
|
|
|
|
|
|
NET
LOSS PER COMMON SHARE
|
|
$
|
(0.02
|
)
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE COMMON
SHARES
OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
& DILUTED
|
|
|
206,227,123
|
|
|
209,390,521
|
|
|
|
|
See
accompanying notes to financial statements.
INTELLIGENTIAS,
INC.
(formerly
Merchandise Creations, Inc.)
(A
DEVELOPMENT STAGE COMPANY)
STATEMENT
OF CHANGES IN STOCKHOLDERS' EQUITY
FROM
OCTOBER 1, 2004 (INCEPTION) THROUGH DECEMBER 31, 2006
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Additional
|
|
During
the
|
|
|
|
|
|
|
Common
Stock
|
|
Paid
- In
|
|
Development
|
|
|
|
|
Description
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Stage
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
October 1, 2004
|
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash to Founder
|
|
|
200,000,000
|
|
|
20,000
|
|
|
(10,000
|
)
|
|
-
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period October 1, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
through
December 31, 2004
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,391
|
)
|
|
(2,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
|
200,000,000
|
|
|
20,000
|
|
|
(10,000
|
)
|
|
(2,391
|
)
|
|
7,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash
|
|
|
11,860,000
|
|
|
1,186
|
|
|
28,464
|
|
|
-
|
|
|
29,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year ended December 31, 2005
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(17,872
|
)
|
|
(17,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
|
211,860,000
|
|
|
21,186
|
|
|
18,464
|
|
|
(20,263
|
)
|
|
19,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
conversion feature of convertible long-term debt
|
|
|
-
|
|
|
-
|
|
|
2,690,000
|
|
|
-
|
|
|
2,690,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
and retirement of common stock
|
|
|
(125,500,000
|
)
|
|
(12,550
|
)
|
|
(7,450
|
)
|
|
|
|
|
(20,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year ended December 31, 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,799,661
|
)
|
|
(4,799,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006 (restated)
|
|
|
86,360,000
|
|
$
|
8,636
|
|
$
|
2,701,014
|
|
$
|
(4,819,924
|
)
|
$
|
(2,110,274
|
)
|
See
accompanying notes to financial statements.
INTELLIGENTIAS,
INC.
(formerly
Merchandise Creations, Inc.)
(A
DEVELOPMENT STAGE COMPANY)
STATEMENT
OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(WITH
CUMULATIVE TOTALS SINCE INCEPTION)
|
|
|
|
|
|
|
Cumulative
Totals
|
|
|
|
|
|
|
|
|
October
1, 2004 through
|
|
|
|
|
2006
|
|
2005
|
|
December
31, 2006
|
|
|
|
|
(Restated)
|
|
|
|
(Restated)
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
$
|
(4,799,661
|
)
|
$
|
(17,872
|
)
|
$
|
(4,819,924
|
)
|
|
Adjustments
to reconcile net (loss) to net cash
|
|
|
|
|
|
|
|
|
|
|
|
used
in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
130,239
|
|
|
-
|
|
|
130,239
|
|
|
Loss
on derivative warrant liability
|
|
|
3,970,800
|
|
|
-
|
|
|
3,970,800
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets and liabilities of discontinued operations
|
|
|
28,601
|
|
|
(7,258
|
)
|
|
19,999
|
|
|
Interest
receivable from related party
|
|
|
(3,733
|
)
|
|
-
|
|
|
(3,733
|
)
|
|
Receivable
from related party
|
|
|
(1,000,000
|
)
|
|
-
|
|
|
(1,000,000
|
)
|
|
Accounts
payable
|
|
|
125,343
|
|
|
-
|
|
|
125,343
|
|
|
Accrued
interest
|
|
|
26,301
|
|
|
-
|
|
|
26,301
|
|
|
Discount
on notes payable
|
|
|
51,852
|
|
|
-
|
|
|
51,852
|
|
|
Total
adjustments
|
|
|
3,329,403
|
|
|
(7,258
|
)
|
|
3,320,801
|
|
|
Net
cash (used in) operating activities
|
|
|
(1,470,258
|
)
|
|
(25,130
|
)
|
|
(1,499,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
of intangible assets
|
|
|
(6,250,000
|
)
|
|
-
|
|
|
(6,250,000
|
)
|
|
Net
cash (used in) investing activities
|
|
|
(6,250,000
|
)
|
|
-
|
|
|
(6,250,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from note payable
|
|
|
8,000,000
|
|
|
-
|
|
|
8,000,000
|
|
|
Repurchase
of common stock
|
|
|
(20,000
|
)
|
|
-
|
|
|
(20,000
|
)
|
|
Issuance
of common stock
|
|
|
-
|
|
|
29,650
|
|
|
39,650
|
|
|
Net
cash provided by financing activities
|
|
|
7,980,000
|
|
|
29,650
|
|
|
8,019,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH
|
|
|
259,742
|
|
|
4,520
|
|
|
270,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS -
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING
OF YEAR
|
|
|
10,785
|
|
|
6,265
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS -
|
|
|
|
|
|
|
|
|
|
|
|
END
OF YEAR
|
|
$
|
270,527
|
|
$
|
10,785
|
|
$
|
270,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
SCHEDULE OF CASH
|
|
|
|
|
|
|
|
|
|
|
|
PAID
DURING THE YEAR FOR:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
Income
taxes
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
See
accompanying notes to financial statements.
INTELLIGENTIAS,
INC
(formerly
MERCHANDISE CREATIONS, INC.)
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
NOTE
1 - BACKGROUND AND BASIS OF PRESENTATION
Intelligentias,
Inc. (the “Company”) is a development stage company which was originally
incorporated in the State of Nevada on October 1, 2004, as Merchandise
Creations, Inc. as a promotional and marketing company specializing in
delivering, promoting, and selling custom designed merchandise for bands
and
artists in the music industry (the “Merchandise Distribution
Business”).
On
December 7, 2006, the Company entered into a Limited Assets Purchase Agreement
by and between the Company, SysteamUS, Inc. and Systeam Italy, SpA, whereby
the
Company acquired certain intellectual property associated with SysteamUS’
security software for $5,850,000. Concurrently with the purchase, the Company
discontinued its Merchandise Distribution Business and changed its focus
to
providing homeland security, data retention and tracking software and services
to law enforcement agencies, telecommunications companies and Internet service
providers.
On
December 15, 2006, the Company amended its articles of incorporation to change
its name from Merchandise Creations, Inc. to Intelligentias, Inc. In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets," the operating
results and assets and liabilities related to the Merchandise Distribution
Business have been reflected as discontinued operations in the accompanying
financial statements. Unless otherwise noted, amounts in these notes to the
financial statements excluded amounts attributable to discontinued operations.
NOTE
2 - GOING CONCERN
The
accompanying financial statements have been prepared assuming the Company
will
continue as a going concern. The Company is in the development stage and
has incurred losses from continuing operations and operational cash outflows
since inception, and does not have historical revenues from continuing
operations.
All
losses accumulated since the inception of business have been considered as
part
of development stage activities.
The
Company’s ability to service its long-term debt, and to fund working capital,
capital expenditures and business development efforts will depend on its
ability
to generate cash from operating activities which is subject to, among other
things, its future operating performance, as well as to general economic,
financial, competitive, legislative, regulatory and other conditions, some
of
which may be beyond its control. If the Company fails to generate sufficient
cash from operations, it will need to raise additional equity or borrow
additional funds to achieve its objectives. There can be no assurance that
the
Company will generate sufficient revenues or that equity or borrowings will
be
available or, if available, will be at rates or prices acceptable to the
Company. These conditions raise substantial doubt about the Company’s ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of these
uncertainties.
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Development
Stage Company
The
Company is considered to be in the development stage as defined in Statement
of
Financial Accounting Standards (SFAS) No. 7, “Accounting and Reporting by
Development Stage Enterprises”. The Company has devoted substantially all of its
efforts to business planning and development. Additionally, the Company has
allocated a substantial portion of its time and investment to bringing its
product to the market, and to raising capital.
Restatements
and Reclassifications
The
Company restated certain balance sheet accounts as of December 31, 2006 to
correct an error related to the accounting treatment applied with respect
to the
convertible long-term debt and accompanying warrants that the Company issued
in
a private placement transaction in December 2006. Certain prior period amounts
have been reclassified to conform to current presentation to take effect
for the
disposal of its operating business.
The
following tables isolate each of the restated amounts in the Company’s balance
sheet as of December 31, 2006, statement of operations for the year ended
December 31, 2006, statement of changes in stockholders’ equity (deficit) for
the year ended December 31, 2006 and statement of cash flows for the year
ended
December 31, 2006.
Statement
of Changes in Stockholders’ Equity (Deficit)
|
|
|
Restated
|
|
As
Previously Reported
|
|
|
|
|
Additional
Paid-in
Capital
|
|
Deficit
Accumulated
During
Development
Stage
|
|
Additional
Paid-in
Capital
|
|
Deficit
Accumulated
During
Development
Stage
|
|
|
Balance,
December 31, 2005
|
|
$
|
18,464
|
|
$
|
(20,263
|
)
|
$
|
18,464
|
|
$
|
(20,263
|
)
|
|
Beneficial
conversion feature of long-term debt
|
|
|
2,690,000
|
|
|
-
|
|
|
4,808,415
|
|
|
-
|
|
|
Warrants
issued in conjunction with convertible
long-term
debt
|
|
|
-
|
|
|
-
|
|
|
3,191,585
|
|
|
-
|
|
|
Repurchase
and retirement of common stock
|
|
|
(7,450
|
)
|
|
-
|
|
|
(7,450
|
)
|
|
-
|
|
|
Net
loss for the year ended December 31, 2006
|
|
|
-
|
|
|
(4,799,661
|
)
|
|
-
|
|
|
(828,861
|
)
|
|
Balance,
December 31, 2006
|
|
$
|
2,701,014
|
|
$
|
(4,819,924
|
)
|
$
|
8,011,014
|
|
$
|
(849,124
|
)
|
Statement
of Cash Flows
|
|
|
For
the Year ended December 31, 2006
|
|
|
|
|
Restated
|
|
As
Previously
Reported
|
|
|
Net
loss
|
|
$
|
4,799,661
|
|
$
|
828,861
|
|
|
Loss
on derivative warrant liability
|
|
|
3,970,800
|
|
|
-
|
|
Use
of Estimates
Preparation
of the financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates have been used by management in
conjunction with the measurement of the valuation allowance relating to deferred
tax assets and future cash flows associated with long-lived assets. Actual
results could differ from those estimates.
Cash
and Cash Equivalents
For
financial statement presentation purposes, the Company considers short-term,
highly liquid investments with original maturities of three months or less
to be
cash and cash equivalents.
The
Company maintains cash and cash equivalent balances at financial institutions
that are insured by the Federal Deposit Insurance Corporation up to $100,000.
Deposits with these banks may exceed the amount of insurance provided on
such
deposits; however, these deposits typically may be redeemed upon demand and,
therefore, bear minimal risk.
Intangible
Assets
Intangible
assets consist of values assigned to intellectual property and Internet website
development costs. Both the intellectual property and Internet website
development costs are being amortized on a straight-line basis over their
estimated economic useful lives of 3 years and are stated at cost less
accumulated amortization. Intangibles are regularly reviewed for impairment
to
determine if facts or circumstances suggest that the carrying value of these
assets may not be recoverable.
Contingencies
The
Company is not currently a party to any pending or threatened legal proceedings.
Based on information currently available, management is not aware of any
matters
that would have a material adverse effect on the Company’s financial condition,
results of operations or cash flows.
Fair
Value of Financial Instruments
The
carrying amounts of the Company’s financial instruments, including cash and cash
equivalents, accounts payable, accrued expenses and note payable approximate
their fair values based on their short-term nature.
Income
Taxes
The
Company has adopted the provisions of SFAS No. 109,
“Accounting
for Income Taxes"
which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax basis of assets and liabilities using enacted tax rates in effect
for
the year in which the differences are expected to reverse. A valuation
allowance is provided for those deferred tax assets for which the related
benefits will likely not be realized.
Derivatives
Derivative
financial instruments, as defined in Financial Accounting Standard No. 133,
“Accounting for Derivative Financial Instruments and Hedging Activities” (“SFAS
133”), consist of financial instruments or other contracts that contain a
notional amount and one or more underlying variables (e.g., interest rate,
security price or other variable), require no initial net investment and
permit
net settlement. Derivative financial instruments may be free−standing or
embedded in other financial instruments. Further, derivative financial
instruments are initially, and subsequently, measured at fair value and recorded
as liabilities or assets.
The
Company has entered into financing arrangements to fund its business capital
requirements, including convertible debt and short-term debt which include
detachable warrants that are indexed to the Company’s common stock. These
contracts require careful evaluation to determine whether derivative features
embedded in host agreements require bifurcation and fair value measurement
or
whether certain conditions for equity classification have been achieved.
In
instances where derivative financial instruments require liability
classification, the Company is required to initially and subsequently measure
such instruments at fair value. Accordingly, the Company adjusts the fair
value
of these derivative components at each reporting period through a charge
to
earnings until such time as the instruments are permitted classification
in
stockholders’ equity. The Company uses the Black−Scholes option pricing model
because it embodies all of the requisite assumptions (including trading
volatility, estimated terms and risk free rates) necessary to estimate the
fair
value of these instruments.
Loss
per Common Share
Loss
per
common share has been computed using the weighted average number of common
shares outstanding during each period. Except where the result would be
anti-dilutive to income from continuing operations, diluted earnings per
share
has been computed assuming the conversion of the convertible long-term debt
and
the elimination of the related interest expense, and the exercise of stock
warrants. For the year ended December 31, 2006, the assumed conversion of
convertible long-term debt and the exercise of stock warrants are anti-dilutive
due to the Company’s net loss and were excluded in determining diluted loss per
share.
Advertising
Costs
Advertising
and promotions costs are expensed as incurred. The Company incurred advertising
costs of $24,999 and $2,729 for the years ended December 31, 2006 and 2005,
respectively, which have been included in loss from discontinued
operations.
Recent
Accounting Pronouncements
In
December 2004, the FASB issued Financial Accounting Standards No. 123 (revised
2004) (“FAS 123R”), Share-Based Payments, FAS 123R replaces FAS No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. FAS 123R requires compensation
expense, measured as the fair value at the grant date, related to share-based
payment transactions to be recognized in the financial statements over the
period that an employee provides service in exchange for the award. FAS 123R
is
effective January 1, 2006. The implementation of this standard did not have
a
material impact on the Company’s financial position, results of operations or
cash flows.
In
December 2004, FASB issued Financial Accounting Standards No. 153, Exchanges
of
Non-monetary Assets, an amendment of APB Opinion No. 29, Accounting for
Non-monetary Transactions ("FAS 153"). This statement amends APB Opinion
29 to
eliminate the exception for non-monetary exchanges of similar productive
assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. Under FAS 153, if a non-monetary exchange
of similar productive assets meets a commercial-substance criterion and fair
value is determinable, the transaction must be accounted for at fair value
resulting in recognition of any gain or loss. FAS 153 is effective for
non-monetary transactions in fiscal periods that begin after June 15, 2005.
The
implementation of this standard did not have a material impact on the Company’s
financial position, results of operations or cash flows.
In
May 2005, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting
Changes and Error Corrections”. SFAS No. 154 replaces Accounting Principles
Board (“APB”) No. 20, “Accounting Changes” and SFAS No. 3, “Reporting
Accounting Changes in Interim Financial Statements” and establishes
retrospective application as the required method for reporting a change in
accounting principle. SFAS No. 154 provides guidance for determining
whether retrospective application of a change in accounting principle is
impracticable and for reporting a change when retrospective application is
impracticable. The reporting of a correction of an error by restating previously
issued financial statements is also addressed. SFAS No. 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The adoption of SFAS No. 154 did not have an
impact on the Company's financial condition or results of
operations.
In
February 2006, the Financial Accounting Standards Board (FASB) issued statement
155,
Accounting
for Certain Hybrid Financial Instruments - an amendment of FASB Statements
no.
133 and 140
. This
statement resolves issues addressed in Statement 133 Implementation Issue
no. D1
“Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets.” This implementation guidance indicated that entities could continue to
apply guidance related to accounting for beneficial interests in paragraphs
14
and 362 of Statement 140, which indicate that any security that can be
contractually prepaid or otherwise settled in such a way that the holder
of the
security would not recover substantially all of its recorded investment should
be subsequently measured like investments in debt securities classified as
available for sale or trading, and may not be classified as held to maturity.
Also, Implementation issue D1 indicated that holders of beneficial interests
in
securitized financial assets that are not subject to paragraphs 14 and 362
of
Statement 140 are not required to apply Statement 133 to those beneficial
interests, pending further guidance. Statement 155 eliminates the exemption
from
Statement 133 for interests in securitized financial assets. It also allows
the
preparer to elect fair value measurement at acquisition, at issuance or when
a
previously recognized financial instrument is subject to a remeasurement
event.
SFAS 155 is effective for all financial instruments acquired or issued after
the
beginning of the fiscal year that begins after September 15 2006. We do not
expect the adoption of this statement will have a material impact on our
results
of operations or financial position.
In
March
2006, the FASB issued statement 156,
Accounting
for Servicing of Financial Assets - an amendment of FASB Statement No.
140
. Under
statement 140, servicing assets and servicing liabilities are amortized over
the
expected period of estimated net servicing income or loss and assessed for
impairment or increased obligation at each reporting date. This statement
requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable. Subsequent
measurement of servicing assets and servicing liabilities at fair value is
permitted, but not required. If derivatives are used to mitigate risks inherent
in servicing assets and servicing liabilities, those derivatives must be
accounted for at fair value. Servicing assets and servicing liabilities
subsequently measured at fair value must be presented separately in the
statement of financial position and there are additional disclosures for
all
separately recognized servicing assets and servicing liabilities. SFAS 156
is
effective for transactions entered into after the first fiscal year that
begins
after September 15 2006. We do not expect the adoption of this statement
will
have a material impact on our results of operations or financial
position.
In
September of 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”
(SFAS No. 157). SFAS No. 157 establishes a framework for measuring
fair value under generally accepted accounting procedures and expands
disclosures on fair value measurements. This statement applies under previously
established valuation pronouncements and does not require the changing of
any
fair value measurements, though it may cause some valuation procedures to
change. Under SFAS No. 157, fair value is established by the price that
would be received to sell the item or the amount to be paid to transfer the
liability of the asset as opposed to the price to be paid for the asset or
received to transfer the liability. Further, it defines fair value as a market
specific valuation as opposed to an entity specific valuation, though the
statement does recognize that there may be instances when the low amount
of
market activity for a particular item or liability may challenge an entity’s
ability to establish a market amount. In the instances that the item is
restricted, this pronouncement states that the owner of the asset or liability
should take into consideration what affects the restriction would have if
viewed
from the perspective of the buyer or assumer of the liability. This statement
is
effective for all assets valued in financial statements for fiscal years
beginning after November 15, 2007. The Company is currently evaluating the
impact of SFAS No. 157 to its financial position and result of operations.
In
September of 2006, the FASB issued SFAS No. 158 “Employer’s Accounting for
Defined Benefit Pension and Other Postretirement Plans” (SFAS No. 158).
SFAS No. 158 requires companies to recognize the funded status of a benefit
plan (difference between plan assets at fair value and the benefit obligation)
in the statement of financial position as well as to list in other comprehensive
income, net of tax, the gains and losses and prior service costs or credit
that
were accrued during the financial period but were not recognized as part
of the
net periodic benefit cost under SFAS No. 87 “Employer’s Accounting for
Pension” or SFAS No. 106 “Employer’s Accounting for Postretirement Benefits
Other Than Pensions”. It also requires all benefit plans (postretirement or
otherwise) to be valued at the end of each fiscal year. Companies must disclose
in the notes to financial statements any delayed gain or loss related to
net
periodic benefit cost. SFAS No. 158 is effective for fiscal years ending
after December 15, 2006 and does not impact the Company's financial
condition or results of operations.
In
July
2006, the FASB issued FASB Interpretation No. 48 “Accounting for Uncertain
Tax Positions” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements in accordance
with FASB Statement No. 109 “Accounting for Income Taxes”. It prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company is currently evaluating the impact of FIN 48
to its financial position and results of operations.
NOTE
4 - INTANGIBLE ASSETS
Intangible
assets consist of the cost to acquire certain intellectual property associated
with SysteamUS’ security software for $5,850,000 described in Note 1 and the
cost to develop the Company’s Internet web site. In December of 2006 we acquired
the software and related intellectual property from Systeam US. At
December 31, 2006, this was the only asset the Company was planning to
acquire. Accordingly, the Company allocated the entire purchase price to
software and the related IP and planned to amortize over 3 years. In the
June 2007, it became apparent that in order to meet the Company’s
business plans it needed to acquire the related operating business related
to
the software; therefore, the Company acquired the operating business of Systeam
Italy SpA. The Company has hired an independent appraiser to value both
purchases and to allocate the combined purchase price to all of the intangible
assets in accordance with applicable accounting standards. It is anticipated
this will be completed in the fall of 2007 and the Company will finalize
its
allocation in its December 31, 2007 Form 10-KSB.
Intangible
assets were as follows at December 31, 2006:
|
|
|
Original
Cost
|
|
Accumulated
Amortization
|
|
Carrying
Value
|
|
Useful
Life (Years)
|
|
|
Intellectual
property
|
|
$
|
5,850,000
|
|
$
|
(125,806
|
)
|
$
|
5,724,194
|
|
|
3
|
|
|
Website
|
|
|
400,000
|
|
|
(4,433
|
)
|
|
395,567
|
|
|
3
|
|
|
Total
intangibles
|
|
$
|
6,250,000
|
|
$
|
(130,239
|
)
|
$
|
6,119,761
|
|
|
|
|
Amortization
expense amounted to $130,239 and $0 for the years ended December 31, 2006
and
2005, respectively, and is expected to be as follows over the next five years:
|
|
|
Intellectual
property
|
|
Website
|
|
|
2007
|
|
$
|
1,950,000
|
|
$
|
133,332
|
|
|
2008
|
|
|
1,950,000
|
|
|
133,332
|
|
|
2009
|
|
|
1,824,194
|
|
|
128,903
|
|
|
2010
|
|
|
-
|
|
|
-
|
|
|
2011
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Total
estimated amortization expense
|
|
$
|
5,724,194
|
|
$
|
395,567
|
|
NOTE
5 - CONVERTIBLE LONG-TERM DEBT AND WARRANTS
On
December 7, 2006, the Company completed an $8,000,000 private offering of
convertible long-term debt (the “Notes”). The Notes are due on December 7, 2009,
bear interest at a rate of 5% per annum, payable in cash beginning on March
1,
2007 and on the first business day of each subsequent three-month period
and
contain no prepayment penalty. The Note is secured by the Company’s right, title
and interest in current and future accounts receivable, personal and fixed
property and intangibles.
At
any
time, the Note is convertible, in whole or in part, at the option of the
holder,
into such number of shares of common stock of the Company as is determined
by
dividing that portion of the outstanding principal balance under the Note
as of
such date that the holder elects to convert by the conversion price of $0.44,
provided, however, that the conversion price shall be subject to adjustment
as
described in the Note agreement. This Note was converted on March 19, 2007
(See
Note 10).
In
connection with the issuance of the Notes, the Company issued the Note holder
warrants (the “Warrants”) to purchase up to 9,000,000 shares of the Company’s
common stock with an exercise price of $0.01, of which 6,750,000 warrants
are
immediately exercisable and the remaining 2,250,000 warrants are exercisable
following the date that the Note is fully converted or prepaid (the “December
2006 Warrants”). The Warrants expire in December 2011. T
he
aggregate fair value of the December 2006 Warrants equals $5,310,000 based
on
the Black-Scholes pricing model using the following assumptions: 5% risk
free
rate, 100% volatility and expected life of the warrants of 30 months. On
the
date of issuance and a
s
of
December 31, 2006, the December 2006 Warrants did not meet the requisite
conditions for equity classification because cash settlement could be required
at the option of Vision in the event of a change in control. Accordingly,
fair
value of the December 2006 Warrants
has been
initially recorded as a discount on the Notes with an offset to Derivative
Warrant Liability. The Company
is
required to adjust the value of the December 2006 Warrants to fair value
at each
reporting period through a charge to earnings until such time as the instruments
are permitted classification in stockholders’ equity.
Total
loss on warrant derivative liabilities was $3,970,800 for the year ended
December 31, 2006.
The
Company computed the effective conversion price of the Notes, noting that
they
contain a beneficial conversion feature (“BCF”) in accordance with the
provisions of EITF 98-5,
Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios
and
00-27,
Application
of Issue No. 98-5 to Certain Convertible Instruments
.
The beneficial conversion feature of $2,690,000 has been recorded as a
discount on the Note with an offset to additional paid-in capital in the
accompanying balance sheet. The December 2006 Warrant and BCF debt discounts
are
being
amortized over a period of 36 months. As of December 31, 2006, a total of
$51,852 has been amortized and recorded as interest expense. In connection
with
the issuance of the Notes, the Company entered into a registration rights
agreement with the Note holder pursuant to which the Company agreed to file
a
registration statement with the Securities and Exchange Commission covering
the
resale of the securities underlying the Note and Warrants. In the event that
the
Company fails to file a registration statement within 60 days or fails to
meet
specified deadlines with respect to causing the registration statement to
be
declared effective, the Company is obligated to pay an amount in cash as
liquidated damages equal to 1.5% of the amount of the holder’s initial
investment in the Notes up to an aggregate of ten percent of the amount of
the
holder’s initial investment. In accordance with the provisions of EITF 00-19,
Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a
Company's Own Stock
,
and
EITF 05-04,
The
Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument
Subject to EITF Issue No. 00-19
,
(under
which it elected to consider the warrants and registration rights on a combined
basis and analyzed under EITF 00-19 consistent with view A of EITF 05-04),
the
Company has determined that these securities meet the criteria for
classification as stockholders’ equity in the accompanying consolidated balance
sheet since the maximum potential liquidated damages penalty payable by the
Company in cash is less than a reasonable estimate of the difference in fair
value between registered and unregistered shares of our common
stock.
NOTE
6 - STOCKHOLDERS’ EQUITY
On
October 1, 2004, the Company was formed with one class of common stock, par
value $0.001. The Company was authorized to issue to up 100,000,000 shares
of
common stock. On November 14, 2006, the Company amended its articles of
incorporation to increase the authorized capital stock and decrease par value
from 100,000,000 shares of common stock, $0.001 par value, to 500,000,000
shares
of capital stock, $0.0001 par value, consisting of 300,000,000 shares of
common
stock, $0.0001 par value, and 200,000,000 shares of undesignated preferred
stock, $0.0001 par value.
In
October 2004, the Company issued 200,000,000 shares of common stock to its
founder for cash of $10,000.
In
March
2005, the Company issued, via a private placement, 11,860,000 shares of its
common stock for cash of $29,650.
On
December 11, 2006, the Company effected a 20-for-1 forward stock split of
its
common stock. Par value of the stock decreased from $0.001 per share to $0.0001
per share. All share and per share amounts have been retroactively restated
to
reflect this split.
On
December 15, 2006, the Company repurchased 125,500,000 of common stock from
its
founder for consideration of $20,000 and immediately retired the
shares.
NOTE
7 - PROVISION FOR INCOME TAXES
Deferred
income taxes are determined using the liability method for the temporary
differences between the financial reporting basis and income tax basis of
the
Company’s assets and liabilities. Deferred income taxes will be measured based
on the tax rates expected to be in effect when the temporary differences
are
included in the Company’s tax return. Deferred tax assets and liabilities are
recognized based on anticipated future tax consequences attributable to
differences between financial statement carrying amounts of assets and
liabilities and their respective tax bases.
At
December 31, 2006 and 2005, deferred tax assets consist of the
following:
|
|
|
2006
|
|
2005
|
|
|
Net
operating loss carry forwards
|
|
$
|
1,927,969
|
|
$
|
(7,148
|
)
|
|
Less:
valuation allowance
|
|
|
(1,927,969
|
)
|
|
7,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
$
|
-
|
|
At
December 31, 2006 and 2005, the Company had accumulated deficits during the
development stage of $849,124 and $20,263, respectively, available to offset
future taxable income through 2020. The Company established valuation allowances
equal to the full amount of the deferred tax assets due to the uncertainty
of
the utilization of the operating losses in future periods.
The
Company’s effective tax rate of 0% differs from federal and state statutory
rates as the Company has incurred net operating losses.
NOTE
8 - RELATED PARTY TRANSACTIONS
As
described in Note 1, “Background and Basis of Presentation”, on December 7,
2006, certain transactions were effected pursuant to an agreement among the
Company, SysteamUS, Inc. and Systeam Italy, SpA. In December 2006, the Company
loaned a total of $1,000,000 to Systeam Italy SpA (the “Systeam Loans”). The
Systeam Loans bear interest at 7.0% per annum and mature in December 2007.
Interest income for the year ended December 31, 2006 was $3,733.
The
Company paid a related party $400,000 to develop its website.
In
the
first quarter of 2007, the Company obtained debt financing from various related
parties totaling $600,000 which bears interest at 10% per annum. On the earlier
of one year or the closing of any future financing all principal and unpaid
accrued interest on the loans will be immediately payable.
NOTE
9 - DISCONTINUED OPERATIONS
As
a
result of the Purchase Agreement, the Company’s board of directors made a
decision to change the business focus from merchandising activities toward
developing the security software purchased from SysteamUS and determined
that
the existing remaining inventory was not complementary to expected ongoing
operations and should be divested. During the year ended December 31, 2006,
the
Company recognized a net loss on discontinued operations in the amount of
$24,605, consisting of $19,999 in advertising costs incurred prior to the
Purchase Agreement and $5,158 in inventory impairment due to obsolescence,
offset by $552 in gross profit on sales. In the prior year ended December
31,
2005, the Company realized a net loss from discontinued operations of $17,872
consisting of professional fees of $12,692, advertising costs of $2,729,
commission expenses of $3,531, and general and administrative expenses of
$4,567, offset by a gain of $5,647.
NOTE
10 - SUBSEQUENT EVENTS
Financing
Activities
On
March
16, 2007, the Company issued to Vision 1,750,000 restricted shares of common
stock in consideration of the holder agreeing to convert the Notes into shares
of common stock prior to the maturity date of the Note. The Note was fully
converted by Vision on March 19, 2007 into 18,181,818 shares of common stock.
In
March
2007, Vision exercised 3,000,000 of the December 2006 Warrants.
On
June
13, 2007, the Company issued to Vision a $3,000,000 Senior Secured Promissory
Note (the “Note”) due on the earlier of June 13, 2008 or upon receipt of
$6,000,000 in net proceeds from the Company’s next debt or equity financing. The
Note bears interest at 12% per annum plus an additional $300,000 when repaid,
is
secured by the Company’s accounts receivable and other personal and fixed assets
and may be prepaid at any time. The June 2007 Warrants also contain
"full-ratchet" anti-dilution protection to Vision during the warrant term,
but
excludes certain events such as issuances of stock in connection with mergers
and acquisitions, strategic license agreements, stock option plans and a
subsequent financing transaction.
In
connection with the issuance of the Note, the Company issued Vision warrants
to
purchase up to 5,500,000 shares of the Company’s common stock with an exercise
price of $2.05 per share expiring in June 2014 (the “June 2007
Warrants”).
On
August
15, 2007, the Company and Vision amended the agreements related to the December
2006 Warrants and the June 2007 Warrants (collectively, the “Warrants”) to
remove the cash settlement provision that could be triggered by a change
in
control. Accordingly, as of the date of the Amendment the Warrants meet the
requisite conditions for equity classification and will be reclassified from
liabilities to stockholders’ equity.
During
January through July 2007, the Company raised $1,720,000 (including $245,000
from related parties) from a small group of accredited investors pursuant
to 10%
unsecured bridge promissory notes (the “Bridge Notes”). The principal and
accrued interest under the Bridge Notes are due and payable upon the earlier
of
one year after issuance or upon receipt of proceeds from the Company’s next debt
or equity financing, but only at such time after a minimum of $4,000,000
in
gross proceeds have been received by us, and then at a rate of $0.50 for
every
$1.00 raised above such level. In connection with the issuance of certain
of the
Bridge Notes, the Company also issued warrants to purchase 1,343,750 shares
of
their common stock, with an exercise price of $0.80 per share, exercisable
for a
period of five years.
Acquisitions
On
June
7, 2007, the Company entered into the Stock Purchase Agreement to acquire
all of
the issued and outstanding stock of Systeam from SysteamUS, Inc. in
consideration for assuming net liabilities of approximately $6,941,730. In
2007,
the Company also established the wholly-owned subsidiaries Retentia, Inc,
Investigatia, Inc. and Interceptia, Inc. In 2007, the Company loaned another
$935,000 in Systeam Loans.
Also
on
June 7, 2007, the Company entered into the Stock Sale Agreement to acquire
all
of the issued and outstanding stock of Datakom GmbH (“Datakom”) for an aggregate
purchase price of $27,650,000, subject to adjustment. The aggregate purchase
price was comprised of: (i) cash consideration of $10.5 million,
$2.0 million of which was paid immediately and the remaining $8,500,000
which is payable within 8 weeks after the distribution of a Private Placement
Memorandum associated with the sale of the Company’s common stock;
(ii) direct transaction costs of $70,000 and (iii) issuance of
14,000,000 shares of the Company’s common stock with a fair value of
$17,078,600, based on the closing price of the Company’s common stock on the
closing date. The Stock Sale Agreement also included contingent consideration
which is based on certain financial performance criteria for Datakom during
calendar year 2007.
Other
On
March
16, 2007, the Company issued 200,000 shares of common stock to two consultants
for services performed during the three months ended March 31, 2007. The
Company
valued these grants at $370,000 based on the fair market value of the Company’s
common stock on the date of issuance and recognized the amount as selling,
general and administrative expense.
Effective
April 16, 2007, the Company hired Lewis W. Moorehead as the Chief Financial
Officer. On August 24, 2007, Mr. Moorehead resigned to pursue other
opportunities. On the same date, the Company appointed Thomas A. Spanier
as the
new Chief Financial Officer, Treasurer and Secretary. The Company agreed
to pay
Mr. Spanier an annual salary of $200,000 and granted him the right to receive
stock options at the same level as the other senior executives when a stock
option plan will be approved.
INTELLIGENTIAS,
INC.
(formerly
Merchandise Creations, Inc.)
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
September
30,
|
|
December
31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,146,877
|
|
$
|
270,527
|
|
|
Accounts
receivable (net of allowance of $193,203 in 2007)
|
|
|
3,777,231
|
|
|
-
|
|
|
Prepaid
expenses and other current assets
|
|
|
513,921
|
|
|
-
|
|
|
Interest
receivable from related party
|
|
|
-
|
|
|
3,733
|
|
|
Due
from related party
|
|
|
-
|
|
|
1,000,000
|
|
|
Other
receivables
|
|
|
1,074,484
|
|
|
-
|
|
|
Inventory
|
|
|
61,150
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
6,573,663
|
|
|
1,274,260
|
|
|
Intangible
assets, net
|
|
|
38,650,589
|
|
|
6,119,761
|
|
|
Fixed
assets, net
|
|
|
1,332,632
|
|
|
-
|
|
|
Long-term
restricted investments
|
|
|
2,489,185
|
|
|
-
|
|
|
Deposits
|
|
|
965,592
|
|
|
-
|
|
|
Other
assets
|
|
|
119,326
|
|
|
-
|
|
|
TOTAL
ASSETS
|
|
$
|
50,130,987
|
|
$
|
7,394,021
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,678,718
|
|
$
|
125,343
|
|
|
Accrued
expenses
|
|
|
9,539,863
|
|
|
26,301
|
|
|
Deferred
revenue
|
|
|
1,572,459
|
|
|
-
|
|
|
Short-term
borrowings, net of discount
|
|
|
3,825,918
|
|
|
-
|
|
|
Acquisition
payable
|
|
|
8,500,000
|
|
|
-
|
|
|
Short-term
borrowings, related party
|
|
|
245,000
|
|
|
-
|
|
|
Derivative
warrant liability
|
|
|
404,600
|
|
|
9,280,800
|
|
|
Convertible
long-term debt, net of discount
|
|
|
-
|
|
|
51,852
|
|
|
Current
liabilities of discontinued operations
|
|
|
-
|
|
|
19,999
|
|
|
Total
current liabilities
|
|
|
26,766,558
|
|
|
9,504,295
|
|
|
Accrued
pension plan liabilities
|
|
|
2,369,933
|
|
|
-
|
|
|
Total
liabilities
|
|
|
29,136,491
|
|
|
9,504,295
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock, $0.0001 par value; 300,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
114,555,468
and 77,360,000 shares issued and outstanding
|
|
|
11,455
|
|
|
7,736
|
|
|
Preferred
stock, $0.0001 par value; 200,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
0
and 0 shares issued and outstanding
|
|
|
-
|
|
|
-
|
|
|
Additional
paid-in capital
|
|
|
49,204,292
|
|
|
2,701,914
|
|
|
Accumulated
other comprehensive loss
|
|
|
(506,558
|
)
|
|
-
|
|
|
Accumulated
deficit
|
|
|
(27,714,693
|
)
|
|
(4,819,924
|
)
|
|
Total
stockholders' equity
|
|
|
20,994,496
|
|
|
(2,110,274
|
)
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
50,130,987
|
|
$
|
7,394,021
|
|
See
accompanying notes to condensed consolidated unaudited financial
statements.
INTELLIGENTIAS,
INC.
(formerly
Merchandise Creations, Inc.)
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND
2006
(UNAUDITED)
|
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
REVENUES
|
|
$
|
3,550,310
|
|
$
|
-
|
|
$
|
5,523,759
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
cost of revenues
|
|
|
1,082,509
|
|
|
-
|
|
|
1,445,026
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
2,819,648
|
|
|
-
|
|
|
5,468,948
|
|
|
-
|
|
|
Amortization
and depreciation
|
|
|
2,473,941
|
|
|
-
|
|
|
4,152,587
|
|
|
-
|
|
|
Total
costs and expenses
|
|
|
6,376,098
|
|
|
-
|
|
|
11,066,561
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
(LOSS)
|
|
|
(2,825,788
|
)
|
|
-
|
|
|
(5,542,802
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on derivative warrant liability
|
|
|
(229,385
|
)
|
|
-
|
|
|
(4,710,935
|
)
|
|
|
|
|
Interest
income (expense)
|
|
|
(1,129,207
|
)
|
|
-
|
|
|
(12,641,031
|
)
|
|
-
|
|
|
Total
other (expenses)
|
|
|
(1,358,592
|
)
|
|
-
|
|
|
(17,351,966
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM CONTINUING OPERATIONS BEFORE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
(4,184,380
|
)
|
|
-
|
|
|
(22,894,768
|
)
|
|
-
|
|
|
Provision
for income taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM CONTINUING OPERATIONS
|
|
|
(4,184,380
|
)
|
|
-
|
|
|
(22,894,768
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM DISCONTINUED OPERATIONS
|
|
|
-
|
|
|
(1,465
|
)
|
|
-
|
|
|
(8,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) APPLICABLE TO COMMON SHARES
|
|
|
(4,184,380
|
)
|
|
(1,465
|
)
|
|
(22,894,768
|
)
|
|
(8,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized securities gains
|
|
$
|
8,109
|
|
|
|
|
$
|
8,109
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(490,354
|
)
|
|
-
|
|
|
(514,667
|
)
|
|
-
|
|
|
Comprehensive
income (loss)
|
|
$
|
(4,666,625
|
)
|
$
|
(1,465
|
)
|
$
|
(23,401,326
|
)
|
$
|
(8,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS PER COMMON SHARE - BASIC & DILUTED:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) PER SHARE - CONTINUING OPERATIONS
|
|
$
|
(0.04
|
)
|
$
|
-
|
|
$
|
(0.23
|
)
|
$
|
-
|
|
|
INCOME
(LOSS) PER SHARE - DISCONTINUED OPERATIONS
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
NET
INCOME (LOSS) PER COMMON SHARE
|
|
$
|
(0.04
|
)
|
$
|
-
|
|
$
|
(0.23
|
)
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
& DILUTED
|
|
|
114,555,468
|
|
|
211,860,000
|
|
|
99,843,573
|
|
|
211,860,000
|
|
See
accompanying notes to condensed consolidated unaudited financial
statements.
INTELLIGENTIAS,
INC.
(formerly
Merchandise Creations, Inc.)
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND
2006
(UNAUDITED)
|
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
$
|
(4,184,380
|
)
|
$
|
(1,465
|
)
|
$
|
(22,894,768
|
)
|
$
|
(8,606
|
)
|
|
Adjustments
to reconcile net (loss) to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
and depreciation
|
|
|
2,473,941
|
|
|
-
|
|
|
4,152,588
|
|
|
-
|
|
|
Amortization
of discount on notes payable
|
|
|
870,861
|
|
|
-
|
|
|
1,156,843
|
|
|
-
|
|
|
Amortization
of discount on convertible debt
|
|
|
-
|
|
|
-
|
|
|
7,948,148
|
|
|
-
|
|
|
Amortization
of debt issuance costs
|
|
|
12,643
|
|
|
|
|
|
12,643
|
|
|
|
|
|
Deferred
financing costs
|
|
|
(285,240
|
)
|
|
|
|
|
(285,240
|
)
|
|
|
|
|
Stock
based compensation
|
|
|
(435,103
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Expense
associated with issuance of common stock to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
induce conversion of convertible long-term debt
|
|
|
-
|
|
|
-
|
|
|
3,263,801
|
|
|
-
|
|
|
Non-cash
expense associated with issuance of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stock to consultants
|
|
|
-
|
|
|
-
|
|
|
370,000
|
|
|
-
|
|
|
Non-cash
(gain) loss on derivative warrant liability
|
|
|
229,385
|
|
|
-
|
|
|
4,710,935
|
|
|
-
|
|
|
Non-cash
foreign currency revaluation
|
|
|
(110,598
|
)
|
|
|
|
|
(110,598
|
)
|
|
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets and liabilities of discontinued operations
|
|
|
-
|
|
|
1,053
|
|
|
-
|
|
|
3,444
|
|
|
Interest
receivable from related party
|
|
|
-
|
|
|
-
|
|
|
(46,276
|
)
|
|
-
|
|
|
Accounts
receivable
|
|
|
(1,117,052
|
)
|
|
-
|
|
|
(1,589,968
|
)
|
|
|
|
|
Unbilled
fees and costs
|
|
|
571,958
|
|
|
|
|
|
571,958
|
|
|
|
|
|
Inventory
|
|
|
(12,446
|
)
|
|
|
|
|
(12,446
|
)
|
|
|
|
|
Prepaid
expenses and other current assets
|
|
|
410,108
|
|
|
-
|
|
|
(114,892
|
)
|
|
-
|
|
|
Other
assets
|
|
|
(17,315
|
)
|
|
-
|
|
|
(59,781
|
)
|
|
-
|
|
|
Accounts
payable
|
|
|
590,300
|
|
|
-
|
|
|
607,034
|
|
|
-
|
|
|
Deferred
revenue
|
|
|
(1,386,489
|
)
|
|
-
|
|
|
(1,567,023
|
)
|
|
-
|
|
|
Accrued
expenses
|
|
|
1,215,614
|
|
|
-
|
|
|
2,347,314
|
|
|
-
|
|
|
Accrued
pension plan liabilities
|
|
|
49,882
|
|
|
-
|
|
|
49,882
|
|
|
-
|
|
|
Total
adjustments
|
|
|
3,060,449
|
|
|
1,053
|
|
|
21,404,922
|
|
|
3,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) operating activities
|
|
|
(1,123,931
|
)
|
|
(412
|
)
|
|
(1,489,846
|
)
|
|
(5,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
of fixed assets
|
|
|
(22,518
|
)
|
|
-
|
|
|
(1,158,957
|
)
|
|
-
|
|
|
Short-term
loans to related party
|
|
|
-
|
|
|
-
|
|
|
(935,000
|
)
|
|
-
|
|
|
Acquisition
of Datakom, net of cash acquired
|
|
|
(52,007
|
)
|
|
-
|
|
|
(1,043,778
|
)
|
|
-
|
|
|
Net
cash (used in) investing activities
|
|
|
(74,525
|
)
|
|
-
|
|
|
(3,137,735
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from short-term borrowings
|
|
|
899,051
|
|
|
-
|
|
|
5,324,051
|
|
|
-
|
|
|
Repayment
of short-term borrowings
|
|
|
(143,290
|
)
|
|
-
|
|
|
(143,290
|
)
|
|
-
|
|
|
Proceeds
from related party short-term borrowings
|
|
|
-
|
|
|
-
|
|
|
245,000
|
|
|
-
|
|
|
Exercise
of warrants
|
|
|
-
|
|
|
-
|
|
|
30,000
|
|
|
-
|
|
|
Net
cash provided by financing activities
|
|
|
755,761
|
|
|
-
|
|
|
5,455,761
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
43,852
|
|
|
|
|
|
48,170
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE)
|
|
|
(398,843
|
)
|
|
(412
|
)
|
|
876,350
|
|
|
(5,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING
OF PERIOD
|
|
|
1,545,720
|
|
|
6,035
|
|
|
270,527
|
|
|
10,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
END
OF PERIOD
|
|
$
|
1,146,877
|
|
$
|
5,623
|
|
$
|
1,146,877
|
|
$
|
5,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
SCHEDULE OF CASH PAID FOR:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Income
taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
SUPPLEMENTAL
SCHEDULE OF NONCASH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of convertible long-term debt
|
|
$
|
-
|
|
$
|
-
|
|
$
|
8,000,000
|
|
$
|
-
|
|
|
Note
payable for acquisition of Datakom
|
|
$
|
-
|
|
$
|
-
|
|
$
|
8,500,000
|
|
$
|
-
|
|
|
Stock
issued for acquisition of Datakom
|
|
$
|
-
|
|
$
|
-
|
|
$
|
17,080,000
|
|
$
|
-
|
|
|
Acquisition
of Systeam
|
|
$
|
-
|
|
$
|
-
|
|
$
|
9,338,982
|
|
$
|
-
|
|
See
accompanying notes to condensed consolidated unaudited financial
statements.
INTELLIGENTIAS,
INC.
(formerly
Merchandise Creations, Inc.)
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Common
Stock
|
|
|
Paid
- In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Description
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Balance,
December 31, 2006
|
|
|
77,360,000
|
|
$
|
7,736
|
|
$
|
2,701,914
|
|
$
|
(4,819,925
|
)
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of long term debt
|
|
|
18,181,818
|
|
|
1,818
|
|
|
7,998,182
|
|
|
|
|
|
|
|
|
Exercise
of warrants
|
|
|
3,000,000
|
|
|
300
|
|
|
29,700
|
|
|
|
|
|
|
|
|
Issuance
of common stock for services performed
|
|
|
200,000
|
|
|
20
|
|
|
369,980
|
|
|
|
|
|
|
|
|
Issuance
of common stock for conversion of long-term debt
|
|
|
1,750,000
|
|
|
175
|
|
|
3,263,626
|
|
|
|
|
|
|
|
|
Issuance
of warrants in connection with bridge financing
|
|
|
|
|
|
|
|
|
776,561
|
|
|
|
|
|
|
|
|
Cashless
stock warrant exercise
|
|
|
63,650
|
|
|
6
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Datakom
|
|
|
14,000,000
|
|
|
1,400
|
|
|
17,077,200
|
|
|
|
|
|
|
|
|
Reclassification
of derivative warrant liability
|
|
|
|
|
|
|
|
|
16,987,135
|
|
|
|
|
|
|
|
|
Net
unrealized securities gains
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
8,109
|
|
|
Foreign
currency translation adjustments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
(514,667
|
)
|
|
Net
loss for the nine months ended September 30, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(22,894,768
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2007
|
|
|
114,555,468
|
|
$
|
11,455
|
|
$
|
49,204,292
|
|
$
|
(27,714,693
|
)
|
$
|
(506,558
|
)
|
See
accompanying notes to condensed consolidated unaudited financial
statements.
INTELLIGENTIAS,
INC
(formerly
MERCHANDISE CREATIONS, INC.)
NOTES
TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE
1 - BACKGROUND AND ACQUISITIONS
Intelligentias,
Inc. (the “Company”) was originally incorporated in the State of Nevada on
October 1, 2004, as Merchandise Creations, Inc., and conducted a promotional
and
marketing business specializing in delivering, promoting and selling
custom-designed merchandise for bands and artists in the music industry (the
“Merchandise Distribution Business”).
On
December 7, 2006, the Company entered into a Limited Assets Purchase Agreement
by and between the Company, SysteamUS, Inc. and Systeam Italy, SpA (“Systeam”),
whereby the Company acquired certain intellectual property associated with
SysteamUS’ security software for $5,850,000. Concurrently with the purchase, the
Company discontinued its Merchandise Distribution Business and changed its
focus
to providing homeland security, data retention and tracking software and
services to law enforcement agencies, telecommunications companies and Internet
service providers. On June 7, 2007, the Company entered into the Stock Purchase
Agreement to acquire all of the issued and outstanding stock of Systeam from
SysteamUS, Inc. in consideration for assuming net liabilities of approximately
$9,338,982 and the exchange of consideration of approximately $2,500,000
by
assuming debt in the same amount due from an entity related to Systeam. In
2007,
the Company also established wholly-owned subsidiaries Retentia, Inc,
Investigatia, Inc. and Interceptia, Inc.
On
December 15, 2006, the Company amended its articles of incorporation to change
its name from Merchandise Creations, Inc. to Intelligentias, Inc. In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 144
"Accounting
for the Impairment or Disposal of Long-Lived Assets,"
the
operating results and assets and liabilities related to the Merchandise
Distribution Business have been reflected as discontinued operations in the
accompanying unaudited financial statements. Unless otherwise noted, amounts
in
these notes to the unaudited financial statements excluded amounts attributable
to discontinued operations.
On
June
7, 2007, the Company entered into the Stock Sale Agreement to acquire all
of the
issued and outstanding stock of Datakom GmbH (“Datakom”) for an aggregate
purchase price of $27,701,548, subject to adjustment. The aggregate purchase
price was comprised of: (i) cash consideration of $10.5 million,
$2.0 million of which was paid immediately, and the remaining amount of
$8,500,000 is payable within eight weeks after the distribution of a private
placement memorandum associated with the sale of the Company’s common stock;
(ii) direct transaction costs of $122,948, and (iii) issuance of
14,000,000 shares of the Company’s common stock with a fair value of
$17,078,600, based on the closing price of the Company’s common stock on the
closing date. The Stock Sale Agreement also included contingent consideration
that is based on certain financial performance criteria for Datakom during
calendar year 2007. This contingency has not been resolved and no amounts
have
been accrued as a result of this contingency at September 30, 2007. Datakom’s
main business focus is the creation of software programs for law enforcement
agencies and intelligence communities that allow for lawful interception
of
telecommunications. The Company also provides consulting services related
to voice-over IP and electronic serial number set-up for various communication
devices, mainframe installation services and pre-deployment services used
to
identify any potential issues prior to deployment of various software
programs.
NOTE
2 - GOING CONCERN
The
accompanying financial statements have been prepared assuming the Company
will
continue as a going concern. The Company has incurred losses from
continuing operations and operational cash outflows since
inception.
The
Company’s ability to service its debt and to fund working capital, capital
expenditures and business development efforts will depend on its ability
to
generate cash from operating activities, which is subject to, among other
things, its future operating performance, as well as general economic,
financial, competitive, legislative, regulatory and other conditions, some
of
which may be beyond its control. If the Company fails to generate sufficient
cash from operations, it will need to raise additional equity or borrow
additional funds to achieve its objectives. There can be no assurance that
the
Company will generate sufficient revenues or that equity or borrowings will
be
available or, if available, will be at rates or on terms acceptable to the
Company. These conditions raise substantial doubt about the Company’s ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of these
uncertainties.
NOTE
3 - SYSTEAM AND DATAKOM ACQUISITIONS
The
Datakom and Systeam acquisitions were accounted for pursuant to the Financial
Accounting Standard No. 141,
Business Combinations
(“FAS
141”), which provides that the assets and liabilities acquired and the equity
interest issued are initially recognized at the date of acquisition and measured
at the fair value of the net assets acquired and consideration exchanged.
Additionally, FAS 141 provides that the results of operations of the acquired
entity after the effective date of acquisition be consolidated in the results
of
operations of the acquirer.
The
Systeam and Datakom preliminary purchase price allocations are as
follows:
|
|
|
Systeam
|
|
Datakom
|
|
|
Fair
value of common stock
|
|
$
|
-
|
|
$
|
17,078,600
|
|
|
Cash
consideration
|
|
|
-
|
|
|
10,500,000
|
|
|
Acquisition
costs
|
|
|
-
|
|
|
122,948
|
|
|
Assets
acquired
|
|
|
(1,820,839
|
)
|
|
(6,609,464
|
)
|
|
Liabilities
assumed
|
|
|
11,159,821
|
|
|
6,094,010
|
|
|
Intangible
assets
|
|
$
|
9,338,982
|
|
$
|
27,186,094
|
|
Approximately
$2.0 million of cash was paid to Datakom immediately. The remaining $8.5
million
is payable in cash under the terms discussed in Note 1 and is recorded as
acquisition payable in the accompanying condensed consolidated balance sheet
at
September 30, 2007.
The
intangible assets resulting from these acquisitions are primarily attributable
to the customer relationships and goodwill associated with additional revenues
and resulting increased margin from the combination of the businesses. The
Company is in the process of obtaining independent valuations to complete
the
allocation of the excess purchase price over tangible assets acquired
(liabilities assumed) for Systeam and Datakom.
The
operating results of Systeam and Datakom have been included in the accompanying
Condensed Consolidated Statements of Operations and Comprehensive Loss
subsequent to the date of the purchases. The following reflects pro forma
combined results of the Company, Systeam and Datakom as if the acquisitions
had
occurred as of the earliest period presented. In management’s opinion, this pro
forma information does not necessarily reflect the actual results that would
have occurred and is not necessarily indicative of future results of operations
of the combined entities. For purposes of calculating the pro formas, management
estimates that a weighted average amortization life of all intangibles including
goodwill will be five years.
|
|
|
|
Three
Months
Ended
September 30,
|
|
|
Nine
Months
Ended
September 30,
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
$
|
2,623,998
|
|
$
|
9,188,116
|
|
$
|
8,197,012
|
|
Loss
before discontinued operations
|
|
$
|
5,811,181
|
|
$
|
27,509,538
|
|
$
|
12,894,580
|
|
|
Net
loss
|
|
$
|
5,812,646
|
|
$
|
27,509,538
|
|
$
|
12,903,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share -
continuing
operations
|
|
$
|
0.03
|
|
$
|
0.26
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
0.03
|
|
$
|
0.26
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
outstanding
- basic and diluted
|
|
|
225,860,000
|
|
|
108,253,830
|
|
|
225,860,000
|
|
NOTE
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
consolidated financial statements include the accounts of the Company and
its
subsidiaries. All material intercompany accounts and transactions are
eliminated.
The
accompanying condensed unaudited financial statements as of September 30,
2007, and for the three and nine months ended September 30, 2007 and
September 30, 2006, respectively, have been prepared in accordance with
generally accepted accounting principles in the United States of America
for
interim financial information and with the instructions to Form 10-QSB and
Item
310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for audited financial statements. In the opinion of the Company’s management,
the interim information includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for
the
interim periods. The footnote disclosures related to the interim financial
information included herein are also unaudited. Such financial information
should be read in conjunction with the financial statements and related notes
thereto as of December 31, 2006 and for the year then ended included in the
Company’s annual report on Form 10-KSB/A (Amendment No.1) for the year ended
December 31, 2006.
Reclassification
Certain
reclassifications have been made in the prior period financial statements
to
conform to the current presentation.
Use
of Estimates
Preparation
of the financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates have been used by management in
conjunction with the measurement of the valuation allowance relating to deferred
tax assets and future cash flows associated with long-lived assets. Actual
results could differ from those estimates.
Cash
and Cash Equivalents
For
financial statement presentation purposes, the Company considers short-term,
highly liquid investments with original maturities of three months or less
to be
cash and cash equivalents.
Receivables
Receivables
are shown at their expected realizable value. This is determined by
adjusting the nominal value of the receivables for an allowance for bad debt,
which is calculated by assessing the risk of loss, generally and for each
receivable, considering general and industry conditions as well as customer
history and creditworthiness. The losses ultimately incurred could differ
materially in the near term from the amounts estimated in determining the
allowance.
Customer
Concentrations
Approximately
82% of the Company’s revenues for the three months ended September 30, 2007
related to eight customers with two customers comprising 61% of revenues
and
approximately 84% of the Company’s revenues for the nine months ended September
30, 2007 related to nine customers with three customers comprising 66% of
revenues. Approximately 82% of the Company’s accounts receivable at
September 30, 2007 related to seven customers with one customer comprising
42%
of accounts receivable.
Investments
The
Company currently classifies all marketable investment securities as
available-for-sale. The Company adjusts the carrying value of
available-for-sale securities to fair value and reports the related temporary
unrealized gains and losses as a separate component of accumulated other
comprehensive loss within the accompanying consolidated statement of changes
in
stockholders’ equity. Declines in the fair value of a marketable
investment security that are estimated to be “other than temporary” are
recognized in the consolidated statements of operations and comprehensive
loss,
thus establishing a new cost basis for such investment. Declines in the
fair value of investments below cost basis for a continuous period are
considered other than temporary and are recorded as charges to earnings,
absent
specific factors to the contrary. The investments are restricted as they
are
pledged as collateral on the pension obligation and certain lines of credit.
Fixed
Assets
Fixed
assets are stated at cost less accumulated depreciation. Depreciation is
recorded on a straight-line basis over the shorter of the contractual lives
or
estimated useful lives of the assets ranging from three to five years.
Contingencies
The
Company is not currently a party to any pending or threatened legal proceedings.
Based on information currently available, management is not aware of any
matters that would have a material adverse effect on the Company’s financial
condition, results of operations or cash flows.
Revenue
Recognition
Data
Retention (“DR”)
The
Company derives its DR revenue from sales of software licenses, installation,
customer support (including maintenance) and consulting services. The Company
has historically been contracted to perform installation services on every
software license sale, and certain software license sales also include customer
support agreements. Customer support agreements vary and may provide customers
with rights to unspecified software updates, maintenance releases and patches
released during the term of the support period, telephone support, and support
personnel during the term of the support period. The Company does not have
standard pricing associated with its customer support agreements due to the
varying nature of the services provided.
The
Company recognizes revenue pursuant to the requirements of American Institute
of
Certified Public Accountants Statement of Position 97-2,
“Software
Revenue Recognition”
,
as
amended. The Company has not yet established vendor specific objective evidence
(“VSOE”) for the fair value of the software license, installation and customer
support elements. As a result, the Company recognizes all revenue for multiple
element arrangements ratably over the period of installation and customer
support, typically three to twenty-four months.
Revenues
for DR consulting services are generally recognized as the services are
performed. If there is a significant uncertainty about the project completion
or
receipt of payment for the consulting services, revenue is deferred until
the
uncertainty is sufficiently resolved. Consulting services primarily comprise
integrating and customizing software previously installed to address changes
in
a customer’s needs or information systems environment.
Lawful
Interception and Network Monitoring (“LINM”)
The
Company derives its LINM revenue from sales of software and services through
its
subsidiary, Datakom. Other LINM services include consulting, assessment and
design services, installation services and training. Substantially all of
the Company’s LINM products have been sold in combination with Customer Support
or Maintenance. Customer Support or Maintenance provides customers with rights
to unspecified software updates, maintenance releases and patches released
during the term of the support period, repair or replacement of hardware
(not
covered by the standard warranty coverage) in the event of breakage or failure,
telephone support, pro-active monitoring of customer installed products,
internet access to technical information and support personnel during the
term
of the support period. Shipping charges billed to customers are included
in
product revenue and the related shipping costs are included in cost of goods
sold. Payment terms to customers generally range from net 30 to
45 days.
LINM
product revenue is recognized once a
legally
binding arrangement with a customer has been evidenced, shipment has occurred,
fees are fixed or determinable and free of contingencies and significant
uncertainties, and collection is probable
.
Customer Support or Maintenance is recognized ratably over the contract period.
The Company’s fees are considered fixed or determinable at the execution of an
agreement, based on specific products and quantities to be delivered at
specified prices. The Company recognizes LINM revenue upon the completion
of
installation and training and acceptance by the customer.
The
Company’s standard agreements with customers do not include rights of return.
The Company assesses the ability to collect from its customers based on a
number
of factors, including creditworthiness of the customer and past transaction
history of the customer. If the customer is deemed not creditworthy, all
revenue
from the arrangement is deferred until payment is received and all other
revenue
recognition criteria have been met.
The
Company’s LINM software is integrated with its hardware and is essential to the
functionality of the integrated system product. The Company provides unspecified
software updates and enhancements related to its products through service
contracts. Accordingly, the Company recognizes revenue in accordance with
the
guidance provided under Statement of Position (“SOP”) No. 97-2, Software
Revenue Recognition (“SOP 97-2”), and Statement of
Position No. 98-9, Modification of SOP No. 97-2, Software
Revenue Recognition, with Respect to Certain Transactions (“SOP 98-9”), for
all transactions involving the sale of software. The Company applies the
provisions of SOP 97-2, Software Revenue Recognition, as amended by
SOP 98-4 and SOP 98-9, and related interpretations to all transactions
to determine the recognition of revenue.
The
Company uses the residual method (as prescribed in SOP 98-9) to recognize
revenue when a product agreement includes one or more elements to be delivered
at a future date and vendor specific objective evidence (VSOE) of the fair
value
of all undelivered elements exists. In virtually all of the Company’s contracts,
Customer Support or Maintenance is the element that remains undelivered at
the
time of delivery of the product to the customer. Under the residual method,
the
fair value of the undelivered elements is deferred and the remaining portion
of
the contract fee is recognized as product revenue.
The
Company considers the four basic revenue recognition criteria for each of
the
elements as follows:
|
·
|
Persuasive
evidence of an arrangement with the customer exists. It is the
Company’s
customary practice to have a written purchase order and, in some
cases, a
written contract signed by both the customer and the Company, or
other
persuasive evidence that an arrangement exists prior to recognizing
revenue on an arrangement.
|
|
·
|
Shipment
or performance has occurred. The Company’s products are usually physically
shipped from the contract manufacturing vendor and delivery to
the
Company’s customers is FOB origin. If products that are essential to the
functionality of the delivered software in an arrangement have
not been
delivered, the Company does not consider delivery to have occurred.
LINM
services revenue is recognized when the services are completed,
except for
Customer Support or Maintenance, which is recognized ratably over
the term
of the Customer Support or Maintenance
agreement.
|
|
·
|
Vendor’s
fee is fixed or determinable. The fee its customers pay for products,
customer support or maintenance and other professional services
is
negotiated at the outset of an arrangement. The fees are therefore
considered to be fixed or determinable at the inception of the
arrangement.
|
|
·
|
Collection
is probable. The Company assesses the probability of collection
on a
customer-by-customer basis. Credit reviews are performed on an
as needed
basis to evaluate the customer’s financial position and ability to pay. If
the Company determines from the outset of an arrangement that collection
is not probable based upon the review process, the Company recognizes
the
revenue on a cash-collected basis.
|
Deferred
Multiple-Element Costs
When
the
Company’s products have been delivered, but the product revenue associated with
the arrangement has been deferred as a result of not meeting the revenue
recognition criteria in SOP 97-2, the Company also defers the related inventory
costs for the delivered items, as unbilled fees and costs, until such time
that
all other revenue recognition criteria have been met.
Software
Development Costs
Research
and development expenditures are charged to operations as incurred.
SFAS No. 86,
Accounting
for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed
(“SFAS 86”)
,
requires capitalization of certain software development costs subsequent
to the
establishment of technological feasibility. Based on the Company’s software
development process, technological feasibility is established upon completion
of
a working model, which also requires certification and extensive testing.
Costs
incurred by the Company between completion of the working model and the point
at
which the product is ready for general release have been immaterial to date.
Foreign
Currency Translation
The
Company’s Systeam and Datakom subsidiaries operate outside the United States and
their local currencies are their functional currencies. The functional currency
is translated into U.S. dollars for balance sheet accounts using the period
end
rates in effect as of the balance sheet date and the average exchange rate
for
revenue and expense accounts for each respective period. The translation
adjustments are deferred as a separate component of stockholders' equity,
within
other comprehensive loss, net of tax where applicable. Gains or losses resulting
from transactions denominated in currencies other than the Company’s functional
currency are included in selling, general and administrative expenses within
the
consolidated statements of operations and comprehensive loss.
Derivatives
Derivative
financial instruments, as defined in Financial Accounting Standard No. 133,
“Accounting
for Derivative Financial Instruments and Hedging Activities”
(“SFAS
133”), consist of financial instruments or other contracts that contain a
notional amount and one or more underlying variables (
e.g.
,
interest rate, security price or other variable), require no initial net
investment and permit net settlement. Derivative financial instruments may
be
free−standing or embedded in other financial instruments. Further, derivative
financial instruments are initially, and subsequently, measured at fair value
and recorded as liabilities or assets.
The
Company has entered into financing arrangements to fund its business capital
requirements, including convertible debt and short-term debt which include
detachable warrants that are indexed to the Company’s common stock. These
contracts require careful evaluation to determine whether derivative features
embedded in host agreements require bifurcation and fair value measurement
or
whether certain conditions for equity classification have been achieved.
In
instances where derivative financial instruments require liability
classification, the Company is required to initially and subsequently measure
such instruments at fair value. Accordingly, the Company adjusts the fair
value
of these derivative components at each reporting period through a charge
to
earnings until such time as the instruments are permitted classification
in
stockholders’ equity. The Company uses the Black−Scholes option pricing model
because it embodies all of the requisite assumptions (including trading
volatility, estimated terms and risk-free rates) necessary to estimate the
fair
value of these instruments.
Defined
Benefit Pension Plan
As
a
result of the Datakom acquisition, the Company assumed the liabilities
associated with a defined benefit pension plan covering two former shareholders
of Datakom. The benefits are based on years of service and the
participant’s compensation during their years of employment. The Company
holds the assets for the pension plan in the Company’s name as appropriate under
German law. The Company anticipates dissolving the pension plan and paying
out
or transferring the related assets and liabilities to the two former
shareholders of Datakom. The accrued pension liability increased from
$2,188,527 at June 30, 2007 to $2,369,932 at September 30, 2007 as a result
of
service and interest costs recognized during the three months ended September
30, 2007. Key assumptions in the calculation of the projected benefit obligation
include a 1.50% annual salary increase and a 4.50% discount rate.
Income
Taxes
The
Company provides for income taxes based on the provisions of SFAS No.
109,
Accounting for Income Taxes(“SFAS 109”),
which,
among other things, requires that recognition of deferred income taxes be
measured by the provisions of enacted tax laws in effect at the date of
financial statements.
Comprehensive
Loss
The
Company reports components of comprehensive income (loss) under the requirements
of SFAS 130,
"Reporting
Comprehensive Income"(“SFAS 130”)
.
SFAS 130 establishes rules for the reporting of comprehensive income or
loss and its components that require certain items be presented as separate
components of stockholders' equity. For the periods presented, the
Company's other comprehensive income consist of foreign currency translation
adjustments and of unrealized gains and losses from marketable securities
available for sale.
Stock-Based
Compensation
The
Company records stock-based compensation in accordance with SFAS No. 123R
“Share
Based Payments”
(“SFAS 123R”)
,
using
the fair value method. All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted
for
based on Emerging Issues Task Force Issue No. 96-18,
“Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or
in Conjunction with Selling, Goods or Services”
using
the fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measurable.
NOTE
5 - BALANCE SHEET INFORMATION
Balance
sheet information at September 30, 2007 is as follows:
Intangible
Assets
|
Intellectual
property
|
|
$
|
5,850,000
|
|
|
Website
|
|
|
400,000
|
|
|
Intangible
assets - Systeam
|
|
|
9,338,982
|
|
|
Intangible
assets - Datakom
|
|
|
27,186,094
|
|
|
|
|
|
42,775,076
|
|
|
Less:
Accumulated amortization
|
|
|
(4,124,487
|
)
|
|
Intangible
assets, net
|
|
$
|
38,650,589
|
|
Accrued
Liabilities
|
Withholding
taxes payable
|
|
$
|
2,065,211
|
|
|
Accrued
interest payable
|
|
|
279,135
|
|
|
Termination
indemnity
|
|
|
878,055
|
|
|
Tax
penalties & interest
|
|
|
932,419
|
|
|
Social
security taxes payable
|
|
|
2,256,925
|
|
|
Income
taxes payable
|
|
|
755,158
|
|
|
Accrued
wages & benefits
|
|
|
1,095,476
|
|
|
Value
added tax (VAT)
|
|
|
888,932
|
|
|
Other
|
|
|
388,552
|
|
|
|
|
$
|
9,539,863
|
|
Included
in accrued liabilities at September 30, 2007 are tax penalties and interest
associated with the Company’s Systeam subsidiary in Italy related to certain
employee withholding taxes, social security taxes, income taxes and value-added
taxes that are past due.
The
termination indemnity associated with the Systeam subsidiary of $878,055
at
September 30, 2007 relates to amounts withheld from employees that are payable
to employees if they are terminated by the Company. Such amounts do not
accrue interest and are based solely on the amounts withheld by the
Company.
NOTE
6 - SHORT-TERM DEBT, CONVERTIBLE LONG-TERM DEBT AND
WARRANTS
Vision
Opportunity Master Fund Financing Transactions
On
December 7, 2006, the Company completed an $8,000,000 private offering of
convertible long-term debt (the “Convertible Note”) with Vision Opportunity
Master Fund Ltd. (“Vision”), the Company’s largest shareholder as of September
30, 2007. On March 16, 2007, the Company issued Vision 1,750,000 shares of
common stock as an inducement to convert the entire Convertible Note into
common
stock. The Convertible Note was fully converted by Vision on March 19,
2007 into 18,181,818 shares of common stock. The Company recognized
$3,263,801 in interest expense related to the fair value of the common stock
issued to Vision to induce conversion. The Company also recognized the
unamortized debt discount on the Convertible Note of $7,948,148 as interest
expense in the accompanying consolidated statements of operations and
comprehensive loss for the nine months ended September 30, 2007.
In
connection with the issuance of the Convertible Note, the Company issued
Vision
warrants to purchase up to 9,000,000 shares of the Company’s common stock with
an exercise price of $0.01 per share (the “December 2006 Warrants”).
The aggregate fair value of the December 2006 Warrants equals
$5,310,000 based on the Black-Scholes option pricing model using the following
assumptions: 5% risk-free rate, 100% volatility and expected life of the
warrants of 30 months. On the date of issuance and as of December 31, 2006
until
the agreement was amended on August 15, 2007, the December 2006 Warrants
did not
meet the requisite conditions for equity classification because cash settlement
could be required at the option of Vision in the event of a change in control.
Accordingly, the fair value of the December 2006 Warrants was initially recorded
as a discount on the Convertible Note with an offset to Derivative Warrant
Liability. The Company adjusted the value of the December 2006 Warrants to
fair
value through a charge to earnings at the end of each reporting period and
at
August 15, 2007, the date the instruments met the requisite conditions for
classification in stockholders’ equity.
On
June
13, 2007, the Company issued to Vision a $3,000,000 Senior Secured Promissory
Note (the “Note”) due on the earlier of June 13, 2008 or upon receipt of
$6,000,000 in net proceeds from the next debt or equity financing. The Note
bears interest at 12% per annum plus an additional $300,000 when repaid.
The
Note is secured by the Company’s accounts receivable and other personal and
fixed assets and may be prepaid at any time.
In
connection with the issuance of the Note, the Company issued Vision warrants
to
purchase up to 5,500,000 shares of the Company’s common stock with an exercise
price of $2.05 per share expiring in June 2014 (the “June 2007 Warrants”). The
aggregate fair value of the warrants equals $3,861,000 based on the
Black-Scholes option pricing model using the following assumptions: 5% risk-free
rate, 100% volatility and expected life of the warrants of 3.5 years. The
June
2007 Warrants also contain "full-ratchet" anti-dilution protection to Vision
during the warrant term, but excludes certain events such as issuances of
stock
in connection with mergers and acquisitions, strategic license agreements,
stock
option plans and a subsequent financing transaction. On the date of issuance
until the agreement was amended on August 15, 2007, the June 2007 Warrants
did
not meet the requisite conditions for equity classification because cash
settlement could be required at the option of Vision in the event of a change in
control. Accordingly, that fair value of the June 2007 Warrants was initially
recorded as a discount on the Note of $3,000,000 with the excess of the fair
value of the warrants over the proceeds from the Note of $861,000 recorded
as a loss on Derivative Warrant Liabilities in the accompanying consolidated
statement of operations and comprehensive loss. The Company also incurred
$42,466 in debt issuance costs that have been included in other assets in
the
accompanying consolidated balance sheet.
Warrant-related
discount and the debt issuance costs are being amortized over a period of
12
months. As of September 30, 2007, a total of $
908,533
has been
amortized and recorded as interest expense. On August 15, 2007, the Company
and
Vision amended the agreements related to the December 2006 Warrants and the
June
2007 Warrants (collectively, the “Warrants”) to remove the cash settlement
provision that could be triggered by a change in control. Accordingly, as
of the
date of the amendment, the Warrants met the requisite conditions for equity
classification and were reclassified from liabilities to stockholders’ equity
and no further value adjustments will be made.
Total
loss on derivative warrant derivative liabilities was $229,385 and $4,710,935
for the three and nine months ended September 30, 2007, respectively. The
following table summarizes the changes in fair value of the December 2006
Warrants and the June 2007 Warrants and reflects the reclassification to
stockholders’ equity of 3,000,000 of the December 2006 Warrants, which were
exercised for $30,000 during March 2007:
|
|
|
December
2006
Warrants
|
|
June
2007
Warrants
|
|
Total
|
|
|
Initial
fair value of December 2006 Warrants (recorded as a
discount
on the Convertible Note)
|
|
$
|
5,310,000
|
|
$
|
-
|
|
$
|
5,310,000
|
|
|
2006
increase in fair value
|
|
|
3,970,800
|
|
|
-
|
|
|
3,970,800
|
|
|
Derivative
warrant liability - December 31, 2006
|
|
|
9,280,800
|
|
|
-
|
|
|
9,280,800
|
|
|
Fair
value adjustment - three months ended March 31, 2007
|
|
|
6,529,200
|
|
|
-
|
|
|
6,529,200
|
|
|
Reclassification
to stockholders' equity for warrants exercised
|
|
|
(5,550,000
|
)
|
|
-
|
|
|
(5,550,000
|
)
|
|
Derivative
warrant liability - March 31, 2007
|
|
|
10,260,000
|
|
|
-
|
|
|
10,260,000
|
|
|
Initial
fair value of June 2007 Warrants (recorded as a discount on the
Note)
|
|
|
-
|
|
|
3,000,000
|
|
|
3,000,000
|
|
|
June
2007 Warrants - Day-one loss from derivative allocation
|
|
|
-
|
|
|
861,000
|
|
|
861,000
|
|
|
Fair
value adjustment - three months ended June 30, 2007
|
|
|
(2,992,800
|
)
|
|
84,150
|
|
|
(2,908,650
|
)
|
|
Derivative
warrant liability - June 30, 2007
|
|
|
7,267,200
|
|
|
3,945,150
|
|
|
11,212,350
|
|
|
Fair
value adjustment-July 1, 2007 to August 15, 2007 (amendment
date)
|
|
|
178,200
|
|
|
46,585
|
|
|
224,785
|
|
|
Reclassification
to stockholders’ equity due to amendment
|
|
|
(7,445,400
|
)
|
|
(3,991,735
|
)
|
|
(11,437,135
|
)
|
|
Derivative
warrant liability - September 30, 2007
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
On
September 18, 2007, the Company amended its Note with Vision to issue an
additional $300,000 senior secured promissory note to Vision (the “September
2007 Note”) due on the earlier of June 13, 2008 or upon receipt of $6,000,000 in
net proceeds from the next debt or equity financing. The September 2007 Note
bears interest at 12% per annum plus an additional $30,000 when repaid, is
secured by the Company’s accounts receivable and other personal and fixed assets
and may be prepaid at any time. As additional consideration, the Company
issued
an immediately exercisable warrant to Vision to purchase 238,095 shares of
the
Company’s common stock, with an exercise price of $1.26 per share, expiring in
September 2014. The Company allocated the $300,000 proceeds to the debt and
related warrants based on their relative fair values. The allocated value
of
these warrants was $119,413 based on the Black-Scholes option pricing model
using the following assumptions: 4.06% risk-free rate, 100% volatility and
expected life of the warrants of 3.5 years. The relative fair value of the
warrants has been recorded as a discount on the note with an offset to
additional paid-in capital in the accompanying consolidated balance sheet.
Other
than the stated terms above, the September 2007 Note is subject to the same
provisions as the original Note. The warrants cannot be settled for cash
and
qualify for equity classification.
Bridge
Financing
During
January through August 2007, the Company raised $1,770,000 (including $245,000
from related parties) from a small group of accredited investors pursuant
to 10%
unsecured bridge promissory notes (the “Bridge Notes”). The principal and
accrued interest under the Bridge Notes are due and payable upon the earlier
of
one year after issuance or upon receipt of proceeds from the Company’s next debt
or equity financing, but only at such time after a minimum of $4,000,000
in
gross proceeds have been received by us, and then at a rate of $0.50 for
every
$1.00 raised above such level. The notes may be prepaid at any time
without penalty. In connection with the issuance of certain of the Bridge
Notes,
the Company also issued warrants to purchase 2,212,500 shares of its common
stock, with an exercise price of $0.80 per share, exercisable for a period
of
five years. The Bridge Notes cannot be settled for cash and are not
subject to mandatory registration and qualify for equity classification.
The
Company allocated the proceeds of the Bridge Notes to the debt and related
warrants based on their relative fair values. The aggregate
allocated value of the warrants equals $657,148 based on the Black-Scholes
option pricing model with the following assumptions: Volatility - 100%; Expected
life (years) - 2.5 years; Risk-free rate of return - 5%.
On
September 25, 2007, the Company raised $400,000 from a small group of accredited
investors pursuant to 10% bridge promissory notes (“September Bridge Notes”).
The principal and accrued interest under the notes are due and payable upon
the
earlier of six months after issuance or from the net proceeds of a $20,000,000
private placement of common stock and warrants after a minimum of $4,000,000
in
gross proceeds have been received by the Company, and then at a rate of $.50
for
every $1.00 raised above such level. The notes may be prepaid at any time
without penalty. The Company agreed to pay an additional fee of 10% upon
repayment of the notes or at maturity. The notes are secured by 1,000,000
shares
of common stock placed in escrow by the Lusk Family Trust, a significant
shareholder of the Company. As part of the financing, the Company issued
warrants to purchase 500,000 shares of the Company’s common stock with an
exercise price of $0.80 per share, for a period of five years. The aggregate
fair value of the warrants equals $404,600 based on the Black-Scholes option
pricing model using the following assumptions: Volatility - 100%; Expected
life
(years) - 2.5 years; Risk-free rate of return - 4.06%. The warrants related
to
the September Bridge Notes contain certain registration right provisions
on a
"best efforts" basis. As the provisions do not specify that the warrants
can be settled in unregistered shares, the warrants do not qualify for equity
classification. The fair value of the warrants was recorded as a discount
on the
note of $400,000 with the excess of the fair value of the warrants over the
proceeds from the notes of $4,600 recorded as a loss on Derivative Warrant
Liabilities in the accompanying consolidated statement of operations and
comprehensive loss.
In
May
2007, 125,000 Bridge Loan warrants were exercised in a cashless exercise
resulting in the issuance of 63,650 shares of common stock.
Short-term
borrowings and short-term borrowings, related parties, consisted of the
following at September 30, 2007 (unaudited):
|
7.75%
credit facility with an Italian bank, collateralized by certain
accounts
receivable
|
|
$
|
479,694
|
|
|
8.50%
credit facility with an Italian bank, collateralized by certain
accounts
receivable
|
|
|
202,777
|
|
|
8.00%
debt with an Italian bank, collateralized by certain accounts
receivable
|
|
|
162,600
|
|
|
|
|
|
|
|
|
8.30%
credit facility, collateralized by certain accounts
receivable
|
|
|
118,515
|
|
|
6.64%
bank borrowing with an Italian bank
|
|
|
95,850
|
|
|
$713,000
credit facility with a German bank. Interest at 8.75% adjusted
quarterly,
collateralized by long-term investments, payable on demand. Approximately
$39,600 and $35,650 of the $713,000 are reserved for credit card
and rent
and utility guarantees, respectively
|
|
|
557,248
|
|
|
$264,000
credit facility with a German bank. Interest at 9.75% and varies
quarterly, unsecured and payable on demand. Approximately $15,800
of the
$264,000 is reserved as a rent guarantee. The line of credit
is
automatically renewed each year and is due on demand
|
|
|
3,952
|
|
|
$37,000
credit facility with a German bank. Interest at 10.00% and varies
quarterly, unsecured and payable on demand. The line of credit
is
automatically renewed each year and is due on demand.
|
|
|
-
|
|
|
12%
debt, $3,300,000 net of discount of $2,219,597; collateralized
by accounts
receivable and other personal and fixed assets
|
|
|
1,080,403
|
|
|
10%
bridge financing, $2,170,000 net of discount of $800,121, including
$245,000 payable to related parties
|
|
|
1,369,879
|
|
|
|
|
$
|
4,070,918
|
|
The
7.75%, 8.50%, 8.00% and 8.30% credit facilities are collateralized by a security
interest in certain accounts receivables of the Company. Borrowings are based
on
a percentage of eligible accounts receivable and mature on the due date of
the
underlying accounts receivable, all within 12 months of the respective balance
sheet dates.
Principal
and interest related to the 6.64% fixed-rate borrowing are payable monthly
until
the final maturity date in December 2007.
NOTE
7 - COMMON STOCK AND STOCK OPTIONS
On
March
16, 2007, the Company issued 200,000 shares of common stock to two consultants
for services performed during the three months ended March 31, 2007. The
Company valued these grants at $370,000 based on the fair market value of
the
Company’s common stock on the date of issuance and recognized the amount as
selling, general and administrative expense in the accompanying consolidated
statements of operations and comprehensive loss.
On
April
14, 2007, the Company issued 2,000,000 stock options with an exercise price
of
$1.60 to an employee. The fair value of this stock option grant was estimated
on
the date of grant using the Black-Scholes option pricing model with the
following assumptions: Volatility - 100%; Expected life - 5 years;
Risk-free rate of return - 5%. On August 24, 2007, the employee resigned
from
the Company and forfeited the options. As a result of this forfeiture, there
was
a change in estimate during the third quarter, of the forfeiture rate, resulting
in a negative stock-based compensation expense of $435,103 that was a reversal
of expenses recognized related to these options in the three months ended
June
30, 2007. As of September 30, 2007, there were no stock options
outstanding.
NOTE
8 - COMMITMENTS AND CONTINGENCIES
Operating
Leases
The
Company leases office space in Germany under a non-cancelable operating lease
expiring in March 2011. The Company also leases office space in Italy
under an operating lease expiring in March 2011. This lease is cancelable
at the option of the Company with six months’ notice.
Future
minimum lease payments under non-cancelable operating leases as of September
30,
2007 were as follows:
|
|
|
Operating
Leases
|
|
|
Remainder
of 2007
|
|
$
|
79,427
|
|
|
2008
|
|
|
298,885
|
|
|
2009
|
|
|
278,359
|
|
|
2010
|
|
|
17,112
|
|
|
2011
|
|
|
-
|
|
|
Thereafter
|
|
|
-
|
|
|
|
|
$
|
673,784
|
|
Indemnification
Agreement
Effective
August 16, 2007, the Company entered into an Indemnification Agreement with
its
Chief Financial Officer (“CFO”), which contains provisions that may require the
Company to, among other things: indemnify the CFO against liabilities that
may arise by reason of his status or service as an officer to the fullest
extent
permitted under Nevada law and the Company’s bylaws and certificate of
incorporation and advance the CFO expenses incurred as a result of any
proceeding against him as to which he could be indemnified.
NOTE
9 - INCOME TAXES
The
Company did not recognize an income tax benefit for the losses incurred for
the
three and nine months ended September 30, 2007 and 2006 since management
has
determined that the realization of the net deferred tax asset is not assured
and
has created a valuation allowance for the entire amount.
NOTE
10 - RELATED PARTY TRANSACTIONS
As
described in Note 1, “Background and Acquisitions”, on December 7, 2006, certain
transactions were effected pursuant to an agreement among the Company,
SysteamUS, Inc. and Systeam Italy, SpA (“Systeam”). In December 2006, the
Company loaned a total of $1,000,000 to Systeam (the “Systeam Loans”). In
the first, second and third quarters of 2007, the Company loaned another
$385,000, $550,000 and $366,765, respectively, in Systeam Loans. Due to
the acquisition of Systeam, these loans were eliminated in consolidation
as of
September 30, 2007.
In
the
first and second quarters of 2007, the Company obtained debt financing of
$245,000 from related parties which bears interest at 10% per annum. On
the earlier of one year or the closing of any future financing, all principal
and unpaid accrued interest on the loans will be immediately
payable.
NOTE
11 - SEGMENT INFORMATION
Upon
completion of the Systeam and Datakom acquisitions in June 2007, the Company
identified its segments based on the way management expects to organize the
Company to assess performance and make operating decisions regarding the
allocation of resources. In accordance with the criteria in SFAS No. 131,
“Disclosure
about Segments of an Enterprise and Related Information,”
the
Company has concluded it has two reportable segments beginning in the three
months ended June 30, 2007, the Data Retention segment and the Lawful
Interception and Network Monitoring segment. The Data Retention segment is
comprised of data retention-related revenues including sales of software
licenses, installation, customer support and consulting services. The Lawful
Interception and Network Monitoring segment is comprised of the sale of lawful
interception software and related intelligence services, in addition to
consulting and network monitoring services.
The
accounting policies for the segments are the same as those described in the
summary of significant accounting policies in Note 4 and in the Company’s 2006
Form 10-KSB. Management is currently assessing how it evaluates segment
performance and currently utilizes income (loss) from operations, excluding
share-based compensation (benefits), depreciation and intangibles amortization
related to certain assets and income taxes. There were no inter-segment sales
during the three and nine month periods ended September 30, 2007. The
Company’s business activities conducted during the three and nine month periods
ended September 30, 2006 were discontinued in December 2006. Accordingly,
related information has not been included in the segment
disclosures.
Summarized
financial information concerning the Company’s reportable segments is as
follows:
|
Nine
months ended September 30, 2007:
|
|
Data
Retention
|
|
Lawful
Interception
and
Network
Monitoring
|
|
Not
Allocated
to
Segments
|
|
Total
|
|
|
Revenues
|
|
$
|
1,653,588
|
|
$
|
3,870,171
|
|
$
|
-
|
|
$
|
5,523,759
|
|
|
Income
(loss) from continuing operations
|
|
$
|
(768,586
|
)
|
$
|
(398,419
|
)
|
$
|
(21,727,763
|
)
|
$
|
(22,894,768
|
)
|
|
Total
assets
|
|
$
|
15,052,143
|
|
$
|
33,041,919
|
|
$
|
2,036,925
|
|
$
|
50,130,987
|
|
|
Three
months ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
153,054
|
|
$
|
3,397,256
|
|
$
|
-
|
|
$
|
3,550,310
|
|
|
Income
(loss) from continuing operations
|
|
$
|
(1,606,709
|
)
|
$
|
101,109
|
|
$
|
(2,678,780
|
)
|
|
($4,184,380
|
)
|
Approximately
95% of DR revenues for the three months ended September 30, 2007 related
to
three customers and approximately 94% of DR revenues for the nine months
ended
September 30, 2007 related to four customers with one customer comprising
80% of
DR revenues for the nine months ended September 30, 2007. Approximately 81%
of
LINM revenues for the three months ended September 30, 2007 related to five
customers with two customer comprising 64% of revenues and approximately
79% of
LINM revenues for the nine months ended September 30, 2007 related to five
customers, with two customers comprising 60% of revenues.
Management
is currently assessing which segment assets will be regularly reviewed as
part
of its overall assessment of the segments’ performance. Management currently
reviews trade accounts receivable, net of allowances, and certain other assets
in assessing segment performance. Assets not assigned to segments include
cash
and cash equivalents and certain corporate-related fixed assets.
In
accordance with the provisions of SFAS 131, revenues earned in the United
States
and internationally based on the location where the services were performed
is
as follows:
|
|
|
For
the Three Months
Ended
September 30, 2007
|
|
For
the Nine Months
September
30, 2007
|
|
|
United
States
|
|
$
|
-
|
|
$
|
1,320,000
|
|
|
Germany
|
|
|
3,397,256
|
|
|
3,870,171
|
|
|
Italy
|
|
|
153,054
|
|
|
333,588
|
|
|
|
|
$
|
3,550,310
|
|
$
|
5,523,759
|
|
NOTE
12 - SUBSEQUENT EVENTS
On
October 19, 2007, the Company completed a private placement of equity securities
to three affiliated funds managed by Kingdon Capital Management, LLC (the
“Investors”), pursuant to the terms of a Securities Purchase Agreement (the
“Purchase Agreement”). Pursuant to the Purchase Agreement, the Company sold an
aggregate of 12,500,000 shares of series A preferred stock (“Preferred Stock”)
and received gross proceeds of $10,000,000. The Preferred Stock is initially
convertible into an equal number of shares of the Company’s common stock (the
“Common Stock”) .
As
part
of the transaction, the Company issued to the Investors warrants to purchase
an
aggregate of up to 6,250,000 shares of Common Stock at an exercise price
of
$1.25 per share (the “Market Warrants”) and warrants to purchase an aggregate of
up to 5,000,000 shares of Common Stock at an exercise price of $1.80 per
share
(the “Premium Warrants” and, together with the Market Warrants, the “Warrants”).
The Warrants are exercisable for five years, contain customary change of
control
buy-out provisions, cashless exercise provisions and are not redeemable.
The
Preferred Stock and Warrants also contain full ratchet anti-dilution provisions
for the first 18 months after issuance and weighted average protection
thereafter for issuances of capital stock below the respective conversion
or
exercise prices, except in specified cases.
As
of
November 5, 2007, the Company paid in full the Bridge Notes totaling $1,770,000
and September Bridge Notes totaling $400,000.
INTELLIGENTIAS,
INC AND SUBSIDIARIES
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Introduction
On
June
7, 2007, the Company entered into the Stock Purchase Agreement to acquire
all of
the issued and outstanding stock of Systeam Italy SpA (“Systeam”) from
SysteamUS, Inc. in consideration for assuming net liabilities of approximately
$9,338,982 including the exchange of consideration of approximately $2,500,000
by assuming debt in the same amount due from an entity related to
Systeam.
Also,
on
June 7, 2007, Intelligentias, Inc. (the “Company” or “Purchaser”) entered into
the Stock Sale Agreement to acquire all of the issued and outstanding stock
of
Datakom GmbH (“Datakom”) from Paul Hoffmann and Lydia Krowka for an aggregate
purchase price of $27,701,548, subject to adjustment. The aggregate purchase
price was comprised of: (i) cash consideration of $10.5 million,
$2.0 million of which was paid immediately and the remaining US$8,500,000
is payable within 8 weeks after the distribution of a Private Placement
Memorandum associated with the sale of the the Company’s common stock;
(ii) direct transaction costs of $122,948 and (iii) issuance of
14,000,000 shares of the Company’s common stock with a fair value of
$17,078,600, based on the closing price of the Company’s common stock on the
closing date. The Stock Sale Agreement also included contingent consideration
which was based on the determination of Datakom’s EBITDA (as defined in the
Stock Sale Agreement) during calendar year 2007.
The
following unaudited pro forma condensed combined financial information is
based
on the historical financial statements of the Company, Systeam and Datakom
and
has been prepared to illustrate the effects of the Company’s acquisitions of
Datakom and Systeam (collectively, the “Acquisitions”). The unaudited pro forma
condensed combined statement of operations for the year ended December 31,
2006
and the nine months ended September 30, 2007 gives effect to the Acquisition
assuming the transactions had been consummated on January 1, 2006. The
adjustments for the nine months ended September 30, 2007 includes the
pre-acquisition historical results of operations for Systeam and Datakom
for the
period from January 1, 2007 through June 7, 2007. The unaudited pro forma
condensed combined statements of operations do not give effect to any
anticipated cost savings or revenue enhancements in connection with the
transactions.
The
Company is in the process of obtaining independent valuations to allocate
the
excess purchase price for Systeam and Datakom. The Company anticipates having
the valuation completed in the fourth quarter of 2007. For purposes of pro
forma
adjustments, management assumes that a weighted average amortization life
of all
intangibles including goodwill will be 5 years.
The
unaudited pro forma condensed combined financial information has been prepared
by the Company’s management for illustrative purposes only and is not
necessarily indicative of the condensed consolidated results of operations
in
future periods or the results that actually would have been realized had
the
Acquisitions been completed during the specified periods. For purposes of
preparing the our financial statements subsequent to the acquisition, we
have
established a new basis for Systeam and Datakom’s assets and liabilities based
upon their fair values and the purchase price we are paying, including the
cost
of the acquisition. As a result of these factors, the actual financial results
of operations will differ, perhaps significantly, from the pro forma amounts
reported in these statements.
|
Intelligentias,
Inc.
Pro
Forma Unaudited Combined Statement of Operations
For
the year ended December 31,
2006
|
|
|
|
|
|
Systeam
Italy
|
|
Datakom
|
|
|
|
|
|
|
|
Pro
Forma
|
|
|
|
|
Intelligentias
|
|
SpA.
|
|
GmbH
|
|
Total
|
|
DR
|
|
|
|
CR
|
|
|
|
Combined
|
|
|
Revenues
|
|
$
|
-
|
|
|
1,543,569
|
|
|
7,147,023
|
|
|
8,690,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,690,592
|
|
|
Services
provided to parent company
|
|
|
-
|
|
|
3,323,489
|
|
|
-
|
|
|
3,323,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,323,489
|
|
|
Total
revenues
|
|
|
-
|
|
|
4,867,058
|
|
|
7,147,023
|
|
|
12,014,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,014,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
cost of revenues
|
|
|
-
|
|
|
360,849
|
|
|
3,852,523
|
|
|
4,213,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,213,372
|
|
|
Selling
general and administrative
|
|
|
599,597
|
|
|
5,977,477
|
|
|
3,151,279
|
|
|
9,728,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,728,353
|
|
|
Depreciation
and amortization
|
|
|
130,239
|
|
|
11,267
|
|
|
135,783
|
|
|
277,289
|
|
|
7,305,015
|
|
|
1
|
|
|
|
|
|
|
|
|
7,582,304
|
|
|
Total
costs and expenses
|
|
|
729,836
|
|
|
6,349,593
|
|
|
7,139,585
|
|
|
14,219,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,524,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(729,836
|
)
|
|
(1,482,535
|
)
|
|
7,438
|
|
|
(2,204,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,509,948
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on derivative warrant liability
|
|
|
(3,970,800
|
)
|
|
-
|
|
|
-
|
|
|
(3,970,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,970,800
|
)
|
|
Interest
income (expense)
|
|
|
(74,420
|
)
|
|
(51,200
|
)
|
|
(97,827
|
)
|
|
(223,447
|
)
|
|
360,000
|
|
|
2
|
|
|
|
|
|
|
|
|
(583,447
|
)
|
|
Total
other income (expense)
|
|
|
(4,045,220
|
)
|
|
(51,200
|
)
|
|
(97827
|
)
|
|
(4,194,247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,554,247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before provision for income
taxes
|
|
|
(4,775,056
|
)
|
|
(1,533,735
|
)
|
|
(90,389
|
)
|
|
(6,399,180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,867,607
|
)
|
|
Provision
for income taxes
|
|
|
-
|
|
|
371,590
|
|
|
-
|
|
|
371,590
|
|
|
|
|
|
|
|
|
371,590
|
|
|
3
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
(4,775,056
|
)
|
|
(1,905,325
|
)
|
|
(90,389
|
)
|
|
(6,770,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,867,607
|
)
|
|
Loss
from discontinued operations
|
|
|
(24,605
|
)
|
|
-
|
|
|
-
|
|
|
(24,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(4,799,661
|
)
|
|
(1,905,325
|
)
|
|
(90,389
|
)
|
|
(6,795,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,892,212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding- basic and diluted
|
|
|
206,227,123
|
|
|
|
|
|
|
|
|
|
|
|
14,000,000
|
|
|
4
|
|
|
|
|
|
|
|
|
220,227,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share- basic and diluted
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.06
|
)
|
|
See
accompanying notes to unaudited pro forma condensed combined financial
information.
|
|
Intelligentias,
Inc. and Subsidiaries
Pro
Forma Unaudited Combined Statement of Operations
For
the Nine Months Ended September 30,
2007
|
|
|
|
Historical
Results of Intelligentias,
|
|
Pro
Forma Adjustments
|
|
|
|
|
|
|
Inc.
and Subsidiaries
|
|
Systeam
Italy SpA (Note 4)
|
|
Datakom
GmbH (Note 4)
|
|
Adjustments
(Note 1)
|
|
Pro
Forma Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
5,523,759
|
|
$
|
693,132
|
|
$
|
2,491,414
|
|
|
|
|
$
|
8,708,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
cost of revenues
|
|
|
1,445,026
|
|
|
492,397
|
|
|
1,333,054
|
|
|
|
|
|
3,270,477
|
|
|
Selling,
general and administrative
|
|
|
5,468,948
|
|
|
1,821,855
|
|
|
1,375,800
|
|
|
|
|
|
8,666,603
|
|
|
Amortization
and depreciation
|
|
|
4,152,587
|
|
|
6,029
|
|
|
47,329
|
|
|
3,043,756
|
1
|
|
7,249,701
|
|
|
Total
costs and expenses
|
|
|
11,066,561
|
|
|
2,320,281
|
|
|
2,756,183
|
|
|
|
|
|
19,186,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
(LOSS)
|
|
|
(5,542,802
|
)
|
|
(1,627,149
|
)
|
|
(264,769
|
)
|
|
|
|
|
(10,478,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME(EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on derivative warrant liability
|
|
|
(4,710,935
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
(4,710,935
|
)
|
|
Interest
income (expense)
|
|
|
(12,641,031
|
)
|
|
(60,503
|
)
|
|
(5,433
|
)
|
|
(165,000
|
)
2
|
|
(12,871,967
|
)
|
|
Total
other (expenses)
|
|
|
(17,351,966
|
)
|
|
(60,503
|
)
|
|
(5,433
|
)
|
|
|
|
|
(17,582,902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME(LOSS)
FROM CONTINUING OPERATIONS BEFORE PROVISION FOR
INCOMETAXES
|
|
|
(22,894,768
|
)
|
|
(1,687,652
|
)
|
|
(270,202
|
)
|
|
|
|
|
(28,061,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME(LOSS) APPLICABLETO COMMON SHARES
|
|
|
(22,894,768
|
)
|
|
(1,687,652
|
)
|
|
(270,202
|
)
|
|
|
|
|
(28,061,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS PER COMMON SHARE- BASIC & DILUTED:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME(LOSS) PER COMMON SHARE
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGECOMMON SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
& DILUTED
|
|
|
99,843,573
|
|
|
|
|
|
|
|
|
8,410,257
|
4
|
|
108,253,830
|
|
Note
1 - Adjustments to Pro Forma Condensed Combined Financial
Information
Adjustment
#1
The
adjustment records amortization expense for the intangible assets acquired
in
the purchase of Systeam and Datakom on a straight-line basis over 5 years
for
the interim and annual periods presented.
Adjustment
#2
The
adjustment records interest expense on the short-term borrowing consummated
on
June 13, 2007 to fund the initial Datakom acquisition payment. The borrowing
includes 5.5 million detachable warrants with an exercise price of $2.05
valued
at $1,688,238 which has been recorded as a debt discount.
Adjustment
#3
This
adjustment eliminates the income tax expense of Systeam (see Note 3 - Income
Tax
Expense below).
Adjustment
#4
The
adjustment represents the additional 14,000,000 shares issued on June 7,
2007
for the purchase of Datakom.
Note
2 - Intangible Assets
The
Company is in the process of obtaining independent valuations to allocate
the
excess purchase price for Systeam and Datakom. The Company anticipates
having the valuation completed in the fourth quarter of 2007. For purposes
of pro forma adjustments, management assumes that a weighted average
amortization life of all intangibles including goodwill will be 5
years.
Note
3 - Income Tax Expense
A
provision for income taxes has not been recorded due to the uncertainty with
respect to Systeam’s tax expense if it had been a consolidated subsidiary of
Intelligentias.
Note
4 - Historical Systeam and Datakom Statement of Operations
Amounts
included in these adjustments represent the pre-acquisition
historical
results of operations for Systeam and Datakom for the period from January
1,
2007 through June 7, 2007.
INDEPENDENT
AUDITORS' REPORT
To
the
Board of Directors and Stockholders
Systeam
Italy SpA
Denver,
Colorado
We
have
audited the accompanying balance sheet of Systeam Italy SpA as of
December 31, 2006, and the related statement of operations, stockholders’
deficit and cash flows for the year then ended and from the period of inception
(February 9, 2005) to December 31, 2005. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.
We
conducted our audits in accordance with auditing standards generally accepted
in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Systeam Italy SpA as of
December 31, 2006, and the results of their operations and their cash flows
for the year then ended and the statement of operations from the period of
inception (February 9, 2005) to December 31, 2005 in conformity with generally
accepted accounting principles in the United States of America.
The
accompanying financial statements have been prepared assuming the Company
will
continue as a going concern. As discussed in Note 2 to the financial statements,
the Company has experienced circumstances which raise substantial doubt about
its ability to continue as a going concern. Management’s plans regarding those
matters also are described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
Ehrhardt
Keefe Steiner & Hottman PC
September
4, 2007
Denver,
Colorado
SYSTEAM
ITALY SpA
BALANCE
SHEETS
|
|
|
March
31,
2007
|
|
December
31,
2006
|
|
|
ASSETS
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
11,316
|
|
$
|
25,948
|
|
|
Accounts
receivable (net of allowance of $168,856)
|
|
|
1,487,397
|
|
|
2,120,078
|
|
|
Unbilled
fees and costs
|
|
|
188,656
|
|
|
135,814
|
|
|
Other
current assets
|
|
|
87,058
|
|
|
66,809
|
|
|
Due
from parent company
|
|
|
2,504,720
|
|
|
2,504,720
|
|
|
Total
current assets
|
|
|
4,279,147
|
|
|
4,853,369
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets (net of accumulated depreciation of $40,366
|
|
|
|
|
|
|
|
|
and
$37,013 respectively)
|
|
|
80,410
|
|
|
71,296
|
|
|
Deposit
on lease and other long term assets
|
|
|
92,501
|
|
|
74,751
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
4,452,058
|
|
$
|
4,999,416
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,014,894
|
|
$
|
781,528
|
|
|
Accrued
expenses
|
|
|
5,848,603
|
|
|
5,433,229
|
|
|
Short-term
borrowings
|
|
|
564,532
|
|
|
769,674
|
|
|
Deferred
revenue
|
|
|
1.558,586
|
|
|
1.806,654
|
|
|
Notes
payable to related party
|
|
|
1,385,416
|
|
|
1,000,000
|
|
|
Total
current liabilities
|
|
|
10,372,031
|
|
|
9,791,085
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
10,372,031
|
|
|
9,791,085
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
|
Common
stock (1 Euro par value, 500,000 shares
|
|
|
|
|
|
|
|
|
authorized,
issued, and outstanding)
|
|
|
648,350
|
|
|
648,350
|
|
|
Additional
paid-in-capital
|
|
|
(1,478,177
|
)
|
|
(1,478,177
|
)
|
|
Accumulated
deficit
|
|
|
(4,624,520
|
)
|
|
(3,589,376
|
)
|
|
Accumulated
other comprehensive income
|
|
|
(465,626
|
)
|
|
(372,466
|
)
|
|
Total
stockholders' deficit
|
|
|
(5,919,973
|
)
|
|
(4,791,669
|
)
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
$
|
4,452,058
|
|
$
|
4,999,416
|
|
See
accompanying notes to financial statements.
SYSTEAM
ITALY SpA
|
|
|
Three
months ended
March 31,
|
|
For
the Year
Ended
December
31,
|
|
Period
from
2/9/2005
(Inception)
Through
|
|
|
|
|
2007
|
|
2006
|
|
2006
|
|
12/31/2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
332,064
|
|
$
|
340,671
|
|
$
|
1,543,569
|
|
$
|
1,854,154
|
|
|
Services
provided to parent company
|
|
|
-
|
|
|
358,923
|
|
|
3,323,489
|
|
|
806,311
|
|
|
Total Revenue
|
|
|
332,064
|
|
|
699,594
|
|
|
4,867,058
|
|
|
2,660,465
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
cost of non-related party revenues
|
|
|
220,070
|
|
|
109,616
|
|
|
360,849
|
|
|
810,482
|
|
|
Operating
expenses
|
|
|
1,116,709
|
|
|
997,187
|
|
|
5,988,744
|
|
|
3,341,048
|
|
|
Total
costs and expenses
|
|
|
1,336,779
|
|
|
1,106,803
|
|
|
6,349,593
|
|
|
4,151,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(1,004,715
|
)
|
|
(407,209
|
)
|
|
(1,482,535
|
)
|
|
(1,491,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
30,429
|
|
|
2,869
|
|
|
51,200
|
|
|
19,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income tax provision
|
|
|
(1,035,144
|
)
|
|
(410,079
|
)
|
|
(1,533,735
|
)
|
|
(1,510,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit (provision)
|
|
|
-
|
|
|
68,823
|
|
|
(371,590
|
)
|
|
(173,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(1,035,144
|
)
|
|
(341,255
|
)
|
|
(1,905,325
|
)
|
|
(1,684,051
|
)
|
|
Foreign
currency translation adjustments
|
|
|
(93,160
|
)
|
|
(51,356
|
)
|
|
(489,968
|
)
|
|
117,502
|
|
|
Comprehensive
loss
|
|
$
|
(1,128,304
|
)
|
$
|
(392,611
|
)
|
$
|
(2,395,293
|
)
|
$
|
(1,566,549
|
)
|
See
accompanying notes to financial statements.
SYSTEAM
ITALY SpA
STATEMENTS
OF CHANGES IN STOCKHOLDERS’ DEFICIT
For
the Three-Month Period Ended March 31, 2007 (unaudited) and the Year Ended
December 31, 2006
and
the Period from February 9, 2005 (Inception) through December 31,
2005
|
|
|
Common
Stock
|
|
Additional
Paid
- In
|
|
Accumulated
|
|
Accumulated
Other
Comprehensive
|
|
|
|
|
Description
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Income
(Loss)
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
February 9, 2005 (Inception)
|
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
and liabilities contributed by parent
|
|
|
500,000
|
|
|
648,350
|
|
|
(1,478,177
|
)
|
|
-
|
|
|
-
|
|
|
(829,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period from February 9, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(inception)
through December 31, 2005
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,684,051
|
)
|
|
-
|
|
|
(1,684,051
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
117,502
|
|
|
117,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
|
500,000
|
|
|
648,350
|
|
|
(1,478,177
|
)
|
|
(1,684,051
|
)
|
|
117,502
|
|
|
(2,396,376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year ended December 31, 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,905,325
|
)
|
|
-
|
|
|
(1,905,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(489,968
|
)
|
|
(489,968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
|
500,000
|
|
|
648,350
|
|
|
(1,478,177
|
)
|
|
(3,589,376
|
)
|
|
(372,466
|
)
|
|
(4,791,669
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the quarter ended March 31, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,035,144
|
)
|
|
-
|
|
|
(1,035,144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(93,160
|
)
|
|
(93,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2007
|
|
|
500,000
|
|
$
|
648,350
|
|
$
|
(1,478,177
|
)
|
$
|
(4,624,520
|
)
|
$
|
(465,626
|
)
|
$
|
(5,919,973
|
)
|
See
accompanying notes to financial statements.
SYSTEAM
ITALY SpA
STATEMENTS
OF CASH FLOWS
|
|
|
Three
Months Ended
March 31,
|
|
For
the Year
Ended
December
31,
|
|
Period
from
February
9, 2005
(Inception)
Through
December
31,
|
|
|
|
|
2007
|
|
2006
|
|
2006
|
|
2005
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,035,144
|
)
|
$
|
(341,255
|
)
|
$
|
(1,905,325
|
)
|
$
|
(1,684,051
|
)
|
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
and depreciation
|
|
|
3,353
|
|
|
2,334
|
|
|
11,267
|
|
|
23,587
|
|
|
Allowance
for doubtful accounts
|
|
|
-
|
|
|
81,457
|
|
|
168,856
|
|
|
-
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable and due from parent
|
|
|
629,109
|
|
|
122,023
|
|
|
1,335,791
|
|
|
(789,374
|
)
|
|
Unbilled
fees and costs
|
|
|
(52,842
|
)
|
|
|
|
|
(135,814
|
)
|
|
|
|
|
Other
current assets
|
|
|
(19,241
|
)
|
|
(1,274
|
)
|
|
(6,056
|
)
|
|
(29,565
|
)
|
|
Accounts
payable
|
|
|
221,939
|
|
|
(55,342
|
)
|
|
22,452
|
|
|
384,886
|
|
|
Accrued
expenses
|
|
|
354,810
|
|
|
389,085
|
|
|
2,369,855
|
|
|
1,534,910
|
|
|
Deferred
revenue
|
|
|
(248,068
|
)
|
|
27,298
|
|
|
(746,650
|
)
|
|
392,011
|
|
|
Deposit
on lease and other long-term assets
|
|
|
(16,708
|
)
|
|
-
|
|
|
-
|
|
|
(69,269
|
)
|
|
Total
adjustments
|
|
|
872,352
|
|
|
566,581
|
|
|
3,019,701
|
|
|
1,447,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash generated (used) in operating activities
|
|
|
(162,792
|
)
|
|
224,326
|
|
|
1,114,376
|
|
|
(236,865
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
of fixed assets
|
|
|
(11,609
|
)
|
|
(4,696
|
)
|
|
(27,735
|
)
|
|
(34,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(11,609
|
)
|
|
(4,696
|
)
|
|
(27,735
|
)
|
|
(34,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from short-term borrowings
|
|
|
874,831
|
|
|
531,696
|
|
|
2,262,364
|
|
|
323,471
|
|
|
Proceeds
from notes payable to related party
|
|
|
385,000
|
|
|
-
|
|
|
1,000,000
|
|
|
-
|
|
|
Payment
of short-term borrowings
|
|
|
(1,083,988
|
)
|
|
(833,375
|
)
|
|
(1,862,178
|
)
|
|
-
|
|
|
Due
from Parent
|
|
|
-
|
|
|
-
|
|
|
(2,504,720
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
175,843
|
|
|
(301,679
|
)
|
|
(1,104,534
|
)
|
|
323,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and
cash
equivalents
|
|
|
(16,074
|
)
|
|
1,339
|
|
|
(42,065
|
)
|
|
(5,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AND
CASH EQUIVALENTS
|
|
|
(14,632
|
)
|
|
(80,710
|
)
|
|
(59,958
|
)
|
|
47,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING
OF PERIOD
|
|
|
25,948
|
|
|
85,906
|
|
|
85,906
|
|
|
38,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
END
OF PERIOD
|
|
$
|
11,316
|
|
$
|
5,196
|
|
$
|
25,948
|
|
$
|
85,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
SCHEDULE OF CASH PAID FOR:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
11,747
|
|
$
|
11,403
|
|
$
|
47,648
|
|
$
|
19,475
|
|
|
Income
taxes
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
See
accompanying notes to financial statements.
Systeam
Italy SpA
Notes
to the Financial Statements
1.
BACKGROUND AND BASIS OF PRESENTATION
Systeam
Italy SpA (the “Company”) was incorporated in Rome, Italy on February 9, 2005 by
SysteamUS, Inc (“SysteamUS”). On March 31, 2005, certain
transactions were effected pursuant to which SysteamUS transferred certain
assets and liabilities associated with its data retention security software
business (the “Business”) from its wholly-owned subsidiary, Systeam SpA, to the
Company. The transaction included the transfer of management, technical and
sales employees associated with the Business and certain customer relationships.
The intellectual property associated with the data retention software was
retained by SysteamUS. Because the transaction was between entities under
common
control, the Company’s assets and liabilities at inception have been reported
for financial reporting purposes at Systeam SpA’s net book value. The net book
value of the assets and liabilities transferred to the Company was a net
deficit
of $829,827.
On
December 7, 2006, the Company entered into a Limited Assets Purchase Agreement
by and between Intelligentias, Inc., SysteamUS and the Company, whereby
Intelligentias, Inc. paid SysteamUS $5,850,000 to acquire all of SysteamUS’
right, title and interest in and to its intangible assets associated with
the
data retention software.
2.
GOING CONCERN
The
accompanying financial statements have been prepared assuming the Company
will
continue as a going concern. The Company has incurred cumulative net losses
and
operational cash outflows since inception. The Company’s ability to
service its debt, and to fund working capital, capital expenditures and business
development efforts will depend on its ability to generate cash from operating
activities which is subject to, among other things, its future operating
performance, as well as to general economic, financial, competitive,
legislative, regulatory and other conditions, some of which may be beyond
its
control. If the Company fails to generate sufficient cash from operations,
it
will need to raise additional equity or borrow additional funds to achieve
its
objectives. There can be no assurance that the Company will generate sufficient
revenues or that equity or borrowings will be available or, if available,
will
be at rates or prices acceptable to the Company. These conditions raise
substantial doubt about the Company’s ability to continue as a going concern.
The financial statements do not include any adjustments that might result
from
the outcome of these uncertainties.
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
Preparation
of the financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates have been used by management in
conjunction with the measurement of the valuation allowance relating to deferred
tax assets and future cash flows associated with long-lived assets. Actual
results could differ from those estimates.
Unaudited
Interim Financial Information
The
unaudited consolidated interim financial information as of March 31, 2007
and
for the three-month periods ended March 31, 2007 and 2006 have been prepared
by
the Company using accounting principles consistent with the audited financial
information for the years ended December 31, 2006 and 2005. The Company
has made all normal, recurring adjustments it believes are necessary to present
fairly, in all material respects, the unaudited interim financial
information.
Cash
and Cash Equivalents
For
financial statement presentation purposes, the Company considers short-term,
highly liquid investments with original maturities of three months or less
to be
cash and cash equivalents.
Concentrations
of Credit Risk
The
Company grants credit in the normal course of business. The Company
periodically performs credit analyses and monitors the financial condition
of
its major customers to reduce credit risk. One customer comprised 73%, 34%
and 62% of the Company’s revenues for the three months ended March 31, 2007 and
2006 (unaudited) and the year ended December 31, 2006, respectively. Two
customers comprised 48% of the Company’s revenues for the year ended December
31, 2005. Additionally, the same customer comprised 32% and 73% of the Company’s
accounts receivables at March 31, 2007 (unaudited), and December 31, 2006,
respectively.
Accounts
Receivable
Receivables
are shown at their expected realizable value. This is determined by
adjusting the nominal value of the receivables for an allowance for bad debt
which is calculated by assessing the risk of loss, generally and for each
receivable, considering general and industry conditions as well as customer
history and creditworthiness. The losses ultimately incurred could differ
materially in the near term from the amounts estimated in determining the
allowance.
Fixed
Assets
Fixed
assets are stated at cost less accumulated depreciation. Depreciation is
recorded on a straight-line basis over the shorter of the contractual lives
or
estimated useful lives of the assets ranging from three to five years.
Depreciation and amortization expense was $11,267 and $23,587 for the years
ended December 31, 2006 and 2005, respectively, and $3,353 and $2,334 for
the
three months ended March 31, 2007 and 2006, respectively.
The
Company reviews its fixed assets for impairment whenever events or changes
in
circumstances indicate that the carrying amount of the asset may not be
recovered. The Company looks primarily to undiscounted future cash flows
in its assessment of whether or not fixed assets have been
impaired.
Fair
Value of Financial Instruments
The
carrying amounts of the Company’s financial instruments, including cash and cash
equivalents, accounts payable, accrued expenses, short-term debt and notes
payable to related party approximate their fair values based on their short-term
nature.
Revenue
Recognition
The
Company derives its revenue from sales of software licenses, installation,
customer support and consulting services. The Company has historically been
contracted to perform installation services on every software license sale
and
certain software license sales also include Customer Support agreements.
Customer Support agreements vary and may provide customers with rights to
unspecified software updates, maintenance releases and patches released during
the term of the support period, telephone support, and support personnel
during
the term of the support period. The Company does not have standard pricing
associated with its Customer Support agreements due to the varying nature
of the
services provided.
We
recognize revenue pursuant to the requirements of American Institute of
Certified Public Accountants Statement of Position 97-2, “Software
Revenue Recognition”, as amended. The Company has not yet established vendor
specific objective evidence (“VSOE”) for the fair value of the software license,
installation and customer support elements. As a result, the Company recognizes
all revenue for multiple element arrangements ratably over the period of
installation and customer support, typically 3 to 24 months.
Revenues
for consulting services are generally recognized as the services are performed.
If there is a significant uncertainty about the project completion or receipt
of
payment for the consulting services, revenue is deferred until the uncertainty
is sufficiently resolved. Consulting services primarily comprise integrating
and
customizing software previously installed to address changes in a customer’s
needs or information systems environment.
Software
Development Costs
Research
and development expenditures are charged to operations as incurred.
SFAS No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed
,
requires capitalization of certain software development costs subsequent
to the
establishment of technological feasibility. Based on the Company’s software
development process, technological feasibility is established upon completion
of
a working model, which also requires certification and extensive testing.
Costs
incurred by the Company between completion of the working model and the point
at
which the product is ready for general release historically have been
immaterial.
Foreign
Currency Translation
The
Company operates outside the United States and its local currency is its
functional currency. The functional currency is translated into U.S. dollars
for
balance sheet accounts using the period end rates in effect as of the balance
sheet date and the average exchange rate for revenue and expense accounts
for
each respective period. The translation adjustments are deferred as a separate
component of stockholders' equity, within other comprehensive loss, net of
tax
where applicable. Gains or losses resulting from transactions denominated
in
currencies other than the Company’s functional currency are included in selling,
general and administrative expenses within the statements of
operations.
Income
Taxes
The
Company provides for income taxes based on the provisions of SFAS No.
109,
Accounting for Income Taxes,
which,
among other things, requires that recognition of deferred income taxes be
measured by the provisions of enacted tax laws in effect at the date of
financial statements.
Recently
Issued Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157,
"Fair Value Measurements,"
which
enhances existing guidance for measuring assets and liabilities at fair value.
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value and expands disclosure about fair value measurements. SFAS No. 157 is
effective for the Company beginning in 2007. The Company is currently assessing
the impact of the adoption of SFAS No. 157, but does not expect that it
will have a significant impact on its financial position or results of
operations.
In
September 2006, the SEC issued Staff Accounting Bulletin ("SAB")
No. 108, "
Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements.
" SAB
No. 108 requires that companies utilize a "dual-approach" to assessing the
quantitative effects of financial statement misstatements. The dual approach
includes both an income statement focused and balance sheet focused assessment.
SAB No. 108 is applicable beginning in 2007. The Company is currently
assessing the impact of the adoption of SAB No. 108, but does not expect
that it will have a significant impact on its financial position or results
of
operations.
In
June 2006, the FASB issued FIN No. 48,
"Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109."
This
Interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. FIN No. 48 is
effective for the Company beginning in 2007. The Company is currently assessing
the impact of the adoption of FIN No. 48, but does not expect that it will
have a significant impact on its financial position or results of
operations.
4.
ACCRUED LIABILITIES
Accrued
liabilities consist of the following:
|
|
|
March
31,
2007
|
|
December
31,
2006
|
|
|
|
|
(unaudited)
|
|
|
|
|
Withholding
taxes payable
|
|
$
|
1,563,137
|
|
$
|
1,380,840
|
|
|
Tax
penalties & interest
|
|
|
1,147,678
|
|
|
1,058,085
|
|
|
Termination
indemnity
|
|
|
823,115
|
|
|
855,663
|
|
|
Social
security taxes payable
|
|
|
1,031,123
|
|
|
824,543
|
|
|
Income
taxes payable
|
|
|
583,606
|
|
|
577,829
|
|
|
Accrued
wages & benefits
|
|
|
550,997
|
|
|
576,935
|
|
|
Value
added tax (VAT)
|
|
|
91,013
|
|
|
138,468
|
|
|
Other
|
|
|
57,934
|
|
|
20,866
|
|
|
|
|
$
|
5,848,603
|
|
$
|
5,433,229
|
|
Included
in accrued liabilities are tax penalties and interest related to certain
employee withholding taxes, social security taxes, income taxes and VAT that
are
past due as of each balance sheet date.
The
termination indemnity of $823,115 and $855,663 at March 31, 2007 and December
31, 2006, respectively, relates to amounts withheld from employees that are
payable to employees if they are terminated by the Company. Such amounts
do not accrue interest and are based solely on the amounts withheld by the
Company.
5.
STOCKHOLDERS’ DEFICIT
The
Company was formed through the issuance of 500,000, one-Euro par value common
stock. As noted in Note 1 “Background and Basis of Presentation”, because the
transaction was between entities under common control, the Company’s assets and
liabilities at inception have been reported for financial reporting purposes
at
Systeam SpA’s historical basis. The net stockholders’ deficit at inception
equals the net liability transferred to the Company of $829,827.
6.
SHORT-TERM
BORROWINGS, COMMITMENTS AND CONTINGENCIES
Short-term
borrowings consist of the following:
|
|
|
March
31,
2007
|
|
December
31,
2006
|
|
|
|
|
(unaudited)
|
|
|
|
|
7.45%
fixed-rate credit facility, collateralized by certain accounts
receivable
|
|
$
|
103,732
|
|
$
|
249,975
|
|
|
7.50%
fixed-rate credit facility, collateralized by certain accounts
receivable
|
|
|
119,424
|
|
|
176,815
|
|
|
8.00%
fixed-rate debt, collateralized by certain accounts
receivable
|
|
|
208,026
|
|
|
210,854
|
|
|
5.64%
fixed-rate bank borrowing
|
|
|
133,350
|
|
|
132,030
|
|
|
|
|
$
|
564,532
|
|
$
|
769,674
|
|
The
7.45%, 7.50% and 8.00% fixed-rate credit facilities are collateralized by
a
security interest in certain accounts receivables of the Company. Borrowings
are
based on a percentage of eligible accounts receivable and mature on the due
date
of the underlying accounts receivable, all within 12 months of the respective
balance sheet dates.
Principal
and interest related to the 5.64% fixed-rate borrowing are payable monthly
from
April until the final maturity date in December 2007.
Operating
Leases
The
Company leases office space under an operating lease expiring in March 2011.
This lease is cancelable at the option of the Company with six months’
notice. Future minimum lease payments under this lease was $151,800 at December
31
st
, 2006.
Rent expense for the three months ended March 31, 2007 and 2006 (unaudited)
was
approximately $75,000 and for the year ended December 31, 2006 and the period
from February 9, 2005 (inception) to December 31, 2005 was $281,395 and
$216,660, respectively. The Company paid a refundable deposit of
approximately $75,000 in connection with this lease.
7.
PROVISION FOR INCOME TAXES
Deferred
income taxes reflect the net tax effects of temporary differences between
the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes. The Company’s primary temporary
differences related to the timing of revenue recognition. The related
deferred tax asset has been fully impaired due to the uncertainty of its
realization due to changes in control of the Company and recent losses from
operations.
During
2006 and 2005, the Company provided for income tax expense although they
had
significant loss for financial reporting purposes. The income tax expense
is due to significant permanent differences related to the treatment of
transactions with SysteamUS under Italian tax law. These transactions have
been eliminated for financial reporting purposes.
8.
RELATED PARTY TRANSACTIONS
As
described in Note 1, “Background and Basis of Presentation”, on December 7,
2006, certain transactions were effected pursuant to an agreement among
Intelligentias, Inc., SysteamUS, Inc. and Systeam Italy, SpA. In
December 2006, Intelligentias, Inc. loaned a total of $1,000,000 to the Company
bearing interest at 7% per annum and maturing in December 2007. In January,
March and May 2007, Intelligentias, Inc. loaned $100,000, $285,000 and $300,000,
respectively, to the Company. The loans bear interest at 7% per annum and
mature
in one year. Interest expense for the year ended December 31, 2006 and the
three
months ended March 31, 2007 was $3,733 and $19,047, respectively.
During
2005 and 2006, the Company provided certain services to its parent company,
SystemUS totaling $806,311 and $3,323,489.
9.
SUBSEQUENT EVENTS
On
June
7, 2007, all of the outstanding common stock of the Company was acquired
by
Intelligentias, Inc. from SysteamUS.
INDEPENDENT
AUDITORS' REPORT
To
the
Board of Directors and Stockholders
Datakom
GmbH
Denver,
Colorado
We
have
audited the accompanying consolidated balance sheet of Datakom GmbH as of
December 31, 2006, and the related statements of operations, stockholders’
equity and cash flows for the year ended December 31, 2006 and 2005. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We
conducted our audits in accordance with auditing standards generally accepted
in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Datakom GmbH as of
December 31, 2006, and the results of their operations and their cash flows
for the year then ended and the statements of operations for the year ended
December 31, 2006 and 2005 in conformity with generally accepted accounting
principles in the United States of America.
Ehrhardt
Keefe Steiner & Hottman PC
August
15, 2007
Denver,
Colorado
DATAKOM
GmbH
CONSOLIDATED
BALANCE SHEETS
|
|
|
March
31,
2007
|
|
December
31,
2006
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,266,567
|
|
$
|
583,150
|
|
|
Accounts
receivable - trade
|
|
|
832,191
|
|
|
701,080
|
|
|
Other
receivables
|
|
|
342,859
|
|
|
157,427
|
|
|
Income
tax receivable
|
|
|
248,752
|
|
|
246,292
|
|
|
Unbilled
fees and costs
|
|
|
307,023
|
|
|
420,208
|
|
|
Inventories
|
|
|
44,740
|
|
|
43,500
|
|
|
Other
assets
|
|
|
232,223
|
|
|
196,882
|
|
|
Total
current assets
|
|
|
3,274,355
|
|
|
2,348,539
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets (net of accumulated depreciation
of
$1,803,544 and $1,760,904, respectively)
|
|
|
182,047
|
|
|
200,057
|
|
|
Other
long term assets
|
|
|
16,054
|
|
|
18,427
|
|
|
Deposits
|
|
|
765,429
|
|
|
757,853
|
|
|
Restricted
long-term investments
|
|
|
2,317,796
|
|
|
2,520,407
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
6,555,681
|
|
$
|
5,845,283
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,005,433
|
|
$
|
891,600
|
|
|
Accrued
expenses
|
|
|
1,164,330
|
|
|
833,144
|
|
|
Short-term
borrowings
|
|
|
516,081
|
|
|
643,170
|
|
|
Income
taxes payable
|
|
|
121,974
|
|
|
120,766
|
|
|
Deferred
revenue
|
|
|
908,182
|
|
|
430,020
|
|
|
Total
current liabilities
|
|
|
3,716,000
|
|
|
2,918,700
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
pension liability
|
|
|
2,117,528
|
|
|
2,048,640
|
|
|
TOTAL
LIABILITIES
|
|
|
5,833,528
|
|
|
4,967,340
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
278,572
|
|
|
278,572
|
|
|
Accumulated
equity
|
|
|
336,351
|
|
|
506,095
|
|
|
Accumulated
other comprehensive income
|
|
|
107,230
|
|
|
93,276
|
|
|
Total
stockholders’ equity
|
|
|
722,153
|
|
|
877,943
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
6,555,681
|
|
$
|
5,845,283
|
|
See
accompanying notes to consolidated financial statements.
DATAKOM
GmbH
CONSOLIDATED
STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE INCOME (LOSS)
|
|
|
Three
months ended
March 31,
|
|
For
the year ended
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,545,584
|
|
$
|
3,094,403
|
|
$
|
7,147,023
|
|
$
|
10,366,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
cost of revenues
|
|
|
880,348
|
|
|
2,074,606
|
|
|
3,852,523
|
|
|
6,332,571
|
|
|
Selling,
general and administrative
|
|
|
811,958
|
|
|
944,763
|
|
|
3,151,279
|
|
|
4,520,472
|
|
|
Depreciation
and amortization
|
|
|
27,115
|
|
|
42,171
|
|
|
135,783
|
|
|
175,439
|
|
|
Total
costs and expenses
|
|
|
1,719,421
|
|
|
3,061,540
|
|
|
7,139,585
|
|
|
11,028,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(173,837
|
)
|
|
32,863
|
|
|
7,438
|
|
|
(661,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
income (loss)
|
|
|
5,309
|
|
|
66
|
|
|
(73,707
|
)
|
|
(139,464
|
)
|
|
Interest
expense
|
|
|
(1,216
|
)
|
|
(2,428
|
)
|
|
(24,120
|
)
|
|
(15,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income tax provision (benefit)
|
|
|
(169,744
|
)
|
|
30,501
|
|
|
(90,389
|
)
|
|
(816,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision (benefit)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
199,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(169,744
|
)
|
|
30,501
|
|
|
(90,389
|
)
|
|
(617,339
|
)
|
|
Foreign
currency translation adjustment
|
|
|
693
|
|
|
(82,453
|
)
|
|
94,209
|
|
|
31,737
|
|
|
Unrealized
gain on investments
|
|
|
13,261
|
|
|
(20,142
|
)
|
|
77,933
|
|
|
288,459
|
|
|
Total
comprehensive income (loss)
|
|
$
|
(155,790
|
)
|
$
|
(72,094
|
)
|
$
|
81,753
|
|
$
|
(297,143
|
)
|
See
accompanying notes to consolidated financial statements.
DATAKOM
GmbH
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For
the Three Months Ended March 31, 2007 (unaudited) and the Year Ended December
31, 2006 and 2005
|
|
|
Common
Stock
|
|
|
|
Accumulated
Other
Comprehensive
|
|
|
|
|
Description
|
|
Shares
|
|
Amount
|
|
Equity
|
|
Income
(Loss)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
|
108,102
|
|
$
|
278,572
|
|
$
|
1,213,823
|
|
$
|
(399,062
|
)
|
$
|
1,093,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
(617,339
|
)
|
|
—
|
|
|
(617,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on investments
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
288,459
|
|
|
288,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
31,737
|
|
|
31,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
|
108,102
|
|
|
278,572
|
|
|
596,484
|
|
|
(78,866
|
)
|
|
796,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
(90,389
|
)
|
|
—
|
|
|
(90,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on investments
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
77,933
|
|
|
77,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
94,209
|
|
|
94,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
|
108,102
|
|
|
278,572
|
|
|
506,095
|
|
|
93,276
|
|
|
877,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
(169,744
|
)
|
|
—
|
|
|
(169,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on investments
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,261
|
|
|
13,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
693
|
|
|
693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2007
|
|
|
108,102
|
|
$
|
278,572
|
|
$
|
336,351
|
|
$
|
107,230
|
|
$
|
722,153
|
|
See
accompanying notes to consolidated financial statements.
DATAKOM
GmbH
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
Three
Months Ended
March 31,
|
|
Year
Ended
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2006
|
|
2005
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(169,744
|
)
|
$
|
30,501
|
|
$
|
(90,389
|
)
|
$
|
(617,339
|
)
|
|
Adjustments
to reconcile net loss to net cash
provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
and depreciation
|
|
|
27,115
|
|
|
42,171
|
|
|
135,783
|
|
|
175,439
|
|
|
Pension
plan expense
|
|
|
48,912
|
|
|
40,796
|
|
|
163,185
|
|
|
129,767
|
|
|
Unrealized
gain (loss) on investments
|
|
|
13,261
|
|
|
(20,142
|
)
|
|
77,933
|
|
|
288,459
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(121,956
|
)
|
|
600,443
|
|
|
880,458
|
|
|
227,298
|
|
|
Other
current assets
|
|
|
(98,905
|
)
|
|
(140,534
|
)
|
|
(433,015
|
)
|
|
(107,721
|
)
|
|
Accounts
payable
|
|
|
103,104
|
|
|
(68,054
|
)
|
|
(547,674
|
)
|
|
201,724
|
|
|
Accrued
expenses
|
|
|
317,274
|
|
|
(57,562
|
)
|
|
(559,257
|
)
|
|
25,235
|
|
|
Deferred
revenue and other
|
|
|
465,669
|
|
|
|
|
|
365,281
|
|
|
(349,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
adjustments
|
|
|
754,474
|
|
|
397,118
|
|
|
82,694
|
|
|
590,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
584,730
|
|
|
427,619
|
|
|
(7,695
|
)
|
|
(26,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of fixed assets
|
|
|
(4,938
|
)
|
|
(7,105
|
)
|
|
(115,632
|
)
|
|
(198,982
|
)
|
|
Proceeds
from sale (purchase) of securities including
contributions
to pension plan investments, net
|
|
|
236,387
|
|
|
41,942
|
|
|
14,057
|
|
|
(70,299
|
)
|
|
Net
cash (used in) investing activities
|
|
|
231,449
|
|
|
34,837
|
|
|
(101,575
|
)
|
|
(269,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from (payments of) short-term borrowings, net
|
|
|
(131,210
|
)
|
|
(366,045
|
)
|
|
231,052
|
|
|
302,708
|
|
|
Payments
for deposits
|
|
|
(13,860
|
)
|
|
(23,229
|
)
|
|
(92,916
|
)
|
|
(99,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
(145,070
|
)
|
|
(389,274
|
)
|
|
138,136
|
|
|
203,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
12,308
|
|
|
11,584
|
|
|
60,356
|
|
|
(51,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
683,417
|
|
|
84,766
|
|
|
89,222
|
|
|
(144,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - BEGINNING OF PERIOD
|
|
|
583,150
|
|
|
493,928
|
|
|
493,928
|
|
|
638,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - END OF PERIOD
|
|
$
|
1,266,567
|
|
$
|
578,694
|
|
$
|
583,150
|
|
$
|
493,928
|
|
Cash
paid
for interest for the years ended December 31, 2006 and 2005 and for the three
months ended March 31, 2006
and
2007 (unaudited) was $24,120, $15,001, $1,216 and $2,428,
respectively.
See
accompanying notes to consolidated financial statements.
DATAKOM
GmbH
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
BACKGROUND AND BASIS OF PRESENTATION
Datakom
GmbH (the “Company”) was incorporated as a Limited Liability Company in Munich,
Germany in 1986. The Company’s main focus is the creation of software
programs which allow for lawful interception of telecommunications for law
enforcement agencies and intelligence services. The Company also has a
consulting division which engages in technological education, namely education
on voiceover IP and electronic serial number set-up for various communication
devices. Additionally, this division performs mainframe installation
services and pre-deployment services, which simulates network loads in order
to
identify any potential issues prior to deployment of various software
programs.
Any
German Limited Liability Corporation changes to the Company’s capital structure
must be approved by its members prior to any transaction. As a German
Limited Liability Corporation the Company pays income taxes on a stand alone
basis.
On
June
7, 2007, the Company entered into a Limited Assets Purchase Agreement by
and
between Intelligentias, Inc. and the Company, whereby Intelligentias, Inc.
agreed to acquire all of the Company’s stock for cash and stock (see Note
9).
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying consolidated financial statements (“financial statements”) include
the accounts of the Company and its wholly owned subsidiary, GTEN AG. All
significant intercompany transactions have been eliminated.
The
Company owned 48.05% of GTEN AG until September of 2006. As described in
Note 6, in September of 2006, the Company acquired the remaining 51.95% of
the
outstanding stock for 1 Euro plus future consideration. GTEN AG has been
consolidated for the entire period of these financial statements as GTEN
AG was
controlled by both the Company and the officers and shareholders of the Company.
Prior to 2005, GTEN AG incurred significant losses that were in excess of
the capital contributed by the minority shareholders and thus 100% of all
operating results of GTEN AG for 2005 and up to September of 2006 have been
reflected in the accompanying consolidated financial statements.
Use
of Estimates
Preparation
of the financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates have been used by management in
conjunction with the measurement of the valuation allowance relating to deferred
tax assets and future cash flows associated with long-lived assets. Actual
results could differ from those estimates.
Unaudited
Interim Financial Information
The
unaudited consolidated interim financial information as of March 31, 2007
and
for the three-month periods ended March 31, 2007 and 2006 have been prepared
by
the Company using accounting principles consistent with the audited financial
information for the years ended December 31, 2006 and 2005. The Company
has made all normal, recurring adjustments it believes are necessary to present
fairly, in all material respects, the unaudited interim financial
information.
Cash
and Cash Equivalents
For
financial statement presentation purposes, the Company considers short-term,
highly liquid investments with original maturities of three months or less
to be
cash and cash equivalents.
The
Company maintains cash and cash equivalent balances at financial institutions
that are insured by the Federal Deposit Insurance Corporation up to $100,000.
Deposits with these banks may exceed the amount of insurance provided on
such deposits; however, these deposits typically may be redeemed upon demand
and, therefore, bear minimal risk.
Concentrations
of Credit Risk
The
Company grants credit in the normal course of business. The Company
periodically performs credit analyses and monitors the financial condition
of
its major customers to reduce credit risk. Three customers comprised 83%
of the Company’s revenues for the three months ended March 31, 2007 (unaudited).
One customer comprised 48% and 30% of the Company’s revenues for the three
months ended March 31, 2006 (unaudited) and the year ended December 31, 2006,
respectively. Additionally, the same customer comprised 28% of the Company’s
accounts receivable at December 31, 2006. Three customers comprised 67% of
the Company’s revenues for the year ended December 31, 2005.
Receivables
Receivables
are shown at their expected realizable value. This is determined by
adjusting the nominal value of the receivables for an allowance for bad debt
which is calculated by assessing the risk of loss, generally and for each
receivable, considering general and industry conditions as well as customer
history and creditworthiness. The losses ultimately incurred could differ
materially in the near term from the amounts estimated in determining the
allowance.
Inventories
Inventories
consist primarily of computers and supplies. Inventories are valued at the
lower of cost or market by the first-in first-out method.
Fixed
Assets
Fixed
assets are stated at cost less accumulated depreciation. Depreciation is
recorded on a straight-line basis over the shorter of the contractual lives
or
estimated useful lives of the assets ranging from five to twelve years.
Depreciation and amortization expense was $135,783 and $175,439 for the years
ended December 31, 2006 and 2005, respectively.
The
Company reviews its fixed assets for impairment whenever events or changes
in
circumstances indicate that the carrying amount of the asset may not be
recovered.
Investments
The
Company currently classifies all marketable investment securities as
available-for-sale. The Company adjusts the carrying value of
available-for-sale securities to fair value and reports the related temporary
unrealized gains and losses as a separate component of “Accumulated other
comprehensive income (loss)” within “Total stockholders’ equity.” Declines
in the fair value of a marketable investment security which are estimated
to be
“other than temporary” are recognized in the Consolidated Statements of
Operations and Comprehensive Income (Loss), thus establishing a new cost
basis
for such investment. Declines in the fair value of investments below cost
basis for a continuous period are considered other than temporary and are
recorded as charges to earnings, absent specific factors to the
contrary.
As
of
December 31, 2006 and 2005, the Company had unrealized gains of $82,162 and
$4,229, respectively, as a part of “Accumulated other comprehensive income
(loss)” within “Total stockholders’ equity.”
Restricted
Investments
At
December 31, 2006, the Company has pledged $2,014,733 and $505,674 of its
investments for collateral on its pension obligation and as collateral on
its
line of credit, respectively.
Product
Warranty
The
Company warrants its products against defects in workmanship. The Company
has reserved $67,636 at December 31, 2006 to cover its estimated cost of
providing future warranty services.
Long-Lived
Assets
The
Company reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recovered. The Company looks primarily to undiscounted future cash flows
in its assessment of whether or not long-lived assets have been
impaired.
Fair
Value of Financial Instruments
The
carrying amounts of the Company’s financial instruments, including cash and cash
equivalents, accounts payable, accrued expenses, short-term debt and notes
payable to related party approximate their fair values based on their short-term
nature.
Revenue
Recognition
The
Company derives its revenue from sales of software and services. Other Services
include consulting, assessment and design services, installation services
and
training. Substantially all of the Company’s products have been sold in
combination with Customer Support or Maintenance. Customer Support or
Maintenance provides customers with rights to unspecified software updates,
maintenance releases and patches released during the term of the support
period,
repair or replacement of hardware (not covered by the standard warranty
coverage) in the event of breakage or failure, telephone support, pro-active
monitoring of customer installed products, internet access to technical
information and support personnel during the term of the support period.
Shipping charges billed to customers are included in product revenue and
the
related shipping costs are included in cost of goods sold. Payment terms
to
customers generally range from net 30 to 45 days.
Product
revenue is recognized once a legally binding arrangement with a customer
has
been evidenced, shipment has occurred, fees are fixed or determinable and
free
of contingencies and significant uncertainties, and collection is probable.
Customer Support or Maintenance is recognized ratably over the contract period.
The Company’s fees are considered fixed or determinable at the execution of an
agreement, based on specific products and quantities to be delivered at
specified prices. We recognize revenue upon the completion of installation
and
training and acceptance by our client.
The
Company’s standard agreements with customers do not include rights of return.
The Company assesses the ability to collect from its customers based on a
number
of factors, including credit worthiness of the customer and past transaction
history of the customer. If the customer is deemed not credit worthy, all
revenue from the arrangement is deferred until payment is received and all
other
revenue recognition criteria have been met.
The
Company’s software is integrated with its hardware and is essential to the
functionality of the integrated system product. The Company provides unspecified
software updates and enhancements related to its products through service
contracts. Accordingly, the Company recognizes revenue in accordance with
the
guidance provided under Statement of Position (“SOP”) No. 97-2,
Software Revenue Recognition
(“SOP 97-2”), and Statement of Position No. 98-9,
Modification of SOP No. 97-2, Software Revenue Recognition, with
Respect to Certain Transactions
(“SOP 98-9”), for all transactions involving the sale of software. The
Company applies the provisions of SOP 97-2,
Software Revenue Recognition,
as
amended by SOP 98-4 and SOP 98-9, and related interpretations to all
transactions to determine the recognition of revenue.
The
Company uses the residual method (as prescribed in SOP 98-9) to recognize
revenue when a product agreement includes one or more elements to be delivered
at a future date and vendor specific objective evidence (VSOE) of the fair
value
of all undelivered elements exists. In virtually all of the Company’s contracts,
Customer Support or Maintenance is the element that remains undelivered at
the
time of delivery of the Product to the customer. Under the residual method,
the
fair value of the undelivered elements is deferred and the remaining portion
of
the contract fee is recognized as product revenue.
The
Company considers the four basic revenue recognition criteria for each of
the
elements as follows:
|
|
|
Persuasive
evidence of an arrangement with the customer exists.
It
is the Company’s customary practice to have a written purchase order and,
in some cases, a written contract signed by both the customer and
the
Company, or other persuasive evidence that an arrangement exists
prior to
recognizing revenue on an arrangement.
|
|
|
·
|
Shipment
or performance has occurred.
The Company’s products are usually physically shipped from the contract
manufacturing vendor and delivery to the Company’s customers is FOB
origin. If products that are essential to the functionality of
the
delivered software in an arrangement have not been delivered, the
Company
does not consider delivery to have occurred. Services revenue is
recognized when the services are completed, except for Customer
Support or
Maintenance, which is recognized ratably over the term of the Customer
Support or Maintenance agreement.
|
|
|
·
|
Vendor’s
fee is fixed or determinable.
The fee our customers pay for our products, Customer Support or
Maintenance and other professional services is negotiated at the
outset of
an arrangement. The fees are therefore considered to be fixed or
determinable at the inception of the
arrangement.
|
|
|
·
|
Collection
is probable.
The Company assesses the probability of collection on a
customer-by-customer basis. Credit reviews are preformed on an
as needed
basis to evaluate the customer’s financial position and ability to pay. If
the Company determines from the outset of an arrangement that collection
is not probable based upon the review process, we recognize the
revenue on
a cash-collected basis.
|
Deferred
Multiple-Element Costs
When
the
Company’s products have been delivered, but the product revenue associated with
the arrangement has been deferred as a result of not meeting the revenue
recognition criteria in SOP 97-2, the Company also defers the related inventory
costs for the delivered items, as unbilled fees and costs, until such time
that
all other revenue recognition criteria have been met.
Foreign
Currency Translation
The
Company operates outside the United States and its local currency is its
functional currency. The functional currency is translated into U.S. dollars
for
balance sheet accounts using the period end rates in effect as of the balance
sheet date and the average exchange rate for revenue and expense accounts
for
each respective period. The translation adjustments are deferred as a separate
component of stockholders' equity, within other comprehensive loss, net of
tax
where applicable. Gains or losses resulting from transactions denominated
in
currencies other than the Company’s functional currency are included in selling,
general and administrative expenses within the statements of
operations.
Income
Taxes
The
Company provides for income taxes based on the provisions of SFAS No.
109,
Accounting for Income Taxes,
which,
among other things, requires that recognition of deferred income taxes be
measured by the provisions of enacted tax laws in effect at the date of
financial statements.
Advertising
and Promotion
Advertising
costs are expensed as incurred. Total advertising and promotion expense
was approximately $91,366 and $98,612 for 2006 and 2005,
respectively.
Recently
Issued Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157,
"Fair Value Measurements,"
which
enhances existing guidance for measuring assets and liabilities at fair value.
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value and expands disclosure about fair value measurements. SFAS No. 157 is
effective for the Company beginning in 2007. The Company is currently assessing
the impact of the adoption of SFAS No. 157, but does not expect that it
will have a significant impact on its financial position or results of
operations.
In
September 2006, the SEC issued Staff Accounting Bulletin ("SAB")
No. 108, "
Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements.
" SAB
No. 108 requires that companies utilize a "dual-approach" to assessing the
quantitative effects of financial statement misstatements. The dual approach
includes both an income statement focused and balance sheet focused assessment.
SAB No. 108 is applicable beginning in 2007. The Company is currently
assessing the impact of the adoption of SAB No. 108, but does not expect
that it will have a significant impact on its financial position or results
of
operations.
In
June 2006, the FASB issued FIN No. 48,
"Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement
No. 109."
This
Interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. FIN No. 48 is
effective for the Company beginning in 2007. The Company is currently assessing
the impact of the adoption of SAB No. 108, but does not expect that it will
have a significant impact on its financial position or results of
operations.
3.
DEPOSIT
The
Company is required to maintain insurance related to its pension
obligation. The company pays insurance premiums to obtain coverage on its
pension liability. Premiums are refundable to the company based upon
payments in excess of the cost to the related insurance. At December 31,
2006 $757,853 in excess refundable premiums were refundable to the company
and
could be received in cash or used to pay future premiums.
4.
ACCRUED LIABILITIES
Accrued
liabilities consist of the following:
|
|
|
December
31,
2006
|
|
|
Accrued
refund
|
|
$
|
240,233
|
|
|
Due
to stockholders
|
|
|
163,315
|
|
|
Other
|
|
|
156,156
|
|
|
Accrued
warranty
|
|
|
67,636
|
|
|
Accrued
vacation
|
|
|
58,477
|
|
|
Accrued
professional fees
|
|
|
46,211
|
|
|
VAT
payable
|
|
|
40,701
|
|
|
Payroll
taxes payable
|
|
|
33,716
|
|
|
Commissions
payable
|
|
|
26,699
|
|
|
|
|
$
|
833,144
|
|
5.
SHORT-TERM
BORROWINGS, COMMITMENTS AND CONTINGENCIES
Short-term
borrowings consist of the following:
|
|
|
December
31,
2006
|
|
|
$713,000
line of credit with a bank. Interest at 8.75% and varies quarterly,
collateralized by
long-term
investments, payable on demand. Approximately $39,600 and $35,650 of
the
$713,000
are reserved for credit card and rent and utility guarantees,
respectively. The
line
of credit is automatically renewed each year and is due on
demand.
|
|
$
|
505,674
|
|
|
|
|
|
|
|
|
$264,000
line of credit with a bank. Interest at 10.25% and varies quarterly,
unsecured and
payable
on demand. Approximately $15,800 of the $264,000 is reserved as a
rent guarantee.
The
line of credit is automatically renewed each year and is due on
demand.
|
|
|
137,496
|
|
|
|
|
|
|
|
|
$37,000
line of credit with a bank. Interest at 10.00% and varies quarterly,
unsecured and
payable
on demand. The line of credit is automatically renewed each year and
is due
on
demand.
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
$
|
643,170
|
|
Operating
Leases
The
Company leases office space under a non-cancelable operating lease expiring
in
2009. The lease contains an automatic extension of two years unless
cancelled by the Company. Rent expense for the years ended December 31,
2006 and 2005 was $190,713 and $188,966, respectively.
Future
minimum lease payments under non-cancelable operating leases as of December
31,
2006:
|
|
|
Operating
Leases
|
|
|
2007
|
|
$
|
190,713
|
|
|
2008
|
|
|
190,713
|
|
|
2009
|
|
|
190,713
|
|
|
|
|
|
|
|
|
|
|
$
|
572,139
|
|
6.
STOCKHOLDERS’ EQUITY
In
September of 2006, the Company purchased the remaining 51.95% of the outstanding
stock of GTEN AG for 1 Euro plus future contingent consideration. The
contingent consideration is 10% of any consideration received for the sale
of
Datakom / GTEN AG. As described in Note 9 to the financial statements, the
Company has entered into a sales agreement whereby the Company has sold its
stock for $10,500,000 cash plus 14,000,000 million shares of Intellegentias
stock before additional earnouts. Thus as of August 1, 2007, the Company
is obligated to pay 10% or $1,050,000 cash plus 1,400,000 million shares
of
Intellegentias stock to these parties. This obligation has not been
accrued as of March 31, 2007 or December 31, 2006 as the Company was sold
on
June 7, 2007.
7.
PROVISION
FOR INCOME TAXES
In
prior
years, the Company incurred losses from operations. The Company has
current net operating loss carryforwards that may be limited due to changes
in
control. The deferred tax asset related to these operating losses has been
fully impaired due to uncertainty of it related to changes in control of
the
Company and recent losses from operations. Income taxes of $115,400 and
$24,400 for the periods ended March 31, 2007 and December 31, 2006 have been
offset due to the utilization of net operating loss carryforwards.
8.
PENSION PLAN
The
Company has a defined benefit pension plan covering two shareholders of the
Company. The benefits are based on years of service and the owner’s
compensation during their years of employment. The Company holds the
assets for the pension plan in the Company’s name as appropriate under German
law. The plan assets which are discussed in Note 2, restricted
investments, include investments in equity securities. As a result of the
sale of the Company discussed in Note 9, the Company anticipates dissolving
the
pension plan and paying out or transferring the related assets and liabilities
to the two shareholders of the Company. During 2006, the projected benefit
obligation increased due to approximately $90,000 of service cost and $80,000
of
interest cost. Key assumptions in the calculation of the projected
benefit obligation include a 1.50% annual salary increase and a 4.50% discount
rate.
9.
SUBSEQUENT EVENTS
On
June
7, 2007, Intelligentias, Inc. entered into a stock sale agreement to acquire
all
of the issued and outstanding stock of the Company for an aggregate purchase
price of $27,650,000, subject to adjustment. The aggregate purchase price
was comprised of: (i) cash consideration of $10.5 million, $2.0 million of
which
was paid immediately and the remaining $8,500,000 which is payable within
8
weeks after the distribution of a Private Placement Memorandum associated
with
the sale of Intelligentias’ common stock; (ii) direct transaction costs of
$70,000 and (iii) issuance of 14,000,000 shares of Intelligentias common
stock
with a fair value of $17,078,600, based on the closing price of Intelligentias’
common stock on the closing date. The stock sale agreement also included
contingent consideration which is based on certain financial performance
criteria for the Company during calendar year 2007.
INTELLIGENTIAS,
INC.
Until
_____ __, 200_, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers’ obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PART
II
INFORMATION
NOT REQUIRED IN PRO
SPECTUS
Item
24. Indemnification of Directors and Officers.
Our
articles of incorporation provide that we will indemnify any person who is
or
was a director, officer, employee, agent or fiduciary of our company to the
fullest extent permitted by applicable law. Nevada law permits a Nevada
corporation to indemnify its directors, officers, employees and agents against
liabilities and expenses they may incur in such capacities in connection with
any proceeding in which they may be involved, if (i) such director or officer
is
not liable to the corporation or its stockholders due to the fact that his
or
her acts or omissions constituted a breach of his or her fiduciary duties as
a
director or officer and the breach of those duties involved intentional
misconduct, fraud or a knowing violation of law, or (ii) he or she acted in
good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of our company, or that with respect to any criminal action or
proceeding, he or she had no reasonable cause to believe that his or her conduct
was unlawful.
In
addition, our bylaws include provisions to indemnify its officers and directors
and other persons against expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred in connection with the action,
suit
or proceeding against such persons by reason of serving or having served as
officers, directors, or in other capacities, if such person either is not liable
pursuant to Nevada Revised Statutes 78.138 or acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of our company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendre or its equivalent will not, of
itself, create a presumption that the person is liable pursuant to Nevada
Revised Statutes 78.138 or did not act in good faith and in a manner which
such
person reasonably believed to be in or not opposed to the best interests of
our
company and, with respect to any criminal action or proceeding, had reasonable
cause to believe that such person’s conduct was unlawful.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of our company under
Nevada law or otherwise, we have been advised the opinion of the U.S. Securities
and Exchange Commission is that such indemnification is against public policy
as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the
event a claim for indemnification against such liabilities (other than payment
by us for expenses incurred or paid by a director, officer or controlling person
of our company in successful defense of any action, suit, or proceeding) is
asserted by a director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of its counsel
the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction, the question of whether such indemnification by it
is
against public policy in the Securities Act of 1933 and will be governed by
the
final adjudication of such issue.
Item
25. Other Expenses of Issuance and Distribution.
|
Registration
Fees
|
|
$
|
1,035
|
|
|
Federal
Taxes
|
|
|
—
|
|
|
State
Taxes
|
|
|
|
|
|
Legal
Fees and Expenses
|
|
|
50,000
|
|
|
Printing
and Engraving Expenses
|
|
|
2,000
|
|
|
Blue
Sky Fees
|
|
|
2,000
|
|
|
Accounting
Fees and Expenses
|
|
|
10,000
|
|
|
Miscellaneous
|
|
|
4,965
|
|
|
Total
|
|
$
|
70,000
|
|
Item
26. Recent Sales of Unregistered Securities.
On
December 7, 2006, we conducted a private offering of debt securities, in which
we raised $8,000,000 in debt financing from Vision Opportunity Master Fund
Ltd.
(“Vision”). On March 16, 2007, we issued to Vision 1,750,000 shares of common
stock in consideration of Vision agreeing to convert the debt into shares of
common stock. The note was fully converted by Vision on March 19, 2007 into
18,181,818 shares of common stock.
During
January through August 2007, we raised $1,770,000 from a small group of
accredited investors pursuant to 10% unsecured bridge promissory notes. The
principal and accrued interest under the notes are due and payable upon the
earlier of one year after issuance or from the net proceeds of our next private
placement, but only at such time after a minimum of $4,000,000 in gross proceeds
have been received by us, and then at a rate of $.50 for every $1.00 raised
above such level. In connection with the issuance of the bridge promissory
notes, we also issued warrants to purchase 2,212,500 shares of our common stock,
with an exercise price of $0.80 per share, for a period of five years. The
proceeds of the bridge financing were used primarily for working capital and
general corporate purposes. The bridge promissory notes were repaid in October
2007, following the Kingdon Capital private placement described
below.
On
June
13, 2007, we entered into a Note and Warrant Purchase Agreement with Vision.
Pursuant to that purchase agreement, Vision purchased a $3,000,000 Senior
Secured Promissory Note due on the earlier of June 13, 2008 or upon receipt
of
$6,000,000 in net proceeds from our next private placement. The promissory
note
bears interest at 12% per annum, and may be prepaid at any time. As part of
the
financing transaction, we also issued a warrant to Vision to purchase 5,500,000
shares of our common stock, with an exercise price of $2.05 per share, for
a
period of seven years. The net proceeds from the financing, following the
payment of offering-related expenses, were used by us to complete the Datakom
acquisition with the excess used to fund working capital
requirements.
On
September 18, 2007, we amended the June 13, 2007 financing with Vision. Pursuant
to that amendment, Vision purchased an additional $300,000 senior secured
promissory note on the same terms and conditions as the June 13 note. As
additional consideration, we issued a warrant to Vision to purchase 238,095
shares of common stock, with an exercise price of $1.26 per share, for a period
of seven years. At the maturity of the note, we will pay Vision an additional
fee of $30,000 in connection with this amendment.
On
September 25, 2007, we raised $400,000 from a small group of accredited
investors pursuant to 10% bridge promissory notes. The principal and accrued
interest under the notes are due and payable upon the earlier of six months
after issuance or from the net proceeds of the next private placement after a
minimum of $4,000,000 in gross proceeds have been received by us, and then
at a
rate of $.50 for every $1.00 raised above such level. The notes may be prepaid
at any time. We agreed to pay an additional fee of 10% upon repayment of the
note or at maturity. The notes are secured by 1,000,000 shares of common stock
placed in escrow by the Lusk Family Trust, a significant stockholder of our
company. As part of the financing, we issued warrants to purchase 500,000 shares
of common stock with an exercise price of $.80 per share for a period of five
years.
On
October 19, 2007, we completed a private placement of equity securities to
three
affiliated funds managed by Kingdon Capital Management, LLC, pursuant to the
terms of a Securities Purchase Agreement. Pursuant to the Securities Purchase
Agreement, we sold an aggregate of 12,500,000 shares of our series A convertible
preferred stock and received gross proceeds of $10,000,000. The series A
convertible preferred stock is initially convertible into an equal number of
shares of our common stock and has the rights, preferences and privileges set
forth in the form of Certificate of Designation, Preferences and Rights filed
as
an exhibit to our current report on Form 8-K dated October 19, 2007. As part
of
the transaction, we issued to the investors warrants to purchase an aggregate
of
up to 6,250,000 shares of common stock at an exercise price of $1.25 per share,
and warrants to purchase an aggregate of up to 5,000,000 shares of common stock
at an exercise price of $1.80 per share. The warrants are exercisable for five
years, contain customary change of control buy-out provisions, cashless exercise
provisions and are not redeemable. The preferred stock and warrants also contain
full ratchet anti-dilution provisions for the first 18 months after issuance
and
weighted average protection for issuances of capital stock below the respective
conversion or exercise prices, except in specified cases. We did not use a
placement agent or any broker-dealer in connection with the private
placement.
With
respect to all aforementioned private placements, the common stock, preferred
stock and common stock issuable upon conversion of preferred stock and exercise
of warrants have not been registered under the Securities Act, and were issued
and sold in reliance upon the exemption from registration contained in Section
4(2) of the Securities Act and Regulation D promulgated thereunder, which exempt
transactions by an issuer not involving any public offering. The issuance of
the
securities was undertaken without general solicitation or advertising. Each
purchaser of securities represented in the respective purchase or subscription
agreement, among other things, that (a) it was an “accredited investor,” as
defined in Regulation D promulgated under the Securities Act of 1933, (b) it
had
obtained sufficient information from us to evaluate the merits and risks of
an
investment in the securities and (c) it was acquiring the securities for
investment purposes and not with a view to any public resale or other
distribution in violation of the Securities Act of 1933 or the securities law
of
any state. In addition, the certificate representing these securities are
restricted securities under the Securities Act of 1933. These securities may
not
be offered or sold in the United States in the absence of an effective
registration statement or exemption from the registration requirements under
the
Securities Act. The consideration and other terms in the purchase or
subscription agreements were determined as a result of arm’s-length negotiations
between us and the various purchasers.
Item
27. Exhibits.
The
exhibits listed in the following Exhibit Index are filed as part of this
Registration Statement.
Exhibit
Number and Description
|
2.1
|
Limited
Assets Purchase Agreement, dated as of December 9, 2006, by Systeam,
Inc.,
Systeam Italy SpA, and Merchandise Creations, Inc.
(1)
|
|
3.1
|
Articles
of Incorporation of Merchandise Creations, Inc. filed on October
1, 2004.
(2)
|
|
3.2
|
Certificate
of Amendment of Articles of Incorporation of Merchandise Creations,
Inc.
(changing name to Intelligentias, Inc.), filed on December 15, 2006.
(3)
|
|
3.3
|
Certificate
of Designations, Preferences and Rights of the Series A Preferred
Stock of
Intelligentias, Inc. (8)
|
|
3.4
|
By-laws
adopted on October 5, 2004. (2)
|
|
4.1
|
Form
of “Market” Warrant to Purchase Common Stock of Intelligentias, Inc.,
issued October 19, 2007. (8)
|
|
4.2
|
Form
of “Premium” Warrant to Purchase Common Stock of Intelligentias, Inc.,
issued October 19, 2007. (8)
|
|
5.1
|
Opinion
of Greenberg Traurig, LLP.
|
|
10.1
|
Note
and Warrant Purchase Agreement, dated as of December 7, 2006, by
and among
Merchandise Creations, Inc. and Vision Opportunity Master Fund, Ltd.
(5)
|
|
10.2
|
Letter
Agreement, dated as of December 18, 2006, by and among Merchandise
Creations, Inc. and Vision Opportunity Master Fund, Ltd.
(5)
|
|
10.3
|
Form
of Convertible Note, dated as of December 7, 2006, by Merchandise
Creations, Inc. to Vision Opportunity Master Fund, Ltd.
(5)
|
|
10.4
|
Registration
Rights Agreement, dated December 7, 2006, by and among Merchandise
Creations, Inc. and Vision Opportunity Master Fund, Ltd.
(5)
|
|
10.5
|
Escrow
Agreement, dated December 7, 2006, by and among Merchandise Creations,
Inc. and Vision Opportunity Master Fund, Ltd.
(4)
|
|
10.6
|
Form
of Series A Warrant, dated December 7, 2006, by Merchandise Creations,
Inc. to Vision Opportunity Master Fund, Ltd.
(5)
|
|
10.7
|
Note
Conversion Letter Agreement, dated March 17, 2007, by and among
Intelligentias, Inc. and Vision Opportunity Master Fund, Ltd.
(6)
|
|
10.8
|
Note
and Warrant Purchase Agreement, dated as of June 13, 2007, by and
among
Intelligentias, Inc. and the purchasers listed on Exhibit A thereto.
(7)
|
|
10.9
|
Senior
Secured Promissory Note due June 13, 2008, dated June 13, 2007, by
Intelligentias, Inc. to Vision Opportunity Master Fund, Ltd.
(7)
|
|
10.10
|
Warrant
to Purchase Shares of Common Stock of Intelligentias, Inc. to Vision
Opportunity Master Fund, Ltd. (7)
|
|
10.11
|
Security
Agreement, dated as of June 13, 2007, made by Intelligentias, Inc.
in
favor of the secured parties listed on Exhibit A thereto.
(7)
|
|
10.12
|
Securities
Purchase Agreement, dated as of October 19, 2007, by and among
Intelligentias, Inc. and the purchasers listed on Exhibit A thereto.
(8)
|
|
14.1
|
Code
of Business Conduct and Ethics.
|
|
23.1
|
Consent
of Ehrhardt Keefe Steiner & Hottman
P.C.
|
|
23.2
|
Consent
of Bagell, Josephs, Levine & Company,
L.L.C.
|
|
23.3
|
Consent
of Greenberg Traurig, LLP (included in Exhibit
5.1).
|
|
(1)
|
Incorporated
by reference to the exhibits included with our Current Report on
Form 8-K,
previously filed on December 14,
2006.
|
|
(2)
|
Incorporated
by reference to the exhibits included with our Registration Statement
on
Form SB-2, as amended, initially filed with the SEC on March 29,
2005.
|
|
(3)
|
Incorporated
by reference to the exhibits included with our Current Report on
Form 8-K,
previously filed with the SEC on December 21,
2006.
|
|
(4)
|
Incorporated
by reference to the exhibits included with our Current Report on
Form 8-K,
previously filed on December 12,
2006.
|
|
(5)
|
Incorporated
by reference to the exhibits included with out Current Report on
Form 8-K,
previously filed on December 19,
2006.
|
|
(6)
|
Incorporated
by reference to the exhibits included with our Current Report on
Form 8-K,
previously filed on March 21, 2007.
|
|
(7)
|
Incorporated
by reference to the exhibits included with our Current Report on
Form 8-K,
previously filed on June 14, 2007.
|
|
(8)
|
Incorporated
by reference to the exhibits included with our Current Report on
Form 8-K,
previously filed on October 22,
2007.
|
Item
28. Undertakings.
(a)
The
undersigned small business issuer hereby undertakes to:
(1)
File,
during any period in which it offers and sells securities, a post-effective
amendment to this prospectus to:
(i)
Include
any prospectus required by section 10(a)(3) of the Securities Act;
(ii)
Reflect
in the prospectus any facts or events which, individually or together, represent
a fundamental change in the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the “Calculation of Registration Fee”
table in the effective registration statement;
(iii)
Include
any additional or changed material information on the plan of
distribution.
(2)
For
determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide
offering.
(3)
File
a
post-effective amendment to remove from registration any of the securities
that
remain unsold at the end of the offering.
(4)
For
determining liability of the undersigned small business issuer under the
Securities Act to any purchaser in the initial distribution of the securities,
the undersigned small business issuer undertakes that in a primary offering
of
securities of the undersigned small business issuer pursuant to this
registration statement, regardless of the underwriting method used to sell
the
securities included with outpurchaser, if the securities are offered or sold
to
such purchaser by means of any of the following communications, the undersigned
small business issuer will be a seller to the purchaser and will be considered
to offer or sell such securities to such purchaser:
(i)
Any
preliminary prospectus or prospectus of the undersigned small business issuer
relating to the offering required to be filed pursuant to Rule 424;
(ii)
Any
free
writing prospectus relating to the offering prepared by or on behalf of the
undersigned small business issuer or used or referred to by the undersigned
small business issuer;
(iii)
The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned small business issuer or its
securities provided by or on behalf of the undersigned small business issuer;
and
(iv)
Any
other
communication that is an offer in the offering made by the undersigned small
business issuer to the purchaser.
(b)
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
(c)
Each
prospectus filed pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than registration statements relying on Rule
430B
or other than prospectuses filed in reliance on Rule 430A, shall be deemed
to be
part of and included in the registration statement as of the date it is first
used after effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into
the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such first
use,
supersede or modify any statement that was made in the registration statement
or
prospectus that was part of the registration statement or made in any such
document immediately prior to such date of first use.
In
the
event that a claim for indemnification against such liabilities (other than
the
payment by the small business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
small business issuer will, unless in the opinion of its counsel the matter
has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this Registration Statement
to be signed on its behalf by the undersigned, in the City of Redwood City,
State of California, on December 6, 2007.
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INTELLIGENTIAS,
INC.
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By:
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/s/
Ian
W. Rice
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Ian
W. Rice
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Chairman
of the Board of Directors and Chief Executive Officer
(principal
executive officer)
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By:
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/s/
Thomas A. Spanier
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Thomas
A. Spanier
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Chief
Financial Officer, Secretary and Treasurer
(principal
financial and accounting officer)
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POWER
OF ATTORNEY
We,
the
undersigned officers and directors of Intelligentias, Inc., hereby severally
constitute and appoint Ian W. Rice, Luigi Caramico and Thomas A. Spanier, and
each of them (with full power to each of them to act alone), our true and lawful
attorneys-in-fact and agents, with full power of substitution, for us and in
our
stead, in any and all capacities, to sign any and all amendments (including
pre-effective and post-effective amendments) to this Registration Statement
and
all documents relating thereto, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the U.S. Securities and
Exchange Commission, granting to said attorneys-in-fact and agents, and each
of
them, full power and authority to do and perform each and every act and thing
necessary or advisable to be done in and about the premises, as full to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all the said attorneys-in-fact and agents, or any of them, or their
substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
In
accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
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Name
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Title
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Date
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/s/
Ian W. Rice
Ian
W. Rice
|
|
Chairman
of the Board of Directors and Chief Executive Officer
(principal
executive officer)
|
|
December
6
,
2007
|
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/s/
Luigi Caramico
Luigi
Caramico
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President
and Director
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/s/
Thomas A. Spanier
Thomas
A. Spanier
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Chief
Financial Officer, Secretary and Treasurer (principal financial and
accounting officer)
|
|
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/s/
Mario Mené
Mario
Mené
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Chief
Technical Officer and Director
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Royston
Hoggarth
|
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Director
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