NOTE 2 – INTANGIBLE ASSETS, NET
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2012
|
|
|
2012
|
|
|
Intangible assets, net, consisted of:
|
|
|
|
|
|
|
|
Developed software (for licensing to customers)
|
|
$
|
2,000,000
|
|
|
$
|
2,000,000
|
|
|
In-place contracts and customer list
|
|
|
100,000
|
|
|
|
100,000
|
|
|
Trade name
|
|
|
100,000
|
|
|
|
100,000
|
|
|
Goodwill
|
|
|
663,041
|
|
|
|
663,041
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,863,041
|
|
|
|
2,863,041
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
(1,140,417
|
)
|
|
|
(967,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
1,722,624
|
|
|
$
|
1,895,124
|
|
The developed software, in-place contracts and customer list, and trade name are amortized using the straight-line method over their estimated economic lives (ten years for the developed software and trade name; five years for the in-place contracts and customer list). Goodwill is not amortized.
For the nine months ended December 31, 2012 and 2011, amortization of intangible assets expense was $172,500. $150,000 was included in cost of software license fees and $22,500 was included in selling, general and administrative expenses.
NOTE 3 – DEFERRED SOFTWARE LICENSE FEES AND SUPPORT
The licenses of the VoipSwitch systems generally include certain post contract customer support (“PCS”). In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 985-605-25, “Software Revenue Recognition”, the Company allocates a portion of the license fees to PCS based on the vendor-specific objective evidence of fair value (generally $1,000 for 1 year technical support) of the PCS and recognizes the PCS revenues ratably over the period of the agreed PCS. Deferred software license fees (attributable to PCS) totaled $201,800 and $181,503 as of December 31, 2012 and March 31, 2012, respectively.
NOTE 4 – LOANS PAYABLE TO RELATED PARTIES
Loans payable to related parties consisted of the following as of December 31, 2012 and March 31, 2012:
|
|
|
December 31,
2012
|
|
|
March 31,
2012
|
|
|
Due chairman of the board of directors
|
|
$
|
23,681
|
|
|
$
|
22,840
|
|
|
Due chief operational officer
|
|
|
15,097
|
|
|
|
15,389
|
|
|
Due former chief financial officer
|
|
|
79
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,857
|
|
|
$
|
38,308
|
|
The loans payable to related parties are all non-interest bearing, unsecured, and due on demand.
NOTE 5 – DERIVATIVE LIABILITIES
As part of the private placement which closed on May 26, 2010, the Company issued a total of 1,380,000 warrants to certain accredited investors. Each warrant entitles the holder to purchase one share of common stock at a price of $0.50 per share through May 26, 2015.
As part of the private placement which closed on June 6, 2011, the Company issued a total of 1,915,385 warrants to certain accredited investors. Each warrant entitles the holder to purchase one share of common stock at a price of $0.30 per share through June 6, 2014.
The exercise price of these warrants is to be adjusted in the event that the Company issues or sells any shares of common stock, options, warrants or any convertible instruments (other than exempted issuances) at an effective price per share which is less than the exercise price of these warrants. Accordingly, in accordance with FASB ASC 815, the Company has accounted for these warrants as derivative liabilities. The fair value of the warrants was determined to be $257,570 as of December 31, 2012 resulting in a gain on the change in the fair value of derivative liabilities of $809,238 during the nine months ended December 31, 2012. The fair value of the warrants was determined using a lattice option pricing model and the following key assumptions as of December 31, 2012:
|
●
|
The stock price would fluctuate with the Company’s projected volatility. The projected volatility curve was based on historical volatilities of the Company for the valuation periods. The projected volatility curve was as follows:
|
|
|
|
1 year
|
|
|
2 year
|
|
|
3 year
|
|
|
4 year
|
|
|
5 year
|
|
|
December 31, 2012
|
|
|
182
|
%
|
|
|
278
|
%
|
|
|
306
|
%
|
|
|
394
|
%
|
|
|
450
|
%
|
|
●
|
The holder would not exercise the warrant as they become exercisable.
|
|
●
|
The holder would exercise the warrant at maturity if the stock price was above the project reset price.
|
|
●
|
A 10% probability of a reset event and a projected financing each year in December (starting in 2013) at prices approximating 110% of the market.
|
|
●
|
The May 26, 2011 warrants’ $0.50 exercise price is projected to reset to $0.037 at maturity and the June 6, 2011 warrants’ $0.30 exercise price is projected to reset to $0.0.49 at maturity.
|
|
●
|
No warrants have been exercised or expired.
|
Fair Value Measurements
FASB ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of ASC 820 were effective January 1, 2008.
As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).
The three levels of the fair value hierarchy defined by ASC 820 are as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. The Company uses Level 3 to determine the fair value of its derivative financial instruments.
The following table summarizes assets and liabilities measured at fair value on a recurring basis as of December 31, 2012:
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
Markets for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identical
Assets and
|
|
|
|
|
|
|
|
|
Balance as of
|
|
|
|
|
Liabilities
|
|
|
Inputs
|
|
|
Inputs
|
|
|
December 31,
|
|
|
Description
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2012
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
257,570
|
|
|
$
|
257,570
|
|
The following table summarizes assets and liabilities measured at fair value on a recurring basis as of March 31, 2012:
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
Markets for
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Identical
Assets and
|
|
|
|
|
|
|
|
|
Balance as of
|
|
|
|
|
Liabilities
|
|
|
Inputs
|
|
|
Inputs
|
|
|
March 31,
|
|
|
Description
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2012
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,066,808
|
|
|
$
|
1,066,808
|
|
The following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial instruments measured at fair value under level 3 on a recurring basis using significant unobservable inputs during the nine months ended December 31, 2012.
|
Fair value at March 31, 2012
|
|
$
|
1,066,808
|
|
|
Additions during the period
|
|
|
-
|
|
|
Transfer in (out) of Level 3
|
|
|
-
|
|
|
Change in the fair value
|
|
|
(809,238)
|
|
|
Fair value at December 31, 2012
|
|
$
|
257,570
|
|
NOTE 6 – STOCKHOLDERS’ EQUITY
Common stock
On April 20, 2012, the Company granted a total of 2,400,000 common shares (1,200,000 shares each) to the Company’s Chief Executive Officer and the Company’s President and Chairman of the Board of Directors for prior services rendered. The fair value of the stock of $626,400 was expensed during the nine months ended December 31, 2012.
Also on April 20, 2012, the Company renewed the director agreements with Michael Taylor and Andrew Millet and granted a total of 600,000 common shares (300,000 shares each). The fair value of the stock of $156,600 was expensed during the nine months ended December 31, 2012.
On April 26, 2012, the Company granted a total of 1,800,000 common shares (600,000 shares each) to a member of the Company’s Board of Directors and to two consultants for prior services rendered. The fair value of the stock of $383,400 was expensed during the nine months ended December 31, 2012.
During August 2012, the Company granted 150,000 common shares to a consultant for prior services rendered. The fair value of the stock of $37,500 was expensed during the nine months ended December 31, 2012.
Stock options
On June 4, 2012, pursuant to employment agreements with its (1) President and Chairman and (2) Chief Executive Officer, the Company granted a total of 500,000 common stock options exercisable at $0.1215 per share. The fair value of the options was determined to be $69,763 using the Black-Scholes option pricing model and the following assumptions: (i) $0.162 share price, (ii) $0.1215 exercise price, (iii) term of 2.5 years, (iv) 177% expected volatility, and (v) 0.35% risk free interest rate. The entire fair value was expensed during the nine months ended December 31, 2012.
On December 21, 2012, pursuant to agreements with Michael Taylor and Andrew Millet, the Company modified existing share awards by exchanging the 1,200,000 common shares (600,000 shares each) granted in prior years for 1,200,000 common stock options (600,000 options each). The options are exercisable at $0.01 per share, vest immediately and expire on December 21, 2022. The fair value of the options was determined to be $130,971 using the Black-Scholes option pricing model and the following assumptions: (i) $0.11 share price, (ii) $0.01 exercise price, (iii) term of 5 years, (iv) 194% expected volatility, and (v) 0.75% risk free interest rate. The fair value of the options on the date of the modification of $130,971 was less than the fair value of the outstanding shares on the date of the modification of $132,000. As such, there was no gain recorded for the exchange during the nine months ended December 31, 2011. The 1,200,000 common shares were returned to the Company and cancelled.
Total option expense was $109,754 during the nine months ended December 31, 2012 consisting of the $69,763 fair value of the options granted on June 4, 2012 and $39,991 from options granted on January 4, 2010, July 4, 2011 and December 22, 2011. As of December 31, 2012, there was $46,444 of unamortized stock option expense from the options granted on January 4, 2010, July 4, 2011 and December 22, 2011 that will be expensed through December 22, 2014.
A summary of stock option activity for the nine months ended December 31, 2012 is as follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Outstanding - March 31, 2012
|
|
|
2,390,000
|
|
|
$
|
0.20
|
|
|
Granted
|
|
|
1,700,000
|
|
|
|
0.04
|
|
|
Forfeited/canceled
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding - December 31, 2012
|
|
|
4,090,000
|
|
|
$
|
0.13
|
|
|
Exercisable – December 31, 2012
|
|
|
3,681,667
|
|
|
$
|
0.12
|
|
The weighted average remaining life of the outstanding options as of December 31, 2012 was 4.80 years and the intrinsic value of the exercisable options as of December 31, 2012 was $84,000.
At December 31, 2012, outstanding stock options consisted of the following:
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Stock
|
|
|
|
|
Expiration
|
|
Date of Grant
|
|
Options
|
|
|
Exercise Price
|
|
Date
|
|
December 23, 2008
|
|
|
915,000
|
|
|
$
|
0.1300
|
|
December 23, 2013
|
|
January 4, 2010
|
|
|
100,000
|
|
|
|
0.1300
|
|
January 4, 2015
|
|
June 26, 2010
|
|
|
500,000
|
|
|
|
0.2500
|
|
June 26, 2015
|
|
June 4, 2011
|
|
|
500,000
|
|
|
|
0.2385
|
|
June 4, 2016
|
|
July 4, 2011
|
|
|
200,000
|
|
|
|
0.2600
|
|
July 4, 2016
|
|
December 22, 2011
|
|
|
175,000
|
|
|
|
0.2300
|
|
December 22, 2016
|
|
June 4, 2012
|
|
|
500,000
|
|
|
|
0.1215
|
|
June 4, 2017
|
|
December 21, 2012
|
|
|
1,200,000
|
|
|
$
|
0.0100
|
|
December 21, 2022
|
|
Total
|
|
|
4,090,000
|
|
|
|
|
|
|
NOTE 7 – COMMITMENTS AND CONTINGENCIES
Registration Rights Agreements
In connection with a private placement which closed May 26, 2010, the Company and the investors executed a Securities Purchase Agreement and a Registration Rights Agreement. Among other things, the Registration Rights Agreement provides that the Company will prepare and file with the SEC a Registration Statement covering the resale of the Registrable Securities and use its commercially reasonable efforts to cause it to be declared effective. If the Registration Statement is not filed by July 30, 2010 or if the Registration Statement filed is not declared effective by the SEC within certain time periods (by December 27, 2010 in the event of a "full review" by the SEC) and the Company has not exercised its reasonable best efforts to secure the Registration Statement's effectiveness with the SEC, the Registration Agreement provides that the Company will pay monthly (until cured) partial liquidated damages to the investors equal to 1% of the purchase price paid by the investors, subject to a maximum of 10% of the purchase price paid by the investors. The Registration Statement was declared effective by the SEC on April 25, 2011.
Potential claims for liquidated damages relating to this Registration Rights Agreement, which the Company does not believe are probable of assertion, approximate $41,400 at December 31, 2012 and March 31, 2012.
In connection with the private placement which closed May 6, 2011 and June 6, 2011, the Company and the investors executed a Securities Purchase Agreement and a Registration Rights Agreement. Among other things, the Registration Rights Agreement provides that the Company will prepare and file with the SEC a Registration Statement covering the resale of the Registrable Securities and use its commercially reasonable efforts to cause it to be declared effective. If the Registration Statement is not filed by July 6, 2011 or if the Registration Statement filed is not declared effective by the SEC within certain time periods (by December 2, 2011 in the event of a "full review" by the SEC) and the Company has not exercised its reasonable best efforts to secure the Registration Statement's effectiveness with the SEC, the Registration Agreement provides that the Company will pay monthly (until cured) partial liquidated damages to the investors equal to 1% of the purchase price paid by the investors, subject to a maximum of 10% of the purchase price paid by the investors. The Registration Statement has not yet been filed.
Potential claims for liquidated damages relating to this Registration Rights Agreement, which the Company does not believe are probably of assertion, approximate $49,800 and $44,820 at December 31, 2012 and March 31, 2012, respectively.
