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In January 2007, the Company arranged working capital financing of $3,045,000 net of financing costs through the issuance of $3,500,000 of 12% promissory notes maturing on September 30, 2008 and 3,850,000 warrants (including placement agent warrants) priced at $0.18.
The financing was raised to meet the Company’s anticipated working capital requirements to achieve its business plan objectives, and in January 2007 the Company repaid the $600,000 of short-term 10% promissory notes raised on November 21, 2006 together with $13,200 in interest charges.
As of June 30, 2007, the Company had no outstanding employee stock options. The Company did not grant any options to employees during the six months ended June 30, 2007 and 2006. The adoption of SFAS 123R did not affect the Company’s condensed consolidated financial statements, for the periods ended June 30, 2007 and 2006, but may have a material impact if options are granted in the future.
In January and February 2007, the Company granted an aggregate of 350,000 warrants to private placement agents in connection with promissory notes aggregating $3.5 million. The warrants are exercisable at $0.18 per share, are fully vested and have a life of 5 years. The warrants were valued using the Black Scholes option model and as a result the Company capitalized $90,112 to deferred financing fees and is amortizing the cost over the term of the notes.
On February 9, 2007 the Company entered into an agreement with Aurelius Consulting Group (an affiliate of RedChip Companies) for investor relations services at the monthly fee of $8,000 and granted 250,000 warrants with an exercise price of $0.30 and 250,000 warrants with an exercise price of $0.50 expiring February 9, 2012. The Company incurred a stock based compensation charge of approximately $160,000.
On February 1, 2006, the Company entered into an agreement with Flat Rate Telecom Ltd. (“Flat Rate”). The agreement provides for cash advances in the amount of $200,610 (100,000 £Sterling). The agreement also provides for the Company's standard commercial reseller (service provider) agreement with Flat Rate for the sale of wholesale line rental and associated voice minutes. The agreement runs for a period of 12 months and was renewed for a further 12 month period to January 31, 2008. The Company bills Flat Rate based on predetermined prices as defined in the reseller (service provider) agreement. As of June 30, 2007 the outstanding receivable balance was $153,945. Revenues generated under this agreement during the three and six months ended June 30, 2007 were approximately $14,605 (7,302 £Sterling)and $24,542, (12,471 £Sterling) respectively, and for the three and six months ended June 30, 2006 were approximately $0 (0 £Sterling) and $7,634 (3,874 £Sterling), respectively. The advance is non interest bearing. The Company has not established a reserve as of June 30, 2007 as the balance was deemed fully collectible by the Company.
In connection with its purchase of the Nokia DX220 switch on November 1, 2005, the Company entered into a support services agreement with C.A.P.E. Management Ltd (“C.A.P.E.”) on November 8, 2005. The Company is currently paying $11,825 (6,000 £Sterling) per month to C.A.P.E. under this agreement. As at 30 June, 2007, the Company has an outstanding receivable derived from cash advances in connection with a carrier interconnect agreement with C.A.P.E. in the amount of $300,915 (150,000 £Sterling). Subsequent to June 30, 2007, the Company agreed to enter into a new contract based on the existing carrier interconnect agreement with C.A.P.E. for the supply and transport of telecommunications traffic, and C.A.P.E. has agreed that the Company will withhold 20% of the invoiced amounts to set-off against the outstanding receivables balance of $300,915 (150,000 £Sterling) owing to the Company. As a result, it is expected that the receivables outstanding will be repaid within approximately 9 months.
Accounts receivable were comprised of the following:
Line and service rentals and associated voice minute services:
Billed $ 53,496
Unbilled 1,644,154
Total $ 1,697,650
Unbilled line and service rentals and services charges represent amounts earned and accrued as receivable from customers for their usage prior to the end of the period. Unbilled service charges are expected to be billed within 1 month of the respective balance sheet date.
A provision was made in the three months ended March 31, 2007 for doubtful debts in the amount of $163,000. An amount of $180,074 has been identified as bad debts and has been written off for the three months ended June 30, 2007, thereby leaving $0 as a provision for doubtful debts going forward.
NOTE 7 - LOANS FROM OFFICERS AND STOCKHOLDERS
As of June 30, 2007, the Company owed $57,068 to its Chief Executive Officer / Director, which amount represents loans that are unsecured, payable on demand and non-interest bearing.
During the three and six months ended June 30, 2007, the Company paid $5,000 to its Chairman for unpaid fees under his director services agreement.
NOTE 9 - CONVERTIBLE NOTES PAYABLE AND BRIDGE LOAN
On November 14, 2006, the Company entered into a bridge note financing agreement aggregating $600,000. The promissory notes have a stated interest rate of 10% per annum and mature on March 31, 2007. The $600,000 of bridge notes were fully repaid in January 2007 in addition to $13,200 in interest expense. In connection with the promissory notes the Company also granted 600,000 common stock purchase warrants. The warrants are exercisable at $0.25 per share, have a life of three years and carry a cashless exercise provision.
The $107,941 fair value of the warrants was calculated using the Black-Scholes option valuation model and has been recorded as a debt discount. The debt discount is accredited to interest expense over the life of the debt. For the three and six month periods ended June 30, 2007, $0 and $70,173, respectively, were charged to interest expense.
On January 11, 2007, the Company completed the sale of $2,475,000 of promissory notes (the "Notes"). The Notes (see also below) are in the aggregate principal amount of $3,500,000, mature on September 30, 2008 and have a stated interest rate of 12% per annum. Interest is payable on February 12, 2008, and at maturity on September 30, 2008. The Company also granted to the note holders 2,475,000 warrants that are exercisable at $0.18 per share and expire on January 11, 2012. The gross proceeds were recorded net of a debt discount of approximately $503,000 for the value of the warrants. The debt discount was calculated using the Black Scholes option valuation model for the value of the warrants and will accrete to interest expense over the term of the Notes. The Company paid the private placement agents a cash fee of $321,750, which was capitalized as deferred financing fees and will be amortized over the life of the Notes. In the event of default any unpaid principal and accrued interest will become convertible at the option of the note holders at the lower of $0.15 or 85% of the last 10 days average closing price of the Company’s common stock prior to conversion.
On January 17, 2007, the Company completed the sale of an additional $750,000 of Notes. The Company also granted to the note holders 750,000 warrants that are exercisable at $0.18 per share and expire January 17, 2012. The gross proceeds were recorded net of a debt discount of $150,000 for the value of the warrants. The debt discount was calculated using the Black Scholes option valuation model for the value of the warrants and will accrete to interest expense over the term of the Notes. The Company paid the private placement agents a cash fee of $97,500, which were capitalized and will be amortized over the life of the Notes. In the event of default any unpaid principal and accrued interest will become convertible at the option of the note holders at the lower of $0.15 or 85% of the last 10 days of the average closing price of the Company’s common stock prior to conversion.
NOTE 9 - CONVERTIBLE NOTES PAYABLE AND BRIDGE LOAN (Continued)
On February 12, 2007, the Company completed the sale of an additional $275,000 of Notes. The Company also granted to the note holders 275,000 warrants that are exercisable at $0.18 per share and expire February 15, 2012. The gross proceeds were recorded net of a debt discount of $63,000 for the value of the warrants. The debt discount was calculated using the black scholes option valuation model for the value of the warrants and will accrete to interest expense over the term of the Notes. The Company paid the private placement agents a cash fee of $35,750, which was capitalized and will be amortized over the life of the Notes. In the event of default any unpaid principal and accrued interest will become convertible at the option of the note holders at the lower of $0.15 or 85% of the last 10 days average closing price of the Company’s common stock.
In the event of default, the Notes and accrued interest will become convertible into shares of the Company’s common stock at the lower of $0.15 or 85% of the last 10 days average closing price of the Company’s common stock prior to conversion. Accordingly, since the number of shares of the Company’s common stock, that the Notes and accrued interest may convert into is indeterminate, the Company may not have sufficient authorized shares in the future to settle conversions or exercises of non-employee instruments, such as warrants and non-employee stock options. The embedded conversion option on the Notes, as well as the aforementioned previously issued instruments which are outstanding would be required to be recorded as liabilities at fair value under the guidance of EITF 00-19. EITF 00-19 requires that the fair market value of these derivative instruments be reassessed at each balance sheet date.
For the three and six months ended June 30, 2007, the Company amortized $98,864 and $179,340 of debt discount with respect to the 2007 debt issuances.
Under the terms of the Notes entered into January and February 2007, the Company has agreed to register the shares underlying the warrants. The Company is required to use its best efforts to have the registration statement declared effective. Pursuant to this agreement, the Company filed its registration statement on Form SB-2 on May 11, 2007, and received a comment letter from the SEC on June 8, 2007. The Company intends to file an amendment to this registration statement responding to the SEC’s comments shortly following the filing of this quarterly report.
In January and February 2007, the Company granted an aggregate of 350,000 warrants to the private placement agents in connection to the promissory notes aggregating $3.5 million. The warrants are exercisable at $0.18 per share, are fully vested and have a life of 5 years. The warrants were valued using the black scholes option model and as a result the Company will capitalize $90,112 to deferred financing fees and will amortize the cost over the term of the notes.
In connection with the $3,500,000 of promissory note financing duing January and February 2007, the Company incurred financing fees of $455,000 and granted 350,000 warrants to the private placement agent for services provided. The warrants are exercisable at $0.18 per share, have a life of five years and carry a cashless exercise provision. The estimated fair value of the warrants is $90,112 using the Black-Scholes option valuation model. The total financing cost of $545,112 has been capitalized as a deferred financing fee and is being amortized to interest expense over the term of the promissory notes. For the six month period ended June 30, 2007, the Company has amortized $140,667 to interest expense (in addition to the amount of $41,222 that was amortized and related to prior years funding.)
Employment Agreements
On August 8, 2006 and May 12, 2006 respectively, the Company entered into an agreement with its Chief Executive Officer, and Chairman to provide director services. The agreement provides for compensation of $2,500 per month to each individual and was increased to $5,000 per month on January 1, 2007. The agreement has a term of two years.
ITPLC has entered into an employment contract with its Chief Executive Officer, and its Technical Director each of which is for a five-year term that expires on December 31, 2008. The contracts will automatically renew unless terminated by either party. The contracts provide for a minimum annual salary, adjusted, at the option of ITPLC, for cost-of-living, performance, and the profitability of ITPLC. In addition, ITPLC may, in its discretion, provide the individual a car with total purchase price, including tax and United Kingdom value added tax, not to exceed 20,000 sterling pounds ($40,122 at June 30, 2007) for use in the performance of duties and replaced every three years.
The minimum annual commitment, excluding the value of the car and any other incentives, under these contracts is as follows:
Years Amount
2007 $ 253,500
2008 253,500
Total $ 507,000
Consulting Agreements and Related Party Transactions
During October 2006, the Company entered into a consulting service agreement with Access Line Investments Limited for marketing, development, and investment planning services for a monthly fee of $12,500. The services provided under this agreement shall be ongoing unless terminated by either party giving no less than six months notice in writing or unless terminated earlier.
On November 1, 2005, ITPLC entered into a consulting agreement with Carmenna Limited, which is 80% owned by the Chairman of the Company. Pursuant to such agreement, Carmenna Limited agreed to provide certain consulting services to ITPLC through December 31, 2008 in consideration for a minimum fee of £Sterling 1,000 per month ($2,006 at June 30, 2007). The agreement was extended effective February 1, 2007 through December 31, 2008 with a monthly fixed rate of £Sterling 5,000 per month ($10,031 at June 30, 2007).
On November 1, 2005, the Company entered into a consulting and support services agreement with Business Development & Consulting Limited, of which the Chairman is one of its beneficiaries. The agreement provides for strategy, planning and finance support at a monthly fee of $10,000, and can be terminated by either party on six months’ notice. The Company paid $30,000 for each of the six months ended June 30, 2007 and 2006, respectively, pursuant to this agreement.
On February 9, 2007 the Company entered into an agreement with Aurelius Consulting Group (an affiliate of RedChip Companies) for investor relations services at the monthly fee of $8,000 and granted 250,000 warrants with an exercise price of $0.30 and 250,000 warrants with an exercise price of $0.50 expiring February 9, 2012. The Company incurred a stock based compensation charge of approximately $160,000.
Other
On October 13, 2006, Marcum & Kliegman LLP (“M&K”), the Company’s independent registered public accounting firm, advised us that they had been requested by the SEC to furnish to the SEC specified financial and other documents for the Company in M&K’s possession and control, as well as financial and other documents for three other unrelated companies. M&K has cooperated fully with the SEC in its response to this request.
NOTE 11 - STOCKHOLDERS’ EQUITY
Warrants
On November 9. 2006, the Company granted warrants to purchase 200,000 shares of common stock at an exercisable price of $1.00 per share to Strategic Growth International, Inc. for settlement of accrued consulting fees. These warrants were valued at $39,960 using the Black-Scholes option pricing model. The warrants expire on May 9, 2009.
On November 14, 2006, the Company entered into a promissory note agreement aggregating $600,000. The promissory notes have a stated interest rate of 10% per annum and mature on March 31, 2007. The promissory notes were repaid with interest in February 2007. In connection with the promissory notes the Company also granted 600,000 common stock purchase warrants to the noteholders and 60,000 warrants to the placement agent. The warrants are exercisable at $0.25 per share, have a life of three years and carry a cashless exercise provision.
On January 11, 2007, the Company entered into a promissory note agreement aggregating $3,500,000. The closings under the agreement were on January 11, January 17 and February 12, 2007. The promissory notes have a stated interest rate of 12% per annum and mature on September 30, 2008. In connection with the promissory notes the Company also granted
Three and six months ended June 30, 2007 and 2006
Revenues. For the three months ended June 30, 2007, revenues increased to $6,062,650 from $5,360,719 for the same period in 2006, an increase of $701,931 or 13%. For the six months ended June 30, 2007, revenues increased to $12,140,181 from $10,722,192 for the same period in 2006, an increase of $1,417,989 or 13%. Such increase is attributable to a higher number of customers resulting from the addition of resellers (service providers).
For our fiscal 2007 second quarter ending June 30, 2007, our customers were primarily residential, business end-users and an increasing number of resellers (service providers) following the Company’s decision to become a predominantly wholesale supplier of line rental and associated voice minutes. As a consequence, the existing residential and business end-user base succumbed to a higher than expected attrition of users due to aggressive marketing campaigns by retail competitors. However, with our focus on developing the wholesale business, we increased the number of resellers (service providers) selling to residential, business end-users, and carriers.
The growth in connecting new lines was hampered by the ongoing but unresolved discussions with carriers regarding deposits. Whereas the Company has signed new Reseller (Service Provider) agreements to supply their customers with line rental and associated voice minutes, the rate at which we have been able to provision these lines has been curtailed due to carrier demands for large deposits. Negotiations are ongoing and we anticipate these to be resolved in a mutually acceptable way over the next several months to enable us to increase the rate of provisioning new lines, and thereby our revenues growth.
Approximately 70% of our end-user customers are small to medium sized businesses with the remainder percentage being residential consumers. During our fiscal 2007 second quarter, there was no single customer representing more that 5% of our revenues for that period.
A new line of commercial business dealing with non-geographic numbers (NGN) was started in July 2007 using the value-added equipment purchased by the Company in late 2006. This new line of business is running to plan and is expected to achieve gross profits in the range 8% to 15% subject to individual customer contracts. Our intention is to build-up this new line of business with targeted marketing campaigns over the coming months to create market awareness.
Gross Profit. Gross profit was $342,583 for the three months ended June 30, 2007, compared to a gross profit of $543,341 for the same period in 2006, representing a decrease of $200,758 or 37% over the previous period. We achieved gross margins of approximately 5.7% in the three months ended June 30, 2007, compared to a gross margin of approximately 10.1% in the same period in 2006. For the six months ended June 30, 2007, gross profit was $707,920, compared to a gross profit of $848,055 for the same period in 2006, representing a decrease of $140,135 or 17% over the previous period. Gross margins were approximately 5.8% in the six months ended June 30, 2007, compared to a gross margin of approximately 7.9% in the same period in 2006.
Gross margins were in line with expectations for the six months ended June 20, 2007, and were lower than in the same period in 2006 due to the additional costs of adding Reseller (Service Provider) end-user lines and due to the further delays in putting the switch into service. We estimate gross profits to improve gradually over the next half year in line with revised expectations and with the addition of value-added services contributing to estimated higher margins.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $939,847 for the three months ended June 30, 2007, from $507,667 for the same period in 2006. For the six months ended June 30, 2007, selling, general and administrative expenses were $2,160,062 compared to a $954,022 for the same period in 2006. As a percentage of total revenues, the aggregate selling, general and administrative expenses were 15.5% during our fiscal 2007 second quarter compared to 9.5% during the comparable quarter in 2006.
The increases are due to approximately $160,000 of costs related to the issue of 500,000 warrants, to Aurelius Consulting Group, $180,074 for the write off of bad and doubtful debts, $437,000 for additional legal, professional and filing fees for the newly merged publicly traded company, approximately $24,052 for additional rent, rates, service and repair charges; approximately $64,363 for additional investor relations expenses, $30,326 for additional telecommunications costs and approximately $42,000 for Director fees. Salaries increased by approximately $72,913 to $235,506.
Depreciation and Amortization Expense. Depreciation and amortization expense increased to approximately $22,777 and $64,659 in the three and six months respectively ended June 30, 2007 from approximately $26,670 and $53,840 respectively for the same periods in 2006. The increase is primarily due to the purchase of additional telecommunications equipment.
Interest Expense. Interest expense increased to $270,914 and $635,575 respectively in the three and six months ended June 30, 2007 from $0 in each of the same periods in 2006. This increase was due primarily to accruals for interest charges on $3,500,000 principal amount of our 12% promissory notes and the related accretion of debt discount and amortization of deferred financing fees for the three and six months ended June 30, 2007.
Net loss. Our net loss for the three and six months ended June 30, 2007 was $860,827 and $2,058,435 respectively compared to a net loss of $8,380 and $193,173 respectively for the same periods in 2006. The increase is primarily due to an increase in Selling, General and Administrative expenses, as well as an increase in interest expenses as mentioned above.
Liquidity and Capital Resources
As of June 30, 2007, we had cash and cash equivalents of $3,745,968 and carrier deposits of $750,489.
Cash and cash equivalents generally consist of cash and money market funds.
The Company incurred a net loss of $860,827 and $2,058,435 respectively for the three and six months ended June 30, 2007. The Company's current assets exceeded its current liabilities by $1,206,270 at June 30, 2007.
On January 11, 2007, the Company completed the sale of $2,475,000 of promissory notes (the "Notes"). The Notes (see also below) are in the aggregate principal amount of $3,500,000, mature on September 30, 2008 and have a stated interest rate of 12% per annum. Interest is payable on February 12, 2008, and at maturity on September 30, 2008. The Company also granted to the note holders 2,475,000 warrants that are exercisable at $0.18 per share and expire on January 11, 2012. The gross proceeds were recorded net of a debt discount of approximately $503,000 for the value of the warrants. The debt discount was calculated using the Black Scholes option valuation model for the value of the warrants and will accrete to interest expense over the term of the Notes. The Company paid the private placement agents a cash fee of $321,750, which was capitalized as deferred financing fees and will be amortized over the life of the Notes. In the event of default any unpaid principal and accrued interest will become convertible at the option of the note holders at the lower of $0.15 or 85% of the last 10 days average closing price of the Company’s common stock prior to conversion.
On January 17, 2007, the Company completed the sale of an additional $750,000 of Notes. The Company also granted to the note holders 750,000 warrants that are exercisable at $0.18 per share and expire January 17, 2012. The gross proceeds were recorded net of a debt discount of $150,000 for the value of the warrants. The debt discount was calculated using the Black Scholes option valuation model for the value of the warrants and will accrete to interest expense over the term of the Notes. The Company paid the private placement agents a cash fee of $97,500, which were capitalized and will be amortized over the life of the Notes. In the event of default any unpaid principal and accrued interest will become convertible at the option of the note holders at the lower of $0.15 or 85% of the last 10 days of the average closing price of the Company’s common stock prior to conversion.
15
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On February 12, 2007, the Company completed the sale of an additional $275,000 of Notes. The Company also granted to the note holders 275,000 warrants that are exercisable at $0.18 per share and expire February 15, 2012. The gross proceeds were recorded net of a debt discount of $63,000 for the value of the warrants. The debt discount was calculated using the black scholes option valuation model for the value of the warrants and will accrete to interest expense over the term of the Notes. The Company paid the private placement agents a cash fee of $35,750, which was capitalized and will be amortized over the life of the Notes. In the event of default any unpaid principal and accrued interest will become convertible at the option of the note holders at the lower of $0.15 or 85% of the last 10 days average closing price of the Company’s common stock.
In the event of default, the Notes and accrued interest will become convertible into shares of the Company’s common stock at the lower of $0.15 or 85% of the last 10 days average closing price of the Company’s common stock prior to conversion. Accordingly, since the number of shares of the Company’s common stock, that the Notes and accrued interest may convert into is indeterminate, the Company may not have sufficient authorized shares in the future to settle conversions or exercises of non-employee instruments, such as warrants and non-employee stock options. The embedded conversion option on the Notes, as well as the aforementioned previously issued instruments which are outstanding would be required to be recorded as liabilities at fair value under the guidance of EITF 00-19. EITF 00-19 requires that the fair market value of these derivative instruments be reassessed at each balance sheet date.
Under the terms of the promissory notes entered into January and February 2007, the Company has agreed to file a registration statement to register the shares underlying the warrants within 120 days from the date of the first closing. The Company is required to use its best efforts for the registration statement to be declared effective. The Company filed its registration statement on Form SB-2 on May 11, 2007, pursuant to this agreement and received a comment letter from the SEC on June 8, 2007. The Company intends to file an amendment to this registration statement responding to the SEC’s comments shortly following the filing of this quarterly report.
In January and February 2007, the Company granted an aggregate of 350,000 warrants to the private placement agents in connection to the promissory notes aggregating $3.5 million. The warrants are exercisable at $0.18 per share, are fully vested and have a life of 5 years. The warrants were valued using the Black-Scholes option model and as a result the Company capitalized $90,112, which was capitalized and is being amortized over the life of the promissory notes.
In connection with the $3,500,000 of promissory note financing the Company incurred fees of $455,000 and granted 350,000 warrants to the private placement agent for services provided. The warrants are exercisable at $0.18 per share, have a life of five years and carry a cashless exercise provision. The estimated fair value of the warrants is $90,112 using the Black-Scholes option valuation model. The total cost of $545,112 has been capitalized as a deferred financing fee and is being amortized to interest expense over the term of the promissory notes. For the 6-month period ended June 30, 2007, the Company has amortized $140,667 to interest expense.
The Company is continuing its investment and marketing initiatives to develop its network and revenue base. We estimate that our current financing strategy of private debt and equity offerings will meet our anticipated objectives and business operations for the next 12 months. We will continue to evaluate opportunities for corporate development. Subject to our ability to obtain adequate financing at the applicable time, we may enter into definitive agreements on one or more of those opportunities.
While we raised capital in January 2007 to meet our immediate working capital and financing needs, additional financing is now required in order to fulfill our business plan objectives and support our projected operating cash flow requirements until we expect to generate positive cash flows. We are presently seeking additional financing in the form of equity or debt in order to provide the necessary working capital to see the Company through its expansion phase. There is no guarantee that we will be successful in raising the additional funds that may be required.
By adapting our operations and development to the level of capitalization, management believes we have sufficient capital resources to meet projected cash flow deficits through the next twelve months. However, if thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations, liquidity and financial condition.
ITEM 1 - LEGAL PROCEEDINGS.
There are no pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company’s property is not the subject of any pending legal proceedings.
On October 13, 2006, Marcum & Kliegman LLP (“M&K”), the Company’s independent registered public accounting firm, advised us that they had been requested by the SEC to furnish to the SEC specified financial and other documents for the Company in M&K’s possession and control, as well as financial and other documents for three other unrelated companies. M&K has cooperated fully with the SEC in its response to this request.
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The financing was raised to meet the Company’s anticipated working capital requirements to achieve its business plan objectives, and in January 2007 the Company repaid the $600,000 of short-term 10% promissory notes raised on November 21, 2006 together with $13,200 in interest charges.
As of June 30, 2007, the Company had no outstanding employee stock options. The Company did not grant any options to employees during the six months ended June 30, 2007 and 2006. The adoption of SFAS 123R did not affect the Company’s condensed consolidated financial statements, for the periods ended June 30, 2007 and 2006, but may have a material impact if options are granted in the future.
In January and February 2007, the Company granted an aggregate of 350,000 warrants to private placement agents in connection with promissory notes aggregating $3.5 million. The warrants are exercisable at $0.18 per share, are fully vested and have a life of 5 years. The warrants were valued using the Black Scholes option model and as a result the Company capitalized $90,112 to deferred financing fees and is amortizing the cost over the term of the notes.
On February 9, 2007 the Company entered into an agreement with Aurelius Consulting Group (an affiliate of RedChip Companies) for investor relations services at the monthly fee of $8,000 and granted 250,000 warrants with an exercise price of $0.30 and 250,000 warrants with an exercise price of $0.50 expiring February 9, 2012. The Company incurred a stock based compensation charge of approximately $160,000.
On February 1, 2006, the Company entered into an agreement with Flat Rate Telecom Ltd. (“Flat Rate”). The agreement provides for cash advances in the amount of $200,610 (100,000 £Sterling). The agreement also provides for the Company's standard commercial reseller (service provider) agreement with Flat Rate for the sale of wholesale line rental and associated voice minutes. The agreement runs for a period of 12 months and was renewed for a further 12 month period to January 31, 2008. The Company bills Flat Rate based on predetermined prices as defined in the reseller (service provider) agreement. As of June 30, 2007 the outstanding receivable balance was $153,945. Revenues generated under this agreement during the three and six months ended June 30, 2007 were approximately $14,605 (7,302 £Sterling)and $24,542, (12,471 £Sterling) respectively, and for the three and six months ended June 30, 2006 were approximately $0 (0 £Sterling) and $7,634 (3,874 £Sterling), respectively. The advance is non interest bearing. The Company has not established a reserve as of June 30, 2007 as the balance was deemed fully collectible by the Company.
In connection with its purchase of the Nokia DX220 switch on November 1, 2005, the Company entered into a support services agreement with C.A.P.E. Management Ltd (“C.A.P.E.”) on November 8, 2005. The Company is currently paying $11,825 (6,000 £Sterling) per month to C.A.P.E. under this agreement. As at 30 June, 2007, the Company has an outstanding receivable derived from cash advances in connection with a carrier interconnect agreement with C.A.P.E. in the amount of $300,915 (150,000 £Sterling). Subsequent to June 30, 2007, the Company agreed to enter into a new contract based on the existing carrier interconnect agreement with C.A.P.E. for the supply and transport of telecommunications traffic, and C.A.P.E. has agreed that the Company will withhold 20% of the invoiced amounts to set-off against the outstanding receivables balance of $300,915 (150,000 £Sterling) owing to the Company. As a result, it is expected that the receivables outstanding will be repaid within approximately 9 months.
Accounts receivable were comprised of the following:
Line and service rentals and associated voice minute services:
Billed $ 53,496
Unbilled 1,644,154
Total $ 1,697,650
Unbilled line and service rentals and services charges represent amounts earned and accrued as receivable from customers for their usage prior to the end of the period. Unbilled service charges are expected to be billed within 1 month of the respective balance sheet date.
A provision was made in the three months ended March 31, 2007 for doubtful debts in the amount of $163,000. An amount of $180,074 has been identified as bad debts and has been written off for the three months ended June 30, 2007, thereby leaving $0 as a provision for doubtful debts going forward.
NOTE 7 - LOANS FROM OFFICERS AND STOCKHOLDERS
As of June 30, 2007, the Company owed $57,068 to its Chief Executive Officer / Director, which amount represents loans that are unsecured, payable on demand and non-interest bearing.
During the three and six months ended June 30, 2007, the Company paid $5,000 to its Chairman for unpaid fees under his director services agreement.
NOTE 9 - CONVERTIBLE NOTES PAYABLE AND BRIDGE LOAN
On November 14, 2006, the Company entered into a bridge note financing agreement aggregating $600,000. The promissory notes have a stated interest rate of 10% per annum and mature on March 31, 2007. The $600,000 of bridge notes were fully repaid in January 2007 in addition to $13,200 in interest expense. In connection with the promissory notes the Company also granted 600,000 common stock purchase warrants. The warrants are exercisable at $0.25 per share, have a life of three years and carry a cashless exercise provision.
The $107,941 fair value of the warrants was calculated using the Black-Scholes option valuation model and has been recorded as a debt discount. The debt discount is accredited to interest expense over the life of the debt. For the three and six month periods ended June 30, 2007, $0 and $70,173, respectively, were charged to interest expense.
On January 11, 2007, the Company completed the sale of $2,475,000 of promissory notes (the "Notes"). The Notes (see also below) are in the aggregate principal amount of $3,500,000, mature on September 30, 2008 and have a stated interest rate of 12% per annum. Interest is payable on February 12, 2008, and at maturity on September 30, 2008. The Company also granted to the note holders 2,475,000 warrants that are exercisable at $0.18 per share and expire on January 11, 2012. The gross proceeds were recorded net of a debt discount of approximately $503,000 for the value of the warrants. The debt discount was calculated using the Black Scholes option valuation model for the value of the warrants and will accrete to interest expense over the term of the Notes. The Company paid the private placement agents a cash fee of $321,750, which was capitalized as deferred financing fees and will be amortized over the life of the Notes. In the event of default any unpaid principal and accrued interest will become convertible at the option of the note holders at the lower of $0.15 or 85% of the last 10 days average closing price of the Company’s common stock prior to conversion.
On January 17, 2007, the Company completed the sale of an additional $750,000 of Notes. The Company also granted to the note holders 750,000 warrants that are exercisable at $0.18 per share and expire January 17, 2012. The gross proceeds were recorded net of a debt discount of $150,000 for the value of the warrants. The debt discount was calculated using the Black Scholes option valuation model for the value of the warrants and will accrete to interest expense over the term of the Notes. The Company paid the private placement agents a cash fee of $97,500, which were capitalized and will be amortized over the life of the Notes. In the event of default any unpaid principal and accrued interest will become convertible at the option of the note holders at the lower of $0.15 or 85% of the last 10 days of the average closing price of the Company’s common stock prior to conversion.
NOTE 9 - CONVERTIBLE NOTES PAYABLE AND BRIDGE LOAN (Continued)
On February 12, 2007, the Company completed the sale of an additional $275,000 of Notes. The Company also granted to the note holders 275,000 warrants that are exercisable at $0.18 per share and expire February 15, 2012. The gross proceeds were recorded net of a debt discount of $63,000 for the value of the warrants. The debt discount was calculated using the black scholes option valuation model for the value of the warrants and will accrete to interest expense over the term of the Notes. The Company paid the private placement agents a cash fee of $35,750, which was capitalized and will be amortized over the life of the Notes. In the event of default any unpaid principal and accrued interest will become convertible at the option of the note holders at the lower of $0.15 or 85% of the last 10 days average closing price of the Company’s common stock.
In the event of default, the Notes and accrued interest will become convertible into shares of the Company’s common stock at the lower of $0.15 or 85% of the last 10 days average closing price of the Company’s common stock prior to conversion. Accordingly, since the number of shares of the Company’s common stock, that the Notes and accrued interest may convert into is indeterminate, the Company may not have sufficient authorized shares in the future to settle conversions or exercises of non-employee instruments, such as warrants and non-employee stock options. The embedded conversion option on the Notes, as well as the aforementioned previously issued instruments which are outstanding would be required to be recorded as liabilities at fair value under the guidance of EITF 00-19. EITF 00-19 requires that the fair market value of these derivative instruments be reassessed at each balance sheet date.
For the three and six months ended June 30, 2007, the Company amortized $98,864 and $179,340 of debt discount with respect to the 2007 debt issuances.
Under the terms of the Notes entered into January and February 2007, the Company has agreed to register the shares underlying the warrants. The Company is required to use its best efforts to have the registration statement declared effective. Pursuant to this agreement, the Company filed its registration statement on Form SB-2 on May 11, 2007, and received a comment letter from the SEC on June 8, 2007. The Company intends to file an amendment to this registration statement responding to the SEC’s comments shortly following the filing of this quarterly report.
In January and February 2007, the Company granted an aggregate of 350,000 warrants to the private placement agents in connection to the promissory notes aggregating $3.5 million. The warrants are exercisable at $0.18 per share, are fully vested and have a life of 5 years. The warrants were valued using the black scholes option model and as a result the Company will capitalize $90,112 to deferred financing fees and will amortize the cost over the term of the notes.
In connection with the $3,500,000 of promissory note financing duing January and February 2007, the Company incurred financing fees of $455,000 and granted 350,000 warrants to the private placement agent for services provided. The warrants are exercisable at $0.18 per share, have a life of five years and carry a cashless exercise provision. The estimated fair value of the warrants is $90,112 using the Black-Scholes option valuation model. The total financing cost of $545,112 has been capitalized as a deferred financing fee and is being amortized to interest expense over the term of the promissory notes. For the six month period ended June 30, 2007, the Company has amortized $140,667 to interest expense (in addition to the amount of $41,222 that was amortized and related to prior years funding.)
Employment Agreements
On August 8, 2006 and May 12, 2006 respectively, the Company entered into an agreement with its Chief Executive Officer, and Chairman to provide director services. The agreement provides for compensation of $2,500 per month to each individual and was increased to $5,000 per month on January 1, 2007. The agreement has a term of two years.
ITPLC has entered into an employment contract with its Chief Executive Officer, and its Technical Director each of which is for a five-year term that expires on December 31, 2008. The contracts will automatically renew unless terminated by either party. The contracts provide for a minimum annual salary, adjusted, at the option of ITPLC, for cost-of-living, performance, and the profitability of ITPLC. In addition, ITPLC may, in its discretion, provide the individual a car with total purchase price, including tax and United Kingdom value added tax, not to exceed 20,000 sterling pounds ($40,122 at June 30, 2007) for use in the performance of duties and replaced every three years.
The minimum annual commitment, excluding the value of the car and any other incentives, under these contracts is as follows:
Years Amount
2007 $ 253,500
2008 253,500
Total $ 507,000
Consulting Agreements and Related Party Transactions
During October 2006, the Company entered into a consulting service agreement with Access Line Investments Limited for marketing, development, and investment planning services for a monthly fee of $12,500. The services provided under this agreement shall be ongoing unless terminated by either party giving no less than six months notice in writing or unless terminated earlier.
On November 1, 2005, ITPLC entered into a consulting agreement with Carmenna Limited, which is 80% owned by the Chairman of the Company. Pursuant to such agreement, Carmenna Limited agreed to provide certain consulting services to ITPLC through December 31, 2008 in consideration for a minimum fee of £Sterling 1,000 per month ($2,006 at June 30, 2007). The agreement was extended effective February 1, 2007 through December 31, 2008 with a monthly fixed rate of £Sterling 5,000 per month ($10,031 at June 30, 2007).
On November 1, 2005, the Company entered into a consulting and support services agreement with Business Development & Consulting Limited, of which the Chairman is one of its beneficiaries. The agreement provides for strategy, planning and finance support at a monthly fee of $10,000, and can be terminated by either party on six months’ notice. The Company paid $30,000 for each of the six months ended June 30, 2007 and 2006, respectively, pursuant to this agreement.
On February 9, 2007 the Company entered into an agreement with Aurelius Consulting Group (an affiliate of RedChip Companies) for investor relations services at the monthly fee of $8,000 and granted 250,000 warrants with an exercise price of $0.30 and 250,000 warrants with an exercise price of $0.50 expiring February 9, 2012. The Company incurred a stock based compensation charge of approximately $160,000.
Other
On October 13, 2006, Marcum & Kliegman LLP (“M&K”), the Company’s independent registered public accounting firm, advised us that they had been requested by the SEC to furnish to the SEC specified financial and other documents for the Company in M&K’s possession and control, as well as financial and other documents for three other unrelated companies. M&K has cooperated fully with the SEC in its response to this request.
NOTE 11 - STOCKHOLDERS’ EQUITY
Warrants
On November 9. 2006, the Company granted warrants to purchase 200,000 shares of common stock at an exercisable price of $1.00 per share to Strategic Growth International, Inc. for settlement of accrued consulting fees. These warrants were valued at $39,960 using the Black-Scholes option pricing model. The warrants expire on May 9, 2009.
On November 14, 2006, the Company entered into a promissory note agreement aggregating $600,000. The promissory notes have a stated interest rate of 10% per annum and mature on March 31, 2007. The promissory notes were repaid with interest in February 2007. In connection with the promissory notes the Company also granted 600,000 common stock purchase warrants to the noteholders and 60,000 warrants to the placement agent. The warrants are exercisable at $0.25 per share, have a life of three years and carry a cashless exercise provision.
On January 11, 2007, the Company entered into a promissory note agreement aggregating $3,500,000. The closings under the agreement were on January 11, January 17 and February 12, 2007. The promissory notes have a stated interest rate of 12% per annum and mature on September 30, 2008. In connection with the promissory notes the Company also granted
Three and six months ended June 30, 2007 and 2006
Revenues. For the three months ended June 30, 2007, revenues increased to $6,062,650 from $5,360,719 for the same period in 2006, an increase of $701,931 or 13%. For the six months ended June 30, 2007, revenues increased to $12,140,181 from $10,722,192 for the same period in 2006, an increase of $1,417,989 or 13%. Such increase is attributable to a higher number of customers resulting from the addition of resellers (service providers).
For our fiscal 2007 second quarter ending June 30, 2007, our customers were primarily residential, business end-users and an increasing number of resellers (service providers) following the Company’s decision to become a predominantly wholesale supplier of line rental and associated voice minutes. As a consequence, the existing residential and business end-user base succumbed to a higher than expected attrition of users due to aggressive marketing campaigns by retail competitors. However, with our focus on developing the wholesale business, we increased the number of resellers (service providers) selling to residential, business end-users, and carriers.
The growth in connecting new lines was hampered by the ongoing but unresolved discussions with carriers regarding deposits. Whereas the Company has signed new Reseller (Service Provider) agreements to supply their customers with line rental and associated voice minutes, the rate at which we have been able to provision these lines has been curtailed due to carrier demands for large deposits. Negotiations are ongoing and we anticipate these to be resolved in a mutually acceptable way over the next several months to enable us to increase the rate of provisioning new lines, and thereby our revenues growth.
Approximately 70% of our end-user customers are small to medium sized businesses with the remainder percentage being residential consumers. During our fiscal 2007 second quarter, there was no single customer representing more that 5% of our revenues for that period.
A new line of commercial business dealing with non-geographic numbers (NGN) was started in July 2007 using the value-added equipment purchased by the Company in late 2006. This new line of business is running to plan and is expected to achieve gross profits in the range 8% to 15% subject to individual customer contracts. Our intention is to build-up this new line of business with targeted marketing campaigns over the coming months to create market awareness.
Gross Profit. Gross profit was $342,583 for the three months ended June 30, 2007, compared to a gross profit of $543,341 for the same period in 2006, representing a decrease of $200,758 or 37% over the previous period. We achieved gross margins of approximately 5.7% in the three months ended June 30, 2007, compared to a gross margin of approximately 10.1% in the same period in 2006. For the six months ended June 30, 2007, gross profit was $707,920, compared to a gross profit of $848,055 for the same period in 2006, representing a decrease of $140,135 or 17% over the previous period. Gross margins were approximately 5.8% in the six months ended June 30, 2007, compared to a gross margin of approximately 7.9% in the same period in 2006.
Gross margins were in line with expectations for the six months ended June 20, 2007, and were lower than in the same period in 2006 due to the additional costs of adding Reseller (Service Provider) end-user lines and due to the further delays in putting the switch into service. We estimate gross profits to improve gradually over the next half year in line with revised expectations and with the addition of value-added services contributing to estimated higher margins.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $939,847 for the three months ended June 30, 2007, from $507,667 for the same period in 2006. For the six months ended June 30, 2007, selling, general and administrative expenses were $2,160,062 compared to a $954,022 for the same period in 2006. As a percentage of total revenues, the aggregate selling, general and administrative expenses were 15.5% during our fiscal 2007 second quarter compared to 9.5% during the comparable quarter in 2006.
The increases are due to approximately $160,000 of costs related to the issue of 500,000 warrants, to Aurelius Consulting Group, $180,074 for the write off of bad and doubtful debts, $437,000 for additional legal, professional and filing fees for the newly merged publicly traded company, approximately $24,052 for additional rent, rates, service and repair charges; approximately $64,363 for additional investor relations expenses, $30,326 for additional telecommunications costs and approximately $42,000 for Director fees. Salaries increased by approximately $72,913 to $235,506.
Depreciation and Amortization Expense. Depreciation and amortization expense increased to approximately $22,777 and $64,659 in the three and six months respectively ended June 30, 2007 from approximately $26,670 and $53,840 respectively for the same periods in 2006. The increase is primarily due to the purchase of additional telecommunications equipment.
Interest Expense. Interest expense increased to $270,914 and $635,575 respectively in the three and six months ended June 30, 2007 from $0 in each of the same periods in 2006. This increase was due primarily to accruals for interest charges on $3,500,000 principal amount of our 12% promissory notes and the related accretion of debt discount and amortization of deferred financing fees for the three and six months ended June 30, 2007.
Net loss. Our net loss for the three and six months ended June 30, 2007 was $860,827 and $2,058,435 respectively compared to a net loss of $8,380 and $193,173 respectively for the same periods in 2006. The increase is primarily due to an increase in Selling, General and Administrative expenses, as well as an increase in interest expenses as mentioned above.
Liquidity and Capital Resources
As of June 30, 2007, we had cash and cash equivalents of $3,745,968 and carrier deposits of $750,489.
Cash and cash equivalents generally consist of cash and money market funds.
The Company incurred a net loss of $860,827 and $2,058,435 respectively for the three and six months ended June 30, 2007. The Company's current assets exceeded its current liabilities by $1,206,270 at June 30, 2007.
On January 11, 2007, the Company completed the sale of $2,475,000 of promissory notes (the "Notes"). The Notes (see also below) are in the aggregate principal amount of $3,500,000, mature on September 30, 2008 and have a stated interest rate of 12% per annum. Interest is payable on February 12, 2008, and at maturity on September 30, 2008. The Company also granted to the note holders 2,475,000 warrants that are exercisable at $0.18 per share and expire on January 11, 2012. The gross proceeds were recorded net of a debt discount of approximately $503,000 for the value of the warrants. The debt discount was calculated using the Black Scholes option valuation model for the value of the warrants and will accrete to interest expense over the term of the Notes. The Company paid the private placement agents a cash fee of $321,750, which was capitalized as deferred financing fees and will be amortized over the life of the Notes. In the event of default any unpaid principal and accrued interest will become convertible at the option of the note holders at the lower of $0.15 or 85% of the last 10 days average closing price of the Company’s common stock prior to conversion.
On January 17, 2007, the Company completed the sale of an additional $750,000 of Notes. The Company also granted to the note holders 750,000 warrants that are exercisable at $0.18 per share and expire January 17, 2012. The gross proceeds were recorded net of a debt discount of $150,000 for the value of the warrants. The debt discount was calculated using the Black Scholes option valuation model for the value of the warrants and will accrete to interest expense over the term of the Notes. The Company paid the private placement agents a cash fee of $97,500, which were capitalized and will be amortized over the life of the Notes. In the event of default any unpaid principal and accrued interest will become convertible at the option of the note holders at the lower of $0.15 or 85% of the last 10 days of the average closing price of the Company’s common stock prior to conversion.
15
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On February 12, 2007, the Company completed the sale of an additional $275,000 of Notes. The Company also granted to the note holders 275,000 warrants that are exercisable at $0.18 per share and expire February 15, 2012. The gross proceeds were recorded net of a debt discount of $63,000 for the value of the warrants. The debt discount was calculated using the black scholes option valuation model for the value of the warrants and will accrete to interest expense over the term of the Notes. The Company paid the private placement agents a cash fee of $35,750, which was capitalized and will be amortized over the life of the Notes. In the event of default any unpaid principal and accrued interest will become convertible at the option of the note holders at the lower of $0.15 or 85% of the last 10 days average closing price of the Company’s common stock.
In the event of default, the Notes and accrued interest will become convertible into shares of the Company’s common stock at the lower of $0.15 or 85% of the last 10 days average closing price of the Company’s common stock prior to conversion. Accordingly, since the number of shares of the Company’s common stock, that the Notes and accrued interest may convert into is indeterminate, the Company may not have sufficient authorized shares in the future to settle conversions or exercises of non-employee instruments, such as warrants and non-employee stock options. The embedded conversion option on the Notes, as well as the aforementioned previously issued instruments which are outstanding would be required to be recorded as liabilities at fair value under the guidance of EITF 00-19. EITF 00-19 requires that the fair market value of these derivative instruments be reassessed at each balance sheet date.
Under the terms of the promissory notes entered into January and February 2007, the Company has agreed to file a registration statement to register the shares underlying the warrants within 120 days from the date of the first closing. The Company is required to use its best efforts for the registration statement to be declared effective. The Company filed its registration statement on Form SB-2 on May 11, 2007, pursuant to this agreement and received a comment letter from the SEC on June 8, 2007. The Company intends to file an amendment to this registration statement responding to the SEC’s comments shortly following the filing of this quarterly report.
In January and February 2007, the Company granted an aggregate of 350,000 warrants to the private placement agents in connection to the promissory notes aggregating $3.5 million. The warrants are exercisable at $0.18 per share, are fully vested and have a life of 5 years. The warrants were valued using the Black-Scholes option model and as a result the Company capitalized $90,112, which was capitalized and is being amortized over the life of the promissory notes.
In connection with the $3,500,000 of promissory note financing the Company incurred fees of $455,000 and granted 350,000 warrants to the private placement agent for services provided. The warrants are exercisable at $0.18 per share, have a life of five years and carry a cashless exercise provision. The estimated fair value of the warrants is $90,112 using the Black-Scholes option valuation model. The total cost of $545,112 has been capitalized as a deferred financing fee and is being amortized to interest expense over the term of the promissory notes. For the 6-month period ended June 30, 2007, the Company has amortized $140,667 to interest expense.
The Company is continuing its investment and marketing initiatives to develop its network and revenue base. We estimate that our current financing strategy of private debt and equity offerings will meet our anticipated objectives and business operations for the next 12 months. We will continue to evaluate opportunities for corporate development. Subject to our ability to obtain adequate financing at the applicable time, we may enter into definitive agreements on one or more of those opportunities.
While we raised capital in January 2007 to meet our immediate working capital and financing needs, additional financing is now required in order to fulfill our business plan objectives and support our projected operating cash flow requirements until we expect to generate positive cash flows. We are presently seeking additional financing in the form of equity or debt in order to provide the necessary working capital to see the Company through its expansion phase. There is no guarantee that we will be successful in raising the additional funds that may be required.
By adapting our operations and development to the level of capitalization, management believes we have sufficient capital resources to meet projected cash flow deficits through the next twelve months. However, if thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations, liquidity and financial condition.
ITEM 1 - LEGAL PROCEEDINGS.
There are no pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company’s property is not the subject of any pending legal proceedings.
On October 13, 2006, Marcum & Kliegman LLP (“M&K”), the Company’s independent registered public accounting firm, advised us that they had been requested by the SEC to furnish to the SEC specified financial and other documents for the Company in M&K’s possession and control, as well as financial and other documents for three other unrelated companies. M&K has cooperated fully with the SEC in its response to this request.
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TechKim
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