Ealixir, Inc. 10-Q

ITEM 1: FINANCIAL STATEMENTS FLINT TELECOM GROUP, INC. (Formerly Semotus Solutions, Inc.) CONDENSED CONSOLIDATED BALANCE SHEETS December 31, 2008 June 30, 2008 (unaudited) ASSETS Current assets Cash and cash equivalents $ 848,629 $ 1,487,021 Trade receivables, net of allowance for doubtful accounts of $197,283 and $190,083 424,910 88,169 Prepaid expenses and other current assets 169,336 46,400 Current assets 1,442,875 1,621,590 Property, plant & equipment: Equipment 1,033,298 705,830 Capitalized leases – equipment 823,236 778,763 Total property, plant & equipment 1,856,534 1,484,593 Less: accumulated depreciation (371,452) (57,082) Net property, plant & equipment 1,485,082 1,427,511 Other assets 31,910 147,969 Total assets $ 2,959,867 $ 3,197,070 LIABILITIES & STOCKHOLDERS' DEFICIT Accounts payable-trade $ 1,539,395 $ 1,072,667 Other accrued liabilities 499,050 200,322 Accrued interest payable 491,051 145,748 Lease obligations – current 396,066 266,707 Notes payable, net of discount 1,551,833 200,000 Convertible notes payable, net of discount 5,069,703 2,322,830 Due to Flint Telecom Ltd. 60,739 227,597 Deferred revenue 230,665 -- Total current liabilities 9,838,502 4,435,871 Convertible notes payable – long-term -- 3,661,646 Lease obligations - long-term 346,324 510,276 Total liabilities 10,184,826 8,607,793 Commitments and contingencies Stockholders' deficit Common stock: $0.01 par value; 100,000,000 authorized, 46,254,432 issued and outstanding at December 31, 2008, 28,460,094 issued and outstanding at June 30, 2008 462,545 284,601 Additional paid-in capital 14,393,928 778,282 Deferred stock compensation (5,913,281) -- Accumulated deficit (16,168,150) (6,473,606) Total stockholders' deficit (7,224,959) (5,410,723) Total liabilities and stockholders’ deficit $ 2,959,867 $ 3,197,070 See accompanying notes to condensed consolidated financial statements. FLINT TELECOM GROUP, INC. (Formerly Semotus Solutions, Inc.) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three months Ended December 31, Six months Ended December 31, 2008 2007 2008 2007 Revenues $ 2,987,042 $ 326,095 $6,212,293 $399,880 Cost of revenues 3,281,413 424,182 6,550,880 676,658 Gross loss (294,371) (98,088) (338,587) (276,777) Operating expenses: Research and development 55,587 - 55,587 - Sales and marketing 210,149 - 210,149 - General and administrative: Consultants 93,900 115,582 571,554 195,530 Salaries and payroll related expense 585,412 - 585,412 - Management fee payable to Flint Ltd 69,714 296,943 286,205 537,447 Stock compensation and option expense Directors and officers 3,002,198 -- 3,002,198 -- Employees 43,051 -- 43,051 -- Depreciation 158,161 -- 314,428 - Impairment of goodwill 2,538,148 -- 2,538,148 -- Other 362,579 15,501 575,616 63,104 Total general and administrative 6,853,163 428,025 7,916,612 796,082 Total operating expenses 7,118,899 428,025 8,182,348 796,082 Operating loss (7,413,270) (526,113) (8,520,935) (1,072,860) Other loss (231,029) -- (12,655) -- Interest expense (904,299) -- (1,160,954) -- Net loss $(8,548,598) $(526,113) $(9,694,544) $(1,072,860) Net loss per common share: Basic $ (0.21) $ (0.02) $ (0.28) $ (0.04) Diluted $ (0.21) $ (0.02) $ (0.28) $ (0.04) Weighted average shares outstanding: Basic 40,393,126 28,460,094 34,459,214 28,460,094 Diluted 40,393,126 28,460,094 34,459,214 28,460,094 See accompanying notes to condensed consolidated financial statements. FLINT TELCOM GROUP, INC. (Formerly Semotus Solutions, Inc.) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Six months ended December 31, 2008 2007 Cash Flows from Operating Activities: Net loss $(9,694,544) $(1,072,860) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 314,428 - Other non-cash transactions: Stock and option compensation expense 3,045,249 - Impairment of goodwill 2,538,148 - Loss on purchase of non-convertible notes 174,956 -- Amortization of debt discounts & warrants 517,248 -- Amortization of debt issuance costs 116,059 -- Loss on disposal of fixed assets 2,032 -- Changes in assets and liabilities, net of acquisition: Accounts receivable 53,971 63,389 Prepaid expense (104,015) 14,692 Accounts payable 343,692 212,802 Accrued liabilities 29,361 (77,565) Accrued interest 396,525 -- Deferred revenue 38,388 -- Net cash used in operating activities (2,228,501) (859,541) Cash Flows from Investing Activities: Purchases of property, plant & equipment (329,558) -- Cash assumed in acquisition of Semotus 83,162 -- Net cash used in investing activities (246,396) - Cash Flows From Financing Activities: Proceeds from short term notes issued 2,507,000 - Short term notes repaid (280,000) -- Proceeds from convertible notes issued 150,000 150,000 Convertible notes repaid (25,000) -- Received (paid) to Flint Telecom Ltd. (166,858) 955,542 Payments on lease obligations (79,065) - Net cash provided by financing activities 2,106,077 1,105,542 Cash Flows From Foreign Currency Activities: Exchange gain (loss) on convertible notes (269,571) -- Net cash provided by (used in) foreign currency activities (269,571) -- Net increase (decrease) in cash and cash equivalents (638,392) 246,001 Cash and cash equivalents, beginning of the period 1,487,021 13,408 Cash and cash equivalents, end of the period $848,629 $259,409 See accompanying notes to condensed consolidated financial statements. FLINT TELECOM GROUP, INC. (Formerly Semotus Solutions, Inc.) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (unaudited) Six Months December Ended 31, 2008 2007 SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid for interest $ 99,567 $ -- =========== =========== Cash paid for income taxes $ -- $-- =========== =========== SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES: Assets purchased under capital lease obligations $ 44,473 $ -- =========== =========== Common stock issued upon conversion of notes payable and accrued interest (Note 8) $ 793,472, $ -- ========== =========== Discounts – warrants $ 1,132,869 $ -- =========== =========== Discounts – beneficial conversion $ 462,454 $ -- =========== =========== Acquisition of Semotus Solutions, Inc.: Accounts receivable Prepaid expense Goodwill Accounts payable Accrued liabilities Deferred revenue $ 390,712 18,922 2,538,148 (123,036) (269,367) (192,277) $2,363,102 -- -- -- -- -- -- $ -- =========== =========== Deferred stock compensation $ 6,307,500 $ -- =========== =========== See accompanying notes to condensed consolidated financial statements. FLINT TELECOM GROUP, INC. (Formerly Semotus Solutions, Inc.) STATEMENT OF STOCKHOLDERS’ DEFICIT (unaudited) Additional Deferred Common Stock paid-in Stock Accumulated Shares Amount Capital Compensation Deficit Total Balances at June 30, 2008 28,460,094 $284,601 $ 778,282 -- $ (6,473,606) $(5,410,723) Acquisition of Semotus Solutions, Inc. 2,990,900 29,900 2,416,364 -- -- 2,446,264 Issuance of new shares as compensation to officers and key employees 11,918,000 119,180 8,819,320 $ (6,307,500) -- 2,631,000 Amortization of deferred stock compensation -- -- -- 394,219 -- 394,219 Conversion of notes payable into equity 2,885,356 28,854 764,618 -- -- 793,472 Issuance of warrants to holders of notes payable -- -- 1,132,869 -- -- 1,132,869 Beneficial conversion feature on convertible notes payable -- -- 462,454 -- -- 462,454 Stock options expense for three months ended December 31, 2008 -- -- 20,031 -- 20,031 Net loss for six months ended December 31, 2008 -- -- -- -- (9,694,544) (9,694,544) Balances at December 31, 2008 46,254,432 $462,545 $14,393,928 $(5,913,281) $(16,168,150) $(7,224,959) See accompanying notes to condensed consolidated financial statements. FLINT TELECOM GROUP, INC. (Formerly Semotus Solutions, Inc.) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Organization and Formation Flint Telecom Group, Inc. (formerly named Semotus Solutions, Inc.) (“Flint” or the “Company”), is a Nevada Corporation. Flint was originally formed in 2005 as Flint Telecom, Inc., a Delaware Corporation, and started operations in April 2006 as a wholly owned subsidiary of Flint Telecom Limited, headquartered in Dublin, Ireland. Flint Telecom Limited is a holding company whose sole operating business in the United States was Flint Telecom, Inc. Flint Telecom Limited was a vehicle for the initial funding of Flint and for the development of the proprietary intellectual property (“IP”). The IP had been licensed to Flint for a nominal fee of $1.00 per year and was subsequently sold to Flint on October 1, 2008. On October 1, 2008, Semotus Solutions, Inc. (“Semotus”) acquired substantially all of the assets and liabilities of Flint in exchange for 28,460,094 shares of restricted common stock pursuant to a definitive Contribution Agreement dated April 23, 2008. Although Semotus is the legal acquirer, for accounting purposes Flint is considered the accounting acquirer in a reverse merger. The name was changed to Flint Telecom Group, Inc. The existing Semotus operations became a division of Flint Telecom Group, Inc. On December 12, 2008, Flint Telecom, Inc., which had changed its name to FTG Holdings, Inc., merged with and into Flint Telecom Group, Inc. so that Flint Telecom Group, Inc. is the surviving corporation. Flint provides next generation turnkey voice, data and wireless services through partner channels primarily in the United States. Flint offers a wholesale call platform for aggregating call traffic at cost competitive rates to other Carriers and distributes telecommunications services and products through its distribution channels. Flint is headquartered in Boca Raton, Florida and operates nationwide as well as internationally. The Semotus business division is a leading provider of enterprise application software connecting individuals wirelessly to critical business systems, urgent information and key processes. Semotus helps mobile employees make better and faster decisions, increases customer satisfaction, and improves efficiencies in business processes for shorter sales and service cycles. The wireless software products and professional services are all included in the HipLink family of software, which provide immediate mobile access and control of business-critical software applications, databases, networks and servers. 2. Basis of Presentation and Future Prospects The accompanying condensed consolidated financial statements have been prepared by us, without audit and in accordance with the instructions to Form 10-Q and Regulation S-K. In the opinion of our management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended December 31, 2008 are not necessarily indicative of the results that may be expected for the year ending June 30, 2009. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. We believe that the disclosures provided are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our SEC Form 8-K/A filed on December 23, 2008. These financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of our business. As reflected in the accompanying financial statements, Flint had a net loss of $8,548,598 and $9,694,544 for the three and six months ended December 31, 2008, respectively, negative cash flow from operating activities of $2,228,501 for the six months ended December 31, 2008, an accumulated stockholder’s deficit of $7,224,959 and a working capital deficit of $8,369,226 as of December 31, 2008. Also, as of December 31, 2008, the Company had limited liquid and capital resources. The Company is currently largely dependent upon obtaining sufficient short and long term financing in order to continue running its operations. The foregoing factors raise substantial doubt about Flint’s ability to continue as a going concern. Ultimately, the Company’s ability to continue as a going concern is dependent upon its ability to attract new sources of capital, exploit the growing telecom services market in order to attain a reasonable threshold of operating efficiency and achieve profitable operations. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. 3. Acquisition of Semotus Solutions, Inc. In the quarter ended December 31, 2008, we acquired Semotus Solutions, Inc. (“Semotus”) through a reverse merger; Semotus issued to Flint Telecom, Inc. 28,460,094 shares of restricted common stock pursuant to a definitive Contribution Agreement dated April 23, 2008 by and among Semotu s, Flint and Flint Telecom Limited (the “Contribution Agreement”). Through the acquisition of Semotus, we acquired $492,796 in fair value of assets, $584,680 in liabilities and recorded $2,538,148, in goodwill. Separate from the Contribution Agreement, as a hiring and retention incentive and in lieu of issuing stock options under the Company’s stock option plan, we issued 8,410,000 shares of restricted common stock, vesting over a period of four years, to executive officers and key employees, and 3,508,000 shares of restricted common stock to Mr. LaPine. These shares of restricted common stock were valued at $8,938,500. We recorded approximately $3,025,219 in expense in the three and six months ended December 31, 2008, related to the shares of restricted common stock granted to these executive officers, directors and key employees. The following are condensed pro forma financial information as though the reverse merger with Semotus had occurred as of the beginning of the six months ended December 31, 2008 and 2007. Flint Telecom Group, Inc. Condensed Pro Forma Statement of Operations (unaudited) Six Months ended December 31, 2008 2007 Revenues $ 6,443,028 $ 789,366 Net income (loss) $ (9,929,108) $ (1,190,583) Net income (loss) per common share $ (0.28) $ (0.04) Weighted average shares outstanding 34,459,214 28,460,094 4. Recent Accounting Pronouncements Statement No. 157 In September 2006, the Financial Accounting Standards Board (the “FASB”) issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”); SFAS 157 establishes a formal framework for measuring fair value under GAAP. It defines and codifies the many definitions of fair value included among various other authoritative literature, clarifies and, in some instances, expands on the guidance for implementing fair value measurements, and increases the level of disclosure required for fair value measurements. Although SFAS 157 applies to and amends the provisions of existing FASB and AICPA pronouncements, it does not, of itself, require any new fair value measurements, nor does it establish valuation standards. SFAS 157 applies to all other accounting pronouncements requiring or permitting fair value measurements, except for; SFAS 123R, share-based payment and related pronouncements, the practicability exceptions to fair value determinations allowed by various other authoritative pronouncements, and AICPA Statements of Position 97-2 and 98-9 that deal with software revenue recognition. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We do not believe that the adoption of SFAS 157 will have a material affect on our financial statements. Statement No. 159 In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Liabilities”. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We do not believe that the adoption of SFAS 159 will have a material affect on our financial statements. Statement No. 141R In December 2007, the FASB issued SFAS No. 141(revised 2007), “Business Combinations” (“SFAS No. 141R”), which revises current purchase accounting guidance in SFAS No. 141, “Business Combination s ”. SFAS No. 141R requires most assets acquired and liabilities assumed in a business combination to be measured at their fair values as of the date of acquisition. SFAS No. 141R also modifies the initial measurement and subsequent remeasurement of contingent consideration and acquired contingencies, and requires that acquisition related costs be recognized as expense as incurred rather than capitalized as part of the cost of the acquisition. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively to business combinations occurring after adoption. The impact of SFAS No. 141R on the Company’s consolidated financial statements will depend on the nature and extent of the Company’s future acquisition activities. Statement No. 160 In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an Amendment of ARB No. 51”. This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This Statement changes the way the consolidated income statement is presented. It requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We do not believe that the adoption of SFAS 160 will have a material affect on our financial statements. Interpretation No. 48 Financial Accounting Standards Board Interpretation No 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No 109, “Accounting for Income Taxes (“FIN 48”)” is effective for fiscal years beginning after December 15, 2006. FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company is evaluating the effects of FIN 48 for the 2008 fiscal year, but it does not believe that it has a liability for unrecognized tax benefits. Management does not believe that there are any other recently-issued accounting pronouncements, but not yet effective accounting standards, which could have a material effect on the accompanying financial statements. 5. Accounts Receivable and Concentration of Credit Risk Two customers accounted for 42% and 43% of the Company’s revenue, respectively, for the three months ended December 31, 2008. Two customers accounted for 43% and 44% of the Company’s revenue, respectively, for the six months ended December 31, 2008. Seven customers accounted for 73% of the accounts receivable at December 31, 2008, the largest of which accounted for 25% of the receivables. Two customers accounted for 64% and 23% of the Company’s revenue, respectively, for the three months ended December 31, 2007. Two customers accounted for 54% and 34% of the Company’s revenue, respectively, for the six months ended December 31, 2007. 6. Accounts Payable Accounts payable at December 31, 2008 were $1,539,395. Seven vendors accounted for 62% of the payables at December 31, 2008, the largest of which accounted for 20% of the payables. Although the company believes that it has adequate alternative vendors to purchase services and products, there can be no assurance of comparability, which could have a detrimental affect on the business. Further, when the vendor provides services for direct access to and call routing for residential or business customers, a reduction in or elimination of that vendor service will probably have a detrimental affect on that portion of Flint’s business. 7. Property, Plant and Equipment Flint has acquired $1,033,298 in equipment and has incurred $823,236 in principal amount of capital lease obligations primarily for computer and telephony equipment. Flint has completed its wholesale call platform. During the three months ended December 31, 2008, we made $112,651 in capital lease payments. During the six months ended December 31, 2008, we made $223,688 in capital lease payments. There were no capital lease obligations in the six months ended December 31, 2007. The future minimum payments under these capital leases are $225,302 in fiscal 2009 and $450,605 in fiscal 2010. The lease terms expire from November 2010 to June 2011. The interest rates range from 9.1% to 21.8%. 8. Promissory and Convertible Notes From June 30, 2007 to December 31, 2008, Flint has issued $2,707,000 principal amount of Promissory notes with Warrants, $3,661,646 principal amount of U.S. Dollar Convertible Promissory Notes and €1,475,000 principal amount of Euro Convertible Promissory Notes. Substantially all of the proceeds have been used for the expansion of Flint’s business, including capital expenditures and working capital. U.S. Dollar Convertible Promissory Notes The U.S. Dollar Convertible Promissory Notes were issued from December 2007 to June 30, 2008 to approximately 50 different individuals and entities with an interest rate of 12% and maturities ranging from six months to one year. The Notes are convertible after the Flint common stock has been listed on the OTC Bulletin Board or has otherwise been publicly trading for twenty trading days. The conversion price for $910,146 of the Notes is based upon a formula which is the lower of (i) the expected market capitalization divided by the number of shares outstanding and (ii) a price per share derived by a percentage multiplied by the average daily closing price of the common stock in the first 20 days of trading, provided however that if the estimated market capitalization is actually below $10 million at the calculation date, then the $10 million number will be used in the calculation. $2,726,500 of the Notes have a conversion price of $0.275 per share. As of December 31, 2008, a total of $793,472 in principal and interest was converted by the U.S. Dollar Convertible Promissory Notes into a total of 2,885,356 shares of restricted common stock. As of February 13, 2009, a total of approximately $1,980,097 in principal and accrued interest was converted by the U.S. Dollar Convertible Promissory Notes into a total of 7,439,680 shares. A holder of one Note in the amount of $122,895 in principal and accrued interest that was not converted executed a six month extension to June 30, 2009. The remaining $1,918,855 was due back to the Note holders as of December 31, 2008, which to date has not yet been repaid; however, management is currently working on executing extensions with all of the remaining Note holders and we believe that all of the remaining Note holders will either sign extensions or convert the Notes without issuing default notices to us. Upon default, we are required to pay interest in cash to the Note holder, payable on demand, on the outstanding principal balance of the Note from the date of the default until the default is cured at the rate of the lesser of thirty percent (30%) per annum and the maximum applicable legal rate per annum. Upon default, the Note holders may at any time at their option declare the entire unpaid principal balance of the Note, together with all interest accrued hereon, immediately due and payable. Euro Convertible Promissory Notes The Euro Convertible Promissory Notes have been issued to one individual, Mr. Michael Butler, in two tranches each with an interest rate of 15%. The maturity is approximately 16 and 17 months based upon the tranche issued. Likewise, the Notes are convertible after the Flint common stock has been listed on the OTC Bulletin Board or has otherwise been publicly trading for twenty trading days or ninety trading days depending on the tranche issued. Finally, the conversion price for €1,175,000 of the Notes is based upon a formula which is the lower of (i) the expected market capitalization divided by the number of shares outstanding and (ii) a price per share derived by a percentage multiplied by the average daily closing price of the common stock in the first 90 days of trading, provided however that if the estimated market capitalization is actually below $10 million at the calculation date, then the $10 million number will be used in the calculation. €300,000 of the Notes have a conversion price of $0.25 per share. We incurred $168,492 of debt issuance costs related to the Convertible Notes and have amortized $162,982 of the costs through December 31, 2008. As of December 31, 2008, $742,250 of these Convertible Notes has been converted. As of October 29, 2008,, there was a beneficial conversion feature calculated for $3,462,008 of the convertible notes. These notes were analyzed after our common stock traded for twenty trading days. The equity feature of $1,635,647 of these notes still has not been valued since these notes require a 90 trading day period. $434,502 of the beneficial conversion feature has been expensed at December 31, 2008. Promissory Notes with Warrants During the three months ended September 30, 2008, Flint issued $1,502,500 of Promissory Notes. $1,202,500 of the Promissory Notes were issued to the Flint Telecom, Ltd. These notes have a 15% interest rate and mature on March 30, 2009. The warrants are exercisable into 1,202,500 common shares at $0.50 per share. The warrants expire on September 30, 2011. Flint also issued $300,000 of Promissory Notes with Warrants to an individual on September 30, 2008. The Note has a 15% interest rate and matures on March 30, 2009. The warrants are exercisable into 300,000 common shares at $0.50 per share. The warrants expire on September 30, 2011. During the three months ended December 31, 2008, Flint issued a $250,000 Promissory Note due March 30, 2009 to an individual with 250,000 warrants exercisable at $0.50 per share, expiring on November 10, 2011. The warrant component of the promissory notes was valued at $1,132,869, The value was recorded as a discount to the promissory note and $1,132,869 was expensed through December 31, 2008. The following are the assumptions used for the Black Scholes calculation: Expected term (in years) Fiscal Year Ended 2009 1 – 1 ½ Yrs. Weighted average volatility 185.09% – 214.36% Expected dividend yield -- Risk-free rate 1.27% – 2.28% 9. STOCK-BASED COMPENSATION During the quarter ended December 31, 2008, as part of the reverse merger with Semotus, we assumed Semotus’ 1996 and 2005 Stock Option Plans, as described in Semotus’ SEC Form 10K for the fiscal year ended March 31, 2008. We adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” requiring us to recognize expense related to the fair value of its employee stock option awards. We recognize the cost of all share-based awards on a straight line vesting basis over the vesting period of the award. Total stock compensation expense recognized by us during the three and six months ended December 31, 2008 was $3,045,249. We have estimated the fair value of our option awards granted on or after October 1, 2008 using the Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on the historical volatility of our stock. We use actual data to estimate option exercises, forfeitures and cancellations within the valuation model. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Fiscal Year Ended Black-Scholes -Based Option Valuation Assumptions 2009 4.0 – 7.0 yrs 193.0% - 222.6% 198.13% -- 2.77% Expected term (in years) Expected volatility Weighted average volatility Expected dividend yield Risk-free rate The following table summarizes the stock option transactions for the quarter ended December 31, 2008 based upon a closing stock price of $0.15 per share as of December 31, 2008: Stock Options Shares (#) Weighted Average Exercise Price ($) Weighted Average Remaining Contractual Life Weighted Average Grant Date Fair Value ($) Aggregate Intrinsic Value ($) Outstanding at October 1, 2008 1,130,192 0.78 -- 0.44 -- Granted 435,000 0.43 -- 0.07 -- Exercised -- -- -- -- -- Forfeited 5,000 0.21 -- 0.17 -- Expired 32,250 10.23 -- 8.30 -- Outstanding at December 31, 2008 1,527,942 0.67 6.19 0.34 -- Exercisable at December 31, 2008 990,783 0.70 4.67 0.45 -- The aggregate intrinsic value of options as of December 31, 2008 was zero, and is calculated as the difference between the exercise price of the underlying options and the market price of our common stock for the shares that had exercise prices that were lower than the $0.15 market price of our common stock at December 31, 2008, of which there were none. No options were exercised during the three months ended December 31, 2008. As a hiring and retention incentive and in lieu of issuing stock options under the Company’s stock option plan, we issued 8,410,000 shares of restricted common stock, vesting over a period of four years, to executive officers and key employees. These shares of restricted common stock have a total value of $6,307,500; this value was calculated based upon the closing market price of our common stock on the date of grant, October 1, 2008, which was $0.75 per share. We recorded approximately $3,045,249 in expense for the three and six months ended December 31, 2008, related to the 8,410,000 shares of restricted common stock granted to these employees. We also amended Mr. LaPine’s employment agreement and issued to him 3,508,000 shares of restricted common stock, having a total value of $2,631,000; this value was calculated based upon the closing market price of our common stock on the date of grant, October 1, 2008, which was $0.75 per share. We recorded $2,631,000 in expense for the three and six months ended December 31, 2008, related to the 3,508,000 shares of restricted common stock issued to Mr. LaPine. 10. Exchange Gains and Losses Flint maintains certain bank accounts denominated in euros and has issued and outstanding €1,475,000 Convertible Notes. The reporting currency of Flint is the U.S. Dollar so that transactions and balances are translated into dollars. Flint recorded a $23,689 and $269,572 loss on translation for the three and six months ended December 31, 2008, respectively. There were no translation gains or losses for the three and six months ended December 31, 2007. 11. Common Stockholder’s Equity Under the Company’s Articles of Incorporation in July 2005, the Company was authorized to issue 3,000 shares of common stock. Effective October 1, 2008, as a result of the closing of the acquisition transaction by and among Flint and Semotus, and as approved by our s tock holders, we filed an amendment to our articles of incorporation increasing our total authorized shares of common stock to 100,000,000. As of December 31, 2008, 46,254,432 shares were issued and outstanding. There are no special voting or economic rights or privileges. 12. Earnings (Loss) Per Share In accordance with SFAS No. 128 "Earnings per Share" (EPS), we report Basic and Diluted EPS as follows: Basic EPS is computed as net income (loss) divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive. Since we incurred a net loss for the three and six months ended December 31, 2008, 24,262,188 potential shares were excluded from the shares used to calculate diluted EPS as their effect is anti-dilutive . Since we incurred a net loss for the three and six months ended December 31, 2007, 1,993,500 potential shares were excluded from the shares used to calculate diluted EPS as their effect is anti-dilutive. We reported a net loss of $14,461,879_and $15,607,826 for the three and six months ended December 31, 2008, respectively. We reported a net loss of $526,113 and $1,072,860 for the three and six months ended December 31, 2007, respectively. 13. Related Party Transactions Flint has limited access to capital from either banking institutions or the capital markets. Consequently, it has loans from Flint Telecom Ltd, which is controlled by Mr. Browne, Flint’s CEO, and Mr. Butler, one of Flint’s board members. Flint, Ltd. also has a direct equity investment in Flint. The loan balance was $60,739 at December 31, 2008. The loan is for management fees owed to Flint, Ltd. The management fees are for the executive, operating and financial services provided by Flint, Ltd. to Flint. These functions, as well as the corporate strategy, are executed by the personnel at Flint, Ltd.. The investment from Flint, Ltd. was $1,062,883 at December 31, 2008. The investment is a direct result of the capital needed for the operations of Flint. In addition, € 1,475,000 in Euro conv ertible notes are owed by Flint to Mr. Butler, and $ 1,1 75,000 in U.S. Dollar convertible notes are owed to Mr. Butler and his family members and affiliates. See Footnote 8 for more details on these notes. 14. Commitments and Contingencies We are not a party to any legal proceedings. Flint assumed an operating lease for its facility in New York, N.Y. starting on April 1, 2008. The lease expires on May 1, 2010. The monthly base lease payment is $9,300 and there are additional payments owed for costs passed through by the landlord. Flint has paid $55,800 in lease payments for the six months ended December 31, 2008. The future minimum lease payments are $55,800 in fiscal 2009 and $93,000 in fiscal 2010. Flint also has two operating leases for apartments in New York, N.Y. commencing 15 th May 2008 and 1 st June 2008. Both leases expire on 30 th June 2009. The monthly base lease payments are $3,695 and $7,300 each. The future minimum lease payments are $22,170 and $43,800 for fiscal 2009. Flint also has four operating leases for furniture in New York, N.Y. starting 1 st July 2008. The leases expire May 30, 2009. The combined monthly lease payments are $1,239.15. The future combined minimum lease payments are $6,195.75for fiscal 2009. 15. Goodwill Impairment In accordance with FASB 142, “Goodwill and Other Intangible Assets” we determined that the goodwill from the Semotus acquisition was impaired due to the disposition of the Semotus Business Division on January 29, 2009 (See Footnote 16, Subsequent Events, Semotus Business Disposition). The goodwill was recorded on October 1, 2008, the closing date of the Semotus acquisition (See Footnote 3, Semotus Acquisition) in the amount of $2,538,148, and was mainly associated with the Hiplink family of products. 16. Subsequent Events China Voice Acquisition On January 29, 2009, five newly created, wholly owned subsidiaries of Flint Telecom Group, Inc. (“Flint”) merged with six wholly owned subsidiaries of China Voice Holding Corp. (“CHVC”) in exchange for 21,000,000 shares of our restricted common stock and $1,500,000 in cash, $500,000 of which was paid at the Closing, a second installment in the amount of $500,000 to be paid on February 12, 2009 and the remaining $500,000 to be paid on March 31, 2009, pursuant to the Merger Agreement. The above summary of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, a copy of which is filed as an exhibit to the Form 8-K that we filed on February 4, 2009. The CHVC subsidiary companies that Flint acquired provide the following telecom services and / or distribute the following telecom products:  CVC Int’l, Inc. was established in January 2007, and is a provider of wholesale VoIP telecommunications services located in South Florida.  Cable and Voice Corporation was established on June 1, 2008, and is a master distributor of advanced broadband products and services located in Tampa, Florida.  StarCom Alliance, Inc. was established in January 2008, and is a master distributor of prepaid cellular products and services.  Phone House Inc. of Florida was established on March 6, 2008, Phone House, Inc. of California was established on June 12, 2001 (and subsequently acquired by CHVC in June 2007) and Dial-Tone Communication Inc. was established on July 19, 2007; each provides discount calling cards that enable users who purchase cards in the United States to call China, India, Mexico, Africa, South America, Brazil, Bangladesh, and other countries throughout the world at significant savings. As part of the closing of the transaction and in addition to the issuance of the common stock and cash paid as noted above , Flint also acquired 15,000,000 shares of restricted common stock of CHVC in exchange for $1,500,000, $750,000 of which will be paid on February 27, 2009 and the remaining $750,000 to be paid on April 30, 2009, pursuant to the CHVC Stock Purchase Agreement. Additionally, Flint issued a Promissory Note to CHVC dated January 29, 2009, in an amount of $7,000,000 , pursuant to which Flint is obligated to make payments as follows: $2,333,333.33 on or before December 31, 2009; $2,333,333.33 on or before July 31, 2010, and $2,333,333.34, plus any remaining balance due on the Note on or before December 31, 2010 (the “Note”). The Note shall not bear any interest pre-default; The Note will bear interest at Eighteen percent (18%) per year for any period of time when a payment is past due. 15,000,000 shares of CHVC restricted common stock are attached to the Note as collateral, pursuant to a Security Agreement . The foregoing description of the Stock Purchase Agreement, Note and Security Agreement are qualified in their entirety by reference to the full text of the Stock Purchase Agreement, Note and Security Agreement, a copy of which are filed as exhibits to the Form 8-K that we filed on February 4, 2009. In order to finance the transaction, Flint simultaneously entered into a Common Stock and Warrant Purchase Agreement with Redquartz Atlanta, LLC (“Redquartz”), in which Flint sold to Redquartz 5,454,545 shares of Flint restricted common stock at $0.275 per share and issued 3,750,000 warrants to purchase shares of Flint’s common stock at $0.40 per share, having a three year term and a cashless exercise provision, in exchange for $1,500,000. Additionally, on January 29, 2009, Flint entered into a Stock Purchase Agreement with Mr. David Tracey, in which we sold 1,454,545 shares of restricted common stock at $0.275 per share to Mr. Tracey in exchange for $400,000. The foregoing description of the common stock and warrant purchases are qualified in their entirety by reference to the full text of the Common Stock and Warrant Purchase Agreement, the Warrant Certificate and the Stock Purchase Agreement, copies of which are filed as exhibits to the Form 8-K that we filed on February 4, 2009. Semotus Business Disposition Additionally, on January 29, 2009, Flint sold all of the assets and liabilities of its ‘Semotus Business’ or ‘Solutions Division’ to Mr. Anthony LaPine for 3,508,000 shares of restricted common stock of Flint owned by Mr. LaPine. Mr. LaPine exercised his right to purchase the Semotus Business/Solutions Division from Flint, in accordance with Section 8.2(f) of the Contribution Agreement by and among Semotus Solutions, Inc. (now named Flint Telecom Group, Inc., and referred to as “Flint”) and Flint Telecom, Inc. dated April 23, 2008, in exchange for 3,508,000 shares of restricted common stock of Flint owned by Mr. LaPine. This transaction was further clarified and consummated by the Agreement and Plan of Corporate Separation and Reorganization by and among Flint and Semotus, Inc. executed as of January 29, 2009, pursuant to which Flint transferred all of the assets and properties, subject to all the liabilities, debts, obligations and contracts, of the Solutions Division to Semotus, Inc. in exchange for Mr. LaPine’s 3,508,000 shares of restricted common stock of Flint. The “Semotus Business”, as set forth in Section 7.18 of the Contribution Agreement, is defined as the operations of Semotus as conducted immediately prior to the acquisition transaction of Flint that closed on October 1, 2008, and does not reflect the business operations of Flint acquired in connection with that transaction. Management and Board of Directors Changes Effective January 29, 2009, we appointed Mr. Bill Burbank as our President, Chief Operating Officer and as a new member to our Board of Directors. Additionally, on January 29, 2009, we appointed Stephen Keaveney and Garrett A. Sullivan as new members of our Board of Directors. To effectuate these new board appointments, our board of directors took such actions as was necessary to increase the size of the Flint board of directors to seven directors, with the vacancies created b y such board increase filled by Mr. Burbank, Mr. Keaveney and Mr. Sullivan. Neither Mr. Burbank nor Mr. Keaveney qualify as “ independent” directors, as that term is defined by the NASDAQ Stock Market and the SEC, and they will not be serving on any Board C ommittees. Also effective as of January 29, 2009, we appointed John Iacovelli as our Chief Technology Officer and Jose Ferrer as our Executive Vice President of Business Development. Please see our SEC Form 8-K filed on February 4, 2009 for a description of the business experience of Messrs. Burbank, Keaveney, Sullivan, Iacovelli and Ferrer for at least the past five years and a description of their terms of employment compensation. U.S. Dollar Convertible Promissory Note Conversions and Extensions From January 1, 2009 to February 13, 2009, a total of approximately $1,186,625 in principal and accrued interest was converted by the U.S. Dollar Convertible Promissory Notes into a total of 4,554,324 shares. A holder of one Note in the amount of $122,895 in principal and accrued interest that was not converted as of December 31, 2008 executed a six month extension to June 30, 2009. The remaining $1,918,855 was due back to the Note holders as of December 31, 2008, which to date has not yet been repaid; however, management is currently working on executing extensions with all of the remaining Note holders and we believe that all of the remaining Note holders will either sign extensions or convert the Notes without issuing default notices to us. Upon default, the Note holders may at any time at their option declare the entire unpaid principal balance of the Note, together with all interest accrued hereon, immediately due and payable.