Ealixir, Inc. 10-Q

ITEM 1: FINANCIAL STATEMENTS FLINT TELECOM GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 2009 June 30, 2009 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 124,457 $ 1,337,002 Accounts receivable, net of allowance for doubtful accounts of $257,893 for September 30, 2009 and $205,397 for June 30, 2009 2,451,160 2,585,875 Notes receivable 250,071 125,000 Inventories 486,947 886,512 Investment in marketable securities 1,950,000 2,700,000 Due from Flint Telecom, Ltd. 88,731 258,731 Due from related parties -- 124,174 Prepaid expenses and other current assets -- 8,724 Current assets 5,351,366 8,026,018 Fixed assets: Equipment 1,860,362 1,851,830 Capitalized leases – equipment 819,025 819,025 Total fixed assets 2,679,387 2,670,855 Less: accumulated depreciation (876,171 ) (687,776 Net fixed assets 1,803,216 1,983,079 Deposit 15,759 3,149 Goodwill 2,687,080 2,687,080 Other intangible assets, net 10,101,888 10,587,115 Total assets $ 19,959,309 $ 23,286,441 LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 4,110,169 $ 5,140,180 Cash overdraft 74,254 175,096 Other accrued liabilities 220,827 215,898 Accrued interest payable 595,719 545,938 Lease obligations – current 706,834 601,275 Lines of credit 3,203,657 3,143,962 Notes payable 1,231,420 1,525,886 Notes payable – related parties, net of discount 6,392,805 5,440,232 Convertible notes payable, net of discount -- 115,000 Convertible notes payable – related parties, net of discount -- 94,062 Redeemable preferred stock 886,981 1,250,000 Total current liabilities 17,422,666 18,247,529 Convertible notes payable – long term, net of discount 216,134 -- Convertible notes payable – long term - due to related parties, net of discount 923,771 542,004 Notes payable due to related parties – long term 2,305,776 3,021,865 Lease obligations - long-term 12,148 117,707 Line of credit – long term -- -- Total liabilities 20,880,495 21,929,105 Commitments and contingencies Stockholders' equity (deficit) Preferred stock: $0.001 par value; 5,000,000 authorized, 886,981 issued and outstanding at September 30, 2009, 1,250,000 issued and outstanding at June 30, 2009 -- -- Common stock: $0.01 par value; 100,000,000 authorized, 76,285,811 issued and outstanding at September 30, 2009, 71,294,702 issued and outstanding at June 30, 2009 754,507 712,947 Common stock issuable 4,154 44,786 Additional paid-in capital 23,608,242 22,085,472 Accumulated comprehensive loss (1,200,000 ) (450,000 ) Accumulated deficit (24,088,089 ) (21,035,869 ) Total stockholders' equity (deficit) (921,186 ) 1,357,336 Total liabilities and stockholders’ equity (deficit) $ 19,959,309 $ 23,286,441 See accompanying notes to condensed consolidated financial statements. 3 FLINT TELECOM GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months September 30, Ended September 30, 2009 2008 Revenues $ 14,504,855 $ 3,225,251 Cost of revenues 13,801,254 3,269,467 Gross profit (loss) 703,601 (44,216 ) Operating expenses: General and administrative: Consultants 19,651 477,654 Bad debt expense 235,950 -- Salaries and payroll related expense 519,499 213,037 Management fee to Flint Telecom, Ltd. 130,000 216,492 Stock compensation and option expense: Directors and officers 336,875 -- Consultants 201,170 -- Employees 44,813 -- Depreciation and amortization expense 673,622 156,267 Other 417,487 -- Total operating expenses 2,556,911 1,063,450 Operating loss (1,875,466 ) (1,107,666 ) Other income (expense) -- 218,374 Interest expense (1,176,754 ) (256,655 ) Provision for income taxes -- -- Net loss $ (3,052,220 ) $ (1,145,947 ) Net loss per common share: Basic $ (0.04 ) $ (0.04 ) Diluted $ (0.04 ) $ (0.04 ) Weighted average shares outstanding: Basic 75,986,113 28,460,094 Diluted 75,986,113 28,460,094 See accompanying notes to condensed consolidated financial statements. 4 FLINT TELCOM GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three months ended September 30, 2009 2008 Cash Flows from Operating Activities: Net loss $ (3,052,220 ) $ (1,145,947 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 673,622 156,267 Other non-cash transactions: Stock and option compensation expense 582,858 -- Accretion of debt discount 804,371 -- Amortization of debt issuance costs -- 64,184 Changes in assets and liabilities, net of acquisition and disposals: Accounts receivable 134,715 (262,325 ) Prepaid expense 8,724 (147,530 ) Inventories 399,565 -- Deposit (12,610 ) -- Accounts payable (1,030,011 ) (179,989 ) Cash overdraft (100,842 ) -- Accrued liabilities 4,929 89,335 Net due from Flint Telecom, Ltd. 170,000 -- Due from related parties 124,174 -- Accrued interest 239,781 104,046 Net cash used in operating activities (1,052,944 ) (1,321,959 ) Cash Flows from Investing Activities: Purchases of fixed assets (8,532 ) (6,287 ) Investment in notes receivable (125,071 ) -- Net cash used in investing activities (133,603 ) (6,287 ) Cash Flows From Financing Activities: Proceeds from lines of credit 16,176 -- Proceeds from related parties debt 115,000 32,220 Proceeds from debt 200,000 1,502,500 Debt issuance fees and expenses -- (11,020 ) Payments on debt -- (25,000 ) Paid to Flint Telecom Ltd. -- -- Redemption of preferred stock (363,019 ) -- Payments on lease obligations -- (5,314 ) Net cash provided by financing activities (31,843) 1,493,386 Cash Flows From Foreign Currency Activities: Exchange gain (loss) on convertible notes 5,845 (245,883 ) Net cash provided by (used in) foreign currency activities 5,845 -- Net increase (decrease) in cash and cash equivalents (1,212,545 ) (80,744 ) Cash and cash equivalents, beginning of the period 1,337,002 1,487,021 Cash and cash equivalents, end of the period $ 124,457 $ 1,406,278 See accompanying notes to condensed consolidated financial statements. 5 FLINT TELECOM GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (unaudited) Three Months September Ended 30, 2009 2008 SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid for interest -- $ 85,366 Cash paid for income taxes -- $ -- SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES: Assets purchased under capital lease obligations -- $ 44,473 Conversion of notes payable and accrued interest (Note 12) $ 117,263 $ -- Discounts – warrants $ 708,791 $ -- Discounts – beneficial conversion $ 114,786 $ -- Capitalization of accrued interest to a note payable $ 190,000 $ -- See accompanying notes to condensed consolidated financial statements. 6 FLINT TELECOM GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT) AND OTHER COMPREHENSIVE LOSS (Unaudited) Common Stock Common Stock Issuable Additional Accumulated Shares Amount Shares Amt. Paid-In Capital Compre-hensive Loss Accum. Deficit Total Balances at June 30, 2009 71,294,702 $712,947 4,478,637 $44,786 $22,085,472 $(450,000) $(21,035,869) $ 1,357,336 Conversion of notes payable 426,411 4,264 116,837 117,263 Beneficial conversion feature on convertible notes payable 114,786 114,786 Shares issued to consultants for services 501,515 5,015 185,059 185,561 Issuance of warrants to holders of notes payable 708,791 708,791 Conversion of notes payable into equity 4,063,183 40,632 (4,063,183) (40,632) -- Stock compensation expense 381,688 381,688 Stock options expense 15,609 15,609 Comprehensive Loss: Comprehensive loss (750,000) (750,000) Net loss for the three months ended September 30, 2009 (3,052,220) (3,052,220) Balances at September 30, 2009 76,285,811 $762,858 415,454 $4,154 $23,608,242 $(1,200,000) $(24,088,089) $(921,186) ======== ======= ====== ====== ========= ========= ========= ========= See accompanying notes to condensed consolidated financial statements. 7 FLINT TELECOM GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Organization and Formation Flint Telecom Group, Inc. (formerly named Semotus Solutions, Inc.) (“Flint”, “We” or the “Company”), is a Nevada Corporation. We were 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”). On October 1, 2008, Semotus Solutions, Inc. (“Semotus”) acquired substantially all of the assets and liabilities of Flint Telecom, Inc. 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 the accounting acquirer. The name was changed to Flint Telecom Group, Inc. The existing Semotus operations became a division of Flint, and were subsequently sold in January 2009. We provide next generation turnkey voice, data and wireless services through partner channels primarily in the United States. We offer a wholesale call platform for aggregating call traffic at cost competitive rates to other Carriers and distribute telecommunications services and products through our distribution channels. We are headquartered in Boca Raton, Florida and operate in the United States. On January 29, 2009, we acquired six U.S. operating subsidiaries of China Voice Holding Corp. (“CHVC”), namely: CVC Int’l Inc., Cable and Voice Corporation, StarCom Alliance Inc, Dial-Tone Communication Inc, Phone House of Florida, Inc., and Phone House, Inc. (of California) (the “Acquisition Companies”), in exchange for 21,000,000 shares of our restricted common stock and $500,000 in cash at Closing and $1,000,000 in deferred payments. The Acquisition Companies 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. 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 internationally. 2. Basis of Presentation 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 months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending June 30, 2010. 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 8 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 10K filed on October 13, 2009. 3. Going Concern These financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of our business. As reflected in the accompanying financial statements, Flint had a net loss of $3,052,220 and $1,145,947 for the three months ended September 30, 2009 and 2008, respectively, negative cash flow from operating activities of $1,052,944 for the three months ended September 30, 2009, an accumulated stockholder’s deficit of $921,186 and a working capital deficit of $12,071,300 as of September 30, 2009. Also, as of September 30, 2009, we had limited liquid and capital resources. We are currently largely dependent upon obtaining sufficient short and long term financing in order to continue running our operations. The foregoing factors raise substantial doubt about our ability to continue as a going concern. Ultimately, our ability to continue as a going concern is dependent upon our 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 we are unable to continue as a going concern. We have secured indicative funding commitments from investors for additional capital, which management believes is sufficient to fund our cash flow needs for the next twelve months. 9 4. Recent Accounting Pronouncements In September 2009, the FASB issued authoritative guidance that applies to arrangements with multiple deliverables and provides another alternative for determining the selling price of deliverables. In addition, the residual method of allocating arrangement consideration is no longer permitted under this guidance. The guidance is effective for fiscal years beginning on or after July 15, 2010. We are currently evaluating the potential impact, if any, of the adoption of this guidance on our consolidated financial statements. In September 2009, the FASB issued authoritative guidance which removes non-software components of tangible products and certain software components of tangible products from the scope of existing software revenue guidance, resulting in the recognition of revenue similar to that for other tangible products. It also requires expanded qualitative and quantitative disclosures. The guidance is effective for fiscal years beginning on or after June 15, 2010. We are currently evaluating the potential impact, if any, of the adoption of this guidance on our consolidated financial statements. In June 2009, the FASB issued authoritative guidance for determining whether an entity is a variable interest entity (“VIE”) and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. Under this guidance, an enterprise has a controlling financial interest when it has a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The guidance also requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance. The guidance also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures and eliminates the scope exclusion for qualifying special-purpose entities. The guidance is 10 effective for fiscal years beginning after Novermber 15, 2009. We are currently evaluating the potential impact, if any, of the adoption of this guidance on our consolidated financial statements. Management does not believe that there are any recently-issued, but not yet effective, accounting standards that could have a material effect on the accompanying financial statements. 5. Accounts Receivable and Concentration of Credit Risk One customer accounted for 65% of our revenue for the three months ended September 30, 2009. Two customers accounted for 38% of the accounts receivable at September 30, 2009, the largest of which accounted for 28% of the receivables. Two customers together accounted for 89% of our revenue for the three months ended September 30, 2008, 45% and 44% respectfully. Two other customers accounted for 37% and 30% of the accounts receivable at September 30, 2008. 6. Investment in Marketable Securities We acquired 15,000,000 shares of restricted common stock of CHVC in exchange for deferred payments totaling $1,500,000 and a Promissory Note to CHVC dated January 29, 2009, in an amount of $7,000,000. We classify these securities as investments in marketable securities available for sale. These securities are stated at their fair value. Unrealized gains or losses in investments in marketable securities available for sale are recognized as an element of other comprehensive income on a monthly basis based on fluctuations in the fair value of the security as quoted on an exchange or an inter-dealer quotation system. Realized gains or losses are recognized in the consolidated statements of operations when the securities are liquidated. To date, the securities received from CHVC are quoted on the Pink Sheets. The securities are restricted as to resale. As the securities are restricted, we are unable to liquidate these securities until the restriction is removed. Unrealized gains or losses on marketable securities available for sale are recognized as an element of comprehensive income on a monthly basis based on changes in the fair value of the security as quoted on an exchange or an inter-dealer quotation system. Once liquidated, realized gains or losses on the sale of marketable securities available for sale are reflected in our net income for the period in which the security was liquidated. Marketable securities are evaluated periodically to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent. It indicates that the prospects for a near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. 7 . Related Party Transactions Loans : We have limited access to capital from either banking institutions or the capital markets. Consequently, we have loans from a number of third parties, including related parties, as follows. On January 29, 2009, we acquired six U.S. operating subsidiaries of China Voice Holding Corp. (“CHVC”), (the “Acquisition Companies”) and 15,000,000 shares of CHVC’s restricted common stock, in exchange for 21,000,000 shares of our restricted common stock, $500,000 in cash at Closing, a $7,000,000 promissory note and $2,500,000 in deferred payments. See Note 4 for more details on the transaction. Bill Burbank, our President and Chief Operating Officer, was and still currently remains the President and Chief Executive Officer of CHVC. As of September 30, 2009, $7,886,981 was due and owing to CHVC. Additionally, during the three months ended September 30, 2009, Mr. Burbank, our President, loaned $40,000 to us. This loan bears no interest or contains any additional cash fees. This loan is due on demand by Mr. Burbank. The balance of the loan as of September 30, 2009 was $40,000. 11 Flint Telecom Ltd, which is controlled by Mr. Browne, Flint’s CEO, and Mr. Butler, one of Flint’s board members, has a loan balance of $88,731 at September 30, 2009. During the three months ended September 30, 2009, Flint Telecom Ltd. assigned a portion, $91,850, of its $202,500 promissory note to a number of unrelated third parties. See Note 12 for more details on this transaction. This note has a 15% interest rate and originally matured on March 30, 2009 but was extended to September 30, 2011. The loan includes charges for management fees earned by Flint Telecom, Ltd. The management fees are for the executive, operating and financial services provided by Flint Telecom, Ltd. to us. The investment from Flint Telecom, Ltd. was $258,731 at September 30, 2009. The investment is for capital needed for our operations. Flint Telecom, Ltd. was also issued warrants on September 30, 2008 exercisable into 1,202,500 common shares at $0.50 per share which expire on September 30, 2011.Flint Telecom, Ltd. also has a direct equity investment in us. On May 13, 2009 we issued to Mr. Butler a Convertible Promissory Note in an amount of $1,516,000, accruing no interest, convertible in whole or in part at $0.40 per share, and due and payable through installment payments of $100,000 each, beginning as of October 31, 2009, and we issued 3,260,000 shares of restricted common stock in the Company, vesting quarterly over a period of three years beginning as of January 1, 2011 such that 100% of the shares are vested as of January 1, 2014.On June 30, 2009 we issued Mr. Butler a subordinated secured convertible promissory note having an interest at a rate of 10% per annum, convertible at $0.275 per share into an aggregate of up to 2,181,818 shares of restricted common stock, with a maturity date 18 months after the Closing (the “Notes”) and warrants to purchase an aggregate of up to 2,181,818 shares of our restricted common stock at $0.35 per share, having a five year term and a cashless exercise provision (the “Warrants”). The Warrants are not exercisable until our Articles of Incorporation are amended to increase the number of total authorized shares of common stock to 200,000,000. $150,000 was due and payable to Mr. Butler by no later than August 11, 2009, which has not yet been repaid and is currently in default, but management is negotiating an extension and believes it will come to an agreement to extend this Note. Upon default, the Note holder may declare this Note immediately due and payable and demand payment of all principal and the Note holder may proceed to collect such amount. We also have a number of loans outstanding from Mr. Butler, one of our directors, with a total outstanding balance of $2,266,000 as of September 30, 2009. We issued to Mr. Butler various promissory notes, convertible promissory notes, warrants and shares of restricted common stock as consideration for these loans. During the three months ended September 30, 2009, Mr. Keaveney, our CFO, loaned $75,000 to us and we issued to him a promissory note in the amount of $75,000, due and payable with a cash fee of $10,000 on or before October 24, 2009. As of the date of this filing, this note has not yet been repaid and Mr. Keaveney is entitled to additional cash fees of $10,000 per month for every month the note is not repaid. 8. Accounts Payable Accounts payable at September 30, 2009 were $4,110,169. Five vendors accounted for 47% of the payables at September 30, 2009, the largest of which accounted for 12% of the payables. Accounts payable at September 30, 2008 were $892,678. Three vendors accounted for 42% of the payables at September 30, 2008, the largest of which accounted for 20% of the payables. Although we believe that we have adequate alternative vendors to purchase services and products, there can be no assurance of comparability, which could have a detrimental effect 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 effect on that portion of our business. 12 9. Lines of Credit Effective June 4, 2009, we entered into a Loan and Security Agreement with Thermo Credit LLC (“Thermo”), for a line of credit in an amount not to exceed $2,000,000 (the “Agreement”). Under the terms of the Agreement, we agreed to pay a commitment fee equal to 2%of the amount of the Credit Facility, an unused facility fee of 0.25% per annum and a monitoring fee equal to the greater of $1,500.00 per month, or 0.05% of the Credit Facility per week. The line of credit is evidenced by a Loan and Security Agreement and a Promissory Note in the maximum amount of $2,000,000. The Note carries an interest rate of the greater of the prime rate plus 8%, or 15%. The indebtedness is secured by a pledge and grant to Thermo of a security interest in all of our property or assets, real or personal, tangible or intangible, now existing or hereafter acquired. As of September 30, 2009, we owed $2,000,000 under the Thermo line of credit. The first principal payment was due to Thermo on September 30, 2009 and as of the date of the filing of this quarterly report, payment has not been made and we are in default and the total balance has therefore been classified as a current liability. Management is currently negotiating an extension and/or restructure of the terms of this line of credit with Thermo, and we believe that Thermo will agree to such an extension or restructuring of the terms of this line of credit. Upon default, the entire unpaid balance of principal, together with all accrued but unpaid interest thereon, and all other indebtedness owing to Thermo at such time, which as of October 10, 2009 was $2,143,961, shall, at the option of Thermo, become immediately due and payable without further notice. In addition, Thermo shall be entitled to foreclose upon its security interests granted under the Agreement and to cause the Collateral to be immediately seized wherever found and sold with or without appraisal. Collateral consists of any and all of our subsidiaries’ property or assets, real or personal, tangible or intangible, now existing or hereafter acquired, and all supporting obligations, products and proceeds of all of the foregoing. We have a second line of credit with the Ulster Bank of Ireland in the amount of €800,000, which has a total value as of September 30, 2009 of approximately $1,167,360. This line of credit has a 4.45% variable interest rate and continues for an indefinite period of time with no set maturity date, but which is subject to review on an annual basis. 10. Promissory Notes and Convertible Promissory Notes During the three months ended September 30, 2009, we issued $315,000 principal amount of Promissory Notes, some with warrants and some with shares of restricted common stock, restructured $540,000 principal amount of promissory notes into U.S. Dollar Convertible Promissory Notes issued with warrants, and restructured $91,850 principal amount of promissory notes originally issued to Flint Telecom, Ltd. into convertible notes, which were assigned to third parties and converted into 334,000 shares of restricted common stock. Substantially all of the proceeds have been used for the expansion of our business, including capital expenditures and working capital. During the three months ended September 30, 2008, we issued $315,000 principal amount of Promissory Notes, $723,330 principal amount of U.S. Dollar Convertible Promissory Notes. As of September 30, 2009, $7,000,000 principal amount of a promissory note issued to CHVC, $2,675,976 principal amount of other promissory notes, some issued with warrants and some with shares of restricted common stock, $1,607,000 principal amount of U.S. Dollar Convertible Promissory Notes, $1,740,000 principal amount of U.S. Dollar Convertible Promissory Notes issued with warrants, were outstanding. Promissory Notes: During the three months ended September 30, 2009, we issued a $100,000 promissory note due September 18, 2009, with warrants to purchase up to 200,000 shares of common stock at $0.50 per share and having a 3 year term. As of September 30, 2009 this note had not been repaid and is currently in default. Management is negotiating an extension with this note holder and we believe we will come to a mutual agreement to extend this note. During the 13 three months ended September 30, 2009 we also issued a $125,000 promissory note with a $25,000 cash fee due on or before October 28, 2009, and a $75,000 promissory note with a $10,000 cash fee due on or before October 24, 2009. Additional cash fees of $10,000 per month accrue for every month the note is not repaid. As of September 30, 2009, we had a total of $2,675,976 worth of principal amounts outstanding under various promissory notes issued to approximately 20 individuals and entities, with interest rates ranging from 0% to 15%, to be repaid between 30 September 2009 and 30 September 2011. Approximately $1,500,000 worth of principal under these notes has not been repaid as of September 30, 2009 and is currently in default. Management is negotiating extensions with these note holders and we believe we will come to a mutual agreement to extend these notes. Upon default, the Note holders may declare their notes immediately due and payable and demand payment of all principal and the note holders may proceed to collect such amounts. 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 have a conversion price of $0.275 per share. During the three months ended September 30, 2009, $24,000in principal plus accrued interest was converted into 92,411 shares. One Note holder, RedQuartz, having a principal amount as of June 30, 2009 of $75,000, executed an extension to September 30, 2011. The remaining $16,000 in principal is held by one note holder and was due as of December 31, 2008 and has not been repaid. Management is negotiating an extension with this note holder and we believe that he will agree to an extension or convert the note. 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 holder may at any time at his option declare the entire unpaid principal balance of the Note, together with all interest accrued hereon, due and payable. As of September 30, 2009, a total of $1,607,000 worth of principal in U.S. Convertible promissory notes was outstanding. $91,000 of that is under the promissory notes as described in the above paragraph, and the remaining $1,516,000 is owed to Mr. Butler and is described in Footnote 9: Related Party Transactions. Convertible Promissory Notes issued with Warrants: Effective September 1, 2009, we entered into an agreement with a holder of $740,000 worth of Promissory Notes to cancel all principal and cash fees due under the Notes and to invest a portion of that amount, $540,000, under the same terms and conditions of the Private Equity Offering that closed on June 30, 2009, which includes a subordinated secured convertible promissory note having an interest at a rate of 10% per annum, convertible at $0.275 per share into an aggregate of up to 1,963,636 shares of restricted common stock, with a maturity date 18 months after the Closing (the “Notes”) and warrants to purchase an aggregate of up to 1,963,636 shares of our restricted common stock at $0.35 per share, having a five year term and a cashless exercise provision (the “Warrants”). The Warrants are not exercisable until our Articles of Incorporation are amended to increase the number of total authorized shares of common stock to 200,000,000. The holder was also granted a subordinated security interest in all of our assets. The remaining $200,000 continues to be due and payable by no later than September 30, 2009. To date, the $200,000 has not yet been repaid and is in default. Management believes that the Note holder will agree to another extension. This Note is secured by 5,000,000 shares of China Voice Holding Corp.’s restricted common stock held directly by Flint; additionally, Mr. Keaveney, our CFO, and Mr. Browne, our CEO, jointly and severally, also personally guaranteed this Note. Upon default, the Note holder may declare this Note immediately due and payable and demand payment of all principal and the Note holder may proceed to collect such amount. As of September 30, 2009, we also have $1,200,000 worth in principal amount of subordinated convertible promissory notes outstanding having an interest rate of 10% per anum, convertible at $0.275 per share into an aggregate of 4,363,636 shares of restricted common stock, with a maturity date 18 months after the issuance dates, and warrants to purchase an aggregate of up to 4,363,636 shares of our restricted common stock at $0.35 per share, having a five year term and a cashless exercise provision. These holders were also granted a subordinated security interest in all of our assets. 14 For the three months ended September 30, 2009, the warrant component of the promissory notes was valued at $1,640,807. The value was recorded as a discount to the promissory note and $619,764was expensed in the three months ending September 30, 2009. The following are the assumptions used for the Black Scholes calculation: Three Months Ended September 30, 2009 Expected term (in years) 1 ½ – 3 Yrs. Weighted average volatility 242.96% – 295.54 % Expected dividend yield -- Risk-free rate 1.44% – 2.26 % Debt Schedule: The following table sets forth the summary schedule of the cash payments required to be made by us, broken down by the type of loan: Type of Loan Total Current Long Term: 1-3 Years Notes payable $ 1,231,420 $ 1,231,420 $ -- Convertible notes payable 1,211,500 631,500 580,000 Line of credit 3,203,657 2,403,657 800,000 Notes payable – related parties 8,848,626 6,465,967 2,382,659 Convertible notes payable – related parties 1,419,396 200,000 1,219,396 Total: $ 15,914,599 $ 10,932,544 $ 4,982,055 11. Commitments and Contingencies We are a party to various legal proceedings in the normal course of business. Based on evaluation of these matters and discussions with counsel, we believe that any potential liabilities arising from these matters will not have a material adverse effect on our consolidated results of operations or financial position. 12. Stockholder’s Equity Common Stock: As of September 30, 2009, we had 100,000,000 total shares of common stock authorized and 88,785,975 shares were issued and outstanding, however, 12,500,082 of these shares have not yet vested and vesting is contingent upon continued employment with the Company; these shares will not be considered issued and outstanding until the shares vest, and therefore as of September 30, 2009, 76,285,811 shares were issued and outstanding. There is no special voting or economic rights or privileges. Preferred Stock: As of September 30, 2009, 5,000,000 total shares of preferred stock were authorized and 886,981 shares of Series C preferred stock were issued and outstanding, par value $0.001. These shares are not convertible into common stock and have no voting rights. As of September 30, 2009, there are no shares of Series A or B preferred stock issued or outstanding. 15 Warrants: We have, as part of various debt and other agreements, issued warrants to purchase our common stock. The following summarizes the information relating to all warrants issued and outstanding as of September 30, 2009: Date Issued Number of Warrants Per Share Warrant Exercise Price Expiration Date 11/14/05 21,000 $ 6.00 11/14/10 12/08/05 2,250 $ 5.60 12/08/10 5/16/06 140,500 $ 6.00 5/16/11 10/1/08 250,000 $ 0.40 10/01/11 10/1/08 1,752,500 $ 0.50 9/18/11 11/10/08 250,000 $ 0.50 11/10/11 6/30/09 4,363,636 $ 0.35 6/30/14 6/30/09 152,727 $ 0.275 6/30/14 8/18/09 200,000 $ 0.50 12/31/12 09/01/09 1,963,636 $ 0.35 09/01/14 All warrants are fully exercisable upon issuance other than the June 30, 2009 and September 1, 2009 subscription warrants, which cannot be exercised until our total authorized common shares have been increased to at least 200,000,000, which we expect to occur at our next annual shareholders’ meeting to be held on December 2, 2009. Five shareholders holding more than a majority of our common shares outstanding have agreed to vote for an increase in our total authorized shares from 100,000,000 to 200,000,000 at our next annual shareholders’ meeting. Stock Option Plans: As part of the reverse merger with Semotus that closed on October 1, 2008, we assumed Semotus’ 1996 and 2005 Stock Option Plans. The 2005 Stock Option Plan (the “2005 Plan”) was adopted by Semotus in July 2005 and in September 2005 the 2005 Plan was approved by its shareholders. In September 2007 the 2005 Plan was amended to provide for the granting of stock options to purchase up to 1,150,000 shares of our common stock, subject to adjustment only in the event of a stock split, stock or other extraordinary dividend, or other similar change in the common stock or capital structure. The 2005 Plan expires in July 2015, ten years after its adoption. Under the 2005 Plan, the Option Committee may grant incentive stock options to purchase shares of our common stock only to employees, and may grant non-qualified stock options to purchase shares of our common stock to our directors, officers, consultants and advisers. The Option Committee may grant options to purchase shares of our common stock at prices not less than fair market value, as defined under the 2005 Plan, at the date of grant for all stock options. The Option Committee also has the authority to set exercise dates (no longer than ten years from the date of grant), payment terms and other provisions for each grant. In addition, incentive options may be granted to persons owning more than 10% of the voting power of all classes of stock, at a price no lower than 110% of the fair market value at the date of grant, as determined by the Option Committee. Incentive options granted under the Plan generally vest over three years at a rate of 33% after year one and then equally on a monthly basis over the next two years from the date of grant. Non-qualified options granted under the Plan generally vest 100% immediately. As of September 30, 2009, 1,163,750 options were outstanding under the 2005 Plan. See Note 19: Stock Based Compensation, for stock option activity. The 1996 Stock Option Incentive Plan (the “Plan”) was originally adopted by Semotus in June 1996. The Plan provided for the granting of stock options to acquire common stock and/or the granting of stock appreciation rights to obtain, in cash or shares of common stock, the benefit of the appreciation of the value of shares of common stock after the grant date. The Plan expired in June of 2006, ten years after its adoption. As of September 30, 2009, 54,975 options remain outstanding and exercisable under the 1996 Plan. 16 13. Earnings (Loss) Per Share We report Basic and Diluted Earnings per Share (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 months ended September 30, 2009, 16,047,182 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 months ended September 30, 2008, 8,741,215 potential shares were excluded from the shares used to calculate diluted EPS as their effect is anti-dilutive. We reported a net loss of $3,052,220)for the three months ended September 30, 2009. We reported a net loss of $1,145,957 for the three months ended September 30, 2008. 14. Stock Based Compensation Stock Options: As part of the reverse merger with Semotus that closed on October 1, 2008, we assumed Semotus’ 1996 and 2005 Stock Option Plans, as described in Note 12. We recognize expense related to the fair value of employee stock option awards on a straight line vesting basis over the vesting period of the award. Total stock expense recognized by us during the three months ended September 30, 2009 was $582,858. 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. Three Months Ended Black-Scholes -Based Option Valuation Assumptions September 30, 2009 4.0 – 7.0 yrs 193.0% - 222.6% 198.13% -- 2.57% Expected term (in years) Expected volatility Weighted average volatility Expected dividend yield Risk-free rate 17 The following table summarizes the stock option transactions for the three months ended September 30, 2009 based upon a closing stock price of $0.22 per share as of September 30, 2009: Stock Options Shares (#) Weighted Average Exercise Price ($) Weighted Average Remaining Contractual Life Weighted Average Grant Date Fair Value ($) Aggregate Intrinsic Value ($) Outstanding at July 1, 2009 1,218,725 0.64 -- 0.34 -- Granted -- -- -- -- -- Exercised -- -- -- -- -- Forfeited -- -- -- -- -- Expired -- -- -- -- -- Outstanding at September 30, 2009 1,218,725 0.64 4.72 0.34 450 Exercisable at September 30, 2009 957,159 0.69 3.88 0.40 211 The aggregate intrinsic value of outstanding options as of September 30, 2009 was $450, 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 $0.22 market price of our common stock at September 30, 2009. No options were exercised during the three months ended September 30, 2009 or 2008. Restricted Common Stock: During the three months ended September 30, 2009, we issued a total of 501,515 shares of restricted stock to consultants as settlements for services rendered. We recorded approximately $185,561 in expense for the three months ended September 30, 2009 related to these shares of restricted common stock granted to these consultants. 15. Exchange Gains and Losses We maintain certain bank accounts denominated in Euros and as of September 30, 2009 have issued and outstanding €1,123,840 convertible notes, €100,000 in non-convertible notes payable, and a portion equal to one million dollars (USD$1,000,000) of the balance due on a $7,000,000 note must be paid through a payment of GBP£721,000, regardless of whether the U.S. dollar strengthens or weakens in relation to the GBP pound sterling during the term of the Note and whether there is therefore a foreign currency translation gain or loss. The reporting currency of Flint is the U.S. Dollar so that transactions and balances are translated into dollars. We recorded a $5,845 loss and a $245,883 gain on translation for the three months ended September 30, 2009 and 2008, respectively. 16. Subsequent Events We have evaluated subsequent events through November 23, 2009, which is the date the financial statements were available to be issued. On October 22, 2009 we were loaned $250,000 and we issued a promissory note in the amount of $250,000, due and payable with a cash fee of $25,000 by no later than the earlier of (i) November 20, 2009, (ii) the day after we receive additional funding from a third party investor, (iii) the issuance of any debt or equity, (iv) in the event of a warrant exercise, or (v) in the event of any other capital invested (the “Note”), and we issued a warrant to purchase up to 250,000 shares of our common stock at $0.50 per share and having a three year term. The Note is currently in default and we received a notice of default on November 23, 2009. The Note is secured by two million (2,000,000) shares of our restricted common stock held directly by Flint Telecom, Ltd. Upon default, the note holder shall have the option of either taking the security of the two million (2,000,000) shares or leaving the Note and fee in place plus interest at the highest legally valid interest rate until the Note is paid in full. On October 28, 2009 we were loaned $230,000 and we issued a promissory note in the amount of $260,000 including accrued interest of $30,000, due and payable on or before December 28, 2009. 18