PINX:TLPH Teliphone Corp Quarterly Report 10-Q/A Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011


OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Commission file number: 000-28793

 


TELIPHONE CORP.

(Exact name of Registrant as specified in its charter)




Nevada

30-0651002

(State or jurisdiction of Incorporation

 (IRS Employer ID #)

Or Organization)



424 St-François-Xavier Street, Montreal, Quebec, Canada H2Y 2S9

(Address of principal executive offices) (Zip Code)


514-313-6000

Registrants telephone number, including area code


Securities registered under Section 12(b) of the Exchange Act:


None

 

Securities registered under Section 12(g) of the Exchange Act:


Common Stock, $0.001 par value per share

 (Title of Class)


 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. xYes oNo

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨  No ¨

 




Indicate by check mark whether the registrant is a large accelerated file, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer

o

Accelerated filer

o


Non-accelerated filer

o

Smaller reporting company

x

(Do not check if a smaller reporting company)


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). oYes xNo

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date. As of May 31, 2012, there were 63,160,745 shares of the issuer's $.001 par value common stock issued and outstanding.

 

 


Explanatory Note

The purpose of this amendment to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012 (the Form 10-Q), originally filed with the Securities and Exchange Commission on May 31, 2012, is to append the correct .html version of our quarterly filing on Form 10-Q.  The .xbrl version filed on the same day remains unchanged.  An error was made by the Companys Edgar Filing Service and they filed the .html file of another client.

 

 


 

 

TABLE OF CONTENTS

 

  

 

Page 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements.

1

 

 

 

Item 2.

Management Discussion and Analysis of Financial Condition and Results of Operations

30

 

 

 

Item 4.

Control and Procedures

42

 

 

PART II OTHER INFORMATION

42

 

 

 

Item 1.

Legal Proceedings

42

 

 

 

Item 1A.

Risk Factors

43

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

 

 

 

Item 3.

Defaults its Upon Senior Securities

43

 

 

 

Item 4.

(Removed and Reserved)

43

 

 

 

Item 5.

Other Information

43

 

 

 

Item 6.

Exhibits

43

 

 

 

Signatures

44

 

 

 



TELIPHONE CORP.

BALANCE SHEET

MARCH 31, 2012 (UNAUDITED) AND SEPTEMBER 30, 2011











ASSETS



US $



MARCH 31,

SEPTEMBER 30,



2012

2011



(UNAUDITED)


Current Assets:




  Cash and cash equivalents


 $12,527   

 $37,481   

  Accounts receivable, net


2,539,334

 140,149   

  Inventory


 13,097

 18,690   

  Prepaid expenses and other current assets


121,622

 47,065





    Total Current Assets


 2,686,580

 243,385





  Fixed assets, net of depreciation


 3,558,626

 1,240,513

  Customer lists, net


 1,710,037

 1,389,416   

  Goodwill


 2,585,040

 585,040   





TOTAL ASSETS


 $10,540,283

 $3,458,354



   


LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)





LIABILITIES




Current Liabilities:




  Deferred revenue


 $893

 $776   

  Current portion of related party convertible debentures


 60,150

 57,240

  Current portion of non related party loans


137,500

 137,500   

  Current portion of related party loans


94,683   

 266,856

  Current portion of obligations under capital lease


 14,722

 24,418

  Liability for stock to be issued


19,868

 469,868

  Accounts payable and accrued expenses


2,525,979

 380,545





      Total Current Liabilities


2,853,795

 1,337,203





Long Term Liabilities:




  Obligations under capital lease, net of current portion


299

 3,686

  Non related party loans, net of current portion


118,957

119,881   

  Related party loans, net of current portion


 70,828

 70,828





TOTAL LIABILITIES


 3,043,879

 1,531,598









STOCKHOLDERS' EQUITY (DEFICIT)




  Common stock, $.001 Par Value; 125,000,000 shares authorized




    and 61,360,745 and 41,360,745 shares issued and outstanding, respectively

 63,161

 41,360

  Additional paid-in capital


7,554,082

 2,125,882

  Accumulated deficit


 (138.006)

 (224,852)

  Accumulated other comprehensive income (loss)


 17,167

 (15,634)





      Total Stockholders' Equity (Deficit)


 7,496,404

 1,926,756





TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

 $10,540,283

 $3,458,354


1


 





TELIPHONE CORP.

STATEMENTS OF OPERATIONS

FOR THE SIX AND THREE MONTHS ENDED MARCH 31, 2011 AND 2010 (UNAUDITED)


 



US$

US$




SIX MONTHS ENDED

THREE MONTHS ENDED




MARCH 31,

MARCH 31,




2012


2011


2012


2011


 

 











 

 

OPERATING REVENUES










 

 

  Revenues


 $7,366,093


 $-


 $6,140,917




 

 











 

 

COST OF REVENUES










 

 

  Inventory, beginning of period


18,690   


-   


12,849   




 

 

  Purchases and cost of VoIP services


5,785,061


 -


 4,993,947




 

  Inventory, end of period


 (13,097)


-   


 (13,097)




 

       Total Cost of Revenues


 5,790,654


-


 4,993,699




 











 

GROSS PROFIT


 1,575,439


 -


 1,147,218




 











 

OPERATING EXPENSES










 

   Wages, professional and consulting fees


 622,641


 (46,011)


 388,948


(62,152)


 

   Other generals and administrative expenses


 213,129


13,175


 133,189


13,175


 

   Depreciation and amortization


 643,728


-


 444,521




 

       Total Operating Expenses


1,479,498


 32,836


 966,658


(48,077)


 











 

NET INCOME (LOSS) BEFORE OTHER










 

INCOME (EXPENSE)


 95,941


(32,837)


180,560


48,977


 











 

OTHER INCOME (EXPENSE)










 

   Interest expense


 (9,095)


 (8,272)


 (5,211)


(4,370)


 

       Total Other Income (Expense)


 (9,095)


 (8,272)


 (5,211)


(4,370)


 











 

NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES

86,846


24,565


175,349


44,607



 

Provision for income taxes


-


-


-


-


 

Net income (loss) from continuing operations


86,846


24,565


175,349


44,607


 











 











 

NET INCOME (LOSS) APPLICABLE TO COMMON SHARES


 $86,846


 $24,565


 $175,349


44,607


 











 

Gain (loss) from continuing operations


86,846


24,565


175,349


44,607


 











 

DISCONTINUED OPERATIONS










 

     Gain from discontinued operations


 -


193,167


 -


189,803


 











 

NET GAIN (LOSS) FROM DISCONTINUED OPERATIONS


 -


193,167


 -


189,803


 











 

NET INCOME (LOSS) APPLICABLE TO COMMON SHARES


 $86,846


 $217,731


 $175,349


234,410


 











 

NET INCOME (LOSS) PER BASIC DILUTED SHARES










 

     From continuing operations


$-


$0.00


$-


$0.00


 

     From discontinued operations


-


0.01


-


0.01


 











 



$-


$0.01


$-


$0.01


 











 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING


51,613,204


37,556,657


61,538,767


37,556,657


 











 











 

COMPREHENSIVE INCOME (LOSS)










 

     Net income (loss)


 $86,846


 $217,731


 $175,349


$234,410


 

     Other comprehensive income (loss)










 

         Currency translation adjustments


32,801


(28,634)


(1,288)


(13,378)


 

Comprehensive income (loss)


 $119,647


 $189,097


 $174,061


$221,032


 


2



TELIPHONE CORP.


 

STATEMENTS OF CASH FLOWS


 

FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)


 



 



US$


 



SIX MONTHS ENDED


 



MARCH 31,


 



2012


2011








CASH FLOWS FROM OPERATING ACTIVITIES - CONTINUING OPERATIONS





   Net income (loss)


$86,846


 $24,564








   Adjustments to reconcile net income (loss) to net cash






     provided by (used in) operating activities:






     Depreciation


643,728


-








  Changes in assets and liabilities






     (Increase) decrease in accounts receivable


(2,399,186)


-


     (Increase) decrease in inventory


5,593


-


     (Increase) decrease in prepaid expenses and other current assets


(74,557)


 -


     Increase (decrease) in deferred revenues


116


 -


     Increase in accounts payable and






       and accrued expenses


2,145,434


 55,210


     Total adjustments


321,128


55,210








     Net cash provided by (used in) operating activities


407,974


79,774








CASH FLOWS FROM INVESTING ACTIVITIES






   Acquisitions of capital assets


(282,461)


-








      Net cash (used in) investing activities


(282,461)


-   








CASH FLOWS FROM FINANCING ACTIVITES






    Payments under capital lease


(13,083)


 -   


    Proceeds from debenture payable


2,910


 3,572


    Proceeds from loans payable - non-related parties, net of repayments


(924)


-


    Proceeds from loan payable - related parties, net or repayments


(172,173)


 (9,466)








       Net cash provided by (used in) financing activities


(183,270)


 (5,894)


   












DISCONTINUED OPERATION






    Operating activities


-


532,128


    Investing activities


-


(414,424)


    Financing activities


-


(186,658)



 

 

 

 

 

 

 

 







       Net cash flows provided by discontinued operations


-


(68,954)








Effect of foreign currencies


32,803


(4,926)








NET INCREASE (DECREASE) IN






    CASH AND CASH EQUIVALENTS


(24,954)


 -   








CASH AND CASH EQUIVALENTS -






    BEGINNING OF PERIOD


37,481


 -   






 


CASH AND CASH EQUIVALENTS - END OF PERIOD


$12,527


 $-   








CASH PAID DURING THE PERIOD FOR:






    Interest expense


9,095


 $19,453








SUPPLEMENTAL NONCASH INFORMATION:












    Common stock issued for acquisition of NYTEX


$5,000,000


$-


    Common stock issued for liability to issue common stock


$450,000


$-








Customer lists acquired


$-


$1,479,265


Common stock issued for BMO deal




(951,022)


Loan Payable BMO




(375,000)


Advances made in prior periods




(153,243)




$-


$-








The accompanying notes are an integral part of the financial statements

3



 TELIPHONE CORP.

FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)


NOTE 1-

ORGANIZATION AND BASIS OF PRESENTATION


The unaudited financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  The financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Companys annual statements and notes.  Certain information and footnote disclosures normally included in financial




statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.  It is suggested that these financial statements be read in conjunction with the September 30, 2011 audited financial statements and the accompanying notes thereto.  While management believes the procedures followed in preparing these financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year.


These unaudited financial statements reflect all adjustments, including normal recurring adjustments which, in the opinion of management, are necessary to present fairly the operations and cash flows for the periods presented.


Teliphone Corp. (the Company, formerly OSK Capital II Corp until it changed its name on August 21, 2006) was incorporated in the State of Nevada on March 2, 1999 to serve as a vehicle to effect a merger, exchange of capital stock, asset acquisition or other business combination with a domestic or foreign private business. Effective April 28, 2005, the Company achieved its objectives with the reverse merger and reorganization with Teliphone Inc., a Canadian company.


Teliphone, Inc. was founded by its original parent company, United American Corporation, a publicly traded Florida Corporation, in order to develop a Voice-over-Internet-Protocol (VoIP) network which enables users to connect an electronic device to their internet connection at the home or office which permits them to make telephone calls to any destination phone number anywhere in the world. VoIP is currently growing in scale significantly in North America. This innovative new approach to telecommunications has the benefit of drastically reducing the cost of making these calls as the distances are covered over the Internet instead of over dedicated lines such as traditional telephony.


Prior to its acquisition by the Company, Teliphone Inc. had grown primarily in the Province of Quebec, Canada through the sale of its product offering in retail stores and over the internet.  In addition to the retail services provided, Teliphone Inc. also sold to wholesalers who re-billed these services to their customers and provided the necessary support to their customers directly.


4



TELIPHONE CORP.

FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)


NOTE 1-

ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)


Teliphone Inc. provided its telecommunications services provided over its own network, and also re-sells traditional telecommunications services provided over the network of Major Telecommunications Providers across Canada through a direct sales channel.


On April 1, 2011, the Company consolidated its operations into that of the parent company.  On May 31, 2011, the Company sold its entire ownership holdings in its subsidiary, Teliphone Inc. and continued operating the same business as before the disposition.


The Company acquired the New York Telecom Exchange Inc. (NYTEX), a telecommunications commodity exchange on December 31, 2011 for 20,000,000 common shares at a value of $0.25 per share. Management believes that the acquisition will allow it to provide a fully-integrated series of options which can now include wholesale traffic. While NYTEX has been in operation since January 2009, expansion of NYTEX will require the Company to seek additional financing externally or through supplier agreements.


NYTEX is a telecommunications commodity exchange established in October 2008 and officially launched in June 2009. It focuses on facilitating the exchange of international call termination. International call termination occurs when a caller initiates a call in one country and it terminates in another. NYTEX provides services much like other commodity exchanges whereby it provides a platform for buyers and sellers to come together to purchase and sell international termination. Unlike traditional telecommunications exchanges where buyers and sellers are matched one to one on a circuit to circuit, in the NYTEX concept sellers sell their termination into a market and buyer buy from that market. NYTEX also




offers a one to one trading facility for clients who request it. NYTEX manages all aspects of the transactions including technical clearing, financial clearing and quality control of the termination bought and sold on the exchange.   NYTEX developed all technical and conceptual aspects in house which includes a unique anti-False Answer Supervision (FAS) system which reduces the number of false calls by up to 90%. NYTEX has technical data centers in Montreal, London and Brussels which manage all calls.


Going Concern

As shown in the accompanying financial statements, the Company has a working capital deficit of ($167,215) as of March 31 2012 and has an accumulated deficit of ($138,006) through March 31, 2012, a decrease from ($224,852) on September 30, 2011. The Company has and continues to streamline their business, and has expanded their services throughout Canada generating positive gross margins. With the acquisition of NYTEX the Company will add wholesale international long distance termination to it service offerings. While the Company generated a positive net income for the quarter, much of this was due to net income from NYTEX. The positive gross margin generated by Teliphone was largely offset by a significant increase in depreciation due to investment in equipment and an increase in consulting fees for platform upgrades as well as product development and implementation of its IPTV service.  The Company has now completed the migration all its voice/data purchases to a new supplier and as a result will reduce its operating costs even further.  While the Company has demonstrated over the last three quarters that it is now operationally profitable, after producing operating losses in each of its fiscal years since inception in 1999 (except 2009, the lack of cash and operating history continues to raise substantial doubt about the Companys ability to continue as a going concern.  


The Company is working on further reducing its working capital deficiency. The Companys former subsidiary, Teliphone Inc. had accumulated trade payables greater than their trade receivables up to May 2011.  The Company had consolidated their operations such that the Company and not its subsidiary, Teliphone Inc. is now operating the business as of April 1, 2011.  On May 9, 2011, Teliphone Inc. filed for creditor protection under provisions of the Canadian Bankruptcy and Insolvency Act.  On May 31, 2011, the Company sold its entire holdings of Teliphone Inc. and as such no longer has responsibility for this trade deficit.

5


TELIPHONE CORP.

FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)


NOTE 1-

ORGANIZATION AND BASIS OF PRESENTATION  (CONTINUED)


The Company acquired the New York Telecom Exchange Inc. (NYTEX), a telecommunications commodity exchange on December 31, 2011 for 20,000,000 common shares at a value of $0.25 per share. Management believes that the acquisition will allow it to provide a fully-integrated series of options which can now include wholesale traffic. While NYTEX has been in operation since January 2009, expansion of NYTEX will require the Company to seek additional financing externally or through supplier agreements.


There is still no guarantee that the Company will be able to raise additional capital or generate the increase in revenues to sustain its operations.


Management believes that the Companys capital requirements will depend on many factors. These factors include the increase in sales through existing channels as well as its ability to continue to expand its distribution points and leveraging its technology into the commercial small business segments. The Companys strategic relationships with telecommunications interconnection companies, internet service providers and retail sales outlets has permitted the Company to achieve consistent monthly growth in acquisition of new customers.


The Companys ability to continue as a going concern for a reasonable period is dependent upon managements ability to raise additional interim capital.  There can be no assurance that management will be able to raise sufficient capital, under terms satisfactory to the Company, if at all.


The financial statements do not include any adjustments relating to the carrying amounts of recorded assets or the carrying amounts and classification of recorded liabilities that may be required should the Company be unable to continue as a going concern.





Effective July 1, 2009, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 105-10, Generally Accepted Accounting Principles Overall (ASC 105-10). ASC 105-10 establishes the FASB Accounting Standards Codification (the Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards.


All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Positions or Emerging Issue Task Force Abstracts. Instead, it will issue Accounting Standards Updates (ASUs).


The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the Codification.


6




TELIPHONE CORP.

FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)


NOTE 2-  

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Principles of Consolidation


The financial statements include the accounts of the Company and its subsidiary for 2012. All significant intercompany accounts and transactions have been eliminated in consolidation. All minority interests have been reflected herein. With the sale of Teliphone Inc. on May 31, 2011, the Company disposed of its only majority-owned subsidiary, and as a result, all noncontrolling interests have been disposed of.


Use of Estimates


The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  On an on-going basis, the Company evaluates its estimates, including, but not limited to, those related to investment tax credits, bad debts, income taxes and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.


Cash


The Company considers all highly liquid debt instruments and other short-term investments with an initial maturity of three months or less to be cash equivalents.



Comprehensive Income


The Company adopted ASC 220-10, Reporting Comprehensive Income, (formerly SFAS No. 130). ASC 220-10 requires the reporting of comprehensive income in addition to net income from operations.  


Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of information that historically has not been recognized in the calculation of net income.


7




TELIPHONE CORP.

FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)


NOTE 2-  

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


Inventory


Inventory is valued at the lower of cost or market determined on a first-in-first-out basis.  Inventory consisted only of finished goods.


Fair Value of Financial Instruments


The carrying amounts reported in the balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments.  For the notes payable, the carrying amount reported is based upon the incremental borrowing rates otherwise available to the Company for similar borrowings.


Currency Translation

For accounts in currencies other than the U.S. dollar, the Company translates income and expense amounts at average exchange rates for the month, translates assets and liabilities at year-end exchange rates and equity at historical rates. The Companys functional currency is the Canadian dollar, while the Company reports its currency in the US dollar. The Company records these translation adjustments as accumulated other comprehensive income (loss). Gains and losses from foreign currency transactions are included in other income (expense) in the results of operations.


Revenue Recognition


Operating revenues for the Company are generated directly within the Company and not in its former subsidiary, Teliphone Inc. since the Company consolidated its operations and sold the inoperative Teliphone Inc. on May 31, 2011.  Operating revenues consist of telecommunications services (voice, video, data and long distance), customer equipment (which enables the Company's telephony services), consulting services and shipping revenue. Generally revenue recognition is the same for Teliphone Corp. and NYTEX except where indicated below. The point in time at which revenue is recognized is determined in accordance with Revenue Recognition under ASC 605-50, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products) ("ASC 605-50"), and ASC 605-25, "Revenue Arrangements with Multiple Deliverables" (ASC 605-25). When the Company emerged from the development stage with the acquisition of Teliphone Inc. in 2005, they began to recognize revenue from their Telephony services when they are earned, specifically when all the following conditions are met:


8


TELIPHONE CORP.

FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)


NOTE 2-

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


Revenue Recognition (continued)


·

Services are provided or products are delivered to customers 

·

There is clear evidence that an arrangement exists 

·

Amounts are fixed or can be determined 

·

The Companys ability to collect is reasonably assured. 


In particular, the Company recognizes:





For Teliphone Corp:


·

Monthly fees for local, long distance and wireless voice services, as well as data services when we provide the services

o

Services over the Companys network means that a significant portion of the voice or data passes over the Companys own data network which it controls and

o

Services resold from Major Providers networks means that the Company re-sells the services purchased from a Major Provider to its customer, and hence does not control the voice or data flow (represents majority of the Companys revenues)

·

Consulting fees which the Company earns when it sells hourly consulting services.

o

Consulting services are typically computer software development related, along with any administrative services that occur in the management of those resources (such as project management, accounting, administrative support, etc)

·

Other fees, such as network access fees, license fees, hosting fees, maintenance fees and standby fees, over the term of the contract 

·

Subscriber revenues when customers receive the service 

·

Revenues from the sale of equipment when the equipment is delivered and accepted by customers 


For NYTEX:


·

Revenue from minutes sold on the exchange at the time of purchase which includes the price of the minutes and a per minute transaction fee which can vary from transaction to transaction.   

·

Consulting fees which the Company earns when it sells hourly consulting services

o

Consulting services are typically for network operators which require advice on management of their international call termination

·

Revenues from the sale of equipment when the equipment is delivered and accepted by customers


Revenues exclude sales taxes and other taxes we collect from our customers.


Multiple-Element Arrangements


We enter into arrangements that may include the sale of a number of products and services, notably in sales of voice services over our own network.  In all such cases, we separately account for each product or service according to the methods previously described when the following three conditions are met:


9




TELIPHONE CORP.

FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)


NOTE 2-

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


Revenue Recognition (continued)


·

The product or service has value to our customer on a stand-alone basis 

·

here is objective and reliable evidence of the fair value of any undelivered product or service 

·

If the sale includes a general right of return relating to a delivered product or service, the delivery or performance of any undelivered product or service is probable and substantially in our control. 

·

If there is objective and reliable evidence of fair value for all products and services in a sale, the total price to the customer is allocated to each product and service based on its relative fair value. Otherwise, we first allocate a portion of the total price to any undelivered products and services based on their fair value and the remainder to the products and services that have been delivered. 

·

If the conditions to account separately for each product or service are not met, we recognize revenue pro rata over the term of the customer agreement.


Resellers


We may enter into arrangements with resellers who provide services to our customers. When we act as the principal in these arrangements, we recognize revenue based on the amounts billed to our customers. Otherwise, we recognize as revenue the net amount that we retain. 


Sales Returns


We accrue an estimated amount for sales returns, based on our past experience, when revenue is recognized.


Deferred Revenues


We record payments we receive in advance, including upfront non-refundable payments, as deferred revenues until we provide the service or deliver the product to customers. Deferred revenues also include amounts billed under multiple-element sales contracts where the conditions to account separately for each product or service sold have not been met.


10




TELIPHONE CORP.

FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)



NOTE 2-

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


Accounts Receivable


The Company conducts business and extends credit based on an evaluation of the customers financial condition, generally without requiring collateral.


Exposure to losses on receivables is expected to vary by customer due to the financial condition of each customer. The Company monitors exposure to credit losses and maintains allowances for anticipated losses considered necessary under the circumstances. The Company has an allowance for doubtful accounts of $230,955 at March 31, 2012. The majority of this amount is from interest charged by NYTEX to clients under a credit policy prior to acquisition. Management is currently reviewing the credit policy and related interest charges for NYTEX operations.


Accounts receivable for Teliphone Corp. are generally due within 30 days and collateral is not required. Unbilled accounts receivable represents amounts due from customers for which billing statements have not been generated and sent to the customers. NYTEX generally operates on a 15 net 15 basis. Traffic that is purchased during the first 15 days of the month is due on the last day of the month and traffic purchased from the 16th to the end of the month is due on the 15th of the following month. NYTEX may require pre-payment if credit has not been established or exceeds established credit limits. NYTEX may negotiate other terms with clients as appropriate and may require pre-payment of traffic if no credit can be established or if a client desires to exceed its established credit limit.


Income Taxes


The Company accounts for income taxes utilizing the liability method of accounting.  Under the liability method, deferred taxes are determined based on differences between financial statement and tax bases of assets and liabilities at enacted tax rates in effect in years in which differences are expected to reverse.  Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts that are expected to be realized.


11




TELIPHONE CORP.

FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)


NOTE 2-

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


Convertible Instruments


The Company reviews the terms of convertible debt and equity securities for indications requiring bifurcation, and separate accounting, for the embedded conversion feature. Generally, embedded conversion features where the ability to physical or net-share settle the conversion option is not within the control of the Company are bifurcated and accounted for as a derivative financial instrument. (See Derivative Financial Instruments below). Bifurcation of the embedded derivative instrument requires allocation of the proceeds first to the fair value of the embedded derivative instrument with the residual allocated to the debt instrument. The resulting discount to the face value of the debt instrument is amortized through periodic charges to interest expense using the Effective Interest Method.


Derivative Financial Instruments


The Company generally does not use derivative financial instruments to hedge exposures to cash-flow or market risks. However, certain other financial instruments, such as warrants or options to acquire common stock and the embedded conversion features of debt and preferred instruments that are indexed to the Companys common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net share settlement is not within the control of the Company. In such instances, net-cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period.


Advertising Costs


The Company expenses the costs associated with advertising as incurred.  Advertising expenses for the six months ended March 31, 2012 and 2011 are included in the statements of operations.


Fixed Assets


Fixed assets are stated at cost.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets; automobiles 3 years, computer equipment 3 years, and furniture and fixtures 5 years.


When assets are retired or otherwise disposed of, the costs and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period.  The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized.  Deduction is made for retirements resulting from renewals or betterments.




12

TELIPHONE CORP.

FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)


NOTE 2-

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


Impairment of Long-Lived Assets


Long-lived assets, primarily fixed assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. The Company does perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and estimated fair value.

 

Earnings (Loss) Per Share of Common Stock


Basic net income (loss) per common share is computed using the weighted average number of common shares outstanding.  Diluted earnings per share (EPS) include additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants.  Common stock equivalents were not included in the computation of diluted earnings per share when the Company reported a loss because to do so would be antidilutive for periods presented.


The following is a reconciliation of the computation for basic and diluted EPS:

  

March  31,

March 31,

      2012

                  2011


Net income (loss)

   

 

  $86,846

              $217,731


Weighted-average common stock

Outstanding (Basic)

51,613,204

               37,556,657


Weighted-average common stock

Equivalents

Stock Options               -                    -

Warrants

  

           

   ___-__     

              _______-      


Weighted-average common stock

Outstanding (Diluted)

51,613,204

             37,556,657


13








TELIPHONE CORP.

FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)


NOTE 2-

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


Earnings (Loss) Per Share of Common Stock (Continued)


The Company has not issued options or warrants to purchase stock in these periods. If there were options or warrants outstanding they would not be included in the computation of diluted EPS when the Company reported a loss because inclusion would have been antidilutive.


Stock-Based Compensation


In 2006, the Company adopted the provisions of ASC 718-10 Share Based Payments for its year ended September 30, 2008. The adoption of this principle had no effect on the Companys operations.


The Company has elected to use the modifiedprospective approach method. Under that transition method, the calculated expense in 2006 is equivalent to compensation expense for all awards granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair values. Stock-based compensation expense for all awards granted after January 1, 2006 is based on the grant-date fair values. The Company recognizes these compensation costs, net of an estimated forfeiture rate, on a pro rata basis over the requisite service period of each vesting tranche of each award. The Company considers voluntary termination behaviour as well as trends of actual option forfeitures when estimating the forfeiture rate.


The Company measures compensation expense for its non-employee stock-based compensation under ASC 505-50, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.  The fair value of the option issued is used to measure the transaction, as this is more reliable than the fair value of the services received.  The fair value is measured at the value of the Companys common stock on the date that the commitment for performance by the counterparty has been reached or the counterpartys performance is complete. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital.


Segment Information


The Company follows the provisions of ASC 280-10, Disclosures about Segments of an Enterprise and Related Information. This standard requires that companies disclose operating segments based on the manner in which management disaggregates the Company in making internal operating decisions. Up to December 31 2011, the Company had not segregated the business despite the Company incurring sales of hardware components for the VoIP service as well as the service itself. The Company treated these items as one component.  


With the acquisition of NYTEX, beginning January 1, 2012, the Company began segregating the business between the activities of Teliphone and NYTEX.


The method for determining what information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. The Companys chief operating decision-maker is considered to be the Companys chief executive officer (CEO). The CEO reviews financial information presented on an entity level basis accompanied by disaggregated information about revenues by product type and certain information about geographic regions where appropriate for purposes of making operating decisions and assessing financial performance. The entity level financial information is identical to the information presented in the accompanying consolidated statements of operations.


The Company has two primary operating areas; under the trade name ``Teliphone`` which provides voice, video and data services to residential and commercial clients across Canada, and under the trade name ``NYTEX`` (New York Telecom Exchange Inc.) which facilitates the exchange of international voice termination to wholesale clients internationally. The Company has determined that as of the balance sheet




date, it is appropriate to present segmentation information by each of these primary operations. Specific geographical segmentation is not relevant for either operation.  




 TELIPHONE CORP.


SEGREGATED FINANCIAL SUMMARY


 SIX MONTHS ENDED MARCH 31, 2012









Teliphone



NYTEX


Total

Segmented Operating Revenues

               $2,323,967    



                $5,042,126    


                 $7,366,093    

Total Cost of Revenues

                  1,582,099    



                4,208,555    


5,790,654

Gross Profit

                  741,868    



                   833,571    


                 1,575,439    








Total Operating Expenses Net of Depreciation and Amortization

                 630,658    



                   214,207    


                    844,865    

Depreciation and Amortization

     643,728    



-


643,728








Net Income (Loss)  Applicable to Common Shares

    ($532,518)   



        $619,364    


$86,846    















Segmented Fixed Assets







NYTEX Trading Platform

$-



             $2,108,333    


$2,108,333

Client Lists

               1,235,037    



                475,000    


1,710,037

Goodwill

                  585,040    



             2,000,000    


2,585,040

Furniture and Fixtures

               1,450,293    



-


1,450,293








Total Assets

 $3,270,370    



     $4,583,333    


   $7,853,703    



14







TELIPHONE CORP.

FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)


NOTE 2-

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


Customer Lists


The Company in March 2011 acquired customer lists in a transaction with a company. The customer lists will be amortized over a period of five years commencing April 1, 2011. The customer lists will be amortized utilizing the straight-line method.


In December 2011 the Company acquired customer lists in a transaction with a company. The customer lists will be amortized over a period of five years commencing January 1, 2012. The customer lists will be amortized utilizing the straight-line method.


Uncertainty in Income Taxes


The Company follows ASC 740-10, Accounting for Uncertainty in Income Taxes (ASC 740-10). This interpretation requires recognition and measurement of uncertain income tax positions using a more-likely-than-not approach. ASC 740-10 is effective for fiscal years beginning after December 15, 2006. Management has adopted ASC 740-10 for 2009, and they evaluate their tax positions on an annual basis, and has determined that as of March 31, 2012, no additional accrual for income taxes other than the federal and state provisions and related interest and estimated penalty accruals is not considered necessary.


Noncontrolling Interests


In accordance with ASC 810-10-45, Noncontrolling Interests in Consolidated Financial Statements, the Company classifies controlling interests as a component of equity within the balance sheets. The Company has retroactively applied the provisions in ASC 810-10-45 to the financial information for the six months ended March 31, 2011. The Company disposed of their only non-wholly owned subsidiary on May 31, 2011.  


Discontinued Operations


The Company has accounted for the sale of its entire holdings in its subsidiary Teliphone Inc in accordance with ASC 360-10-45, Property, Plant, and Equipment Overall Glossary-Component of an Entity, (formerly FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets).  (See NOTE 13 DISCONTINUED OPERATIONS).  In the prior year financial statement comparatives, the Company has reflected the prior year presentation to reflect elements of the disposed subsidiary as discontinued operations.  This reclassification had no effect on earnings per share of the prior period as is for presentation purposes only.



Recent Accounting Pronouncements


In May 2011, FASB issued Accounting Standards Update (ASU) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. FASB ASU 2011-04 amends and clarifies the measurement and disclosure requirements of FASB ASC 820 resulting in common requirements for measuring fair value and for disclosing information about fair value measurements, clarification of how to apply existing fair value measurement and disclosure requirements, and changes to certain principles and requirements for measuring fair value and disclosing information about fair value measurements. The new requirements are effective for fiscal years beginning after December 15, 2011. The Company plans to adopt this amended guidance on October 1, 2012 and at this time does not anticipate that it will have a material impact on the Companys results of operations, cash flows or financial position.


In June 2011, FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which amends the disclosure and presentation requirements of Comprehensive Income. Specifically, FASB ASU No. 2011-05 requires that all nonowner changes in stockholders equity be presented either in 1) a single continuous statement of comprehensive income or 2) two separate but consecutive statements, in which the first




statement presents total net income and its components, and the second statement presents total other comprehensive income and its components. These new presentation requirements, as currently set forth, are effective for the Company beginning October 1, 2012, with early adoption permitted. The Company plans to adopt this amended guidance on October 1, 2012 and at this time does not anticipate that it will have a material impact on the Companys results of operations, cash flows or financial position.


In September 2011, FASB issued ASU 2011-08, Testing Goodwill for Impairment, which amended goodwill impairment guidance to provide an option for entities to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. After assessing the totality of events and circumstances, if an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, performance of the two-step impairment test is no longer required. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. Adoption of this guidance is not expected to have any impact on the Companys results of operations, cash flows or financial position.


There were other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Companys financial position, results of operations or cash flows.



15



NOTE 3-

FIXED ASSETS


Fixed assets as of March 31, 2012 (unaudited) and September 30, 2011 were as follows:



Estimated Useful

(unaudited)



Life (Years)

March 31,

 September 30,



2012

2011





Furniture and fixtures

5

$551

$689

Trading platform

5

2,300,000

-

Computer equipment


3

 1,840,424


1,357,963








4,140,975

1,358,652

Less: accumulated depreciation


582,349

118,139

Fixed assets, net


$3,558,626

$1,240,513



There was $464,349 and $81,572 charged to operations for depreciation expense for continuing operations for the six months ended March 31, 2012 and 2011, respectively.


NOTE 4-

CUSTOMER LISTS


Customer lists as of March 31, 2012 (unaudited) and September 30, 2011 were as follows:



Estimated Useful

(unaudited)



Lives (Years)

March 31,

 September 30,



2012

2011

Customer lists

5

 $ 2,043,796


$ 1,543,796







2,043,796

1,543,796

Less: accumulated amortization


333,759

154,380

Customer lists, net


$1,710,037

$1,389,416


There was $179,380 and $0 charged to operations for depreciation expense for continuing operations for the six months ended March 31, 2012 and 2011, respectively.


19




TELIPHONE CORP.

FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)


NOTE 5-

RELATED PARTY LOANS


Long Term Related Party Debt


On April 1, 2011, the Company assumed debt of a shareholder previously held within its former majority-owned subsidiary, Teliphone Inc. of $70,828.  The loan matures on December 31, 2013 with interest only payable monthly at an annual rate of 12%.  The Company reserves the right to pay the principal in its entirety at any time without penalty. The total amount is outstanding as of March 31, 2012.


Current Related Party Debt


The Company received a total of $73,827 collectively from a Director of the Company and a Company owned and controlled by the same Director through March 31, 2012.  The advances are considered short term in nature, accrue interest at 12% per annum, and are due on demand. As of March 31 2012, the Company has accrued $20,856 in interest on these advances.


NOTE 6-

CONVERTIBLE DEBENTURES


On February 6, 2009, the Company entered into a 12% Convertible Debenture (the A Debenture) with an individual. The A Debenture had a maturity date of February 6, 2010, and incurred interest at a rate of 12% per annum.  On February 6, 2010, the A Debenture was renewed for an additional 12 months at 12% to mature on February 6, 2012. The Company has discussed a long term extension of this debenture with the debenture holder. While no final agreement has been reached, the Company believes that the debenture holder will allow the Company to maintain interest only payments for at least one year.


The A Debenture can either be paid to the holders on February 6, 2012 or converted at the holders option any time up to maturity at a conversion price equal to eighty percent (80%) of the average closing price of the common stock as listed on a Principal Market for the five (5) trading days immediately preceding the conversion date. If the common stock is not traded on a Principal Market, the conversion price shall mean the closing bid price as furnished by the National Association of Securities Dealers, Inc.


On February 17, 2009, the Company entered into a 12% Convertible Debenture (the B Debenture) with an individual. The B Debenture had a maturity date of February 17, 2010, and incurred interest at a rate of 12% per annum.  On February 17, 2010, the B Debenture was renewed for an additional 12 months at 12% to mature on February 17, 2012 and has been renewed again for an additional 12 months.


The B Debenture can either be paid to the holders on February 17, 2012 or converted at the holders option any time up to maturity at a conversion price equal to eighty percent (80%) of the average closing price of the common stock as listed on a Principal Market for the five (5) trading days immediately preceding the conversion date. If the common stock is not traded on a Principal Market, the conversion price shall mean the closing bid price as furnished by the National Association of Securities Dealers, Inc.


The total amount of the A and B Debentures was $60,150.







20


TELIPHONE CORP.

FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)


NOTE 6-

CONVERTIBLE DEBENTURES (CONTINUED)


The convertible debentures met the definition of hybrid instruments, as defined in ASC 815-10, Accounting for Derivative Instruments and Hedging Activities (ASC 815-10). The hybrid instruments are comprised of a i) a debt instrument, as the host contract and ii) an option to convert the debentures into common stock of the Company, as an embedded derivative. The embedded derivative derives its value based on the underlying fair value of the Companys common stock. The Embedded Derivative is not clearly and closely related to the underlying host debt instrument since the economic characteristics and risk associated with this derivative are based on the common stock fair value.


The embedded derivative did not qualify as a fair value or cash flow hedge under ASC 815-10.


NOTE 7-

COMMITMENTS / LITIGATION


The Company assumed the lease from its former subsidiary Teliphone Inc. for its Toronto, Canada offices, which is set to expire on August 31, 2014. The Company has the following commitments remaining on this lease:


September 30, 2012:

$22,178

2013:     $51,960

2014:     $43,300


The Company has a lease with a business center for its Montreal, Canada offices which is set to expire on November 30, 2013. The Company has the following commitments remaining on this lease:


September 30, 2012:

$27,478

2013:     $13,980


The Company assumed the various capital lease agreements from its former subsidiary Teliphone Inc. for computer equipment with Dell Financial Services Canada Limited, both operating and capital leases.  The Companys operating leases expired during the year ended September 30, 2011. All new leases the Company has entered into have been capital leases, see Note 11.


In September 2011 the Company began negotiations with Dezmocom Inc. of Montreal to establish Teliphone Business Solutions Corp, a joint venture between the Company and Dezmocom dedicated to the marketing of the Company's products and services and establishment of new sales channels. Dezmocom had an established track record of developing and overseeing marketing channels such as resellers and agents as well as internal expertise in sales of products the same or similar to those of the Company. An agreement was executed on April 15, 2012 and under the agreement the Company and Dezmocom will share profits from the joint venture equally. The Company has been working with Dezmocom on this project and has advanced Teliphone Business Solutions $18,734 which has been matched by Dezmocom. This amount is reflected in other current assets at March 31, 2012.

21


TELIPHONE CORP.

FINANCIAL STATEMENTS




FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)


NOTE 7-

COMMITMENTS / LITIGATION (CONTINUED)


On April 29, 2009, 9191-4200 Quebec Inc. (9191) entered into a purchase agreement with 3 individuals residing in the Province of Ontario, Canada for all of the issued and outstanding shares of Orion Communications Inc. (Orion).  On April 30, 2009, Orion, under management of 9191, had executed a services agreement with the Companys subsidiary, Teliphone Inc. to provide telecommunications services to the customers of Orion.  On January 18, 2010, 9191 filed a Statement of Claim in Superior Court of Justice in the Province of Ontario, Canada for rescission due to overpayment and damages totalling CDN$1,000,000 claiming misrepresentation of financial statements made by the former owners.


On February 18, 2010, the Former owners of Orion filed their defense and counterclaim against 9191, naming the Company, its former subsidiary Teliphone Inc., George Metrakos, a current Director of the Company and the Companys President and CEO at the time, and other individuals as third party claimants for a total of CDN$4,000,000.  The Former Owners of Orion claim that the Company, its former subsidiary and Director are third party claimants due to its agreements with 9191 to provide services to the clients of Orion.


The Former owners of Orion are also pursuing the Companys former subsidiary Teliphone Inc. for $150,000 for the early termination of the employment agreement.


On March 10, 2010, Bank of Montreal (BMO), a Canadian financial institution and creditor of Orion has filed a claim against the Companys former subsidiary Teliphone Inc. requesting payment of Orions outstanding debt of CDN$778,607.  BMO stood as a secured creditor of Orion based on its issuance of a credit line to Orion in 2007.  BMO claimed that as a secured creditor holding a General Security Agreement, it had rights to the receivables of Orion and claims that these receivables are being collected by Teliphone Inc.


On March 30, 2011, the Company acquired the client lists from BMO and therefore resolved the disputes with BMO for a total settlement of $375,000 payable over 24 months as follows:  $25,000 due at commencement and a further $11,458 per month, with a final payment of $75,000 on the 24th month (See Note 12 for further discussion).


Subsequently on November 15, 2011, BMO did not accept the monthly payment claiming that additional legal fees were owed to BMO by Teliphone and no payments have been made since that date. These fees were not listed in the original agreement and the Company and BMO.


The Company, BMO, 9191, Metrakos and the former owners have since reached an agreement on this issue and an amended all party agreement which resolves disputes between the parties will upon final execution see resumption of payments by the Company to BMO.

 

22




TELIPHONE CORP.

FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)



NOTE 8-

STOCKHOLDERS EQUITY (DEFICIT)


Common Stock


As of March 31, 2012, the Company has 125,000,000 shares of common stock authorized with a par value of $.001.


The Company has 63,160,745 shares issued and outstanding as of March 31, 2012.


On September 30, 2004, the Company had 3,216,000 shares issued and outstanding. On April 28, 2005, the Company entered into a reverse merger upon the acquisition of Teliphone, Inc. and issued 27,010,000 shares of common stock to the shareholders of Teliphone, Inc. in exchange for all of the outstanding shares of stock of Teliphone, Inc. Thus the Company had 30,426,000 shares issued and outstanding.


On August 31, 2005, the Company issued 663,520 shares of common stock in conversion of the Companys convertible debentures in the amount of $331,760.


On August 22, 2006, the Company issued 1,699,323 shares of common stock to United American Corporation in conversion of related party debt in the amount of $421,080 (see Note 4). An additional 171 fractional shares were issued in December 2006.


On August 22, 2006, the Company issued 105,000 shares of common stock for consulting services. These services have been valued at $0.25 per share, the price at which the Companys offering will be. The value of $26,250 was reflected in the consolidated statement of operation for the year ended September 30, 2006.


In December 2006, the Company issued 660,000 shares of common stock representing a value in the amount of $165,000, for consulting services that occurred during the year ended September 30, 2006. The Company recognized the expense in the year ended September 30, 2006 as the services were provided in this time frame. The Company used the $0.25 price for valuation purposes.   


23




TELIPHONE CORP.

FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)


NOTE 8-

STOCKHOLDERS EQUITY (DEFICIT) (CONTINUED)


Common Stock (Continued)


The Company issued 3,812,633 shares of common stock of the Company in February 2009 as part of the debt conversion agreement with related parties on December 31, 2008. The Company also issued 10,000 shares of stock for services rendered at a value of $.038 per share ($380).


The Company issued 180,000 shares of common stock to convert related party notes in the amount of $22,500 ($0.125 per share) on March 31, 2010.


The Company issued 3,804,088 shares on May 4, 2011 for the acquisition of the rights to service the former clients of Orion Communications Inc. (Orion) after its dispute settlement with Orions secured creditors (see Note 10).


The Company agreed to issue 489,871 shares on March 31, 2010 as part of an interest payment to shareholders in order to solidify personal guarantees in conjunction with an extension of the Companys operating line of credit facility with its Bank.  In addition, the Company has agreed to issue 1,800,000 shares of stock for its acquisition of $450,000 worth of equipment from Orion Communications, Inc. on March 23, 2012.


The Company issued 20,000,000 shares ($0.25 per share) on December 30, 2011 for the acquisition of the New York Telecom Exchange Inc. The value of $5,000,000 was allocated as follows: $2,300,000 for the trading platform, $200,000 for computer equipment, $500,000 for the customer lists, and the remaining balance of $2,000,000 allocated to goodwill.



NOTE 9-

PROVISION FOR INCOME TAXES


Deferred income taxes are determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Companys assets and liabilities.  Deferred income taxes are measured based on the tax rates expected to be in effect when the temporary differences are included in the Companys tax return.  Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.


At March 31, 2012 the Company had no deferred tax assets.


24


TELIPHONE CORP.

FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)


NOTE 9-

PROVISION FOR INCOME TAXES (CONTINUED)


At March 31, 2012, the Company had a net operating profit in the amount of amount of $86,846, all of which occurring within the Province of Ontario, Canada, and is offset by net loss carry forward and hence no income tax is due.  

A reconciliation of the Companys effective tax rate as a percentage of income before taxes and federal statutory rate for the periods ended March 31, 2012 and 2011 is summarized as follows:



 

 

 

 


2012


2011


Federal statutory rate

(34.0)%


(34.0)%


State income taxes, net of federal benefits

3.3


3.3


Valuation allowance

30.7


30.7



0%


0%



 

 

 

 


2011


2010


Canadian Federal statutory rate

3.5%


3.5%


Canadian Provincial income taxes, net of federal benefits

12.0


12.0


Valuation allowance

0.0


0.0



15.5%


15.5%




NOTE 10-

SERVICING CONTRACT FOR THE CUSTOMERS OF ORION COMMUNICATIONS INC.


On May 7, 2009, the Companys then subsidiary Teliphone Inc. entered into an assignment agreement with 9191-4200 Quebec Inc. (9191) in order to have the customer contracts of Orion Communications Inc., (Orion) an Ontario, Canada Company assigned to the Company for its management.  No consideration was paid however the Company and 9191 had agreed to share 50% each of the gross benefits received from the customer base.


On February 23, 2010, the Companys agreement of assignment with 9191 was cancelled due to a default of the assignor.  As a result of the default, immediate payment for all amounts owed by 9191 was requested, however 9191 did not comply.  The delivery of services to Orion clients was suspended, and the clients were permitted to request delivery of service directly from the Company.  As a result of the cancellation of the contract, the Company took a write-down (fully impaired) of $337,275 previously listed as Goodwill.


25


TELIPHONE CORP.

FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)


NOTE 10-

SERVICING CONTRACT FOR THE CUSTOMERS OF ORION COMMUNICATIONS INC. (CONTINUED)


As a result of the lawsuits against the Companys former subsidiary resulting from the transaction (See NOTE 7), on March 31, 2011, the Company negotiated and entered into an Asset Purchase Agreement with Orion Communications, Inc. (Orion) and 9191-4200 Quebec, Inc. (9191) to acquire the customers from Orion valued at $1,479,265. As consideration for these customers, the Company issued 3,804,088 shares at a value of $0.25 per share for a total of $951,022, pay $375,000 to BMO in the form of a note payable (see Note 12) and utilize the $153,243 paid in advances from prior years.


NOTE 11-

OBLIGATIONS UNDER CAPITAL LEASE


On April 1, 2011, the Company assumed the capital leases of its former subsidiary Teliphone Inc.  The Company leases some of its computer equipment pursuant to capital leases. At March 31, 2012, minimum future annual lease obligations are as follows:






Year Ending

March 31, 2013

$16,453

March 31, 2014

       315

  16,768


Less: Amounts representing interest

  (1,747.)

Total

  15,021


Current portion

    (14,722)


Long-term portion      

    $299


NOTE 12-

NOTE PAYABLE - BMO


On March 30, 2011, the Company entered into a non-interest bearing Note Payable to Bank of Montreal (BMO) for a total of $375,000 as part of its dispute resolution regarding the management of the clients of Orion Communications Inc.  The Note calls for an initial payment of $25,000 followed by 24 equal payments due on the 15th of the month of $11,458, and a final payment of $75,000 due on April 15, 2013.  The Company has classified the Note Payable on its balance sheet as at March 31, 2012 as $187,535 as a long-term liability and $137,500 as the current portion in its current liabilities.  As of October 2011, the Company had met all of its payment obligations on this note payable.  Subsequently on November 15, 2011, BMO did not accept the monthly payment claiming that additional legal fees were owed to BMO by Teliphone. These fees were not listed in the original agreement and the Company and BMO. The Company and BMO have since reached an agreement on this issue and an amended agreement which resolves the dispute between the parties and will upon final execution see resumption of payments by the Company to BMO (NOTE 7).



26


TELIPHONE CORP.

FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)


NOTE 13-

DISCONTINUED OPERATIONS


On April 1, 2011, the Company consolidated the operations of its subsidiary (operating within the jurisdictions of Quebec, Canada and Ontario, Canada) unto itself (operating in the jurisdiction of Nevada).  As a result of the consolidation, the following fixed assets (net of accumulated depreciation) were transferred from Teliphone Inc. to Teliphone Corp.:


Computer Equipment for IPTV:

$395,170

Computer Equipment for VoIP:

$132,431

Furniture and Office Equipment:

       $660


Total:

$528,261


The only remaining fixed asset in Teliphone Inc. was:


Computer Equipment for Mobile VoIP:

$15,840


The Company also assigned all client and supplier contracts from Teliphone Inc. to Teliphone Corp and as such, continued to operate the same business.





On May 31, 2011, the Company sold its entire holdings consisting of 89.1% of the issued and outstanding Common Shares of its subsidiary Teliphone Inc. to YEURB INVESTMENTS COMPANY LIMITED, a Commonwealth of the Bahamas Corporation.  The gains and losses from the disposition of certain income-producing assets and associated liabilities, operating results, and cash flows are reflected as discontinued operations in the financial statements for all periods presented.  Although net earnings are not affected, the Company has reclassified results that were previously included in continuing operations as discontinued operations for qualifying dispositions.


As a result of this transaction, the Companys financial statements have been prepared with the results of operations and cash flows of this disposed property shown as discontinued operations.  All historical statements have been restated in accordance with GAAP.


 NOTE 14-

SUBSEQUENT EVENTS


In September 2011 the Company began negotiations with Dezmocom Inc. of Montreal to establish Teliphone Business Solutions Corp, a joint venture between the Company and Dezmocom dedicated to the marketing of the Company's products and services and establishment of new sales channels. Dezmocom had an established track record of developing and overseeing marketing channels such as resellers and agents as well as internal expertise in sales of products the same or similar to those of the Company. Subsequently on April 15, 2012 an agreement was executed and under the agreement the Company and Dezmocom will share profits from the joint venture equally. The Company has been working with Dezmocom on this project and has advanced Teliphone Business Solutions $18,734 which has been matched by Dezmocom. This amount is reflected in other current assets at March 31, 2012.


27




ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations and prospects.  Words such as expects, anticipates, intends, plans, believes, seeks, estimates and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this Quarterly Report on Form 10-Q.  Additionally, statements concerning future matters are forward-looking statements.

 

Although forward-looking statements in this Quarterly Report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements.  We caution the reader that numerous important factors, including those factors discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, which are incorporated herein by reference, could affect our actual results and could cause our actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company.  Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q.  We file reports with the Securities and Exchange Commission (the SEC or Commission).  You can read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  In addition, the SEC maintains an internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.




 

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report on Form 10-Q. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

 

As used in this Quarterly Report, the terms we, us, our, and Teliphone mean Teliphone Corp. and our subsidiaries unless otherwise indicated.


GENERAL OVERVIEW


OVERVIEW


We are a telecommunications company engaged in the business of providing broadband telephone services utilizing our innovative Voice over Internet Protocol, or VoIP, technology platform.


We were incorporated in the State of Nevada on March 2, 1999 under the name "OSK Capital II Corp." to serve as a vehicle to effect a merger, exchange of capital stock, asset acquisition or other business combination with a domestic or foreign private business. Effective April 28, 2005, we achieved our objective with the reverse merger and reorganization with Teliphone Inc., a Canadian company. On August 21, 2006, we changed our name from OSK Capital II Corp. to Teliphone Corp.  As a result of the merger and re-organization, Teliphone Inc. became our wholly owned subsidiary and we became a majority owned subsidiary of Teliphone Inc.'s parent company, United American Corporation, a Florida Corporation trading on the OTC Bulletin Board under the trading symbol UAMA.  

  

Effective August 1, 2006, we entered into a transaction with 3901823 Canada Inc. ("3901823") and issued to 3901823 shares of Teliphone Inc. common stock, which was equal to a 25% ownership interest, in exchange for access to 3901823s operating company Intelco Communications Inc. (Intelco) global distribution channels, cost reduction through usage of Intelcos network and data center, along with a credit facility of $75,000.  Subsequently on September 30, 2008, Teliphone Inc. issued additional stock to us representing the conversion into equity of cash advances made between August 1, 2006 to September 30, 2008.  As a result, we increased own ownership interest in the outstanding capital stock of Teliphone Inc. to 87.1% as of September 30, 2010.  We do not have any other subsidiary entities.

 

On February 15, 2008, we entered into a letter of intent to acquire certain assets and liabilities of the business operating as "Dialek Telecom" and complemented the offering of voice services over our own network with the resale of voice and data services over the networks of major providers. The Company entered into a definitive agreement with 9191-4200 Quebec Inc., owners of Dialek Telecom, on June 30, 2008 and the transaction was deemed to have an effective date as of February 15, 2008.  As a result of this transaction, we acquired an additional 2,000 customers for telecommunications services in Canada, along with other assets valued at CDN$86,000, liabilities valued at CDN$227,000 and access to an operating line of credit of CDN$150,000 at an annualized interest rate of 18%.


In June 2008, we commenced trading of our common stock on the OTC Bulletin Board and our common stock is currently quoted on the OTC pink sheets (OTCQB) electronic quotation system under the trading symbol TLPH.

 

30



On May 7, 2009, we entered into a customer assignment agreement with the owners of Orion Communications Inc.  (Orion).  As a result of this transaction, we acquired an additional 580 business customers for telecommunications services in Canada, along with other assets valued at CDN$376,781 and liabilities valued at CDN$418,762.  We and the owner of Orion, 9191-4200 Quebec Inc., agreed to a gross benefit sharing arrangement of 50%-50% for any potential future benefits derived from the customer base.  After a brief dispute with the secured creditors of Orion, on March 31, 2011, the Company acquired the client contracts in an acquisition valued at




$1,479,265.  The Company paid $951,022 in common stock of the Company with the issuance of 3,804,088 shares (in May 2011) (valued at $0.25 per share) and $528,243 in cash.


On April 1, 2011, we consolidated our operations to include those of our majority-owned subsidiary Teliphone Inc.  On May 31, 2011, we sold our entire holdings of our 87.1% ownership of Teliphone Inc. to YEURB INVESTMENTS COMPANY LIMITED, a Commonwealth of the Bahamas Corporation.  The impact on our balance sheet due to the disposition of our subsidiary was as follows: We reduced our Assets by a total of $115,114, we reduced our Liabilities by $2,304,774 and we increased our Shareholder equity by $2,189,630.  For the nine months ended June 30, 2011, the transaction had the following impact on our statement of operations: We reduced our Gross Profit by $524,369, and we reduced our Expenses including Operations, Interest and Amortization by a total of $968,984. In total, the Company experienced a gain on disposal of its subsidiary of $948,266. In total, the Company experienced a gain on disposition of $2,462,895.


On December 31, 2011 we entered into an agreement with the New York Telecom Exchange Inc. (NYTEX) to purchase all the company's assets, liabilities, intellectual property, client list and operations for 20 million common shares of Teliphone Corp. at a value of $0.25 per share for a total transaction of $5,000,000. NYTEX is a telecommunications commodity exchange for the purchase and sale of international voice termination. NYTEX provides technical and financial clearing of transactions as well as value added services such as quality of service, anti-false answer supervision, market information and customer support. In 2011 NYTEX had transacted some 200 million minutes (100 million minutes bought and 100 million minutes sold) for a value of approximately $30 million ($15 million bought and $15 million sold).


Description of Business

 

Principal products or services and their markets


Teliphone Corp

 

We are a telecommunications company engaged in the business of providing broadband telephone services utilizing our innovative Voice over Internet Protocol, ("VoIP") technology platform.  We offer feature-rich, low-cost communications services to our customers, thus providing them what we believe is an experience similar to traditional telephone services at a reduced cost. VoIP means that the technology used to send data over the Internet (example, an e-mail or web site page display) is used to transmit voice as well. The technology is known as packet switching. Instead of establishing a dedicated connection between two devices (computers, telephones, etc.) and sending the message "in one piece," this technology divides the message into smaller fragments, called 'packets'. These packets are transmitted separately over the internet and when they reach the final destination, they are reassembled into the original message.

  

We have invested in the research and development of our VoIP telecommunications technology, which permits the control, forwarding, storing and billing of phone calls made or received by our customers. Our technology consists of proprietary software programming and specific hardware configurations; however, we have no specific legal entitlement that would prohibit a third party from utilizing the same base software languages and same hardware in order to produce similar telephony service offerings adversely impacted our business.


Base software languages are the language building blocks used by programmers to translate the desired logic sequences into a message that the computer can understand and execute.  An example of a logic sequence is if the user dials 011 before the number, the software should then treat this as an international call and invoice the client accordingly.  The combination and use of these building blocks is known as "software code, and hence this combination, created by our programmers, along with off-the-shelf computer and telecommunications hardware (i.e. equipment that is readily available by computer, networking and telecommunications companies) is collectively referred to as our technology and trade secrets.


Examples of off-the-shelf hardware utilized include the desktop phones and handsets, computer servers used to store such things as account information and voice mail, and telecommunications hardware that permit the routing of telephone voice calls between various points across the internet and the worlds Public Switched Telephone Network (PSTN), the global wired and wireless connections between every land and mobile phone.




 

We can provide no assurance that others will not gain access to our technology. In order to protect this proprietary technology, we enter into non-disclosure and confidentiality agreements and understandings with our employees, consultants, re-sellers, distributors, wholesalers and technology partners. We can provide no assurance that our technology and trade secrets will not be stolen, challenged, invalidated or circumvented. If any of these were to occur, we would suffer from a decreased competitive advantage, resulting in lower profitability due to decreased sales.

 

 

31


 

 

We offer the following products and services to customers utilizing our VoIP technology platform:

 

·

Residential phone service. Customers purchase a VoIP adaptor from a re-seller and install it in their home. This allows all of their traditional phones in their home to have their inbound and outbound calls redirected to our technology platform. As a result, the residential customer purchases their choice of unlimited local or long distance calling services, with pay-per-minute long distance calling services.

 

·

Business phone service. Customers purchase multiple VoIP adaptors from re-sellers and install them in their business. Similar to Residential phone service, customers purchase from us various local and long distance calling services.


For residential and business phone services, we, invoice and collect funds directly from the end-user customer and pay a commission to their re-sellers and distributors upon receipt of the funds. The customer can also purchase the VoIP adaptors and calling services directly via our website www.teliphone.us for US customers and www.teliphone.ca for Canadian customers.

 

·

We also sell VoIP calling services to wholesalers who re-sell these services to their customers. In this case we provide the services to the end-user customers, but invoices and collects funds from the wholesaler, who invoices their customers and provides technical support to their customers directly.

 

The VoIP adaptors are manufactured by Linksys-Cisco and purchased by us directly from the manufacturer and re-sold to the re-sellers and wholesalers.

 

teliPhone Residential IP-Television services


We have recently introduced IPTV (Internet Protocol Television) for our residential clients. IPTV is a method of delivering television, movies and other streaming content to a television set via the Internet. The service works much like traditional cable in that the content is streamed to a decoder box via high speed internet which is then sent to the television via one of several wire options.  IPTV is sold as a standalone service or part of a bundle of services. IPTV is currently unregulated by the Canadian Radio Television Commission (CRTC) the Federal regulatory body which overseas broadcasting in Canada. In November 2011 announced that it had no plans to regulate IPTV or other Internet streaming services but would monitor the industry on a regular basis.


New York Telecom Exchange Inc.


NYTEX is a telecommunications commodity exchange that focuses on facilitating the exchange of international call termination. International call termination occurs when a caller initiates a call in one country and it terminates in another. NYTEX provides services much like other commodity exchanges whereby it provides a platform for buyers and sellers to come together to purchase and sell international termination. Unlike traditional telecommunications exchanges where buyers and sellers are matched one to one on a circuit to circuit, in the NYTEX concept sellers sell their termination into a market and buyer buy from that market. NYTEX also offers a one to one trading facility for clients who request it. NYTEX manages all aspects of the transactions including technical clearing, financial clearing and quality control of the termination bought and sold on the exchange.   NYTEX developed all technical




and conceptual aspects in house. NYTEX has technical data centers in Montreal, London and Brussels which manage all calls.  All calls utilize Voice over IP (VoIP) technology via the public Internet.   


NYTEX focuses on the trade and exchange of high value markets, typically with termination rates over $0.05 per minute. The majority of these markets are in countries with developing or emerging economies such as in Africa, Central and South America. NYTEX utilizes the services of authorized brokers who facilitate trading and help to develop its client base. Brokers are paid a proportion of the fees they generate or on a fixed salary basis.


As NYTEX is a commodity exchange, its revenues are dependent on the efforts of its brokers, international demand for long distance termination, Management`s ability to negotiate supplier terms and the availability of alternate supply. As such the revenues for NYTEX can be cyclical and previous performance is not necessarily an indicator of future revenue. Management is moving to mitigate revenue cycles and by identifying and increasing the number of NYTEX authorized brokers and increasing its efforts to secure a broader base of low cost supply.



Distribution methods of the products or services

 

Teliphone Corp

 

We distribute our products and services through our retail partners' stores. Our retail partners have existing public retail outlets where they typically sell telecommunications or computer related products and services such as other telecommunications services (cellular phones) or computer hardware and software.

 

We do not own or rent any retail space for the purpose of distribution, but instead rely on our re-seller partners to display and promote our products and services within their existing retail stores.

 

For a retail sale to occur, our re-sellers purchase hardware from us and hold inventory of our hardware at their store. In some cases, we may sell the hardware to our re-sellers below cost in order to subsidize the customer's purchase of the hardware from the re-seller. Upon the sale of hardware to the customer, the retail partner activates the service on our website while in-store with the customer.


 

Internet Sales.

 

We distribute our products through the sale of hardware on our website, www.teliphone.us. The customer purchases the necessary hardware from our on-line catalogue. Upon receipt of the hardware from us, the customer returns to our website to activate their services.

 

 

32


 

 

Wholesale Sales.

 

We distribute our products and services through wholesalers. A wholesaler is a business partner who purchases our products and services "unbranded" or on a private label basis and re-bills the services to their end-user customers. In the case of a sale to our wholesalers, we do not sell the hardware below cost.


Direct Sales.

 

We distribute our products and services directly to customers via our own sales force.  We currently employ 2 people in this capacity, providing sales solutions directly to larger business clients throughout Canada.

 

The agreements between our wholesalers and our customers are similar to those that we have with our retail customers. The wholesalers provide monthly calling services to their customers and invoice them on a monthly basis




on their usage. Our form of general conditions for use of our telecommunications products and services is the agreement that we hold with our wholesalers. While product and professional liability cannot be entirely eliminated, the conditions set forth in terms and conditions of sale serve to forewarn wholesalers that should a stoppage of service occur, we cannot be held liable.  Since we do not currently hold product and professional liability insurance coverage, this does not protect us from potential litigation.

 

Teliphone Business Solutions Corp.


In April 2012 the Company signed an agreement with Dezmocom Inc. for the creation of Teliphone Business Solutions Corp. ("TBS"), a 50/50 joint venture. TBS is responsible for expanding the market for the Company's products and services through direct sales as well as the creation of new sales channels including agents and resellers. TBS operates in cooperation with Teliphone's direct sales people.



New York Telecom Exchange (NYTEX).


NYTEX does not have any direct sales channels. In order to obtain new clients it relies on trade show participation, management's contact base, brokers' contact base, publicity in trade magazines and other media and a very limited amount of advertising.



 

Results of Operations  


Teliphone generates revenues from the sale of telecommunications services to our customers, along with the hardware required for our customers to utilize these services. Our cost of sales includes all of the necessary purchases required for us to deliver these services. This includes the use of broadband internet access required for our servers to be in communication with our customers VoIP devices at the customers location, our rental of voice channels connected to the Public-Switched-Telephone-Network; that is the traditional phone network which currently links all phone numbers worldwide as well as the cost to purchase the telecommunications services from Major Carriers that we re-sell to our customers.


The New York Telecom Exchange generates revenues from buyers of international traffic termination cleared through its platform which includes transaction fees. Our cost of sales include all necessary purchases required for us to deliver this service. This includes the use of broadband internet access required to receive and send call traffic, Voice over IP devices at our data centers required to receive and send traffic and the cost of international call termination provided by sellers on the platform.


Six Months Ended March 31, 2012 compared with Six Months Ended March 31, 2011.


For the six month period ended March 31, 2012, we recorded sales of $7,366,093 as compared to $2,119,579 for the same period in 2011 (prior to reclassification to discontinued operations).  All revenues for the Company in the prior period were generated by our majority-owned subsidiary at the time, Teliphone Inc.  We consolidated our operations into the parent company on April 1, 2011 and sold the inoperative subsidiary on May 31, 2011 and hence prior period sales were reported in that entity only.  The revenues were derived entirely from the sale of telecommunications services to residential and business clients.


Our cost of sales was $5,790,654 for the six month period ended March 31, 2012, as compared to $1,529,261 in the prior year (prior to reclassification to discontinued operations).  All purchases for the Company in the prior period were generated by our majority-owned subsidiary at the time, Teliphone Inc.  We consolidated our operations into the parent company on April 1, 2011 and sold the inoperative subsidiary on May 31, 2011 and hence prior period sales are being reported in that entity only.  Our cost of sales also includes our commissions paid to our re-sellers as we are distributing a portion of recurring revenues to the re-seller after the sale has been consummated. Our cost of sales also includes any variable costs of service delivery that we may have, including our per-minute costs for terminating our customers calls on another carriers network.  Gross margin for the period was $1,147,498, as compared to $259,414 in the prior year.





Our operating expenses were likewise affected by the consolidation of our operations and subsequent disposal of our subsidiary, Teliphone Inc.  Employees were terminated in Teliphone Inc and re-hired in Teliphone Corp. so as to ensure continuity in the organization; likewise consultants were also terminated and then re-engaged within the new organization.  As a result, the consolidation of our statements of operations for the period reflect the expenses actually incurred within the Company, and all expenses incurred during the current fiscal year that were incurred by our former subsidiary are included as reference figures.  


Our aggregate operating expenses for the six month period ended March 31, 2012, were $1,479,498 compared to $674,406 for the prior year (prior to reclassification to discontinued operations). The Company incurred a number of one time charges for the migration of its voice and data services to a new supplier. Management has projected that cost savings from the migration will offset these charges in 3-5 months.    Other general and administrative expenses were $213,129 compared with $119,148 in the prior year.  Wages, professional and consulting fees were $622,641 during that period as opposed to $445,575 for the same period last year, the increase due to legal fees as well as consultants hired to upgrade the Teliphone platform and further develop the IPTV systems. The Company increased its depreciation expenses to $643,728 for the six month period from $58,864. The significant increase in depreciation is due to upgrades in the Company's network as well as the incorporation of NYTEX assets.  The Company commenced its depreciation of its computer equipment acquired during the consolidation of April 1, 2011, has commenced to depreciate its acquired Orion Communications client lists effective April 1, 2011 and has commenced to depreciate equipment purchased during the period.


As a result, we had net income of $86,846 for the six month period ended March 31, 2012 as compared to a net income of $217,731 (prior to reclassification to discontinued operations) for the same period in the prior year.   The decrease in operating income is primarily due to an increase in depreciation due to equipment upgrading and purchase of professional services for product development and one time charges for the migration of voice and data services to a new supplier.


Segregated revenues and costs for Teliphone and NYTEX are shown in the table below. NYTEX data commences post acquisition on January 1 2012. While revenue segregation is fairly straightforward, both Teliphone and NYTEX share common infrastructure including network costs, administration, customer service and overhead.  Costs for these components have been allocated according to reasonable loading estimates between the two segments. All direct costs of revenues are allocated to the respective segment.  




 Teliphone Corp.

 



 Segregated Financial Summary

 



 Six Months Ending March 31, 2012

 








Teliphone


NYTEX


Total

 

 

Segmented Operating Revenues

        $2,323,967    


         $5,042,126    


          $7,366,093    

 

 







 

 

Total Cost of Revenues

      1,582,099    


4,208,555    


5,790,654

 

 







 

 

Gross Profit

      741,868    


   833,571    


  1,575,469

 

 







 

 

Total Operating Expenses Net of Depreciation and Amortization

           621,563    


   214,207    


835,770                 

 

 

Depreciation and Amortization

           643,728    




444,521

 

 

Other Income (Expense)

(9,095)




(9,095)

 

 







 

 

Net Income (Loss)  Applicable to

Common Shares

         ($532,488)   


  $619,364    


             $86,876    

 

 




 


 

33


 


Three Months Ended March 31, 2012 compared with Three Months Ended March 31, 2011.


 

For the three month period ended March 31, 2012, we recorded sales of $6,140,917 as compared to $1,079,721 for the same period in 2011 (prior to reclassification to discontinued operations).  All revenues for the Company in the prior period were generated by our majority-owned subsidiary at the time, Teliphone Inc.  We consolidated our operations into the parent company on April 1, 2011 and sold the inoperative subsidiary on May 31, 2011 and hence prior period sales were reported in that entity only.  The revenues were derived entirely from the sale of telecommunications services to residential and business clients. Our cost of sales was $4,993,699 for the three month period ended March 31, 2012, as compared to $782,219 in the prior year (prior to reclassification to discontinued operations).  All purchases for the Company in the prior period were generated by our majority-owned subsidiary at the time, Teliphone Inc.  We consolidated our operations into the parent company on April 1, 2011 and sold the inoperative subsidiary on May 31, 2011 and hence prior period sales are being reported in that entity only.  Our cost of sales also includes our commissions paid to our re-sellers as we are distributing a portion of recurring revenues to the re-seller after the sale has been consummated. Our cost of sales also includes any variable costs of service delivery that we may have, including our per-minute costs for terminating our customers calls on another carriers network.  Gross margin for the period was $1,147,218, as compared to $297,502 in the prior year.


Our aggregate operating expenses for the three month period ended March 31, 2012, were $966,658 compared to $362,501 for the prior year (prior to reclassification to discontinued operations). The Company incurred a number of one time charges for the migration of its voice and data services to a new supplier. Management has projected that cost savings from the migration will offset these charges in 3-5 months.    Other general and administrative expenses were $133,189 compared with $72,077 in the prior year.  Wages, professional and consulting fees were $388,948 during that period as opposed to $231,560 for the same period last year, the increase due to legal fees as well as consultants hired to upgrade the Teliphone platform and further develop the IPTV systems. The Company increased its depreciation expenses from $444,521 for the three month period to $58,864. The significant increase in depreciation is due to upgrades in the Company's network as well as the incorporation of NYTEX assets.  The Company commenced its depreciation of its computer equipment acquired during the consolidation of April 1, 2011, has commenced to depreciate its acquired Orion Communications client lists effective April 1, 2011 and has commenced to depreciate equipment purchased during the period.

 

 

34


 

 



As a result, we had net income of $175,349 for the three month period ended March 31, 2012 as compared to a net income of $234,410 (prior to reclassification to discontinued operations) for the same period in the prior year.   The decrease in operating income is primarily due to an increase in depreciation due to equipment upgrading and purchase of professional services for product development and one time charges for the migration of voice and data services to a new supplier.





Segregated revenues and costs for Teliphone and NYTEX are shown in the table below. While revenue segregation is fairly straightforward, both Teliphone and NYTEX share common infrastructure including network costs, administration, customer service and overhead.  Costs for these components have been allocated according to reasonable loading estimates between the two segments. All direct costs of revenues are allocated to the respective segment.  




 Teliphone Corp.

 



 Segregated Financial Summary

 



 Three Months Ending March 31, 2012

 








Teliphone


NYTEX


Total

 

 

Segmented Operating Revenues

        $1,098,791    


         $5,042,126    


          $6,140,917    

 

 







 

 

Total Cost of Revenues

      785,144    


4,208,555    



 

 







 

 

Gross Profit

      313,647    


   833,571    


  1,147,218

 

 







 

 

Total Operating Expenses Net of Depreciation and Amortization

           313,141    


   214,207    


             527,348    

 

 

Depreciation and Amortization

           444,521    




444,521

 

 







 

 

Net Income (Loss)  Applicable to Common Shares

         ($444,015)   


  $619,364    


             $175,349    

 

 

 




Liquidity and Capital Resources

 

At March 31, 2012:

 

On our balance sheet as of March 31, 2012, we had assets consisting of accounts receivable in the amount of $2,539,334, inventory of $13,097, prepaid expenses of $121,622 and cash of $12,527. We also show fixed assets, net of depreciation of $3,558,626.  We likewise show Net Customer List asset value of $1,710,037 representing the acquisition of the client contracts from Orion Communications Inc. and the New York Telecom Exchange Inc. and $2,585,040 representing the goodwill from our acquisition of the clients of Dialek Telecom in 2008, the client contracts of Orion in 2011 and the New York Telecom Exchange Inc.  Our balance sheet reflects an accumulated deficit of $138,006 and total stockholders equity of $7,554,082.

 

We had net cash provided of $407,974 from operating activities during the six month period ended March 31, 2012.


We used $282,461 of cash in investing activities for the acquisition of capital assets for the  six month period ended March 31, 201, as compared to $414,424 use of cash in the prior period 2011 (prior to reclassification to discontinued operations).


For the six month period ended March 31, 2012, we had net cash used in financing activities of $183,270 due in large part to the net repayment of $172,173 in loans payable to related parties.  


In pursuing our business strategy, we will require additional cash for growing our operating and investing activities.  We will continue to borrow money through our operating line of credit at our subsidiarys bank when




such cash for growth purposes is required.  In order to increase this operating line, we rely on collateral guarantees from shareholders and related parties.  We continue to search for ways to reduce costs and increase revenues of our VoIP and telecommunications resell services.

 

 

35


 

 

We anticipate raising funds in order to increase our base of customers through the acquisition of telecommunications resellers.  No financing agreements to date exist for the Company, but Management believes that growth the acquisition of clients will continue to support the growth of the Company in lieu of intense marketing expenditures.  Likewise, we continues to pursue and carry out our business plan, which includes marketing programs aimed at the promotion of our services, hiring additional staff to distribute and find additional distribution channels, enhance the current services we are providing and maintain our compliance with Sarbanes - Oxley Section 404.

 

Other than current requirements from our suppliers, and the maintenance of our current level of operating expenses, we do not have any commitments for capital expenditures or other known or reasonably likely cash requirements.

 

We have classified an additional $70,828 of related party loans as a long term liability due to the requirement of repayment of interest only over the next 5 years. In addition, we have current obligations of $94,683 which includes accrued interest to related parties.

 

The accompanying financial statements have been prepared assuming we will continue as a going concern. We have suffered recurring losses from operations from our inception in 2004 to our fiscal year ended September 30, 2008.  We had emerged from the recurring losses and posted a net income for the year ended September 30, 2009, however returned to a net loss position for the fiscal year ended September 30, 2010.  The disposition of our majority owned subsidiary Teliphone Inc. on May 31, 2011 permitted us to realize a net income of $1,915,553 or $0.05 per share for the nine month period ending June 30, 2011, however this gain was made during an extraordinary event and is non-recurring.  While the disposition permitted us to reduce our working capital deficiency from ($2,532,203) on March 31, 2011 to ($98,637) on March 31 2012, we still operate within a deficiency in working capital and have yet to solidify an operating line of credit with our bank.


The financial statements do not include any adjustments that might result from the outcome of any uncertainty that may arise due to this working capital deficit. We have been searching for new distribution channels to wholesale their services to provide additional revenues to support their operations.  There is no guarantee that we will be able to raise additional capital or generate the increase in revenues to sustain our operations. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive, the consequences would be a material adverse effect on our business, operating results, financial condition and prospects.  These conditions raise substantial doubt about our ability to continue as a going concern for a reasonable period.

 

Off Balance Sheet Arrangements


We do not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have material current or future effect on financial conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses.


Going Concern

Due to the lack of significant cash flow and the large working capital deficiency, these factors continue to raise substantial doubt about the Companys ability to continue as a going concern.  There can be no assurance that management will be able to raise sufficient capital, under terms satisfactory to us, if at all. 

 

Critical Accounting Policies





Our significant accounting policies are summarized in note 2 to our financial statements. While the selection and application of any accounting policy may involve some level of subjective judgments and estimates, we believe the following accounting policies are the most critical to our financial statements, potentially involve the most subjective judgments in their selection and application, and are the most susceptible to uncertainties and changing conditions:

 

 

36


 

 

 

Use of Estimates


The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  On an on-going basis, the Company evaluates its estimates, including, but not limited to, those related to investment tax credits, bad debts, income taxes and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.


Cash and Cash Equivalents


The Company considers all highly liquid debt instruments and other short-term investments with an initial maturity of three months or less to be cash equivalents.


Comprehensive Income


The Company adopted ASC 220-10, Reporting Comprehensive Income, (formerly SFAS No. 130). ASC 220-10 requires the reporting of comprehensive income in addition to net income from operations.


Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of information that historically has not been recognized in the calculation of net income.


Currency Translation

 

For accounts in currencies other than the U.S. dollar, the Company translates income and expense amounts at average exchange rates for the year, translates assets and liabilities at year-end exchange rates and equity at historical rates. The Companys functional currency is the Canadian dollar, while the Company reports its currency in the US dollar. The Company records these translation adjustments as accumulated other comprehensive income (loss). Gains and losses from foreign currency transactions are included in other income (expense) in the results of operations.

 

 

 

37


 

 

Revenue Recognition


Operating revenues consist of telecommunications services (voice, data and long distance), customer equipment (which enables the Company's telephony services), consulting services and shipping revenue. The point in time at which revenue is recognized is determined in accordance with Revenue Recognition under ASC 605-50, Accounting




for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products) ("ASC 605-50"), and ASC 605-25, "Revenue Arrangements with Multiple Deliverables" (ASC 605-25). When the Company emerged from the development stage with the acquisition of Teliphone Inc. in 2005, they began to recognize revenue from their Telephony services when they are earned, specifically when all the following conditions are met:


·  

Services are provided or products are delivered to customers 

·  

There is clear evidence that an arrangement exists 

·  

Amounts are fixed or can be determined 

·  

The Companys ability to collect is reasonably assured. 


In particular, the Company recognizes:


Teliphone


·  

Monthly fees for local, long distance and wireless voice services, as well as data services when we provide the services

o  

Services over the Companys network means that a significant portion of the voice or data passes over the Companys own data network which it controls and

o  

Services resold from Major Providers networks means that the Company re-sells the services purchased from a Major Provider to its customer, and hence does not control the voice or data flow (represents majority of the Companys revenues)

·  

Consulting fees which the Company earns when it sells hourly consulting services.

o  

Consulting services are typically computer software development related, along with any administrative services that occur in the management of those resources (such as project management, accounting, administrative support, etc)

·  

Other fees, such as network access fees, license fees, hosting fees, maintenance fees and standby fees, over the term of the contract 

·  

Subscriber revenues when customers receive the service 

·  

Revenues from the sale of equipment when the equipment is delivered and accepted by customers 


Revenues exclude sales taxes and other taxes we collect from our customers.


Multiple-Element Arrangements


We enter into arrangements that may include the sale of a number of products and services, notably in sales of voice services over our own network.  In all such cases, we separately account for each product or service according to the methods previously described when the following three conditions are met:


·  

The product or service has value to our customer on a stand-alone basis 

·  

There is objective and reliable evidence of the fair value of any undelivered product or service 

·  

If the sale includes a general right of return relating to a delivered product or service, the delivery or performance of any undelivered product or service is probable and substantially in our control. 

·  

If there is objective and reliable evidence of fair value for all products and services in a sale, the total price to the customer is allocated to each product and service based on its relative fair value. Otherwise, we first allocate a portion of the total price to any undelivered products and services based on their fair value and the remainder to the products and services that have been delivered. 

·  

If the conditions to account separately for each product or service are not met, we recognize revenue pro rata over the term of the customer agreement.

 

 




38


 

New York Telecom Exchange Inc (NYTEX)


·

Revenue from minutes sold on the exchange at the time of purchase which includes the price of the minutes and a per minute transaction fee which can vary from transaction to transaction.   

·

Consulting fees which the Company earns when it sells hourly consulting services

o

Consulting services are typically for network operators which require advice on management of their international call termination

·

Revenues from the sale of equipment when the equipment is delivered and accepted by customers

 


Resellers


We may enter into arrangements with resellers who provide services to our customers. When we act as the principal in these arrangements, we recognize revenue based on the amounts billed to our customers. Otherwise, we recognize as revenue the net amount that we retain. 


Sales Returns


We accrue an estimated amount for sales returns, based on our past experience, when revenue is recognized.

 

Deferred Revenues


We record payments we receive in advance, including upfront non-refundable payments, as deferred revenues until we provide the service or deliver the product to customers. Deferred revenues also include amounts billed under multiple-element sales contracts where the conditions to account separately for each product or service sold have not been met.


Accounts Receivable


The Company conducts business and extends credit based on an evaluation of the customers financial condition, generally without requiring collateral.


Exposure to losses on receivables is expected to vary by customer due to the financial condition of each customer. The Company monitors exposure to credit losses and maintains allowances for anticipated losses considered necessary under the circumstances.


Accounts receivable are generally due within 30 days and collateral is not required. Unbilled accounts receivable represents amounts due from customers for which billing statements have not been generated and sent to the customers.


Income Taxes


The Company accounts for income taxes utilizing the liability method of accounting.  Under the liability method, deferred taxes are determined based on differences between financial statement and tax bases of assets and liabilities at enacted tax rates in effect in years in which differences are expected to reverse.  Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts that are expected to be realized.

 




 

 

39


 

 

Convertible Instruments


The Company reviews the terms of convertible debt and equity securities for indications requiring bifurcation, and separate accounting, for the embedded conversion feature. Generally, embedded conversion features where the ability to physical or net-share settle the conversion option is not within the control of the Company are bifurcated and accounted for as a derivative financial instrument. (See Derivative Financial Instruments below). Bifurcation of the embedded derivative instrument requires allocation of the proceeds first to the fair value of the embedded derivative instrument with the residual allocated to the debt instrument. The resulting discount to the face value of the debt instrument is amortized through periodic charges to interest expense using the Effective Interest Method.


Derivative Financial Instruments


The Company generally does not use derivative financial instruments to hedge exposures to cash-flow or market risks. However, certain other financial instruments, such as warrants or options to acquire common stock and the embedded conversion features of debt and preferred instruments that are indexed to the Companys common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net share settlement is not within the control of the Company. In such instances, net-cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period.

 

Fixed Assets


Fixed assets are stated at cost.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets; automobiles 3 years, computer equipment 3 years, and furniture and fixtures 5 years.


When assets are retired or otherwise disposed of, the costs and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period.  The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized.  Deduction is made for retirements resulting from renewals or betterments.

 

Impairment of Long-Lived Assets


Long-lived assets, primarily fixed assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. The Company does perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and estimated fair value.

 

Earnings (Loss) Per Share of Common Stock

 

Basic net income (loss) per common share is computed using the weighted average number of common shares outstanding.  Diluted earnings per share (EPS) includes additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants.  Common stock equivalents were not included in the computation of diluted earnings per share when the Company reported a loss because to do so would be antidilutive for periods presented.




 

 

40


 

 

The Company has not issued options or warrants to purchase stock in these periods. If there were options or warrants outstanding they would not be included in the computation of diluted EPS when the Company reported a loss because inclusion would have been antidilutive.


Stock-Based Compensation


In 2006, the Company adopted the provisions of ASC 718-10 Share Based Payments for its year ended December 31, 2008. The adoption of this principle had no effect on the Companys operations.


The Company has elected to use the modifiedprospective approach method. Under that transition method, the calculated expense in 2006 is equivalent to compensation expense for all awards granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair values. Stock-based compensation expense for all awards granted after January 1, 2006 is based on the grant-date fair values. The Company recognizes these compensation costs, net of an estimated forfeiture rate, on a pro rata basis over the requisite service period of each vesting tranche of each award. The Company considers voluntary termination behavior as well as trends of actual option forfeitures when estimating the forfeiture rate.


The Company measures compensation expense for its non-employee stock-based compensation under ASC 505-50, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.  The fair value of the option issued is used to measure the transaction, as this is more reliable than the fair value of the services received.  The fair value is measured at the value of the Companys common stock on the date that the commitment for performance by the counterparty has been reached or the counterpartys performance is complete. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital.

 

Segment Information


The Company follows the provisions of ASC 280-10, Disclosures about Segments of an Enterprise and Related Information. This standard requires that companies disclose operating segments based on the manner in which management disaggregates the Company in making internal operating decisions. Up to December 31 2011 had not segregated the business despite the Company incurring sales of hardware components for the VoIP service as well as the service itself. The Company treated these items as one component.  


With the acquisition of NYTEX, beginning January 1, 2012, the Company began segregating the business between the activities of Teliphone and NYTEX.

 

Uncertainty in Income Taxes


The Company follows ASC 740-10, Accounting for Uncertainty in Income Taxes (ASC 740-10). This interpretation requires recognition and measurement of uncertain income tax positions using a more-likely-than-not approach. ASC 740-10 is effective for fiscal years beginning after December 15, 2006. Management has adopted ASC 740-10 for 2009, and they evaluate their tax positions on an annual basis.



 

 

41


 

 

ITEM 4. CONTROL AND PROCEDURES.




 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures


Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934.  Based on this evaluation as of March 31, 2012, the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level to ensure that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, including this Quarterly Report, were recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and was accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.  Our conclusion is based primarily on our inadvertent failure to file management's assessment of internal controls over financial reporting in connection with the filing of our Annual Report on Form 10-K for the period ending September 30, 2011, which failure stems, we believe, primarily from the fact that we have limited personnel on our accounting and financial staff.  We are in the process of considering changes in our disclosure controls and procedures in order to address the aforementioned failure to timely file the assessment, but have made no changes in our disclosure controls and procedures as of the date of this report.

  

Changes in Internal Controls

 

There have been no changes in our internal controls over financial reporting or in other factors that could materially affect, or are reasonably likely to affect, our internal controls over financial reporting during the period ended March 31, 2012.

 

PART II - OTHER INFORMATION


ITEM 1 - LEGAL PROCEEDINGS

 

  

Former Owners of Orion Communications Inc.

 

During the three months ended March 31, 2012, there have been no material developments in the legal proceedings discussed in our annual report filed on form 10-K for the year ended September 30, 2011.

 

Bank of Montreal, related to Former Owners of Orion Communications Inc.

 

On March 30, 2011, BMO dropped its lawsuit against the Companys subsidiary due to a negotiated settlement which permitted the transfer of full and unencumbered rights to the servicing contracts of the clients of Orion.  As a result of the Company entered into a non-interest bearing Note Payable to BMO for a total of $375,000. The Note calls for an initial payment of $25,000 followed by 24 equal payments due on the 15th of the month of $11,458, and a final payment of $75,000 due on April 15, 2013.   To date, the Company has met all of its payment obligations on this note payable.


Subsequently on November 15, 2011, BMO did not accept the monthly payment claiming that additional legal fees were owed to BMO by Teliphone and no payments have been made since that date. These fees were not listed in the original agreement and the Company and BMO.


The Company, BMO, 9191, Metrakos and the former owners have since reached an agreement on this issue and an amended all party agreement which resolves disputes between the parties will upon final execution see resumption of payments by the Company to BMO.

 



 




42


 

 

ITEM 1A - RISK FACTORS


Not Applicable.

 

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.


ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

 

There have been no material defaults.

 

ITEM 4 - (REMOVED AND RESERVED)

 

ITEM 5 - OTHER INFORMATION


None.

 

ITEM 6 - EXHIBITS

 

31.1

  

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.

 

 

31.2

  

Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.

 

 

32.1

  

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.

 

 

32.2

  

Certification of Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.

 

 

43


 






 

SIGNATURES


Pursuant to the requirements of Section 13 or 15(b) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Montreal, Quebec, Canada.


Dated: May 31, 2012


TELIPHONE CORP



/s/ Lawry Trevor-Deutsch

Lawry Trevor-Deutsch

President & Chief Executive Officer



/s/ Lawry Trevor-Deutsch

Lawry Trevor-Deutsch

Principal Financial Officer



/s/ Lawry Trevor-Deutsch

Lawry Trevor-Deutsch

Principal Accounting Officer




 44






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