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SECURITIES AND EXCHANGE COMMISSION FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2008 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DELAWARE 470830931 Indicate by check mark whether the registrant is a large accelerated filer, 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. (Check one): Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x At November 10, 2008, the number of shares outstanding of the registrants common stock, no par value (the only class of voting stock), was 181,483,368. TELEMETRIX INC. 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements Telemetrix, Inc. See the accompanying notes to the consolidated financial statements. 3 Telemetrix, Inc. See the accompanying notes to the consolidated financial statements. 4 Telemetrix, Inc. See the accompanying notes to the consolidated financial statements. 5 TELEMETRIX, INC. NOTE 1. BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and Rule 8.03 of Regulation SX. They do not include all of the information and footnotes for complete financial statements as required by GAAP. In management's opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. For further information, refer to the Company's financial statements as of December 31, 2007, and for the two years then ended, including notes thereto included in the Company's Form 10-KSB. NOTE 2. EARNINGS PER SHARE The Company calculates net income (loss) per share as required by SFAS 128, "Earnings per Share." Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding. During periods when they are anti-dilutive, common stock equivalents, if any, are not considered in the computation. NOTE 3. NOTES PAYABLE RELATED PARTIES The Company has outstanding notes payable to four affiliates of the Company in the principal amount of $5,629,109 at September 30, 2008. The Company has recorded accrued interest of $1,653,226 as of September 30, 2008, related to these notes. 7 The Company has issued convertible promissory notes to Nyssen LP (Nyssen) totaling $1,648,259 for advances from November 30, 2004 through September 30, 2008. The notes pay interest at 15% per annum and mature on December 31, 2008. During the nine months ended September 30, 2008, Nyssen, advanced $275,000 and the Company recorded interest expense of $186,760. The Company has issued convertible promissory notes to Becker Capital Management LLC (Becker) totaling $1,875,044 for advances from May 17, 2005, through September 30, 2008. The notes pay interest at 15% per annum and mature on December 31, 2008. During the nine months ended September 30, 2008, Becker advanced $0 and the Company recorded interest expense of $214,067. The Company has issued convertible promissory notes to LB Becker Consulting (LB Becker) totaling $1,638,806 for advances from April 7, 2006 through September 30, 2008. The notes pay interest at 15% per annum and mature on December 31, 2008. During the nine months ended September 30, 2008, LB Becker advanced $270,000 and the Company recorded interest expense of $178,941. On December 31, 2004, the Company recorded a $467,000 promissory note to Tracy Broadcasting Corporation for advances recorded by the Company in 2002 and 2003. The notes bear interest at 10% per annum and have a conversion feature of $.020 per share. The Company used the intrinsic value method to determine proceeds that should be allocated to the embedded beneficial conversion feature for the $467,000 convertible note. The Company recorded $46,618 of interest expense on this note during the nine months ended September 30, 2008 (See Note 7). NOTE 4. NOTES PAYABLE The Company entered into a Business Loan Agreement on March 30, 2007, and borrowed $718,714 on a variable rate loan due on March 31, 2011. The business loan agreement was modified March 30, 2008. Under the modified terms, the Company will pay this loan in accordance with the following payment schedule: 5 monthly consecutive interest payments, beginning April 30, 2008, with interest calculated on the unpaid principal balances at an interest rate based on the Wall Street Journal Prime Rate (currently at 5.0%); 30 monthly consecutive principal and interest payments in the initial amount of $24,865 each, beginning September 30, 2008, with the interest calculated on the unpaid principal balances at the interest rate based on the Wall Street Journal Prime Rate. The current portion of this balance of this loan is $269,274 with $427,570 classified as long-term debt. The Company entered into a Security Agreement granting to Lender a security interest in certain equ
ipment. The Company had previously granted a security interest in the equipment to Becker Capital Management and LB Becker Consulting, who assigned the security interest to this Lender. The Company paid interest of $32,496 related to this note during the nine months ended September 30, 2008. 8 Future minimum principal payments pursuant to long-term debt agreements are as follows: $1,200,000 Convertible debentures with interest at 6% per annum, are in default. The Company recorded $55,025 of interest expense on these debentures for the nine months ended September 30, 2008. Total interest payable on these debentures is $758,153 at September 30, 2008. NOTE 5. CONVERTIBLE NOTE PAYABLE The Company signed a Promissory Note on May 13, 2008, borrowing $750,000 at 15% per annum. The Company paid a 2% loan origination fee of $15,000, to the lender. At the Lenders option, all, or a portion of, the principal and accrued interest may be converted into common stock of the Company at a conversion price of $.03 per share. No monthly payments are required under the Promissory Note; the note and accrued interest are payable May 12, 2009. Principal plus accrued interest payable at maturity is $862,500. Interest accrued through September 30, 2008 is $43,269. The Company provided the lender with guarantees of payment from three principals of Telemetrix, Inc. NOTE 6. GOING CONCERN The Companys financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has experienced significant losses from operations. For the nine months ended September 30, 2008, the Company incurred a net loss of $2,561,756. In addition, the Company has an accumulated deficit of $84,747,926 and working capital and stockholders deficits of $11,674,011 and $11,726,035 at September 30, 2008. The Companys ability to continue as a going concern is contingent upon its ability to expand its service operations and secure additional financing. The Company is pursuing financing for its operations and seeking to expand its operations. Failure to secure such financing or expand its operations may result in the Company not being able to continue as a going concern. 9 The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. NOTE 7. LITIGATION Litigation On January 16, 2007 Tracy Broadcasting Corporation filed a complaint in the District Court for Scottsbluff County, Nebraska, against the Company, in Case No. CI-07 37. Tracy Broadcasting Corporation is owned by Michael Tracy, a former CEO and Director of the Company. Mr. Tracy is also a major shareholder of the Company. The Complaint alleges that the Company owes Tracy Broadcasting Corporation $467,000 plus accrued interest at 10% per annum for outstanding loans under a promissory note issued in December 2004. The Companys records indicate that the promissory notes were repaid in full and dispute the claim. Appeals to compel arbitration in Denver, Colorado have failed. The suit will be argued in Nebraska District Court. On April 12, 2006, Michael J. Tracy filed a complaint in the District Court for Scottsbluff County, Nebraska, against the Company, in Case No. CI-06-291. Mr. Tracy is the former CEO and Director of the Company. The Complaint alleges that the Company owes Mr. Tracy $3,378,129 as of April 1, 2006, including principal and interest for loans Mr. Tracy made to the Company at various times in 2001 and 2002. In November 2006, the Company tendered 23,894,351 shares of common stock to Mr. Tracy in satisfaction of the May 26, 2003 Exchange and Conversion Agreement and 3,472,789 shares of common for deferred compensation. The Company filed a motion to compel arbitration in Denver, Colorado. On November 27, 2007, the motion to compel arbitration was ordered and the claim was dismissed from District Court in Nebraska. As of the date of the financial statements, Mr. Tracy has filed an arbitration action in Denver, Colorado on $5,125. Other On October 19, 2006, the Company filed a Request for Arbitration with the World Intellectual Property Organization against UT Starcom, Inc., the successor in interest to Telos Technologies, Inc., the manufacturer of the Sonata SE switching system (GSM switch). The Request for Arbitration was accepted on October 24, 2006. The dispute relates to a Master Purchase and License Agreement dated October 22, 2003 for a Sonata SE Global System for Mobile Communications switching system. The Company requests arbitration of the following claims: (1) breach of contract; (2) breach of good faith and fair dealing; (3) fraudulent misrepresentations; (4) fraudulent inducement; (5) negligent misrepresentation; (6) intentional interference with existing contractual relations; (7) intentional interference with prospective economic relations; (8) negligent interference with existing economic relations; and (9) negligent interference with prospective economic relations. The Company claims that UT St
arcom failed to perform from the time of installation and UT Starcom failed to deliver five significant features and functionality that UT Starcom represented would be available at the time the Company purchased the GSM switch. These features and functionality include among others, (a) E911-Phase II functionality in the GSM Switch so that Telemetrix could comply with the FCCs mandated 911 services requirement by June 30, 2006; a GSM feature including 10 intelligent network functions into a GSM network system; CALEA, which imposes upon Telemetrix a statutory obligation to ensure that its equipment, facilities or services that provide a customer or subscriber with the ability to originate, terminate or direct communications. Telemetrix requests entry of an award during the arbitration in its favor and against UT Starcom for general damages or alternatively, a rescission of the Agreement plus the cost of arbitration and for such other and further relief as the Arbitrator may deem just and fair. The Arbitrators decision, received November 7, 2008, states that the Company owes UT Starcom an immaterial amount. NOTE 8. CONCENTRATIONS During the nine months ended September 30, 2008, three customers accounted for approximately 25%, 23% and 16%, a total of 64%, of total revenue and one customer accounted for 26% of accounts receivable at September 30, 2008. A large customer notified the Company on July 25, 2008 that the customer had lost its major source of funding and its operations are under the control of its secured creditor. The full amount of this customers receivable, $9,532, was recognized as a bad debt at June 30, 2008. The customer accounted for 24% of the Companys revenues for both the 6 months and 9 months ended September 30, 2008. NOTE 9. COMMITMENTS AND CONTINGENCIES Operating Leases The Company entered into a five year lease with an officer of the Company on January 1, 2008. The lease is for office space of 3,199 square feet for $5,065 per month. The five year lease includes an annual increase of 3% per annum. The lease was modified on September 1, 2008, to include 1,999 square feet for $3,865 per month. The annual rentals are as follows: In addition, the Company leases Nebraska office space pursuant to a lease expiring in April 2009 at a monthly rental of $980. Minimum payments for the years 2008 and 2009 are as follows: 11 Item 2. Management's Discussion and Analysis of Financial Condition and Plan of Operation The following discussion should be read in conjunction with our financial statements and related notes appearing elsewhere in this Form 10-Q and our Annual Report on Form 10-KSB for our fiscal year ended December 31, 2007. The terms "the Company," "we," "our" or "us" refer to Telemetrix, Inc. This discussion contains forward-looking statements based on our current expectations, assumptions, and estimates. The words or phrases "believe," "expect," "may," "anticipates" or similar expressions are intended to identify "forward-looking statements." Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties pertaining to our business, including: (a) our history of losses makes it difficult to evaluate our current and future business and our future financial results; (b) our ability to proceed with our operating plan is dependent on our ability to obtain additional financing; (c) even if we obtain additional debt or equity financing, the value of our common stock may be diluted; (d) our ability to continue as a going concern is contingent upon our ability to expand our service operations and secure additional financing; (e) debt obligations of approximately $9 million may negatively affect our ability to expand our operations; (f) whether we will be able to keep pace with the rapid development of technology in the wireless communications services area; (g) whether our existing technology will become obsolete or too ex
pensive to upgrade; (h) the possibility that our business will be subject to increasing government regulation and related increasing costs; and (i) should we lose the services of third party providers, our operations may be negatively affected, including interruptions in our service. Our third party providers include roaming partners, other wireless network companies, and our switch hosting provider. Statements are made as of the filing of this Form 10-Q with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement. 12 Overview Telemetrix Inc. (through its wholly owned subsidiary, Convey Communications Inc.), is an FCC-licensed operator of wireless communications services, based in Boulder, Colorado. Telemetrix is a public company that trades on PinkSheets under the symbol TLXT. The Company was founded in 1999, acquired its FCC licenses in 2000, and initially focused on paging and wireless utility meter reading services. During 2006, the Company upgraded its network infrastructure to a Nokia R4 packet-based solution that has the capability to support up to 10 million users. In 2007, the Company began offering voice and data services. The Company has roaming agreements with Cingular, T-Mobile and other US carriers as well as Telcel and Telefonica in Mexico. Divisions We currently operate one division, Cellular Services. In 2007, Telemetrix began offering wholesale and retail voice and data services to developers of wireless convergent services that combine PCS (commonly referred to as cellular), voice over internet protocol (VoIP), Wi-Fi, and soon, WiMAX network products as bundled offers. Type of Customers Our customers are developers who purchase our cellular services for branding and marketing customized wireless applications such as wireless or virtual PBX, seamless roaming between IP, WLAN and cell and machine to machine (M2M) application providers.
Washington, D.C. 20549
(Mark one)
x
OR
¨
TELEMETRIX INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction
of incorporation or organization)6770
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification No.)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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:.Yes x No ¨
6650 Gunpark Drive, Suite 100, Boulder, CO 80301
(303) 652-0103
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
Large Accelerated filer ¨
Non-accelerated filer ¨
(Do not check if a smaller
Reporting company)
Accelerated filer ¨
Smaller reporting company x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Table of Contents
INDEX
Table of Contents
Consolidated Balance Sheets
September 30,
2008
December 31,
2007
(Unaudited)
Assets
Current assets:
Cash
$
-
$
46,652
Accounts receivable, net
25,172
38,756
Deposits
27,307
2,918
Total current assets
52,479
88,326
Property and equipment, net
375,546
635,875
Total assets
$
428,025
$
724,201
Liabilities and stockholders' (deficit)
Current liabilities:
Accounts payable
$
1,251,535
$
873,795
Accrued expenses
215,193
378,013
Accrued interest-Convertible debentures
758,153
649,252
Convertible debentures
1,200,000
1,200,000
Convertible note
750,000
-
Notes payable - affiliates
5,629,109
5,084,109
Accrued Interest - affiliates
1,653,226
994,597
Current portion of long-term debt
269,274
164,859
Total current liabilities
11,726,490
9,344,625
Long-term debt
427,570
553,855
Stockholders' (deficit):
Preferred stock, $.001 par value, 25,000,000 shares authorized
none issued or outstanding
-
-
Preferred stock, series D, $.001 par value, convertible,
liquidation preferences $30 per share, 250,000 authorized
none issued or outstanding
-
-
Common stock, $.001 par value,
750,000,000 shares authorized,
181,483,368 shares issued and outstanding
181,484
180,484
Paid in capital
72,840,407
72,831,407
Accumulated (deficit)
(84,747,926
)
(82,186,170
)
Total stockholders' (deficit)
(11,726,035
)
(9,174,279
)
Total liabilities and stockholders' (deficit)
$
428,025
$
724,201
Table of Contents
Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
Three months
Nine months
2008
2007
2008
2007
Revenue:
Cellular services
$
43,231
$
55,941
$
217,365
$
151,239
Cost of revenue
20,004
49,185
137,905
131,565
Gross margin
23,227
6,756
79,460
19,674
Operating expenses:
Selling, general and administrative expenses
657,815
559,782
1,782,851
1,460,518
(Loss) from operations
(634,588
)
(553,026
)
(1,703,391
)
(1,440,844
)
Other (income) expense:
Gain on the settlement of debt
-
-
-
(80,330
)
Interest expense
303,934
224,452
858,365
609,731
Total other (income) expense
303,934
224,452
858,365
529,401
Net (loss)
$
(938,522
)
$
(777,478
)
$
(2,561,756
)
$
(1,970,245
)
Per share information - basic and fully diluted:
Weighted average shares outstanding
181,483,368
180,483,368
181,041,762
180,483,368
Net (loss) per share
$
(0.01
)
$
(0.00
)
$
(0.01
)
$
(0.01
)
Table of Contents
Consolidated Statements of Cash Flows
Six Months Ended September 30, 2008 and 2007
(Unaudited)
2008
2007
Cash flows from operating activities:
Net cash (used in) operating activities
$
(1,319,782
)
$
(1,008,739
)
Cash flows from investing activities:
Purchase of property and equipment
-
(39,550
)
Net cash (used in) investing activities
-
(39,550
)
Cash flows from financing activities:
Convertible notes payable-affiliates
545,000
1,210,000
Proceeds from notes payable
750,000
718,714
Payments on long term debt and notes payable-affiliates
(21,870
)
(718,714
)
Net cash provided by financing activities
1,273,130
1,210,000
Net increase in cash
(46,652
)
161,714
Beginning - cash balance
46,652
45,872
Ending - cash balance
$
-
$
207,586
Supplemental cash flow information:
Cash paid for income taxes
$
-
$
-
Cash paid for interest
$
38,068
$
43,264
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008 (Unaudited)
Type of Debt
Interest
Conversion
Maturity
Amount
Rate
Price
Date
of Principal
Convertible notes
15
%
$.010 per share
12/31/08
$
1,648,259
Convertible notes
15
%
$.010 per share
12/31/08
1,875,044
Convertible notes
15
%
$.010 per share
12/31/08
1,638,806
Convertible notes
10
%
$.020 per share
12/31/06
467,000
Debt discount, less amortization of $467,000
-
Total
$
5,629,109
Table of Contents
Table of Contents
2008
$
66,064
2009
272,691
2010
286,841
2011
71,248
$
696,844
Table of Contents
Table of Contents
2008
$
55,980
2009
47,771
2010
49,205
2011
50,681
2012
52,201
$
255,838
2008
$
11,760
2009
3,920
$
15,680
Table of Contents
Revenues
Our revenues consist of the following:
Voice. Voice includes local and long-distance wireless service provided to resellers and wholesale customers. We offer a comprehensive range of high-quality nationwide wireless voice communications services in a variety of pricing plans on a postpaid basis. Our voice services are on a contract basis and include charges for usage as well as access to the network. We will begin offering voice services on prepaid plans in late 2008.
Data. The Company began offering data services in 2007. GPRS (General Packet Radio Services) is the standard for wireless data communications that operates at speeds up to 115 kilobits per second. It provides continuous connection to the Internet for mobile phone, PDA, smartphone and computer users. Our data services are on a contract basis and include charges for usage as well as access to the network. We will begin offering data services on prepaid plans in late 2008.
13
SMS. The Company has been offering Short Message Service (SMS) for a number of years. SMS (commonly referred to as text messaging) is a globally accepted wireless service that enables the transmission of alphanumeric messages between mobile subscribers and external systems, and is also used in machine-to-machine (M2M) applications.
Our customers use our services primarily for machine-to-machine datacollection and monitoring. As with GPRS, our customers are developersof convergent services as well as application providers in security andutilities. The Company has three U.S. patents related to telemetry anddata transmission. Our data services are on a contract basis and includecharges for usage as well as access to the network. We will begin offeringSMS services on prepaid plans in late 2008.
Other. We also receive cellular revenue from the rental of our towers and cellular roaming revenue
Our revenues are dependent upon the following factors:
Our ability to secure additional agreements for wholesale and reseller customers using our nationwide network access as well as our ability to generate an increase in usage by our existing customers;
Our ability to hire and maintain qualified engineering and customer service staff that will be able to assist in customer set-up and testing;
Demand for our services;
Individual economic conditions in our markets; and
Our general ability to market our services.
Capital Expenditures and Requirements
During the first nine months of 2008 and 2007, we made capital expenditures of $0 and $39,550. During the second quarter of 2008, the Company made a deposit of $99,150 on a billing system. The software developer and the Company recently halted development of the billing system.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts. These estimates and assumptions are evaluated on an on-going basis and are based on historical experience and various other factors that are believed to be reasonable. Estimates and assumptions include, but are not limited to, fixed asset lives, intangible assets, income taxes, and contingencies, which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements. Our principal critical accounting policies consist of revenue recognition and stock compensation. Our critical accounting policies are outlined in our audited financial statements contained in our Form 10-KSB for the year ended December 31, 2007.
14
Results of Operations
Comparison of Three Months Ended September 30, 2008 and 2007
Revenues. Revenues for the three months ended September 30, 2008 decreased by $12,710 or 22.7% to $43,231 from $55,941 for the three months ended September 30, 2007. The decrease in revenue is primarily attributable to the loss of a large customer in July 2008.
Cost of Revenues. Cost of revenues currently consists primarily of roaming charges and signaling charges from our switch operator. Cost of revenues decreased by 59.3% or $29,181 to $20,004 for the three months ended September 30, 2008 from $49,185 for the comparable 2007 period, representing 46.3% and 87.9% of the total revenues for the three months ended September 30, 2008 and 2007, respectively. The decrease in the cost of revenues is attributable to decreased revenues and the related card charges.
Operating (Losses). Operations for the three months ended September 30, 2008 reflected a loss of ($634,588) compared to an operating loss of ($553,026) during the comparable 2007 period. On a year over year basis for the third quarter, our operating losses increased by 14.7% or $81,562. The increase in operating loss was primarily due to increased maintenance and billing system contract costs.
Selling, General and Administrative Expense. General and administrative expense increased by $98,033 or 17.5% to $657,815 for the three month period ended September 30, 2008, from $559,782 for the three-month period ended September 30, 2007. The increase in our general and administrative expenses is primarily attributable an increase in the number of our employees and the related compensation and benefits expense.
Interest Expense. Interest expense for the three-month period ended September 30, 2008 increased by $79,482 or 35.4% to $303,934 as compared to $224,452 for the three-month period ended September 30, 2007. The increase in interest expense is due to increasing loan balances from lenders.
Net Loss. Net loss for the three-month period ended September 30, 2008 increased by 20.7% or $161,044 to ($938,522) from ($777,478) for the three months ended September 30, 2007. The increase in net loss is primarily due to increased operating costs related to compensation and interest expense.
Comparison of Nine Months Ended September 30, 2008 and 2007
15
Revenues. Revenues for the nine months ended September 30, 2008 increased by $66,126 or 43.7% to $217,365 from $151,239 for the nine months ended September 30, 2007. The increase in revenue is primarily attributable to increased cellular offerings including voice and GPRS (General Packet Radio Services) that were not available in early 2007.
Cost of Revenues. Cost of revenues consists primarily of roaming charges and billing service charges. Cost of revenues increased by 4.8% or $6,340 to $137,905 for the nine months ended September 30, 2008 from $131,565 for the comparable 2007 period, representing 63.4% and 86.9% of the total revenues for the nine months ended September 30, 2008 and 2007, respectively. The increase in the cost of revenues is attributable to increased roaming charges and increased billing services charges.
Operating (Losses). Operations for the nine months ended September 30, 2008 reflected a loss of ($1,703,391) compared to an operating loss of ($1,440,844) during the comparable 2007 period. On a year over year basis for the first nine months, our operating losses increased by 18.2% or $262,547. The increase in operating loss was primarily due to increased expenses such as increased equipment maintenance and billing system contract costs and mitigated by the increase in revenues.
Selling, General and Administrative Expense. General and administrative expense increased by $322,333 or 22.1% to $1,782,851 for the nine month period ended September 30, 2008 from $1,460,518 for the nine-month period ended September 30, 2007. The increase in our general and administrative expenses is primarily attributable to an increase in the number of our employees and the related compensation and benefits expenses.
Gain on Settlement of Debt. The Company recorded a gain on the settlement of debt of $-0- for the period ended September 30, 2008 compared to a gain of $80,330 in the third quarter of 2007. The September 2007 gain was the result of vendor debts going beyond the statute of limitations for collection.
Interest Expense. Interest expense for the nine-month period ended September 30, 2008 increased by $248,634 or 40.1% to $858,365 compared to $609,731 for the nine-month period ended September 30, 2007. The increase in interest expense is due to increased loan balances from lenders.
Net Loss. Net loss for the nine-month period ended September 30, 2008 increased by 30.0% or $591,511 to ($2,561,756) from ($1,970,245) for the nine months ended September 30, 2007. The increase in net loss is due to an increase in general and administrative expenses, interest expense, and cost of sales and mitigated by the increase in revenues. Net loss per share remained unchanged at ($0.01) for both nine month periods ended September 30, 2008 and 2007.
16
Balance Sheet
Current Assets. Current Assets amounted to $52,479 as of September 30, 2008 representing a decrease of $35,847 or 40.1% from Current Assets of $88,326 as of December 31, 2007. The decrease is primarily due to the cash balance at September 30, 2008 which reflects the use of funds in operations offset by financing activities.
Current Liabilities. As of September 30, 2008, Current Liabilities are $11,726,490 representing an increase of $2,381,865 or 25.5% from Current Liabilities of $9,344,625 as of December 31, 2007. The increase is due to increased accounts payable and notes payable balances and increased accrued interest payable on the notes.
Liquidity and Capital Resources
Net cash used in operating activities for the period ending September 30, 2008 was ($1,319,782) compared with ($1,008,736) for the same period in 2007.
Cash used in investing activities for the periods ended September 30, 2008 was $0 compared to $39,550 for the same period in 2007. The cash used in investing activities in the second three months of 2007 is due to the purchase of telecommunication billing equipment.
Cash provided by financing activities for the period ended September 30, 2008 was $1,273,130 as compared to $1,210,000 for the period ended September 30, 2007. The cash provided in 2007 is from the proceeds of convertible notes payable from affiliates; the cash provided in the period ended September 30, 2008, is from $545,000 in notes payable from affiliates and $750,000 of notes payable from other sources.
Cash at September 30, 2008 decreased to $0 from $46,652 at December 31, 2007. Cash at October 31, 2008 amounted to $5,325.
We shall continue to finance our operations mainly from loans and fundraising activities. We do not believe that our future cash flow from operations together with our current cash will be sufficient to finance our activities through the year 2008; therefore, we plan to raise money from affiliates to fund continuing operations.
As of September 30, 2008, we have an accumulated deficit of $84,747,926 and working capital and stockholders' deficits of $11,674,011 and $11,726,035.
Our ability to continue as a going concern is contingent upon our ability to attain profitable operations and secure adequate financing.
17
We cannot continue to satisfy our current cash requirements for a period of twelve (12) months through our existing capital. We anticipate total estimated operating expenditures of approximately $1,232,066 over the next twelve (12) months, in the following areas:
Salaries and labor = $278,400
G&A (exclusive of salaries) = $953,666
Our current cash of $0 as of September 30, 2008 and a commitment for additional funding up to $400,000 from an affiliate will satisfy our cash requirements through the end of December 2008.
Accordingly, we will be unable to fund our expenses through our existing assets or cash. In order to acquire funding, we may be required to issue shares of our common stock, which will dilute the interest of current shareholders. Moreover, we may still need additional financing through traditional bank financing or a debt or equity offering; however, because we have limited revenues, and a poor financial condition, we may be unsuccessful in obtaining such financing or the amount of the financing may be minimal and therefore inadequate to implement our business plans. In the event that we do not receive financing or our financing is inadequate, we may have to liquidate our business and undertake any or all of the following actions:
Significantly reduce, eliminate or curtail our business, operating and research and development activities so as to reduce operating costs;
Sell, assign or otherwise dispose of our assets, if any, to raise cash or to settle claims by creditors;
Pay our liabilities in order of priority, if we have available cash to pay such liabilities;
If any cash remains after we satisfy amounts due to our creditors, distribute any remaining cash to our shareholders in an amount equal to the net market value of our net assets;
File a Certificate of Dissolution with the State of Delaware to dissolve our corporation and close our business;
Make the appropriate filings with the Securities and Exchange Commission so that we will no longer be required to file periodic and other required reports with the Securities and Exchange Commission, if, in fact, we are a reporting company at that time; and
Make the appropriate filings with the National Association of Security Dealers to affect a delisting of our stock.
Based upon our current assets, however, we would not have the ability to distribute any cash to our shareholders.
18
If we have any liabilities that we are unable to satisfy and we qualify for protection under the U.S. Bankruptcy Code, we may voluntarily file for reorganization under Chapter 11 or liquidation under Chapter 7. Our creditors may also file a Chapter 7 or Chapter 11 bankruptcy action against us. If our creditors or we file for Chapter 7 or Chapter 11 bankruptcy, our creditors will take priority over our shareholders. If we fail to file for bankruptcy under Chapter 7 or Chapter 11 and we have creditors, such creditors may institute proceedings against us seeking forfeiture of our assets, if any. We do not know and cannot determine which, if any, of these actions we may be forced to take. If any of these foregoing events occur, shareholders could lose their entire investment in our shares.
To date, we have funded our activities principally from loans from related parties and loans from third party lenders.
Contractual Obligations and Commercial Commitments
The Company entered into a five year lease with an officer of the Company on January 1, 2008. The lease is for office space of 3,199 square feet for $5,065 per month. The five year lease includes an annual increase of 3% per annum. The lease was modified September 1, 2008, to reflect 1,999 leased square feet for a monthly rent of $3,865.
The annual rentals are as follows:
2008 | $ | 55,980 | |
2009 | 47,771 | ||
2010 | 49,205 | ||
2011 | 50,681 | ||
2012 | 52,201 | ||
$ | 255,838 |
In addition, the Company leases office space pursuant to a lease expiring in April 2009 at a monthly rental of $980. Future minimum payments are as follows:
2008 | $ | 11,760 | |
2009 | 3,920 | ||
$ | 15,680 |
19
The Company signed a Promissory Note on May 13, 2008, borrowing $750,000 at 15% per annum. The Company paid a 2% loan origination fee of $15,000, to the lender. At the Lenders option, all, or a portion of, the principal and accrued interest may be converted into common stock of the Company at a conversion price of $.03 per share. No monthly payments are required under the Promissory Note; the note and accrued interest are payable May 12, 2009. Principal plus accrued interest payable at maturity is $862,500. Interest accrued through September 30, 2008, is $43,269. The Company provided the lender with guarantees of payment from three principals of Telemetrix, Inc.
The Company entered into a Business Loan Agreement on March 30, 2007, and borrowed $718,714 on a variable rate loan due on March 31, 2011. The business loan agreement was modified March 30, 2008. Under the modified terms, the Company will pay this loan in accordance with the following payment schedule: 5 monthly consecutive interest payments, beginning April 30, 2008, with interest calculated on the unpaid principal balances at an interest rate based on the Wall Street Journal Prime Rate (currently at 5.0%); 30 monthly consecutive principal and interest payments in the initial amount of $24,864 each, beginning September 30, 2008 with the interest calculated on the unpaid principal balances at the interest rate based on the Wall Street Journal Prime Rate. The current portion of this balance of this loan is $269,274 with $427,570 classified as long-term debt. The Company entered into a Security Agreement granting to Lender a security interest in certain equi pment. The Company had previously granted a security interest in the equipment to Becker Capital Management and LB Becker Consulting, who assigned the security interest to this Lender.
Future minimum principal payments pursuant to long-term debt agreements are as follows:
2008 | $ | 66,064 | |
2009 | 272,691 | ||
2010 | 286,841 | ||
2011 | 71,248 | ||
$ | 696,844 |
$1,200,000 Convertible debentures interest at 6.09% per annum, conversion feature allows the holder to use the debenture as payment for a like value of securities should the Company complete a stock offering of $6,000,000 at January 1, 2001. Such an offering was not completed. The debentures are currently in default. The Company recorded $55,026 of interest expense on these debentures for nine months of 2008. Total interest payable on these debentures is $758,153 at September 30, 2008.
20
In September 2006, the Company entered into an agreement with Verisign for output billing services. This contract enables the Company to provide billing services to our roaming partners. The contract is for 36 months and the charges for this service are transaction based with certain minimums.
In September 2006, the Company entered into an agreement with ARS Informatica for voice and data billing services. This contract enables the Company to provide billing services to our voice and data customers. The contract is for three years and the charges for this service are transaction based with certain minimums.
On April 3, 2006, the Company entered into a Hosting Agreement and an Equipment Services Agreement with a Nokia value added reseller located in Texas. This nine year agreement requires a monthly payment of $8,500 per month for services to operate and maintain our radio access network in Nebraska. Additionally, the company signed a nine year agreement on office space in Scottsbluff, Nebraska to host our media gateway equipment. This lease requires a monthly payment of $980.
On May 14, 2008 the Company entered into a Billing Software Agreement for billing software development. The Company and the software developer recently terminated the software development.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a 15(e) and 15d 15(e) under the Securities and Exchange Act of 1934, as amended, or the Exchange Act, which are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to our management, including our President, Chairman of the Board, and Chief Financial Officer and Chief Executive Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our CEO and CFO, or persons performing similar functions, our management has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this interim report. Based on that evaluation, our CEO and CFO, or persons performing similar functions, concluded that our disclosure controls and procedures were effective as of September 30, 2008.
21
Evaluation of Changes in Internal Control over Financial Reporting
Under the supervision and with the participation of our CEO and CFO, or persons performing similar functions, our management has evaluated our internal control over financial reporting during the third quarter of 2008. Based on that evaluation, our CEO and CFO, or persons performing similar functions, did not identify any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION Item 1. Legal Proceedings |
On January 16, 2007 Tracy Broadcasting Corporation filed a complaint in the District Court for Scottsbluff County, Nebraska, against the Company, in Case No. CI-07 37. Tracy Broadcasting Corporation is owned by Michael Tracy, a former CEO and Director of the Company. Mr. Tracy is also a major shareholder of the Company. The Complaint alleges that the Company owes Tracy Broadcasting Corporation $467,000 plus accrued interest at 10% per annum for outstanding loans under a promissory note issued in December 2004. The Companys records indicate that the promissory notes were repaid in full and dispute the claim. The Company filed a motion to compel arbitration in Denver, Colorado. On November 27, 2007 the motion was denied and the Company has appealed the decision with the Nebraska Supreme Court. The appeal was denied; the suit will be heard in Nebraska District Court. The date has not been announced.
On April 12, 2006, Michael J. Tracy filed a complaint in the District Court for Scottsbluff County, Nebraska, against the Company, in Case No. CI-06-291. Mr. Tracy is the former CEO and Director of the Company. The Complaint alleges that the Company owes Mr. Tracy $3,378,129 as of April 1, 2006, including principal and interest for loans Mr. Tracy made to the Company at various times in 2001 and 2002. In November 2006, the Company tendered 23,894,351 shares of common stock to Mr. Tracy in satisfaction of the May 26, 2003 Exchange and Conversion Agreement and 3,472,789 shares of common for deferred compensation. The Company filed a motion to compel arbitration in Denver, Colorado. On November 27, 2007, the motion to compel arbitration was ordered and the claim was dismissed from District Court in Nebraska. As of the date of filing these financial statements, Mr. Tracy has requested arbitration on $5,125 of alleged amounts owed.
22
Other
On October 19, 2006, the Company filed a Request for Arbitration with the World Intellectual Property Organization against UT Starcom, Inc., the successor in interest to Telos Technologies, Inc., the manufacturer of the Sonata SE switching system (GSM switch). The Request for Arbitration was accepted on October 24, 2006. The dispute relates to a Master Purchase and License Agreement dated October 22, 2003 for a Sonata SE Global System for Mobile Communications switching system. The Company requests arbitration of the following claims: (1) breach of contract; (2) breach of good faith and fair dealing; (3) fraudulent misrepresentations; (4) fraudulent inducement; (5) negligent misrepresentation; (6) intentional interference with existing contractual relations; (7) intentional interference with prospective economic relations; (8) negligent interference with existing economic relations; and (9) negligent interference with prospective economic relations. The Co mpany claims that UT Starcom failed to perform from the time of installation and UT Starcom failed to deliver five significant features and functionality that UT Starcom represented would be available at the time the Company purchased the GSM switch. These features and functionality include among others, (a) E911-Phase II functionality in the GSM Switch so that Telemetrix could comply with the FCCs mandated 911 services requirement by June 30, 2006; a GSM feature including intelligent network functions into a GSM network system; CALEA, which imposes upon Telemetrix a statutory obligation to ensure that its equipment, facilities or services that provide a customer or subscriber with the ability to originate, terminate or direct communications. Telemetrix requests entry of an award during the arbitration in its favor and against UT Starcom for general damages or alternatively, a rescission of the Agreement plus the cost of arbitration and for such other and further relief as the Arbitrator may deem just and fair. The Arbitrator decision, dated November 7, 2008, determines that the Company owes UT Starcom an immaterial amount.
We are subject to disputes and litigation in the ordinary course of our business. None of these matters, in the opinion of our management, is material or likely to result in a material effect on us based upon information available at this time.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
23
Item 6. Exhibits and Reports on Form 8-K Exhibits |
33 |
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 |
34 |
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 |
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
November 10, 2008
Telemetrix Inc.
By: /s/ William Becker | November 10, 2008 | |
William Becker, Chairman | ||
By: /s/ Gary Brown | November 10, 2008 | |
Gary Brown, Director | ||
By: /s/ Larry Becker | November 10, 2008 | |
Larry Becker, Director | ||
By: /s/ Patrick Kealy | November 10, 2008 | |
Patrick Kealy, Director |
24
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CERTIFICATION |
I, William Becker, Chief Executive Officer (Principal Executive and Accounting Officer) certify that:
1. | I have reviewed this quarterly report on Form 10-Q for the first fiscal quarter September 30, 2008, of Telemetrix Inc.; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial position, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The small business issuers other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in exchange Act Rules 13a- 15(f) and 15d-15(f)) for the small business issuer and have: | |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared: | |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
c. | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure control and procedures, as of the end of the period covered by this report based on such evaluation; and | |
d. | Disclosed in this report any change in the small business issuers internal control over financial reporting that occurred during the small business issuers most recent fiscal quarter (the small business issuers fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuers internal control over financial reporting; and | |
5. | The small business issuers other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuers auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): | |
a. | All significant deficiencies and material weaknesses in the design or operating of internal control over financial reporting which are reasonably likely to adversely affect the small business issuers ability to record, process, summarize and report financial information; and | |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuers internal control over financial reporting. |
Date: November 10, 2008 |
/s/ William Becker
William Becker
Chief Executive Officer and Chief Financial Officer
(Principal Executive and Accounting Officer)
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Annual Report on Form 10-Q (the Report) of Telemetrix Inc. (the Company) for the quarter ended September 30, 2008, I, William Becker, Chief Executive Officer (Principal Executive and Financial Officer) of the Company, hereby certify pursuant to 18 U.S.C. section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
November 10, 2008 |
/s/ William Becker
Name: William Becker
Title: Chief Executive Officer
(Principal Executive and Financial Officer)