UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 or organization)		(IRS Employer ID Number)

 

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

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: 514-313-6000

 

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).  xYes oNo

 

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	(Do not check if a smaller reporting company)	Smaller reporting company	x

 

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

 

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date. As of August 22, 2011, there were 41,360,745 shares of the issuer's $0.001 par value common stock issued and outstanding.

 

 

 

 

 

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.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2011 (UNAUDITED) AND SEPTEMBER 30, 2010
ASSETS
		US $
		JUNE 30,	SEPTEMBER 30,
		2011	2010
		(UNAUDITED)
Current Assets:
Cash and cash equivalents		$-	$-
Accounts receivable, net		235,695	-
Inventory		13,882	-
Prepaid expenses and other current assets		33,771	140,637
Assets of discontinued operations - current		-	501,244
Total Current Assets		283,348	641,881
Fixed assets, net of depreciation		522,398	170,639
Customer lists, net		1,466,606	-
Goodwill		585,040	-
Assets of discontinued operations -non-current		-	560,738
TOTAL ASSETS		$2,857,392	$1,373,258
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES
Current Liabilities:
Bank overdraft		$48,570	$-
Deferred revenue		845	-
Promissory note payable		-	-
Current portion of related party convertible debentures		62,208	58,309
Current portion of non related party loans		35,640	-
Current portion of related party loans		-	8,000
Current portion of obligations under capital lease		6,401	13,165
Liability for stock to be issued		19,868	19,868
Accounts payable and accrued expenses		413,378	12,173
Liabilities of discontinued operations - current		-	1,260,121
Total Current Liabilities		586,910	1,371,636
Long Term Liabilities:
Related party convertible debentures, net of current portion		-	-
Obligations under capital lease, net of current portion		22,979	10,971
Non related party loans, net of current portion		305,642	-
Related party loans, net of current portion		70,828	70,828
Liabilities of discontinued operations -non-current		-	355,517
TOTAL LIABILITIES		986,359	1,808,952
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.001 Par Value; 125,000,000 shares authorized
and 41,360,745 and 37,376,657 shares issued and outstanding, respectively		41,361	37,557
Additional paid-in capital		2,125,882	1,870,191
Accumulated deficit		(316,013)	(2,240,750)
Accumulated other comprehensive income (loss)		19,803	(128,623)
Total Stockholders' Equity (Deficit)		1,871,033	(461,625)
Noncontrolling interest		-	25,931
Total Stockholders' Equity (Deficit)		1,871,033	(435,694)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)		$2,857,392	$1,373,258

1

 

2

3

 TELIPHONE CORP.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)

NOTE 1-

ORGANIZATION AND BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The condensed consolidated financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Company’s annual consolidated 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 condensed consolidated financial statements be read in conjunction with the September 30, 2010 audited financial statements and the accompanying notes thereto.  While management believes the procedures followed in preparing these condensed consolidated 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 condensed consolidated unaudited financial statements reflect all adjustments, including normal recurring adjustments which, in the opinion of management, are necessary to present fairly the consolidated 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.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (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.

Going Concern

As shown in the accompanying condensed consolidated financial statements, the Company has a working capital deficit of ($303,562) as of June 30, 2011, and has an accumulated deficit of ($316,013) through June 30, 2011. The Company has streamlined their business, and expanded their services throughout Canada generating positive gross margins and is demonstrating a positive net income for the current fiscal year.  The Company settled litigation in March, 2011 (see Note 7) that is anticipated to result in a will reduction in its operating costs.  One May 31, 2011, the Company disposed of its majority-owned subsidiary, Teliphone Inc., which resulted in a gain on disposition of $2,462,895.  The Company is overdrawn on its bank accounts by $48,570.

While the Company has demonstrated that it is now 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 Company’s ability to continue as a going concern.  

The Company reduced approximately $2,500,000 in its working capital deficiency with its sale of its subsidiary, Teliphone Inc. in May, 2011.  Teliphone Inc. had accumulated trade payables greater than their trade receivables from inception up to May 2011.  The Company had consolidated its 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 this trade deficit is not reflected in the Company’s financial for the interim period ended June 30, 2011.

The Company reduced approximately $950,000 of related party debt in February 2009 as this was converted into additional shares of the Company’s stock and $22,500 during the year ended September 30, 2010.

On May 1, 2009, the Company entered into a customer assignment contract with 9191-4200 Quebec Inc. where it began to service the customers of Orion Communications Inc., an Ontario, Canada Company.  The transaction is further detailed in Note 10.

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.

5

TELIPHONE CORP.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)

NOTE 1-

ORGANIZATION AND BASIS OF PRESENTATION  (CONTINUED)

Going Concern (Continued)

Management believes that the Company’s 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 Company’s 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 Company’s ability to continue as a going concern for a reasonable period is dependent upon management’s 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 condensed consolidated 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.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)

NOTE 2-  

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The financial statements include the accounts of the Company and its majority owned subsidiaries. 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 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.

The Company does not have available an operating line of credit from the bank. The Company as of June 30, 2011 has $48,570 overdrawn.

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.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (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 condensed consolidated 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 subsidiaries outside the United States that prepare financial statements 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 Company’s 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, 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:

8

TELIPHONE CORP.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (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 Company’s ability to collect is reasonably assured. 

In particular, the Company recognizes:

·

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

o

“Services over the Company’s network” means that a significant portion of the voice or data passes over the Company’s own data network which it controls and

o

“Services resold from Major Provider’s 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 Company’s 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:

9

TELIPHONE CORP.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (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.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (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 $48,635 at June 30, 2011.

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.

11

TELIPHONE CORP.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (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 Company’s 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 nine months ended June 30, 2011 and 2010 are included in selling and promotion expenses in the condensed consolidated 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.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (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. During the year ended September 30, 2010, the Company impaired $337,275 of Goodwill (see Note 10).

 

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.

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

  

   June 30,

June 30,

      2011

2010

Net income (loss)

   

 

  $1,915,553

              ($157,224)

Weighted-average common stock

Outstanding (Basic)

41,360,747

               37,437,316

Weighted-average common stock

Equivalents

Stock Options

          -

   

              -

Warrants

        

 -

      

              -

      

Weighted-average common stock

Outstanding (Diluted)

41,360,747

             37,437,316

13

QB\14252270.1

TELIPHONE CORP.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (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 Company’s operations.

The Company has elected to use the modified–prospective 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 Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s 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. Despite the Company incurring sales of hardware components for the VoIP service as well as the service itself, the Company treats these items as one component, therefore has not segregated their business.

14

QB\14252270.1

TELIPHONE CORP.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (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.

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, 2011, 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 condensed consolidated balance sheets. The Company has retroactively applied the provisions in ASC 810-10-45 to the financial information for the nine months ended June 30, 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 September 2006, ASC issued 820, Fair Value Measurements. ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is encouraged. The adoption of ASC 820 is not expected to have a material impact on the financial statements.

15

TELIPHONE CORP.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)

NOTE 2-

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent Accounting Pronouncements (Continued)

In February 2007, ASC issued 825-10, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of ASC 320-10, (“ASC 825-10”) which permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. A business entity is required to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This statement is expected to expand the use of fair value measurement. ASC 825-10 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.

In December 2007, the Company adopted ASC 805, Business Combinations (“ASC 805”). ASC 805 retains the fundamental requirements that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. ASC 805 defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control.  ASC 805 will require an entity to record separately from the business combination the direct costs, where previously these costs were included in the total allocated cost of the acquisition.  ASC 805 will require an entity to recognize the assets acquired, liabilities assumed, and any non-controlling interest in the acquired at the acquisition date, at their fair values as of that date.  

ASC 805 will require an entity to recognize as an asset or liability at fair value for certain contingencies, either contractual or non-contractual, if certain criteria are met.  Finally, ASC 805 will require an entity to recognize contingent consideration at the date of acquisition, based on the fair value at that date.  This will be effective for business combinations completed on or after the first annual reporting period beginning on or after December 15, 2008.  Early adoption is not permitted and the ASC is to be applied prospectively only.  Upon adoption of this ASC, there would be no impact to the Company’s results of operations and financial condition for acquisitions previously completed.  The adoption of ASC 805 is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

In March 2008, ASC issued ASC 815, Disclosures about Derivative Instruments and Hedging Activities”, (“ASC 815”). ASC 815 requires enhanced disclosures about an entity’s derivative and hedging activities. These enhanced disclosures will discuss: how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for and its related interpretations; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. ASC 815 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not believe that ASC 815 will have an impact on their results of operations or financial position.

16

TELIPHONE CORP.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)

NOTE 2-

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent Accounting Pronouncements (Continued)

In April 2008, ASC 350-30 was issued, “Determination of the Useful Life of Intangible Assets”. The Company was required to adopt ASC 350-30 on October 1, 2008. The guidance in ASC 350-30 for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after adoption, and the disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, adoption. The Company does not believe ASC 350-30 will materially impact their financial position, results of operations or cash flows.

In May 2008, ASC 470-20 was issued, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“ASC 470-20”). ASC 470-20 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. ASC 470-20 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis. The Company does not believe that the adoption of ASC 470-20 will have a material effect on its financial position, results of operations or cash flows.

In June 2008, ASC 815-40 was issued, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“ASC 815-40”), which supersedes the definition in ASC 605-50 for periods beginning after December 15, 2008. The objective of ASC 815-40 is to provide guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock and it applies to any freestanding financial instrument or embedded feature that has all the characteristics of a derivative in accordance with ASC 815-20.

ASC 815-40 also applies to any freestanding financial instrument that is potentially settled in an entity’s own stock. The Company believes that ASC 815-40, will not have a material impact on their financial position, results of operations and cash flows.

In June 2008, ASC 470-20-65 was issued, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios (“ASC 470-20-65”). ASC 470-20-65 is effective for years ending after December 15, 2008. The overall objective of ASC 470-20-65 is to provide for consistency in application of all the standards issued for convertible securities. The Company has computed and recorded a beneficial conversion feature in connection with certain of their prior financing arrangements and does not believe that ASC 470-20-65 will have a material effect on that accounting.

17

TELIPHONE CORP.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)

NOTE 2-

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent Accounting Pronouncements (Continued)

Effective April 1, 2009, the Company adopted ASC 855, Subsequent Events (“ASC 855”). ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires disclosure of the date through which an entity has evaluated subsequent events and the basis for that date – that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. Adoption of ASC 855 did not have a material impact on the Company’s results of operations or financial condition.

Effective July 1, 2009, the Company adopted FASB ASU No. 2009-05, Fair Value Measurement and Disclosures (Topic 820) (“ASU 2009-05”). ASU 2009-05 provided amendments to ASC 820-10, Fair Value Measurements and Disclosures – Overall, for the fair value measurement of liabilities. ASU 2009-05 provides clarification that in circumstances in which a quoted market price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain techniques. ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required for Level 1 fair value measurements. Adoption of ASU 2009-05 did not have a material impact on the Company’s results of operations or financial condition.

In January 2010, the Company adopted FASB ASU No. 2010-06, Fair Value Measurement and Disclosures (Topic 820)- Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). These standards require new disclosures on the amount and reason for transfers in and out of Level 1 and 2 fair value measurements. The standards also require new disclosures of activities, including purchases, sales, issuances, and settlements within the Level 3 fair value measurements. The standard also clarifies existing disclosure requirements on levels of disaggregation and disclosures about inputs and valuation techniques. These new disclosures are effective beginning with the first interim filing in 2010. The disclosures about the rollforward of information in Level 3 are required for the Company with its first interim filing in 2011. The Company does not believe this standard will impact their financial statements.

18

TELIPHONE CORP.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)

NOTE 2-

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent Accounting Pronouncements (Continued)

In February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements”. This update addresses both the interaction of the requirements of Topic 855, “Subsequent Events”, with the SEC’s reporting requirements and the intended breadth of the reissuance disclosures provision related to subsequent events (paragraph 855-10-50-4). The amendments in this update have the potential to change reporting by both private and public entities, however, the nature of the change may vary depending on facts and circumstances. Adoption of ASU 2010-09 did not have a material impact on the Company’s consolidated results of operations or financial condition.

Other ASU’s that have been issued or proposed by the FASB ASC that do not require adoption until a future date and are not expected to have a material impact on the financial statements upon adoption.

NOTE 3-

FIXED ASSETS

Fixed assets as of June 30, 2011 (unaudited) and September 30, 2010 were as follows:

	Estimated Useful	(unaudited)
	Lives (Years)	June 30,	September 30,
		2011	2010
Furniture and fixtures	5	$689	$2,268
Computer equipment	3	568,113	395,884
		568,802	398,152
Less: accumulated depreciation		46,404	227,513
Fixed assets, net		$522,398	$170,639

There was $46,404 and $0 charged to operations for depreciation expense for continuing operations for the nine months ended June 30, 2011 and 2010, respectively. $16,353 of the fixed assets were disposed of in the sale of the subsidiary.

NOTE 4-

CUSTOMER LISTS

Customer lists as of June 30, 2011 (unaudited) and September 30, 2010 were as follows:

	Estimated Useful	(unaudited)
	Lives (Years)	June 30,	September 30,
		2011	2010
Customer lists	5	$1,543,796	$ -
		1,543,796	-
Less: accumulated amortization		77,190	-
Customer lists, net		$1,466,606	$-

There was $77,190 and $0 charged to operations for depreciation expense for continuing operations for the nine months ended June 30, 2011 and 2010, respectively.

19

TELIPHONE CORP.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (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 June 30, 2011.

The Company has accrued $0 in accrued interest on this payable.

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 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.

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 aggregated principal amount of the A and B Debentures was $62,208.  Interest accrued for the period was $5,400.

QB\14252270.1

20

TELIPHONE CORP.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (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 Company’s 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 majority-owned subsidiary, Teliphone Inc., (“Teliphone Inc.”) for its Toronto, Canada offices, which is set to expire on August 31, 2014. The Company pays approximately $47,000 (CND$) for the year ending September 30, 2011 and 2012 and $49,000 for the year ending September 30, 2013 and 2014 for an aggregate total of $192,000. Rent expense for this lease for the nine months ended June 30, 2011 was $10,607 from continuing operations.

The Company’ assumed the various lease agreements from Teliphone Inc., for computer equipment with Dell Financial Services Canada Limited, both operating and capital leases.  The Company pays approximately $1,500 (CDN$) per month on their operating leases.   The Company’s operating leases are set to expire during the year ended September 30, 2011. All new leases the Company have entered into have been capital leases, see Note 11.

21

TELIPHONE CORP.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (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 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 totaling 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, Teliphone Inc., George Metrakos, a current director of the Company and the Company’s 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, Teliphone Inc. 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 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 Teliphone Inc. requesting payment of Orion’s 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 24^th month.  (See Note 12 for further discussion)

22

TELIPHONE CORP.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)

NOTE 8-

STOCKHOLDERS’ EQUITY (DEFICIT)

Common Stock

As of June 30, 2011, the Company has 125,000,000 shares of common stock authorized with a par value of $.001.

The Company has 41,360,745 shares issued and outstanding as of June 30, 2011.

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 Company’s 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 Company’s 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.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (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 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 Company’s operating line of credit facility with its Bank.  The stock has not been issued, however the Company has booked a liability for stock to be issued of $19,868 as of March 31, 2011.

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 Orion’s secured creditors (see Note 10).

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 Company’s 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 Company’s 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 June 30, 2011 the Company had no deferred tax assets.

24

TELIPHONE CORP.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)

NOTE 9-

PROVISION FOR INCOME TAXES (CONTINUED)

At June 30, 2011, the Company had a net operating loss in the amount of amount of ($316,013), of which $363,478 occurred in the operating jurisdiction of Ontario, Canada and ($679,491) occurred in the operating jurisdiction of Nevada.

A reconciliation of the Company’s effective tax rate as a percentage of income before taxes and federal statutory rate for the periods ended June 30, 2011 and 2010 is summarized as follows:

	2011		2010
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 Company’s 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 Company’s 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.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)

NOTE 10-

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

As a result of the lawsuits against the Company’s 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, paid $375,000 to BMO in the form of a note payable (see Note 12) and utilized 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 June 30, 2011, minimum future annual lease obligations are as follows:

Year Ending

September 30, 2011

$  6,401

September 30, 2012

  22,035

September 30, 2013

      944

  29,380

Less: Amounts representing interest

  (3,334)

Total

  26,046

Current portion

 (6,401)

Long-term portion      

$19,645

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 15^th 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 June 30, 2011 as $35,640 as a current liability and $305,642 as a long term liability.  To date, the Company has met all of its payment obligations on this note payable.

26

TELIPHONE CORP.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (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 consolidated 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 Company’s 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.  Summarized financial information for discontinued operations for the nine month period ended June 30, 2011 are as follows:

 

27

TELIPHONE CORP.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)

NOTE 13-

DISCONTINUED OPERATIONS (CONTINUED)

ASSETS
Current Assets:
Cash and cash equivalents
Accounts receivable, net	$643
Inventory
Prepaid expenses and other current assets	98,148
Total Current Assets	98,791
Fixed assets, net of depreciation	16,353
TOTAL ASSETS	$115,144
LIABILITIES
Current Liabilities:
Bank overdraft	$335,819
Deferred revenue	3,238
Current portion of non related party loans	213,219
Current portion of obligations under capital lease	-
Accounts payable and accrued expenses	1,752,499 -
Total Current Liabilities	$2,304,774
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock	$739,005
Additional paid-in capital
Accumulated deficit	(2,462,895)
Accumulated other comprehensive income (loss)	(227,576)
Noncontrolling interest	(238,164)
Total Stockholders' Equity (Deficit)	$(2,189,630)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)	$115,144

28

TELIPHONE CORP.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)

NOTE 13-

DISCONTINUED OPERATIONS (CONTINUED)

NOTE 13-

DISCONTINUED OPERATIONS (CONTINUED)

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.

29

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, 2010, which are incorporated herein by reference, could affect our actual results and could cause our actual consolidated 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 3901823’s operating company Intelco Communications Inc. (“Intelco”) global distribution channels, cost reduction through usage of Intelco’s 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" in a transaction that sought to complement 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, the Company 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.

 

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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 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.  No written agreement exists for this transaction as it was performed by two entities under common control. 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.

Description of Business

 

Principal products or services and their markets

 

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 world’s 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.

 

 

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[What approximate percentage of the company’s revenues comprise each of the services described below?]

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, www.teliphone.ca for Canadian customers and www.teliphone.in for India 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.

 

Distribution methods of the products or services

 

Retail Sales.

 

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 retail 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 retailers below cost in order to subsidize the customer's purchase of the hardware from the retailers. 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.

 

 

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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.  Although we do not anticipate that any claim will be made against us, there can be no assurance that customers will not initiate claims seeking to impose liability against us.  Given that we do not hold product and professional liability insurance coverage, any claim against us, even in the absence of any adverse outcome, could have a material adverse effect on the financial results of the Company.

Status of any publicly announced new product or service

teliPhone Residential IP-Television services

 

We are presently launching an internet-based television service for residential clients that will include traditional cable television and network media, as well as a full suite of pay-per-view listings.  The service is currently in beta testing and we have completed the necessary upgrades to our network in order to accommodate these new services.

 

Results of Operations  –Three Months Ended June 30, 2011 compared with Three Months Ended June 30, 2010.

The following description of an extraordinary event of disposition of Teliphone Inc., the Company’s majority owned subsidiary, is the primary result of the one-time, non-recurring gain from disposition of $1,321,463 for the three month period ending June 30, 2011:

Prior to April 1, 2011, all revenues were generated at the subsidiary level by Teliphone Inc.  Subsequent to April 1, 2011 due to the consolidation of operations between the Company and Teliphone Inc., all revenues were generated at the Company level.  From April 1, 2011 to May 9, 2011, certain suppliers continued to invoice Teliphone Inc. for services delivered to Teliphone Corp during the period.  On May 9, 2011, Teliphone Inc. filed for creditor protection under provisions available to it under the Canadian Bankruptcy and Insolvency Act and as such, these payables do not appear on the books and records of the Company.  The Company sold all of its equity interest in Teliphone Inc. on May 31, 2011.

For information purposes only, the following outlines the Company’s PRO FORMA Statement of Operations in order to demonstrate the Results of Operations for comparative purposes:

According to disclosure requirements of the Financial Accounting Standards Board, the Company has disclosed its discontinued operations in accordance with 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) and as such have removed from the reporting of its Statement of Operations for the nine month ended June 30, 2011 operations which occurred within the disposed entity, Teliphone Inc.  However, since the Company had consolidated its operations effective April 1, 2011, the Company will discuss prior period comparatives for disclosure purposes in the Management’s Discussion and Analysis.

Revenues

We continue to generate revenues from the sale of telecommunications services to our customers, along with the hardware required for our customers to utilize these services even with the disposition of Teliphone Inc.  Prior to the disposition of our equity interest in Teliphone Inc., all of the client and supplier agreements were assigned from Teliphone Inc. to the Company and hence there has been no change in the nature of our business or our ability to generate revenues from our existing customers.

For the three month period ended June 30, 2011, we recorded sales of $1,136,503 as compared to $0 at the parent level for the same period in 2010.  When considering revenues formerly disclosed within Teliphone Inc., the Company would have reported sales of $1,129,089, which demonstrates that the Company has increased sales by 0.6% compared to the prior period.  The revenues were derived entirely from the sale of telecommunications services to residential and business clients.

Cost of Sales

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 customer’s 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.

Our cost of sales were $102,427 for the three month period ended June 30, 2011, as compared to $14,697 in the prior year.   From April 1, 2011 to June 30, 2011, an additional $390,418 was invoiced by suppliers against services delivered by the Company, however these amounts were invoiced to Teliphone Inc. and hence have become part of the proposal to creditors by Teliphone Inc. and not those of the Company. When considering the total cost of sales of $492,845 for the three month period ended June 30, 2011, as compared with $699,886 which represents the total cost of sales for the three month period ended June 30, 2010, the Company experienced a 29.6% decrease in the cost of sales. 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 carrier’s network.  

Gross Margin

Gross Margin for the period was $1,034,076, as compared to ($14,697) in the prior year, however on a Pro Forma basis, Gross Margin for the period was $643,658 as compared to $429,203 for the prior year, an increase of 50.0%.

Operating Expenses

Our operating expenses were likewise affected by the consolidation of our operations and subsequent disposal of 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 have been removed.  Aggregate operating expenses during the three month period endedJune 30, 2011 were $652,209.

Our aggregate operating expenses for the three month period ended June 30, 2011, were $652,209 compared to ($5,350) for the prior year ($331,717 when considering all operations within Teliphone Inc. as well for the prior period, an increase of 96.6%).  The following detailed breakdown of operating expenses considers the entire operation including Teliphone Inc. for the prior year comparatives.  Selling and Promotion expenses was $3,195 for the period compared with $2,920 in the prior period.  Other general and administrative expenses were $372,228 compared with $54,525 in the prior period.  Professional and consulting fees were $153,192 during that period as opposed to $54,518 for the same period last year.   The Company increased its depreciation expenses from $3,421 for the three month period to $123,594 as the company commenced its depreciation of its computer equipment acquired during the consolidation of April 1, 2011 and has commenced to depreciate its acquired Orion Communications client lists effective April 1, 2011.

Net Income

As a result, we had net income of $1,697,822 for the three month period ended June 30, 2011 as compared to a net income of $96,367 for the same period in the prior year.  The net income is primarily due to the gain from discontinued operations of $1,321,463 over the three month period ending June 30, 2011.  

Results of Operations  –Nine Months Ended June 30, 2011 compared with Nine Months Ended June 30, 2010.

The following description of an extraordinary event of disposition of the Teliphone Inc., the Company’s majority owned subsidiary, the primary result of the one-time, non-recurring gain from disposition of $1,514,649 for the nine month period ending June 30, 2011:

Prior to April 1, 2011, all revenues were generated at subsidiary level by Teliphone Inc.  Subsequent to April 1, 2011 due to the consolidation of operations between the Company and Teliphone Inc., all revenues were generated at the Company level.  From April 1, 2011 to May 9, 2011, certain suppliers continued to invoice Teliphone Inc. for services delivered to Teliphone Corp during the period.  On May 9, 2011, Teliphone Inc. filed for creditor protection under provisions available to it under the Canadian Bankruptcy and Insolvency Act and as such, these payables do not appear on the books and records of the Company.  The Company sold all of its equity interest in Teliphone Inc. on May 31, 2011.

Revenues

We continue to generate revenues from the sale of telecommunications services to our customers, along with the hardware required for our customers to utilize these services even with the disposition of Teliphone Inc.  Prior to the disposition of our equity interest in Teliphone Inc., all of the client and supplier agreements were assigned from Teliphone Inc. to the Company and hence there has been no change in the nature of our business or our ability to generate revenues from our existing customers.

For the nine month period ended June 30, 2011, we recorded sales of $1,136,503 as compared to $79,270 for the same period in 2010.  The prior period revenues consisted of consulting services sold at the time to the Company’s subsidiary Teliphone Inc. as management fees and was considered at the time as inter-company.  Taking into consideration revenues for the nine month period ended June 30, 2011 the Company actually produced $3,256,082 revenues for the nine month period ending June 30, 2011.  When considering revenues formerly disclosed within Teliphone Inc. for the prior period of $3,635,732, the Company has decreased revenues by 10.9%.  The revenues for the current period were derived entirely from the sale of telecommunications services to residential and business clients.

Cost of Sales

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 customer’s 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.

Our cost of sales were $85,117 for the nine month period ended June 30, 2011, as compared to ($12,550) in the prior year.  When considering all purchases as outlined in our report of operations for the three month period ended June 30, 2011, our overall cost of sales was $1,959,466 as compared to $2,260,219, a decrease of 13.3%.  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 carrier’s network.  

Gross Margin

Gross margin for the period was $1,051,386, as compared to $91,820 in the prior year, however when considering all the costs and revenues by the entire operation, Gross Margin for the period was $1,296,616 as compared to $1,375,513, a decrease of 5.7%.

Operating Expenses

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 have been removed.  Aggregate operating expenses during the nine month period ending July [June?] 30, 2011 were $636,682.

Our aggregate operating expenses for the nine month period ended June 30, 2011, were $636,682 compared to $234,350 for the prior year ($1,640,802 when considering all operations within Teliphone Inc. as well for the prior period, a decrease of 61.2%).  Selling and Promotion expenses was $3,195 for the period compared with $16,767 in the prior period.  Other general and administrative expenses were $385,403 compared with $151,265 in the prior period.  Professional and consulting fees were $124,490 during that period as compared with $440,741 for the same period last year.   The Company increased its depreciation expenses from $9,689 for the nine month period to $123,594 as the company commenced its depreciation of its computer equipment acquired during the consolidation of April 1, 2011 and has commenced to depreciate its acquired Orion Communications client lists effective April 1, 2011.

Net Income (Loss)

As a result, we had net income of $1,915,553 for the nine month period ended June 30, 2011 as compared to a net loss of ($157,223) for the same period in the prior year.  The operating income is primarily due to the gain from discontinued operations of $1,514,629 over the entire nine month period ending June 30, 2011.

Liquidity and Capital Resources

 

We had cash and cash equivalents of $0 at June 30, 2011 and September 30, 2010.  We were likewise overdrawn on our bank accounts by $48,570.  This amount overdrawn represents checks issued that are still outstanding as of the close of business on June 30, 2011 that have yet to be deposited.

At June 30, 2011, we had a working capital deficit of $303,562, a decrease from a working capital deficit of $729,755 as of September 30, 2010.  The difference in working capital deficit was primarily because of the elimination of certain payables that were in Teliphone Inc. prior to its disposition.

We have been able to sustain operations with no cash and cash equivalents balance as of June 30, 2011 and September 30, 2010 due to our ability to utilize our short-term credit facilities provided by our suppliers.

We do not have a line of credit in place to provide cash needed for growth purposes.  To successfully grow our business, our management believes it must continue to increase our base of customers through the acquisition of telecommunications reseller.  Our current cash on hand is insufficient to be able to make any acquisition of a telecommunications reseller.  Accordingly, we must obtain additional financing in order to increase our customer based through acquisitions.  We anticipate that any additional funding will be in the form of equity financing from the sale of our common stock.  We intend to seek additional funding in the form of equity financing from the sale of our common stock, but cannot provide any assurance that we will be able to raise sufficient funding from the sale of our common stock to fund the acquisition of telecommunications resellers.  If we are unable to obtain additional financing when sought, our ability to grow our business will be impaired and may be forced to curtail operations, liquidate assets, seek additional capital on less favorable terms and/or pursue other measures.  Any additional equity financing may involve substantial dilution to our then existing shareholders.  No financing agreements exist for the Company to date.

The table below sets forth a summary of the significant sources and uses of cash for the nine month periods ended June 30, 2011 and 2010 and the discussion that follows focuses on this information in more detail.

Cash provided by operating activities was $499,330 in the nine months ended June 30, 2011 compared to cash used in operating activities of $149,710 in the nine months ended June 30, 2011.  Net income of $400,924 for the nine months ended June 30, 2011, an increase in accounts payable and accrued expenses of $399,631 and the effect of non-cash charges to income, such as depreciation, were the primary reasons for our positive operating cash flow for the nine months ended June 30, 2011.  The Company’s positive operating cash flows for the nine months ended June 30, 2011 was offset by an increase in accounts receivable of $234,964 and an increase in prepaid expenses of $177,143 attributable to advanced payments required to continue supply from a number of the Company’s main suppliers during the nine months ended June 30, 2011.  We increased our prepayments to suppliers since the Company assumed the supply contracts of its former subsidiary, Teliphone Inc. in order to continue to operate its business.  Since Teliphone Inc. had outstanding payables with these same suppliers, additional security was required by these suppliers in order to permit the continuance of service delivery during the assignment of clients from Teliphone Inc.

Cash used in investing activities was $17,424 in the nine month period ended June 30, 2011, compared to $0 in the nine month period ended June 30, 2010.  All cash used in investing activities during the nine month period June 30, 2010 related to the acquisition of capital assets.

Cash used in financing activities was $6,193 in the nine month period ended June 30, 2011, compared to $105,132 in the nine month period ended June 30, 2010.  This change was primarily attributable to the increase in bank overdraft of $48,364 during the nine months ended June 30, 2011 and a decrease in proceeds from a loan payable of $62,269 from a related party.

We used $604,660 of cash in discontinued operations related to the disposition of Teliphone Inc., our former majority-owned subsidiary, during the nine month period ended June 30, 2011 as compared to discontinued operations providing cash flows of $262,758 for the nine months ended June 30, 2010.

Credit Facility.  We do not have a line of credit in place.  We will continue to seek a new credit facility with our bank since we sold our holdings of Teliphone Inc. which previously maintained a line of credit.  No agreements are in place currently with our bank to borrow funds.  Prior to the consolidation of Teliphone Inc.’s operations and subsequent disposition of our majority-interest in Teliphone, Inc., we had a line of credit in place to provide cash needed for growth purposes.  The Company presently does not have any outstanding credit facility or line of credit. The Company is seeking a credit facility or line of credit to provide the Company with funding should the need arise to finance growth or other expenditures. The Company has had only preliminary discussions with various financial institutions and third parties with the goal of obtaining a new credit facility or line of credit; however, it has no formal commitment regarding any of these alternatives at present.  We anticipate that it will be difficult to obtain a new line of credit facility.   Any new credit facility, if obtained, may not be on terms favorable to the Company.  Any overdraft that the company may have is being secured by the personal guarantee of our President.

Commitments/Contingencies:

 

Capital Expenditures.  At September 30, 2011, the Company has no material commitments for capital expenditures.

 

Lease commitments.  The Company assumed a property lease from Teliphone Inc., our former majority-owned subsidiary, for its Toronto, Canada offices, which is set to expire on August 31, 2014. The Company is obligated under the terms of the lease to pay approximately $45,000 (for the year ending September 30, 2011 and 2012 and $47,000 for the year ending September 30, 2013 and 2014 for an aggregate total of $192,000. Rent expense for this lease for the nine months ended June 30, 2011 was $10,607 from continuing operations.

Note Payable to Bank of Montreal.  On March 30, 2011, the Company entered into a non-interest bearing Note Payable (the “Note”) 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. (“Orion”).  BMO dropped its lawsuit against the Teliphone Inc., the Company’s former majority-owned subsidiary, due to a negotiated settlement which permitted the transfer of full and unencumbered rights to the servicing contracts of the clients of Orion.  The Note calls for an initial payment of $25,000 followed by 24 equal payments due on the 15^th 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 June 30, 2011 as $35,640 as a current liability and $305,642 as a long term liability.  To date, the Company has met all of its payment obligations on this note payable.

Convertible Debentures.  As of June 30, 2011, we had an aggregate of $62,208 in principal amount of convertible debentures that remain outstanding, which come due in February 2012.  These convertible debentures are accruing interest at a rate of 12% per annum and $[insert] in interest has been accrued as of June 30, 2011. These convertible debentures are convertible into shares our the Company’s common stock at the holder’s option.  If the holders choose not to convert the notes, we will either have to repay the notes, or reach an agreement with the note holders to extend the terms thereof.  If we are forced to repay the notes, this could have a material adverse impact on the Company's business, operations, financial condition and prospects.

Long Term Related Party Debt.  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. 

 

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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

While the Company has demonstrated that it is now profitable for the nine month period of operation for the year ending September 30, 2011, after producing operating losses in each of its fiscal years since inception in 1999 (except 2009), the lack of cash, working capital deficiency continue to raise substantial doubt about the Company’s 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. 

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 ($303,562) on June 30, 2011, 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.

 

Critical Accounting Policies

Our financial statements have been prepared in conformity with GAAP. For a full discussion of our accounting policies as required by GAAP, refer to our Annual Report on Form 10-K for the year ended September 30, 2010. We consider certain accounting policies to be critical to an understanding of our condensed consolidated financial statements because their application requires significant judgment and reliance on estimations of matters that are inherently uncertain. The specific risks related to these critical accounting policies are unchanged at the date of this report and are described in detail in our Annual Report on Form 10-K.

 

Recent Accounting Pronouncements

In September 2006, ASC issued 820, Fair Value Measurements. ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is encouraged. The adoption of ASC 820 is not expected to have a material impact on the financial statements.

 

 

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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 June 30, 2011, 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 SEC’s 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, 2010, 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.  

The Company plans to invest further in increasing its staffing to permit a full-time Chief Operating Officer in order to better manage its disclosure requirements and to ensure timely delivery of disclosure material as required.  At the date of this filing, this position has not yet been filled.

  

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 nine months ended June 30, 2011.

 

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

 

BR Communications Inc.

 

The BR Communications Inc. litigation involved a claim against  Teliphone Inc., the Company’s former majority-owned subsidiary.  The Company sold its majority interest in Teliphone Inc. on May 31, 2011 and hence is not directly or indirectly through any subsidiary entity a party to this lawsuit.    

  

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

 

On March 30, 2011, BMO dropped its lawsuit against the Company’s 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.  The Company has classified the Note Payable on its balance sheet as at June 30, 2011 as $35,640 as a current liability and $305,642 as a long term liability.  To date, the Company has met all of its payment obligations on this note payable.

 

 

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ITEM 1A - RISK FACTORS

Not Applicable.

 

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

 

On May 4, 2011, 3,804,088 shares were issued to 9191-4200 Quebec Inc. (“9191”) as part of the acquisition of the Client Lists of Orion Communications Inc. from 9191.

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

 

10.1

Term Sheet to the Asset Purchase Agreement by and between Teliphone Corp. and 9191-4200 Quebec Inc. dated March 31, 2011

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.

 

99.1

Stock Purcahse Agreement by and between Teliphone Corp. and Yeurb Investments Company Limited dated June 1, 2011

 

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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: August 22, 2011

			TELIPHONE CORP.
			/s/ Lawry Trevor-Deutsch
			Lawry Trevor-Deutsch Chief Executive Officer and President

 

			TELIPHONE CORP.
			/s/ Lawry Trevor-Deutsch
			Lawry Trevor-Deutsch Principal Financial Officer

 

			TELIPHONE CORP.
			/s/ Lawry Trevor-Deutsch
			Lawry Trevor-Deutsch Principal Accounting Officer

 

 

 

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