10-Q 1 teliphone_10q20121231.htm TELIPHONE CORP 12-31-2012 10-Q Converted by EDGARwiz



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 DECEMBER 31, 2012


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)

 

300-1550 Alberni, Vancouver, British Columbia V6G 1A5

(Address of principal executive offices) (Zip Code)


Registrants telephone number, including area code: 604-990-2000

 

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 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

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date. As of April 5, 2013, there were 124,660,745 shares of the issuer's $.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

29

 

 

 

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

DECEMBER 31, 2012 (UNAUDITED) AND SEPTEMBER 30, 2012


ASSETS

   US $

DECEMBER 31,

SEPTEMBER 30,

         2012          

             2012

(UNAUDITED)

Current Assets:

  Cash

 $1,562,026

 $22,821

  Accounts receivable, net

 4,021,499

 892,549

  Accounts receivable - related party

 -   

 58,180

  Inventory

 47,178

 16,257

  Investments

 20,444

 20,444

  Prepaid expenses and other current assets

           2,094,204

                 51,234

    Total Current Assets

               7,745,351

              1,061,485


  Fixed assets, net of depreciation

 10,245,962

 2,924,075

  Prepaid expenses, net of current portion

 1,930,397

 -   

  Customer lists, net

 3,556,045

 1,505,657

  Goodwill

         13,641,659

             2,585,040


TOTAL ASSETS

       $37,119,414

           $8,076,257


LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Current Liabilities:

  Deferred revenue

 $1,474,676

 $906

  Current portion of related party convertible debentures

 60,180

 61,026

  Current portion of non related party notes

 2,682,578

 305,520

  Current portion of related party loans

 224,450

 112,880

  Current portion of obligations under capital lease

 282,228

 3,922

  Liability for stock to be issued

 19,868

 19,868

  Accounts payable and accrued expenses

 3,617,179

 2,544,229

  Other accrued liabilities

 2,041,430

 -   

  Liabilities for payroll

           1,580,297

              348,359


      Total Current Liabilities

             11,982,886

           3,396,710


Long Term Liabilities:

  Obligations under capital lease, net of current portion

 237,521

 -   

  Non related party, net of current

 2,034,203

 -   

  Related party loans, net of current

                70,828

               70,828


         14,325,438

          3,467,538


STOCKHOLDERS' EQUITY

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

    and 124,660,745 and 61,360,745 shares issued and outstanding,

    respectively

 124,660

 63,160

  Additional paid-in capital

 26,048,082

 7,554,082

  Accumulated deficit

 (3,370,048)

 (3,006,956)

  Accumulated other comprehensive income (loss)

               (8,718)

              (1,567)


      Total Stockholders' Equity

 22,793,976

 4,608,719


TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

            $37,119,414

 

$8,076,257


The accompanying notes are an integral part of the consolidated financial statements




 TELIPHONE CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2012 AND 2011

(UNAUDITED)


           

            US$

         THREE MONTHS ENDED

                  DECEMBER 31,

        2012       

         2011                       


OPERATING REVENUES

  Revenues

   $2,887,853

     $1,225,176


COST OF REVENUES

  Inventory, beginning of period

 16,257

 18,690

  Purchases and cost of VoIP services

 1,713,452

 791,114

  Inventory, end of period

 (47,178)

 (12,849)

       Total Cost of Revenues

    1,682,531

        796,955


GROSS PROFIT

     1,205,322

        428,221


OPERATING EXPENSES

   Selling and promotion

 33,235

 -

   Wages, professional and consulting fees

622,245

 233,693

   Other general and administrative expenses

 386,603

 79,940

   Depreciation and amortization

       516,900

          199,207

       Total Operating Expenses

    1,558,983

         512,840


NET INCOME (LOSS) BEFORE OTHER

INCOME (EXPENSE)

 (353,661)

 (84,619)


OTHER INCOME (EXPENSE)

   Interest expense

         (9,431)

           (3,884)

       Total Other Income (Expense)

         (9,431)

           (3,884)


NET INCOME (LOSS) BEFORE PROVISION

FOR INCOME TAXES

 (363,092)

 (88,503)

Provision for Income Taxes

 -

 -


NET INCOME (LOSS) APPLICABLE

TO COMMON SHARES

   $(363,092)

       $(88,503)



NET INCOME (LOSS) PER BASIC AND

DILUTED SHARES

$(0.00)

 $(0.00)


WEIGHTED AVERAGE NUMBER OF COMMON

    SHARES OUTSTANDING

  77,510,745

    41,578,137


COMPREHENSIVE INCOME (LOSS)

     Net income (loss)

 $(363,092)

 $(88,503)

     Other comprehensive income (loss)

         Currency translation adjustments

          (7,151)

          34,089

Comprehensive income (loss)

    $(370,243)

       $(54,414)

The accompanying notes are an integral part of the consolidated financial statements

















TELIPHONE CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2012 AND 2011

(UNAUDITED)

US$

THREE MONTHS ENDED

DECEMBER 31,

          2012      

         2011  


CASH FLOWS FROM OPERATING ACTIVITIES

   Net (loss)

        $(363,092)

      $(88,503)


   Adjustments to reconcile net (loss) to net cash

     provided by operating activities:

     Depreciation and amortization

 516,900

 199,207


  Changes in assets and liabilities

     (Increase) in accounts receivable

 (733,981)

 (44,435)

     (Increase) decrease in inventory and other assets

 (5,967)

 5,841

     (Increase) decrease in prepaid expenses and other current assets

 312,619

 (20,060)

     (Decrease) Increase in liability for stock to be issued

 -

 -

     Increase (decrease) in deferred revenues

 103,613

 100

    Increase (decrease) in accounts payable and accrued expenses

 891,193

 201,033

     Total adjustments

   1,084,377

       341,450


     Net cash provided by operating activities

    721,285

       252,947


CASH FLOWS FROM INVESTING ACTIVITIES

   Acquisition of cash on purchase of subsidiary

 943,726

 -

   Acquisitions of capital assets

          (17,736)

     (129,454)


      Net cash provided by (used in) investing activities

       925,990

     (129,454)


CASH FLOWS FROM FINANCING ACTIVITES

    Repayments of amounts under capital lease

 (22,210)

 (6,254)

   Advancement (Repayment) of Notes payable - non-related parties

 (228,423)

 22,005

   (Repayment) Proceeds from loan payable - related parties, net

      152,800

     (173,612)


       Net cash (used in) financing activities

   (97,833)

     (157,861)

 

Effect of foreign currencies

          (10,237)

        31,603


NET INCREASE (DECREASE) IN CASH

 1,539,205

 (2,765)


CASH - BEGINNING OF PERIOD

         22,821

        37,481


CASH - END OF PERIOD

  $1,562,026

      $34,716


CASH PAID DURING THE PERIOD FOR:

    Interest expense

        $9,431

       $3,884


SUPPLEMENTAL NONCASH INFORMATION


Warrants issued for conversion of notes payable non-related

$5,000,000

$ -




Accounts payable forgiven for goodwill on NYTEX

$992,958

$ -


Acquisition of  Quebec:

Accounts receivable

$2,347,975

$ -

Prepaid expenses and other assets

4,334,079

-

Property, plant and equipment

7,758,629

-

Customer lists

2,152,578

-

Goodwill

12,049,765

-

Accounts payable

(9,171,061)

-

Notes payable

(6,287,232)

-

Long-term liabilities

(598,459)

-

Common stock issued for acquisition

(13,530,000)

-


Cash acquired in acquisition

($943,726)

$ -


Acquisition of NYTEX:

Customer lists

$ -

$500.000

Other receivables

-

2,000,000

Depreciable assets

-

2,500,000


Common stock issued in acquisition

$ -

$5,000,000




















The accompanying notes are an integral part of the consolidated financial statements




TELIPHONE CORP.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2012 AND 2011

(UNAUDITED)


NOTE 1-

ORGANIZATION AND BASIS OF PRESENTATION


The unaudited consolidated financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  The financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Companys annual statements and notes.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.  It is suggested that these consolidated financial statements be read in conjunction with the September 30, 2012 audited financial statements and the accompanying notes thereto.  While management believes the procedures followed in preparing these 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 unaudited consolidated financial statements reflect all adjustments, including normal recurring adjustments which, in the opinion of management, are necessary to present fairly the operations and cash flows for the periods presented.


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


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


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


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


On April 1, 2011, the Company consolidated its operations into that of the parent company.  On May 31, 2011, the Company sold its entire ownership holdings in its




subsidiary, Teliphone Inc. and continued operating the same business as before the disposition.


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


NYTEX is a telecommunications commodity exchange established in October 2008 and officially launched in June 2009. It focuses on facilitating the exchange of international call termination. International call termination occurs when a caller initiates a call in one country and it terminates in another. NYTEX provides services much like other commodity exchanges whereby it provides a platform for buyers and sellers to come together to purchase and sell international termination. Unlike traditional telecommunications exchanges where buyers and sellers are matched one to one on a circuit to circuit, in the NYTEX concept sellers sell their termination into a market and buyer buy from that market. NYTEX also offers a one to one trading facility for clients who request it. NYTEX manages all aspects of the transactions including technical clearing, financial clearing and quality control of the termination bought and sold on the exchange.   NYTEX developed all technical and conceptual aspects in house which includes a unique anti-False Answer Supervision (FAS) system which reduces the number of false calls by up to 90%. NYTEX has technical data centers in Montreal and London which manage all calls. Subsequently with the acquisition of the operations and network of Navigata Communications 2009 Inc., NYTEX will be able to take advantage of Navigatas data centers in Calgary, Edmonton, Toronto, Vancouver and Kelowna. It will further be able to take advantage of Navigatas existing wholesale business.


On December 11, 2012, Teliphone Corp. (the "Company") completed the acquisition of the core assets and network (the "Navigata Acquired Businesses") of Navigata Communications 2009 Inc. (the "Seller"). The acquisition was effected pursuant to a two-step process involving a Purchase Agreement, dated as of November 30, 2012, among 9191-4200 Quebec Inc., a corporation incorporated under the laws of the Province of Quebec, Canada ("Quebec"), the Seller and certain affiliates of Quebec (the "Asset Purchase Agreement"); and a Share Exchange Agreement, dated as of December 11, 2012, by and between the Company and Fiducie Residence JAAM, a family trust registered in the Province of Quebec, Canada ("JAAM").


On November 30, 2012, pursuant to the Asset Purchase Agreement, Quebec acquired from Seller selected assets and liabilities related to the business of providing telecommunications services, including voice, data and internet services, to service providers and end users, using its national MPLS-enabled data backbone, microwave backhaul network in British Columbia, and carrier points of interconnection in Vancouver, Toronto, Seattle, LA, and New York (the "Asset Purchase"). As consideration for the Asset Purchase, Quebec paid an aggregate consideration of CD$6,440,000, along with the assumption of certain limited current liabilities of the Seller, as follows: (i) CD$500,000 paid in cash by wire transfer at closing of the Asset Purchase; (ii) $940,000 to be paid in cash by certified check, wire transfer or other immediately available funds on December 14, 2012; and (iii) a total of CD$5,000,000 to be paid in cash in five separate, equal installments of CD$1,000,000 each due on December 15 of each of 2013, 2014, 2015, 2016 and 2017 (the "Deferred Consideration"). Interest will accrue on the Deferred Consideration at a rate of 6.5% per annum. In addition, under a Temporary Service Agreement, an additional CD$386,629 was agreed to be added to the purchase price for employees and Cascade Directors




services, bringing the total purchase price to CD$6,826,630.  On December 28, 2012, JAAM assumed the $5,000,000 debt from the Company in exchange for 11,416,667 warrants for common shares of the Company.


On December 11, 2012, the Company completed the acquisition from JAMM of 100% of the outstanding stock of Quebec (the "Stock Acquisition"). The Stock Acquisition was effected pursuant to a Share Exchange Agreement in which the Company acquired all of Quebecs outstanding shares in exchange for tendering 61,500,000 shares of the Company, valued at US$13,530,000, to JAMM. Quebec was subsequently re-named Teliphone Navigata-Westel Communication Inc.


The warrants are based on a vesting schedule of 5 tranches with each tranche exercisable for 3 years of the date of vesting as follows:


Tranche

Vesting Date

Number

Purchase Price

Expiry of

    

of Warrant

of Warrants

per share(USD)

Warrant


1

December 15, 2013

5,000,000

 $0.20

December 15, 2016

2

December 15, 2014

2,500,000

 $0.40

December 15, 2017

3

December 15, 2015

1,666,667

 $0.60

December 15, 2018

4

December 15, 2016

1,250,000

 $0.80

December 15, 2019

5

December 15, 2017

1,000,000

 $1.00

December 15, 2020



On  December 28, 2012 the Company entered in to an agreement with The New York Telecom Exchange Inc., a New York Company (NYTEX) under which NYTEX unconditionally assumed all responsibility and liability for $992,958 of liabilities relating to invoices from three suppliers that are currently shown as Accounts Payable on the books of the Company. No consideration is payable by the Company in this transaction. As a result of this transaction, the Company decreased the goodwill purchased in the transaction with NYTEX one year earlier.


On February 8, 2013 the Company completed the acquisition of 100% of the outstanding stock of Titan Communications Inc. The acquisition was effected through a two stage process. Firstly, pursuant to a Share Purchase Agreement (the SPA) effective February 8, 2013, Fiducie Familiale M.A.A. ("MAA"), a related party to the Company, acquired all of Titans outstanding shares in exchange for a total consideration of $1,696,600. The consideration is payable in accordance with the following schedule: i) $349,300  paid at closing; ii) $34,930 paid 30 days from closing; iii) $34,930 paid 60 days from closing; and iv) the balance ($1,277,440) to be paid in 36 equal monthly payments ($35,484 each) beginning 90 days from closing. Additional consideration equal to, 10% of the aggregate revenue generated by Titan above $1,663,267 in the first 12 months beginning 30 days from closing and 10% of the aggregate revenue generated by Cloud-Phone Inc above $540,000 in the first 12 months beginning 30 days from closing, may also be payable if the revenue thresholds are surpassed. Secondly, also on February 8, 2013 the Company acquired from MAA all share capital, assets and liabilities of Titan in return for assuming all liabilities due to the former shareholders of Titan under the SPA plus the payment of $1.


On February 8, 2013 the Company completed the acquisition of 100% of the outstanding stock of Cloud-Phone Inc. The acquisition was effected pursuant through a two stage process. Firstly, pursuant to a Share Purchase Agreement (the SPA) effective February 8, 2013, Fiducie Familiale M.A.A. ("MAA"), a related party to the Company acquired all of Cloud-Phones outstanding shares in exchange for the assumption of certain liabilities of Cloud Phone totaling $99,800. The consideration is payable in accordance with the following schedule: i) $19,960 payable at closing; ii) the balance ($79,840) to be paid in




20 equal monthly payments ($3,992 each) beginning 30 days after closing. Secondly, also on February 8, 2013 the Company acquired from MAA all share capital, assets and liabilities of Cloud-Phone in return for assuming all liabilities due under the SPA plus the payment of $1.


Going Concern

As shown in the accompanying consolidated financial statements, the Company has incurred a net loss of $363,092 for the three months ended December 31, 2012 as well as having a working capital deficit of $4,237,535 as of December 31 2012 and has an accumulated deficit of $3,370,048 through December 31, 2012. The Company has and continues to streamline their business, and has expanded their services throughout Canada generating positive gross margins. With the acquisition of NYTEX and the core operations and network of Navigata Communications 2009 Inc. acquired by Quebec, whom the Company acquired, the Company added significant annualized revenues including wholesale international long distance termination to it service offerings. The positive gross margin generated by the Company was largely offset by an increase in depreciation due to investment in equipment, customer lists, an increase in consulting fees for platform upgrades as well as product development and implementation of its IPTV service. As the acquisition of Navigata was completed on December 11, 2013, only 20 days related revenues and expenditures are reflected in the Condensed Consolidated Statements of Operations. Annualized revenues from Navigata at time of acquisition were approximately $33 million. Annualized net loss from Navigata was approximately $5m for its last fiscal year.


Teliphone Inc. had accumulated trade payables greater than their trade receivables up to May 2011.  The Company had consolidated their operations such that the Company and not its former 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.


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.


Management believes that the Companys capital requirements will depend on many factors. These factors include the increase in sales through existing channels as well as its ability to leverage its technology into the commercial small business segments.


Lastly, on December 16, 2012 the Company completed an acquisition of the core operations and network of Navigata Communications 2009 Inc. pursuant to an asset purchase agreement executed on November 30, 2012 through an acquisition company, 9191-4200 Quebec Inc. The assets acquired related to the business of providing telecommunications services, including voice, data and internet services, to service providers and end users, using its national MPLS-enabled data backbone, microwave backhaul network in British Columbia, and carrier points of interconnection in Vancouver, Toronto, Seattle, Los Angeles, and New York. While the acquisition increased the Company's sales and net equity, it will require a significant effort related to restructuring including negotiation with creditors and rationalization of resources. The Companys balance sheet includes a full provision for un-validated liabilities assumed through the acquisition. It is managements opinion that a yet to be determined portion of assumed liabilities will be eliminated during the validation process.


The Companys ability to continue as a going concern for a reasonable period is dependent upon managements ability to raise additional interim capital.  There can be no




assurance that management will be able to raise sufficient capital, under terms satisfactory to the Company, if at all.


The 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.



NOTE 2-  

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Principles of Consolidation


The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.


Use of Estimates


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


Cash

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





Prepaid Expenses


The Company pays for some property related services in advance and recognizes these expenses as prepaid at the balance sheet date. Prepaid expenses are carried at fair value which is deemed to be the gross value of the pre-payment due to the short-term maturity of these payments. The Company does have certain prepaid expenses that extend beyond one-year and those are classified as non-current assets.


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.


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. The Company accounts for its investment in a nonconsolidated company in accordance with the provisions of ASC 820.


Currency Translation

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


Revenue Recognition


Operating revenues for the Company are generated directly within the Company and not in its former subsidiary, Teliphone Inc. since the Company consolidated its operations and sold the inoperative Teliphone Inc. on May 31, 2011.  Operating revenues consist of telecommunications services (voice, video, data and long distance), customer equipment (which enables the Company's telephony services), consulting services and shipping revenue. Generally revenue recognition is the same for Teliphone Corp., the NYTEX




wholesale platform and the operations acquired from Navigata Communications 2009 Inc. except where indicated below. The point in time at which revenue is recognized is determined in accordance with Revenue Recognition under ASC 605-50, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products) ("ASC 605-50"), and ASC 605-25, "Revenue Arrangements with Multiple Deliverables" (ASC 605-25). When the Company emerged from the development stage with the acquisition of Teliphone Inc. in 2005, they began to recognize revenue from their Telephony services when they are earned, specifically when all the following conditions are met:

·

Services are provided or products are delivered to customers 

·

There is clear evidence that an arrangement exists 

·

Amounts are fixed or can be determined 

·

The Companys ability to collect is reasonably assured. 


In particular, the Company recognizes:


For Teliphone Corp. and the acquired operations of Navigata Communications 2009 Inc.:


·

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

o

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

o

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

·

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

o

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

·

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

·

Subscriber revenues when customers receive the service 

·

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


For NYTEX and other wholesale traffic:


·

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

·

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

o

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

·

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





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


Multiple-Element Arrangements


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


·

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.


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 $1,183,573 at December 31, 2012.  This includes a specific provision against a debt owed by one of the Companys largest customers for the amount of $717,516.





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


Income Taxes


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


Convertible Instruments


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


Derivative Financial Instruments


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


Advertising Costs


The Company expenses the costs associated with advertising as incurred.  Advertising expenses for the three months ended December 31, 2012 and 2011 are included 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, furniture and fixtures 5 years and Telecoms and other long lived infrastructure 10 to 20 years dependent on the asset type.


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

Impairment of Long-Lived Assets


Long-lived assets, primarily fixed assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. The Company does perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and estimated fair value. The Company last conducted an impairment test for the year end September 30, 2012. This test did not take into consideration assets acquired in the Quebec transaction on December 11, 2012. The Company is currently having an independent valuation performed on those assets and will perform another impairment test upon the results of that independent valuation.

 

Earnings (Loss) Per Share of Common Stock


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


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

   



December 31, 2012

December 31, 2011

Net (loss)

$ (363,092)

$   (88,503)

Weighted-average common stock Outstanding (Basic)

77,510,745

41,578,137

Weighted-average common stock Equivalents:




Stock Options

-

-


Warrants

5,000,000

-

Outstanding (Diluted)

82,510,745

41,578,137


The Company issued the following warrants on December 28, 2012. The warrants are based on a vesting schedule of 5 tranches with each tranche exercisable for 3 years of the date of vesting as follows:


Tranche

Vesting Date

        Number

Purchase Price

Expiry of Warrant

 of Warrant

       of Warrants

per share(USD)


1

December 15, 2013

5,000,000

$0.20

December 15, 2016

2

December 15, 2014

2,500,000

$0.40

December 15, 2017

3

December 15, 2015

1,666,667

$0.60

December 15, 2018

4

December 15, 2016

1,250,000

$0.80

December 15, 2019

5

December 15, 2017

1,000,000

$1.00

December 15, 2020



They are not included in the computation of diluted EPS when the Company reported a loss as their inclusion would be antidilutive.


Stock-Based Compensation


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


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


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


Segment Information


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





With the acquisition of NYTEX, beginning January 1, 2012, the Company began segregating the business between the activities of Teliphone and NYTEX. With the acquisition of the operations and network of Navigata Communications 2009 Inc., the Company instead began segregating revenues by voice/data/network operations and wholesale traffic (which includes all operations formerly segregated by NYTEX).


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


The Company has two primary operating areas; under the trade names Teliphone and Teliphone Navigata-Westel which provide voice, video and data services to residential and commercial clients across Canada, and under the trade names NYTEX (New York Telecom Exchange Inc.) and Navigata Wholesale which facilitates the exchange of domestic and international voice termination to domestic and international wholesale clients. The Company has determined that as of the balance sheet date, it is appropriate to present segmentation information by each of these primary operations and they are noted as Voice/Data and Wholesale respectively. Specific geographical segmentation is not relevant for either operation.  




 TELIPHONE CORP.


SEGREGATED FINANCIAL SUMMARY


 THREE MONTHS ENDED DECEMBER 31, 2012









Wholesale



Voice/Data


Total








Segmented Operating Revenues

$966,338



                $1,921,515    


                 $2,887,853    

Total Cost of Revenues

768,547                  



                913,984    


1,682,531

Gross Profit

197,791                  



                   1,007,531    


                 1,205,322    

Total Operating Expenses Net of Depreciation and Amortization

295,744



755,770


1,051,514

Depreciation and Amortization

252,582



264,318


516,900








Net (Loss)  Applicable to Common Shares

$(350,535)



        $(12,557)    


$(363,092)    



















Segmented Fixed and Intangible Assets

Wholesale



Voice/Data


Total








NYTEX Trading Platform

$1,533,333    



             $-    


$1,533,333    

Client Lists

1,605,532    



                1,950,513    


3,556,045

Goodwill

                  7,755,300    



             5,886,359    


13,641,659

Furniture and Fixtures

               628,793    



493,970


1,122,763

Vehicles

-



12,381


12,381

 Land

27,965



21,969


49,933

Buildings & Towers

252,308



198,209


450,516

Telecoms Network

1,432,572



1,125,404


2,557,976

Switching Equipment

902,018



708,610


1,610,629

Radio Equipment

1,022,933



803,599


1,826,531

Site Improvements

153,783



120,810


274,593

Computer HW & SW

452,124



355,181


807,306

Total Assets

 $15,766,661    



     $11,677,005


   $27,443,666    



Customer Lists


The Company has acquired customer lists in three separate transactions. The customer lists will be amortized over a period of five years utilizing the straight-line method. Amortization expense related to the customer lists was $102,190 and $77,190 for the three months ended December 31, 2012 and 2011, respectively. Management has determined that no further impairment is necessary as of December 31, 2012.



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 December 31, 2012, no additional accrual for income taxes other than the federal and state provisions and related interest and estimated penalty accruals is not considered necessary.





The Company has performed a review of its material tax positions. During the periods ended December 31, 2012 and 2011, the Company did not recognize any amounts for interest and penalties with respect to any unrecognized tax benefits.




Goodwill

Goodwill and Other Intangible AssetsUnder ASC No. 350, IntangiblesGoodwill and Other (ASC 350), goodwill and indefinite lived intangible assets are not amortized but are reviewed annually for impairment, or more frequently, if impairment indicators arise. Intangible assets that have finite lives are amortized over their estimated useful lives and are subject to the provisions of ASC No. 360, Property, Plant and Equipment (ASC 360).

Goodwill impairment is tested at least annually (October 1 for the Company) or when factors indicate potential impairment using a two-step process that begins with an estimation of the fair value of each reporting unit. Step 1 is a screen for potential impairment pursuant to which the estimated fair value of each reporting unit is compared to its carrying value. The Company estimates the fair values of each reporting unit by a combination of (i) estimation of the discounted cash flows of each of the reporting units based on projected earnings in the future (the income approach) and (ii) a comparative analysis of revenue and margins multiples of public companies in similar markets (the market approach). If there is a deficiency (the estimated fair value of a reporting unit is less than its carrying value), a Step 2 test is required.

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

In addition, the Company acquired $585,040 in goodwill from the Orion acquisition in 2011.

Goodwill acquired in connection with the Quebec acquisition is $12,049,765 in the books and records of the Company.  


On  December 28, 2012 the Company entered in to an agreement with The New York Telecom Exchange Inc., a New York Company (NYTEX) under which NYTEX unconditionally assumed all responsibility and liability for $992,958 of liabilities relating to invoices from three suppliers that are currently shown as Accounts Payable on the books of the Company. As a result of this transaction, the Company decreased the goodwill purchased in the transaction with NYTEX one year earlier.

Upon performing an evaluation at September 30, 2012, Management determined that none of the goodwill has been impaired. The Company will perform another evaluation upon completion of an independent valuation of the assets acquired in the Quebec transaction is completed.


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).    In the prior year financial statement comparatives, the Company has reflected the prior year presentation to reflect elements of the disposed subsidiary as discontinued operations.  This reclassification had no effect on earnings per share of the prior period as is for presentation purposes only.



Recent Accounting Pronouncements


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


In June 2011, FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which amends the disclosure and presentation requirements of Comprehensive Income. Specifically, FASB ASU No. 2011-05 requires that all nonowner changes in stockholders equity be presented either in 1) a single continuous statement of comprehensive income or 2) two separate but consecutive statements, in which the first statement presents total net income and its components, and the second statement presents total other comprehensive income and its components. These new presentation requirements, as currently set forth, are effective for the Company beginning October 1, 2012, with early adoption permitted. The Company plans to adopt this amended guidance on October 1, 2012 and at this time does not anticipate that it will have a material impact on the Companys results of operations, cash flows or financial position.


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


In July 2012, the FASB issued ASU 2012-02, Intangibles Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, on testing for indefinite-lived intangible assets for impairment. The new guidance provides an entity to simplify the testing for a drop in value of intangible assets such as trademarks, patents, and distribution rights. The amended standard reduces the cost of accounting for indefinite-lived intangible assets, especially in cases where the likelihood of impairment is low. The changes permit businesses and other organizations to first use subjective criteria to




determine if an intangible asset has lost value. The amendments to U.S. GAAP will be effective for fiscal years starting after September 15, 2012. The Companys adoption of this accounting guidance does not have a material impact on the consolidated financial statements and related disclosures.

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


NOTE 3-

FIXED ASSETS


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



Estimated Useful

(unaudited)



Life (Years)

December 31,

 September 30,



2012

2012





Land

-

49,933

-

Buildings & Towers

-

456,293

-

Furniture and fixtures

5

69,656

689

Trading platform

5

2,300,000

2,300,000

Telecoms Networks

15

2,570,340

-

Switching equipment

15

1,628,107

-

Radio Equipment

17

1,862,381

-

Site Improvements

15

287,665

-

Vehicles

5

12,445

-

Computer equipment


3

2,725,828


1,902,276








11,962,648

4,202,965

Less: accumulated depreciation


1,716,686

1,278,890

Fixed assets, net


$10,245,962

$2,924,075



There was $414,710 and $122,017 charged to operations for depreciation expense for continuing operations for the three months ended December 31, 2012 and 2011, respectively. In addition, based on an evaluation of the Companys fixed assets, Management has determined that there is no impairment on any of these long-lived assets as of December 31, 2012.


NOTE 4-

CUSTOMER LISTS


Customer lists as of December 31, 2012 (unaudited) and September 30, 2012 were as

follows:



Estimated Useful

(unaudited)



Lives (Years)

December 31,

 September 30,



2012

2012

Customer lists

5

 $ 4,196,374


$ 2,043,796







4,196,374

2,043,796

Less: accumulated amortization


640,329

538,139

Customer lists, net


$3,556,045

$1,505,657

There was $102,190 and $72,190 charged to operations for amortization expense of customer lists for continuing operations for the three months ended December 31, 2012 and 2011, respectively. Based on an evaluation of the customers, Management has determined no further impairment to be necessary as of December 31, 2012.


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 December 31, 2012. The Company has accrued $33,997 in accrued interest on this payable.



Current Related Party Debt


The Company received a total of $198,598 collectively from a former Director of the Company and a Company owned and controlled by the same Director through December 31, 2012.  The advances are considered short term in nature, accrue interest at 10% per annum, and are due on demand. As of December 31, 2012, the Company has accrued $10,259 in interest on these advances.


NOTE 6-

CONVERTIBLE DEBENTURES


On February 6, 2009, the Company entered into a 12% Convertible Debenture (the A Debenture) with an individual. The A Debenture had an original 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%. As of February 6, 2011 the debenture holder agreed to continue on a month to month basis with monthly interest payments continuing at the 12% rate.


The A Debenture can either be paid to the holder on the anniversary or converted at the Company's option any time after the first anniversary at a conversion price equal to $0.25 per share of the common stock.


On February 17, 2009, the Company entered into a 12% Convertible Debenture (the B Debenture) with an individual. The B Debenture had an original 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% and was further renewed to mature on February 28, 2014.


The original terms of the A Debenture was that it could either be paid to the holder on the anniversary or converted at the Company's option any time after the first anniversary at a conversion price equal to $0.25 per share of the common stock.  Subsequently, on February 1, 2013, the debenture was converted to a 2 year note at 12% per annum




payable monthly with maturity on January 31, 2015, payable at any time by the Company without penalty.


The total amount of the A and B Debentures was $60,180.


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


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


NOTE 7-

COMMITMENTS / LITIGATION/INVESTMENT


The Company assumed the lease from its former subsidiary Teliphone Inc. for its Toronto, Canada offices, which was set to expire on August 31, 2014. In December 2012 the Company negotiated early termination of this lease and no further obligations remain.


Following the Quebec acquisition, the Company assumed a number of ongoing leases for the rental of properties used either as office space or for the provision services to customers. These commitments are over variable terms from three to thirty years. Commitments under these leases over time are as follows:


Year to:

Amount of Commitment


September 30, 2013:

$1,394,561

September 30, 2014:

$1,433,044

September 30, 2015:

$1,225,546

September 30, 2016:

$617,373

September 30, 2017:

$181,361

September 30, 2018 & Onwards:

$154,634


Total Commitments

$4,992,540


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


Teliphone Business Solutions Corp.


In September 2011 the Company began negotiations with Dezmocom Inc. of Montreal to establish Teliphone Business Solutions Corp, a joint venture between the Company and Dezmocom dedicated to the marketing of the Company's products and services and establishment of new sales channels. Dezmocom had an established track record of developing and overseeing marketing channels such as resellers and agents as well as internal expertise in sales of products the same or similar to those of the Company. Under an initial agreement executed on April 15, 2012 with the Company Dezmocom would share profits from the joint venture equally. The Company has been working with Dezmocom on this project and has advanced Teliphone Business Solutions an initial




$19,426 increased to $20,444 which has been matched by Dezmocom. This amount is reflected in investments at December 31, 2012. In The Company subsequently reduced its stake in TBS to 20% to more accurately reflect the Company's level of involvement in TBS. However the Company continues to accrue the same direct financial benefits through sales of goods and services to TBS.


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


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


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


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


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


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


Subsequently, on January 23, 2013 the Company reached an all-party agreement to settle all outstanding issues and obligations. The agreement now calls for a payment of $305,520.69 which covers principle, interest and all costs to be paid over 10 months. An initial payment of $50,000 and the agreement calls for 9 monthly payments of $25,000 and a final payment of $30,520.69 on October 31, 2013. The Company has classified the entire amount as a current liability on December 31, 2012, and has made all required payments through March 2013.

 


NOTE 8-

STOCKHOLDERS EQUITY (DEFICIT)





Common Stock


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


The Company has 124,660,745 shares issued and outstanding as of December 31, 2012.


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


The Company agreed to issue 489,871 shares on March 31, 2010 as part of an interest payment to shareholders in order to solidify personal guarantees in conjunction with an extension of the Companys operating line of credit facility with its Bank.  In addition, the Company has agreed to issue 1,800,000 shares of stock for its acquisition of $450,000 worth of equipment from Orion Communications, Inc. on September 1, 2011. The 2,289,471 shares of stock has not been issued, however the Company has booked a liability for stock to be issued of $469,868 as of September 30, 2011. The 1,800,000 shares were issued in fiscal 2012.


The Company issued 20,000,000 shares ($0.25 per share) on December 30, 2011 for the acquisition of the New York Telecom Exchange Inc. The value of $5,000,000 was allocated as follows: $2,300,000 for the trading platform, $200,000 for computer equipment, $500,000 for the customer lists, and the remaining balance of $2,000,000 allocated to goodwill. This is considered a related party transaction as the Companys President and CEO and 10% Beneficial Owner are majority owners of the owner of all the issued and outstanding stock of The New York Telecom Exchange, Inc.


On December 11, 2012, the Company issued 61,500,000 shares ($0.22 per share) for the acquisition of the core operations, assets and network of Navigata Communications 2009 Inc. The value of this transaction was $13,530,000.


On December 28, 2012, JAAM assumed the $5,000,000 debt from the Company in exchange for 11,416,667 warrants for common shares of the Company. The warrants are based on a vesting schedule of 5 tranches with each tranche exercisable for 3 years of the date of vesting as follows:



Tranche   Vesting Date

  Number

Purchase Price

Expiry of

         of Warrant

of Warrants

Warrant

per share(USD)    


1   

December 15, 2013

5,000,000     $0.20

December 15, 2016

2   

December 15, 2014

2,500,000     $0.40

December 15, 2017

3   

December 15, 2015

1,666,667     $0.60

December 15, 2018

4   

December 15, 2016

1,250,000     $0.80

December 15, 2019

5  

December 15, 2017

1,000,000     $1.00

December 15, 2020


These are the only warrants outstanding as of December 31, 2012 and there are no options issued as of December 31, 2012.


Subsequently, in March 2013 the Company filed with the State of Nevada to have its share capital increased to 250,000,000 common shares.






NOTE 9-

PROVISION FOR INCOME TAXES


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


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


At December 31, 2012, the Company had a net operating loss in the amount of amount of $430,284 for the period and a cumulative net loss of $4,249,984, which was generated within the Province of Ontario, Canada, and is offset by net loss carry forward and hence no income tax is due.  

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



 

 

 

 


2012


2011


Federal statutory rate

(34.0)%


(34.0)%


State income taxes, net of federal benefits

3.3


3.3


Valuation allowance

30.7


30.7



0%


0%



 

 

 

 


2011


2010


Canadian Federal statutory rate

3.5%


3.5%


Canadian Provincial income taxes, net of federal benefits

12.0


12.0


Valuation allowance

0.0


0.0



15.5%


15.5%




NOTE 10-

SERVICING CONTRACT FOR THE CUSTOMERS OF ORION COMMUNICATIONS INC.


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


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


As a result of the lawsuits against the Companys former subsidiary resulting from the transaction (See NOTE 7), on March 31, 2011, the Company negotiated and entered into




an Asset Purchase Agreement with Orion Communications, Inc. (Orion) and 9191-4200 Quebec, Inc. (9191) to acquire the customers from Orion valued at $1,479,265. As consideration for these customers, the Company issued 3,804,088 shares at a value of $0.25 per share for a total of $951,022, pay $375,000 to BMO in the form of a note payable (see Note 12) and utilize the $153,243 paid in advances from prior years.


NOTE 11-

OBLIGATIONS UNDER CAPITAL LEASE


On April 1, 2011, the Company assumed the capital leases of its former subsidiary Teliphone Inc.  The Company leases some of its computer equipment pursuant to capital leases. Additionally, on December 11, 2012 the Company assumed 5 finance leases for telecoms networking equipment, following its acquisition of the Navigata core business.


At December 31, 2012, minimum future annual lease obligations are as follows:



Year Ending

December 31, 2013

$306,428

December 31, 2014

$243,790

  ______    

  550,218


Less: Amounts representing interest

  (30,469)


Total Capital Payable

  519,749


Less: Current portion

              (282,228)


Long-term portion      

              $ 237,521


NOTE 12-

NOTE PAYABLE - BMO


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


Subsequently, on January 23, 2013 the Company reached an all party agreement to settle all outstanding issues and obligations. The agreement now calls for a payment of $305,520.69 which covers principle, interest and all costs to be paid over 10 months. An initial payment of $50,000 and the agreement calls for 9 monthly payments of $25,000 and a final payment of $30,520.69 on October 31, 2013. The Company has classified the entire amount as a current liability on December 31, 2012, and has successfully made all required payments through March 2013.


See NOTE 14 SUBSEQUENT EVENTS.



NOTE 13-

NOTE PAYABLE NAVIGATA ASSET PURCHASE





On December 11, 2012, the Company completed the acquisition of the core assets and network (the "Navigata Acquired Businesses") of Navigata Communications 2009 Inc. (the "Seller"). The acquisition was effected pursuant to a two-step process involving a Purchase Agreement, dated as of November 30, 2012, among 9191-4200 Quebec Inc., a corporation incorporated under the laws of the Province of Quebec, Canada ("Quebec"), the Seller and certain affiliates of Quebec (the "Asset Purchase Agreement"); and a Share Exchange Agreement, dated as of December 11, 2012, by and between the Company and Fiducie Residence JAAM, a family trust registered in the Province of Quebec, Canada ("JAAM").


On November 30, 2012, pursuant to the Asset Purchase Agreement, Quebec acquired from Seller selected assets and liabilities related to the business of providing telecommunications services, including voice, data and internet services, to service providers and end users, using its national MPLS-enabled data backbone, microwave backhaul network in British Columbia, and carrier points of interconnection in Vancouver, Toronto, Seattle, LA, and New York (the "Asset Purchase"). As consideration for the Asset Purchase, Quebec paid an aggregate consideration of CD$6,440,000, along with the assumption of certain limited current liabilities of the Seller, as follows: (i) CD$500,000 paid in cash by wire transfer at closing of the Asset Purchase; (ii) $940,000 to be paid in cash by certified check, wire transfer or other immediately available funds on December 14, 2012; and (iii) a total of CD$5,000,000 to be paid in cash in five separate, equal installments of CD$1,000,000 each due on December 15 of each of 2013, 2014, 2015, 2016 and 2017 (the "Deferred Consideration"). Interest will accrue on the Deferred Consideration at a rate of 6.5% per annum. In addition, under a Temporary Service Agreement, an additional CD$386,629 was agreed to be added to the purchase price for employees and Cascade Directors services, bringing the total purchase price to CD$6,826,630.  


On December 28, 2012, JAAM assumed the $5,000,000 debt from the Company in exchange for 11,416,667 warrants for common shares of the Company.


At the December 31, 2012 the total amount owing under this note was $1,025,963. The Company made $228,423 in payments from December 11, 2012 through December 31, 2012.



NOTE 14-

SUBSEQUENT EVENTS


On November 15, 2011, BMO did not accept the monthly payment claiming that additional legal fees were owed to BMO by the Company. These fees were not listed in the original agreement and the Company and BMO entered into discussions to attempt to resolve BMO's claim.

Subsequently, on January 23, 2013 the Company reached an all-party agreement to settle all outstanding issues and obligations. The agreement now calls for a payment of $305,520.69 which covers principle, interest and all costs to be paid over 10 months. An initial payment of $50,000 and the agreement calls for 9 monthly payments of $25,000 and a final payment of $30,520.69 on October 31, 2013. The Company has classified the entire amount as a current liability on December 31, 2012, and has successfully made all required payments through March 2013.


On February 8, 2013 the Company completed the acquisition of 100% of the outstanding stock of Titan Communications Inc. The acquisition was effected through a two stage process. Firstly, pursuant to a Share Purchase Agreement (the SPA) effective February 8, 2013, Fiducie Familiale M.A.A. ("MAA"), a related party to the Company, acquired all




of Titans outstanding shares in exchange for a total consideration of $1,696,600. The consideration is payable in accordance with the following schedule: i) $349,300  paid at closing; ii) $34,930 paid 30 days from closing; iii) $34,930 paid 60 days from closing; and iv) the balance ($1,277,440) to be paid in 36 equal monthly payments ($35,484 each) beginning 90 days from closing. Additional consideration equal to, 10% of the aggregate revenue generated by Titan above $1,663,267 in the first 12 months beginning 30 days from closing and 10% of the aggregate revenue generated by Cloud-Phone Inc above $540,000 in the first 12 months beginning 30 days from closing, may also be payable if the revenue thresholds are surpassed. Secondly, also on February 8, 2013 the Company acquired from MAA all share capital, assets and liabilities of Titan in return for assuming all liabilities due to the former shareholders of Titan under the SPA plus the payment of $1.


On February 8, 2013 the Company completed the acquisition of 100% of the outstanding stock of Cloud-Phone Inc. The acquisition was effected pursuant through a two stage process. Firstly, pursuant to a Share Purchase Agreement (the SPA) effective February 8, 2013, Fiducie Familiale M.A.A. ("MAA"), a related party to the Company acquired all of Cloud-Phones outstanding shares in exchange for the assumption of certain liabilities of Cloud Phone totaling $99,800. The consideration is payable in accordance with the following schedule: i) $19,960 payable at closing; ii) the balance ($79,840) to be paid in 20 equal monthly payments ($3,992 each) beginning 30 days after closing. Secondly, also on February 8, 2013 the Company acquired from MAA all share capital, assets and liabilities of Cloud-Phone in return for assuming all liabilities due under the SPA plus the payment of $1.



The combined net assets purchased in both transactions on February 8, 2013 were:


Net Assets Purchased

   Property, plant and equipment

$254,191

   Customer lists

998,000

   Investments

84,319

   Cash

4,481

   Current assets

644,129

   Current liabilities

(775,919)

   Long-term Liabilities

(29,192)

   Goodwill

616,393

                           Purchase Price                                          

$1,796,402



The goodwill will not be amortized but it will be tested annually for impairment. Goodwill in connection with these acquisitions is stated at $616,393 in the books and records of the Company


The following table shows pro-forma results for the years ended September 30, 2012 and 2011 as if both acquisitions had occurred on October 1, 2010. These unaudited pro forma results of operations are based on the historical financial statements and related notes of each of the purchased Company and Teliphone Corp.


  

For the years ended September 30,

     2012

  

    

    2011

Revenues                                                         $34,561,308

$35,748,971

Net income (loss)                             

               $(3,968,468)

  $3,904,975

  







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, 2012, which are incorporated herein by reference, could affect our actual results and could cause our actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company.  Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q.  We file reports with the Securities and Exchange Commission (the SEC or Commission).  You can read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  In addition, the SEC maintains an internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.

 

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

 

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


GENERAL OVERVIEW


OVERVIEW


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


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

  

Effective August 1, 2006, we entered into a transaction with 3901823 Canada Inc. ("3901823") and issued to 3901823 shares of Teliphone Inc. common stock, which was equal to a 25% ownership interest, in exchange for access to 3901823s operating company Intelco Communications Inc. (Intelco) global distribution channels, cost




reduction through usage of Intelcos network and data center, along with a credit facility of $75,000.  Subsequently on September 30, 2008, Teliphone Inc. issued additional stock to us representing the conversion into equity of cash advances made between August 1, 2006 to September 30, 2008.  As a result, we increased own ownership interest in the outstanding capital stock of Teliphone Inc. to 87.1% as of September 30, 2010.  We do not have any other subsidiary entities.

 

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


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

 

On May 7, 2009, we entered into a customer assignment agreement with the owners of Orion Communications Inc.  (Orion).  As a result of this transaction, we acquired an additional 580 business customers for telecommunications services in Canada, along with other assets valued at CDN$376,781 and liabilities valued at CDN$418,762.  We and the owner of Orion, 9191-4200 Quebec Inc., agreed to a gross benefit sharing arrangement of 50%-50% for any potential future benefits derived from the customer base.  After a brief dispute with the secured creditors of Orion, on March 31, 2011, the Company acquired the client contracts in an acquisition valued at $1,479,265.  The Company paid $951,022 in common stock of the Company with the issuance of 3,804,088 shares (in May 2011) (valued at $0.25 per share) and $528,243 in cash.


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


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


On December 11, 2012, Teliphone Corp. (the "Company") completed the acquisition of the core assets and network (the "Navigata Acquired Businesses") of Navigata Communications 2009 Inc. (the "Seller"). The acquisition was effected pursuant to a two-step process involving a Purchase Agreement, dated as of November 30, 2012, among 9191-4200 Quebec Inc., a corporation incorporated under the laws of the Province of Quebec, Canada ("Quebec"), the Seller and certain affiliates of Quebec (the "Asset Purchase Agreement"); and a Share Exchange Agreement, dated as of December 11, 2012, by and between the Company and Fiducie Residence JAAM, a family trust registered in the Province of Quebec, Canada ("JAAM").


On November 30, 2012, pursuant to the Asset Purchase Agreement, Quebec acquired from Seller selected assets and liabilities related to the business of providing telecommunications services, including voice, data and internet




services, to service providers and end users, using its national MPLS-enabled data backbone, microwave backhaul network in British Columbia, and carrier points of interconnection in Vancouver, Toronto, Seattle, LA, and New York (the "Asset Purchase"). As consideration for the Asset Purchase, Quebec paid an aggregate consideration of US$6,440,000, along with the assumption of certain limited current liabilities of the Seller, as follows: (i) US$500,000 paid in cash by wire transfer at closing of the Asset Purchase; (ii) $940,000 to be paid in cash by certified check, wire transfer or other immediately available funds on December 14, 2012; and (iii) a total of US$5,000,000 to be paid in cash in five separate, equal installments of US$1,000,000 each due on December 15 of each of 2013, 2014, 2015, 2016 and 2017 (the "Deferred Consideration"). Interest will accrue on the Deferred Consideration at a rate of 6.5% per annum.


On December 11, 2012, the Company completed the acquisition from JAMM of 100% of the outstanding stock of Quebec (the "Stock Acquisition"). The Stock Acquisition was effected pursuant to a Share Exchange Agreement in which the Company acquired all of Quebecs outstanding shares in exchange for tendering 61,500,000 shares of the Company, valued at US$13,530,000, to JAMM. Quebec was subsequently re-named Teliphone Navigata-Westel Communication Inc.


On December 28, 2012, JAAM assumed the $5,000,000 debt from the Company in exchange for 11,416,667 warrants for common shares of the Company. The warrants are based on a vesting schedule of 5 tranches with each tranche exercisable for 3 years of the date of vesting as follows:


Tranche

Vesting Date

Number

Purchase Price

Expiry of Warrant

    of Warrant

of Warrants

per share(USD)


1

December 15, 2013

5,000,000

   $0.20

December 15, 2016

2

December 15, 2014

2,500,000

   $0.40

December 15, 2017

3

December 15, 2015

1,666,667

   $0.60

December 15, 2018

4

December 15, 2016

1,250,000

   $0.80

December 15, 2019

5

December 15, 2017

1,000,000

   $1.00

December 15, 2020


On December 11, 2012, the Company completed the acquisition from JAMM of 100% of the outstanding stock of Quebec (the "Stock Acquisition"). The Stock Acquisition was effected pursuant to a Share Exchange Agreement in which the Company acquired all of Quebecs outstanding shares in exchange for tendering 61,500,000 shares of the Company, valued at US$13,530,000, to JAMM. Quebec was subsequently re-named Teliphone Navigata-Westel.


On  December 28, 2012 the Company entered in to an agreement with The New York Telecom Exchange Inc., a New York Company (NYTEX) under which NYTEX unconditionally assumed all responsibility and liability for $992,958 of liabilities relating to invoices from three suppliers that are currently shown as Accounts Payable on the books of the Company. No consideration is payable by the Company in this transaction. As a result of this transaction, the Company decreased the goodwill purchased in the transaction with NYTEX one year earlier.


On February 8, 2013 the Company completed the acquisition of 100% of the outstanding stock of Titan Communications Inc. The acquisition was effected through a two stage process. Firstly, pursuant to a Share Purchase Agreement (the SPA) effective February 8, 2013, Fiducie Familiale M.A.A. ("MAA"), a related party to the Company, acquired all of Titans outstanding shares in exchange for a total consideration of $1,696,600. The consideration is payable in accordance with the following schedule: i) $349,300  paid at closing; ii) $34,930 paid 30 days from closing; iii) $34,930 paid 60 days from closing; and iv) the balance ($1,277,440) to be paid in 36 equal monthly payments ($35,484 each) beginning 90 days from closing. Additional consideration equal to, 10% of the aggregate revenue generated by Titan above $1,663,267 in the first 12 months beginning 30 days from closing and 10% of the aggregate revenue generated by Cloud-Phone Inc above $540,000 in the first 12 months beginning 30 days from closing, may also be payable if the revenue thresholds are surpassed. Secondly, also on February 8, 2013 the Company acquired from MAA all share capital, assets and liabilities of Titan in return for assuming all liabilities due to the former shareholders of Titan under the SPA plus the payment of $1.


On February 8, 2013 the Company completed the acquisition of 100% of the outstanding stock of Cloud-Phone Inc. The acquisition was effected pursuant through a two stage process. Firstly, pursuant to a Share Purchase Agreement (the SPA) effective February 8, 2013, Fiducie Familiale M.A.A. ("MAA"), a related party to the Company




acquired all of Cloud-Phones outstanding shares in exchange for the assumption of certain liabilities of Cloud Phone  totaling $99,800. The consideration is payable in accordance with the following schedule: i) $19,960 payable at closing; ii) the balance ($79,840) to be paid in 20 equal monthly payments ($3,992 each) beginning 30 days after closing. Secondly, also on February 8, 2013 the Company acquired from MAA all share capital, assets and liabilities of Cloud-Phone in return for assuming all liabilities due under the SPA plus the payment of $1.




Description of Business

 

Principal products or services and their markets


Teliphone Corp - Voice and Data Operations



We are a telecommunications company engaged in the business of providing broadband telephone services primarily utilizing Voice over Internet Protocol, (VoIP) technology platform as well as re-selling traditional voice and data services of Tier-1 telecommunications providers to our customers.  We offer communications services to our customers with many features at favourable prices, thus providing them what we believe is an experience similar to traditional telephone services at a reduced cost.  Our main geographic focus is within the target market of Canada although with the recent acquisition of Navigata Communications 2009 Inc. the Company now has some limited operations in the United States.


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, which could adversely impact our business.


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


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

  

We offer the following products and services to customers utilizing VoIP and traditional technology platforms: 


Residential voice, data and television service. Customers purchase various equipment based on the services they require to be delivered.  The offering of services occurs over a combination of telecommunications platforms.  For example, the data connection provided is rented by us from a Tier-1 provider who has network access in the geographical area of the customer.  We then offer Voice and Television services utilizing our technology over this data connection.  The customer sees one invoice for all communications services delivered to their location, and see one provider for these services.  Residential voice, data and television service accounts for approximately 10% of the revenue we generated during the three months ended December 31, 2012.


Business voice and data services. Similar to the residential product and service offering, business customers generally purchase larger volume and more robust, commercial grade equipment that when coupled with our multiple services offering, complete the needs of our Business Customers who likewise receive one invoice from




us for all of their monthly services consumption.  Business voice and data service accounts for approximately 66% of the revenue we generated during the three months ended December 31, 2012.


Collocation Services. Collocation provides business clients with a secure, climate-controlled environment with direct network access to house mission-critical servers or interconnect to carrier access points. These facilities are shared by a number of clients which benefit from economies of scale where only a small portion of a collocation facility is required.


Carrier Services. Carrier services consist of a suite of products which support domestic and international voice traffic. This includes provision of local and international phone numbers (DIDs), toll-free origination, North American Termination, International Termination, Pre-paid and Post-paid calling cards and rebilling solutions for voice resellers.


Commodity Exchange. With the acquisition of the New York Telecom Exchange (NYTEX), Teliphone offers web based commodity exchange for international traffic termination. Buyers and sellers can trade international termination minutes online anonymously. NYTEX acts as a financial and technical clearinghouse. With the acquisition of the operations of Navigata Communications 2009 Inc. the Company has access to increased markets and capacity to service the wholesale voice market and will now include US and domestic termination.



With the acquisition of Navigata Communications 2009 Inc., the Company has expanded both the nature and scope of its offerings to include more paid technical services, microwave communications, wholesale data services and tower/site collocation.



New York Telecom Exchange


NYTEX is a telecommunications commodity exchange that focuses on facilitating the exchange of international call termination. International call termination occurs when a caller initiates a call in one country and it terminates in another. NYTEX provides services much like other commodity exchanges whereby it provides a platform for buyers and sellers to come together to purchase and sell international termination. Unlike traditional telecommunications exchanges where buyers and sellers are matched one to one on a circuit to circuit, in the NYTEX concept sellers sell their termination into a market and buyer buy from that market. NYTEX also offers a one to one trading facility for clients who request it. NYTEX manages all aspects of the transactions including technical clearing, financial clearing and quality control of the termination bought and sold on the exchange.   NYTEX developed all technical and conceptual aspects in house. NYTEX has technical data centers in Montreal, London and Brussels which manage all calls.  All calls utilize Voice over IP (VoIP) technology via the public Internet.   


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


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



Distribution methods of the products or services

 

Teliphone Voice and Data Products:





Internet Sales.  We distribute our products through the sale of hardware on our website, www.teliphone.ca. 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.

 

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.  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 disclaimer does not protect us from potential litigation. Subsequently, as of January 1, 2013, the Company acquired a comprehensive product and professional liability insurance policy.


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.  Subsequently, with the acquisition of Navigata Communications 2009 Inc. we had 8 people in sales.


Retail Sales.  We developed a network of over 40 retail points of sale via retail reseller relationships until 2009.  We abandoned this sales channel by 2010 as it did not provide the sales that we were anticipating relative to the cost of commissions and overhead required to support the sales.  The Company does not have any retail points of sale nor do they sell their products and services in any retail establishments at this time.


New York Telecom Exchange Wholesale Traffic.  Wholesale traffic is transacted business to business whereby sellers of voice termination, sell capacity to carriers which need to terminate voice calls in a particular market.  These are typically high level transactions between individuals whose sole function is to buy or sell on behalf of their business. Companies often undertake both buying and selling of voice termination.  Sales are therefore generated primarily as a result of established relationships between the parties. Teliphone  relies heavily on personnel with such relationships supplemented by presence at major wholesale traffic trade shows such as the International Telecoms Week. Wholesale traffic accounted for approximately 50% of the revenue we generated for the three months ended December 31, 2012.


Status of New Products or Services


teliPhone Residential IP-Television services.  We have launched an Internet-based television service for residential clients that includes traditional cable television and network media, as well as a full suite of pay-per-view listings.  The service is currently being offered to selected customers in the Province of Quebec, Canada and we have completed the necessary upgrades to our network in order to accommodate these new services.  We are utilizing our existing distribution channels to provide these services to the residential market.  

 

Teliphone Business Solutions Corp.


In April 2012 the Company signed an agreement with Dezmocom Inc. for the creation of Teliphone Business Solutions Corp. ("TBS"), a 50/50 joint venture. TBS is responsible for expanding the market for the Company's products and services through direct sales as well as the creation of new sales channels including agents and resellers. TBS operates in cooperation with Telephones direct sales people. Subsequently the Company reduced its stake in TBS to 20% to more accurately reflect the Company's level of involvement in TBS. However the Company continues to accrue the same direct financial benefits through sales of goods and services to TBS.


 

Results of Operations  


Teliphone generates revenues from the sale of telecommunications services to our customers, along with the hardware required for our customers to utilize these services. Our cost of sales includes all of the necessary




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


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


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


For the three month period ended December 31, 2012, we recorded sales of $2,887,853 as compared to $1,225,176 for the same period in 2011.  The increase represents the 20 days of revenue recorded from the acquired operations of Navigata Communications 2009 Inc. beginning December 11, 2012.


Our cost of sales was $1,682,531 for the three month period ended December 31, 2012, as compared to $796,955.  Our cost of sales also includes our commissions paid to our re-sellers as we are distributing a portion of recurring revenues to the re-seller after the sale has been consummated. Our cost of sales also includes any variable costs of service delivery that we may have, including our per-minute costs for terminating our customers calls on another carriers network. The increase represents the 20 days of revenue recorded from the acquired operations of Navigata Communications 2009 Inc. beginning December 11, 2012. 


Our aggregate operating expenses for the three month period ended December 31, 2012, were $1,558,983 compared to $512,840 for the prior year. The Company incurred a number of one-time charges related to the acquisition of the operations of Navigata Communications 2009 Inc. Other general and administrative expenses were $386,603 compared with $79,940 in the prior year.  Wages, professional and consulting fees were $622,245 during that period as opposed to $233,693 for the same period last year, the increase due to acquisition of Navigata employees, the hiring of additional technical support, customer support and legal fees. The Company increased its depreciation expenses to $516,900 for the three month period from $199,207. The significant increase in depreciation is due to upgrades in the Company's network as well as the acquisition of NYTEX and Navigata assets.  The Company commenced its depreciation of its computer equipment acquired during the consolidation of April 1, 2011, has commenced to depreciate its acquired Orion Communications client lists effective April 1, 2011 and has commenced to depreciate equipment purchased during the period as well as the NYTEX platform and customer lists and the newly acquired assets of the Navigata core business.


As a result, we had net loss of $363,092 for the three month period ended December 31, 2012 as compared to a net loss of $88,503 for the same period in the prior year.   The decrease in operating income is primarily due to an increase in depreciation due to equipment upgrading, the acquisition of NYTEX and Navigata assets and purchase of professional services for product development.


Earnings before interest, depreciation and amortization for the period were $163,239 compared with $114,588 in the previous period.


Segregated revenues and costs for the wholesale (NYTEX and part of the recently acquired Navigata business) and Voice/Data (TeliPhone and the balance of the Navigata business) are shown in the table below. While revenue segregation is fairly straightforward, both Teliphone and NYTEX share common infrastructure including network costs, administration, customer service and overhead.  Costs for these components have been allocated according to reasonable loading estimates between the two segments. All direct costs of revenues are allocated to the respective segment.  





 TELIPHONE CORP.


SEGREGATED FINANCIAL SUMMARY


 THREE MONTHS ENDED DECEMBER 31, 2012









Wholesale



Voice/Data


Total








Segmented Operating Revenues

$966,338



                $1,921,515    


                 $2,887,853    

Total Cost of Revenues

768,547                  



                913,984    


1,682,531

Gross Profit

197,791                  



                   1,007,531    


                 1,205,322    

Total Operating Expenses Net of Depreciation and Amortization

295,744



755,770


1,051,514

Depreciation and Amortization

252,582



264,318


516,900








Net (Loss)  Applicable to Common Shares

$(350,535)



        $(12,557)    


$(363,092)    




Liquidity and Capital Resources

 

At December 31, 2012:

 

On our condensed consolidated balance sheet as of December 31, 2012, we had assets consisting of accounts receivable in the amount of $4,021,499, inventory of $47,178, prepaid expenses of $4,024,601, investments of $20,444 and cash of $1,562,026. We also show fixed assets, net of depreciation of $10,245,962.  We likewise show Net Customer List asset value of $3,556,045 representing the acquisition of the client contracts from Orion Communications Inc., the New York Telecom Exchange Inc. and Navigata Communications 2009 Inc. and $13,641,659 representing the goodwill from our acquisition of the clients of Dialed Telecom in 2008, the client contracts of Orion in 2011, the New York Telecom Exchange Inc. and operations of Navigata Communications 2009Inc.  Our balance sheet reflects an accumulated deficit of $3,370,048 and total stockholders equity of $22,793,976.

 

We had net cash provided by operating activities of $721,285 during the three month period ended December 31, 2012 compared to net cash provided by operating activities of $252,947 in 2011.


We had net cash provided by investing activities of $925,990 for the three month period ended December 31, 2012, as compared to $129,454 use of cash in the prior period in 2011.


For the three month period ended December 31, 2012, we had net cash used in financing activities of $97,833 versus $157,861 used in the same period in 2011.  


In pursuing our business strategy, we will require additional cash for growing our operating and investing activities.  We will continue to borrow money through our operating line of credit at our subsidiarys bank when such cash for growth purposes is required.  In order to increase this operating line, we rely on collateral guarantees from shareholders and related parties.  We continue to search for ways to reduce costs and increase revenues of our VoIP and telecommunications resell services.

    

We anticipate raising funds in order to increase our base of customers through the acquisition of telecommunications resellers.  No financing agreements to date exist for the Company, but Management believes that growth the




acquisition of clients will continue to support the growth of the Company in lieu of intense marketing expenditures.  Likewise, we continues to pursue and carry out our business plan, which includes marketing programs aimed at the promotion of our services, hiring additional staff to distribute and find additional distribution channels, enhance the current services we are providing and maintain our compliance with Sarbanes - Oxley Section 404.

 

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

 

We have classified an additional $70,828 of related party loans as a long term liability due to the requirement of repayment of interest only over the next 5 years. In addition, we have current obligations of $224,450.

 


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

 

Off Balance Sheet Arrangements


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


Going Concern


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


Critical Accounting Policies


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

 

 

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.


Prepaid Expenses


The Company pays for some property related services in advance and recognizes these expenses as prepaid at the balance sheet date. Prepaid expenses are carried at fair value which is deemed to be the gross value of the pre-payment due to the short-term maturity of these payments. The Company does have certain prepaid expenses that extend beyond one-year and those are classified as non-current assets.


Comprehensive Income


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


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


Currency Translation

 

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

 

 

Revenue Recognition


Operating revenues consist of telecommunications services (voice, data and long distance), customer equipment (which enables the Company's telephony services), consulting services and shipping revenue. The point in time at which revenue is recognized is determined in accordance with Revenue Recognition under ASC 605-50, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products) ("ASC 605-50"), and ASC 605-25, "Revenue Arrangements with Multiple Deliverables" (ASC 605-25). When the Company emerged from the development stage with the acquisition of Teliphone Inc. in 2005, they began to recognize revenue from their Telephony services when they are earned, specifically when all the following conditions are met:


·  

Services are provided or products are delivered to customers 

·  

There is clear evidence that an arrangement exists 

·  

Amounts are fixed or can be determined 

·  

The Companys ability to collect is reasonably assured. 


In particular, the Company recognizes:


Teliphone / Teliphone Navigata-Westel


·  

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

o  

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

o  

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

·  

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

o  

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

·  

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

·  

Subscriber revenues when customers receive the service 

·  

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


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


Multiple-Element Arrangements


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


·  

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

·  

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

·  

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

·  

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

·  

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

 

 


 

New York Telecom Exchange Inc. (NYTEX) and Navigata Wholesale Telecommunications


·

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

·

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

o

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

·

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

 


Resellers





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


Sales Returns


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

 

Deferred Revenues


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


Accounts Receivable


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


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


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


Income Taxes


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

 

  

 

Convertible Instruments


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


Derivative Financial Instruments


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




settlement. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period.

 

Fixed Assets


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


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

 

Impairment of Long-Lived Assets


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

 

Earnings (Loss) Per Share of Common Stock

 

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

 


Stock-Based Compensation


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


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


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

 

Segment Information





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


With the acquisition of NYTEX, beginning January 1, 2012, the Company began segregating the business between the activities of Teliphone and NYTEX. With the acquisition of the operations and network of Navigata Communications 2009 Inc., the Company began segregating revenues by voice/data/network operations and wholesale traffic (which includes all operations formerly segregated by NYTEX).

 

Uncertainty in Income Taxes


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


The Company has performed a review of its material tax positions and did not recognize any amounts for interest and penalties with respect to any unrecognized tax benefits.



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 December 31, 2012, the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level to ensure that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, including this Quarterly Report, were recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and was accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.  Our conclusion is based primarily on our inadvertent failure to file management's assessment of internal controls over financial reporting in connection with the filing of our Annual Report on Form 10-K for the period ending September 30, 2012, 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 notification. We believe that improvements will occur with the acquisition of Navigata Communications 2009 Inc. in December 2012 due to more internal resources being available for delivery of effective disclosures, controls and procedures. The expanded entity now has a dedicated staff position to each of Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and Senior Vice President Corporate Affairs rather than combined responsibilities.

  

Changes in Internal Controls

 

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

 

PART II - OTHER INFORMATION





ITEM 1 - LEGAL PROCEEDINGS

 

  

Former Owners of Orion Communications Inc.

 

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

 

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

 

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


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


Subsequently, on January 23, 2013 the Company reached an all-party agreement to settle all outstanding issues and obligations. The agreement now calls for a payment of $305,520.69 which covers principle, interest and all costs to be paid over 10 months. An initial payment of $50,000 and the agreement calls for 9 monthly payments of $25,000 and a final payment of $30,520.69 on October 31, 2013. The Company has classified the entire amount as a current liability on September 30, 2012, and has successfully made all required payments through March 2013.


 

ITEM 1A - RISK FACTORS


Not Applicable.

 

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

 

None.


ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

 

There have been no material defaults.

 

ITEM 4 MINE SAFETY DISCLOSURES


None.

 

ITEM 5 - OTHER INFORMATION


None.

 

ITEM 6 - EXHIBITS

 

31.1

  

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

 

 

31.2

  

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

 

 

32.1

  

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

 

 

32.2

  

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

 

 

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 Vancouver, British Columbia, Canada.


Dated: April 5, 2013


 TELIPHONE CORP.

  

  

  

  

  

  

 /s/ Benoit Laliberte

  

 Benoit Laliberte

 Chief Executive Officer and President

  

 

 TELIPHONE CORP.

  

  

  

  

  

  

 /s/ Benoit Laliberte

  

 Benoit Laliberte

 Principal Financial Officer

  

 

 TELIPHONE CORP.

  

  

  

  

  

  

 /s/ Benoit Laliberte

  

 Benoit Laliberte

 Principal Accounting Officer