UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
(Mark
One)
¨
Annual
Report Under Section 13 or 15(d) of The Securities Exchange Act of
1934
For
the
fiscal year ended: ___________________
x
Transition Report Under Section 13 or 15(d) of The Securities Exchange Act
of
1934
For
the
transition period from March 31, 2005 to March 31, 2006
Commission
File Number 333-123365
TELECOMM
SALES NETWORK, INC.
(Name
of
small business issuer in its charter)
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DELAWARE
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20-1602779
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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516-D
River Highway
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PMB
297
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Mooresville,
North Carolina
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28117-6830
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(Address
of principal executive offices)
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(Zip
Code)
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512-236-0925
Issuer's
telephone number
Securities
registered under Section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act: None
Check
whether the issuer (1) 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. Yes x
No
¨
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act). Yes ¨No
x
The
registrant's revenues for the most recent fiscal year were: $486,568
The
aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the average high and low prices as reported on the
Over-The-Counter Bulletin Board on June 21, 2006 was $26,062,630.
The
registrant had 16,000,000 shares of common stock outstanding as of June 21,
2006.
Documents
incorporated by reference: None.
Transitional
Small Business Disclosure Format (check one): Yes ¨
No
x
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PAGE
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PART
I
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Item
1.
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Description
of Business.
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2
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Item
2.
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Description
of Property.
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10 |
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Item
3.
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Legal
Proceedings.
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10 |
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Item
4.
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Submission
of Matters to a Vote of Security Holders.
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10 |
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PART
II
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11
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Item
5.
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Market
for Common Equity and Related Stockholder Matters.
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11 |
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Item
6.
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Management's
Discussion and Analysis or Plan of Operation.
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12 |
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Item
7.
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Financial
Statements.
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24 |
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Item
8.
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Changes
In And Disagreements With Accountants On Accounting
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And
Financial Disclosure.
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24 |
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Item
8A.
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Controls
and Procedures
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24 |
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Item
8B.
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Other
Information
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25 |
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PART
III
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Item
9.
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Directors,
Executive Officers, Promoters And Control Persons;
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Compliance
With Section 16(a) Of The Exchange Act.
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25 |
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Item
10.
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Executive
Compensation.
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27 |
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Item
11.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
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32 |
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Item
12.
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Certain
Relationships and Related Transactions.
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34 |
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Item
13.
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Exhibits.
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35 |
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Item
14.
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Principal
Accountant Fees and Services.
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36 |
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Signatures
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Explanatory
Note
On
January 26, 2006, our Board of Directors approved a change in our fiscal
year-end from September 30 to March 31 in order to have our fiscal year-end
coincide with the fiscal year of our operating subsidiary, EnviroSystems, Inc.
In the future, we will report on a March 31 year end basis, with our first
three
fiscal quarters ending on June 30, September 30, and December 31. Since Telecomm
is a holding company, with no prior operations, and all current operations
conducted through its subsidiary EnviroSystems, we decided to provide financial
statements for the twelve month period ending March 31, 2006. Accordingly,
this
Transition Report on Form 10-KSB covers the transition period from March 31,
2005 through March 31, 2006. We refer to the period March 31, 2005 through
March
31, 2006 as the "Transition Period" or the "twelve months ended March 31, 2006"
or the “fiscal year ended March 31, 2006.”
We
have
included in this Transition Report on Form 10-KSB, pursuant to disclosure
requirements of Item 7, the previously issued audit report from Weinick Sanders
Leventhal & Co., LLP (“Weinick”) on the financial statements of
EnviroSystems, Inc., for the fiscal year ended March 31, 2005. We are not able
to obtain the reissued audit report covering the 2005 financials statements
of
EnviroSystems because Weinick is no longer practicing public accounting.
Consistent with SEC’s guidance in paragraph 65 of AU 9508.15, in filing its
Transition Report on Form 10-KSB for the twelve months ended March 31, 2006,
we
have included the previously issued audit report of Weinick and disclosed that
(a) the report is copy of the previously issued Weinick report and (b) the
report has not been reissued by Weinick.
PART
I
FORWARD
LOOKING STATEMENTS
This
Transition Report on Form 10-KSB (including the Exhibits hereto) contains
certain "forward-looking statements" within the meaning of the of Section 27A
of
the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934,
and the Private Securities Litigation Reform Act of 1995, such as statements
relating to our financial condition, results of operations, plans, objectives,
future performance and business operations. Such statements relate to
expectations concerning matters that are not historical fact. Accordingly,
statements that are based on management's projections, estimates, assumptions
and judgments are forward-looking statements. These forward-looking statements
are typically identified by words or phrases such as "believe," "expect,"
"anticipate," "plan," "estimate," "approximately," "intend," and other similar
words and expressions, or future or conditional verbs such as "should," "would,"
"could," and "may." In addition, we may from time to time make such written
or
oral "forward-looking statements" in future filings (including exhibits thereto)
with the Securities and Exchange Commission (the “Commission" or "SEC"), in our
reports to stockholders, and in other communications made by or with our
approval. These forward-looking statements are based largely on our current
expectations, assumptions, plans, estimates, judgments and projections about
our
business and our industry, and they involve inherent risks and uncertainties.
Although we believe that these forward-looking statements are based upon
reasonable estimates and assumptions, we can give no assurance that our
expectations will in fact occur or that our estimates or assumptions will be
correct, and we caution that actual results may differ materially and adversely
from those in the forward-looking statements. Forward-looking statements involve
known and unknown risks, uncertainties, contingencies and other factors that
could cause our or our industry's actual results, level of activity, performance
or achievement to differ materially from those discussed in or implied by any
forward-looking statements made by or on behalf of us and could cause our
financial condition, results of operations or cash flows to be materially
adversely effected. Accordingly, investors and all others are cautioned not
to
place undue reliance on such forward-looking statements. In evaluating these
statements, some of the factors that you should consider include those described
below under "Risk Factors" and elsewhere in this Transition Report on Form
10-KSB.
ITEM
1. DESCRIPTION OF BUSINESS.
Overview
Telecomm
Sales Network, Inc., through our wholly-owned subsidiary EnviroSystems (ESI),
produces cleaning and disinfecting products that help prevent the spread of
infectious micro-organisms without harmful effects to people, equipment or
the
environment. We are focused on safe infection prevention technologies that
are
expected to position the company in the forefront of the industry at a time
when
there is rapidly growing awareness of the critical need to prevent biological
risks — both natural and man-made. Shortly after the completion of our
acquisition of EnviroSystems, our business activities were redirected
in
response to communications with the U.S. Environmental Protection Agency (EPA).
Following
up on concerns raised by the U.S. Environmental Protection Agency (EPA)
regarding EcoTru®
on
the
basis of product testing performed during the course of an ongoing nation-wide
product testing program (the National Antimicrobial Testing Program) being
conducted by the EPA on all disinfecting products and the Company’s own
dissatisfaction with the manufacturing process used previously for its
EcoTru®
disinfectant product, the Company suspended
sales, marketing and distribution of its EcoTru®
disinfectant product. The Company also undertook a voluntary retrieval program
to recover stocks of EcoTru®
that
were manufactured during 2005. These actions were initiated during
January 2006.
Our
business activities have been focused upon aggressively reviewing all aspects
of
our EcoTru®
product
line. In addition to efforts to establish new manufacturing facilities,
independent testing is ongoing in conjunction with a program to review and
enhance the Company’s archive of test data. Further, we are instituting a new
quality assurance program. While ESI’s reviews and quality initiatives will
address issues raised by the EPA, these same programs are integral parts of
our
business plan and include steps we began taking prior to the EPA
inquiry.
Independent
testing to support updated and potential additional label claims has also been
initiated, and new markets segments are under review. Simultaneously we are
in
discussions with several international business partners in multiple
markets.
The
Company has recently filled an application for EPA registration of a new
disinfectant product based on ESI’s proprietary technology. It is anticipated
that this product will include new label claims not previously made for
EcoTru®
products.
Concurrently, the Company confirmed that it was conducting analysis on a new
manufacturing process for its hospital grade disinfectant formulation with
the
intent to reintroduce the EcoTru®
product.
The Company is exploring multiple process improvements in advance of its return
to the hospital grade disinfectant market.
Through
EnviroSystems, we have developed and have trade secret rights to what we believe
to be a unique and proprietary emulsion biocide technology platform that is
expected to be reformulated for use as a hospital grade hard-surface
disinfectant product. This product, which will be an update of our product
that
historically was known as EcoTru®
Ready to
Use (“EcoTru®
RTU”),
is expected to demonstrate through testing that it will effectively kill
numerous bacteria, fungi, and viruses, including Hepatitis B and C, HIV, herpes
and influenza. In addition to being highly effective as a disinfectant, the
updated EcoTru®
RTU is
expected to occupy a unique position in the market place in that it will combine
this microbial effectiveness in a disinfectant product which also will have
a
favorable profile for health and environmental effects.
Our
primary product is EcoTru RTU, which is produced using our proprietary emulsion
technology. The active biocide ingredient in EcoTru®
RTU is
parachlorometaxylenol (“PCMX”) which is a broad spectrum biocide that has been
available on the market for decades. ESI has formulated PCMX into a unique
emulsion which enables EcoTru®
RTU to
deliver minute quantities of PCMX directly to the cellular walls of viruses,
bacteria and fungi to destroy them. The surface of each particle has a negative
surface charge that is crucial to the targeting mechanism. There is an
electrostatic attraction between EcoTru®’s
particles and the microbes. The targeting of the microbes by these particles
is
the basis for EcoTru®’s
efficacy and favorable environmental profile. This direct action allows ESI
to
use lower concentrations of PCMX, only 0.2% of the total solution, resulting
in
EcoTru®
products
that we believe are highly effective yet safe to use.
EcoTru®
RTU
liquid is expected to become available again soon in 22 ounce spray containers,
one gallon bottles, 5 gallon pails and 55 gallon drums. The Company also
produces a cleaning wipes product and plans to develop and test a wipe with
the
intent to register the product as a disinfectant wipe with EPA. We intend to
market a disinfecting wipe with similar claims as those authorized for
EcoTru®
RTU once
EPA registration has been granted. We intend to apply to register our wipe
technology with the EPA as soon as possible.
We
currently maintain an office in Mooresville, North Carolina, with an address
at
516-D River Highway, PMB 297, Mooresville, North Carolina 28117 and at 1900
Wyatt Drive, Suite 15, Santa Clara, California 95054. Our telephone number
is
(512) 236-0925. Our website address is www.envirosi.com.
Recent
EPA Action and Product Retrieval Program
In
January 2006, we received notice from the EPA Region 9 that it had conducted
random tests of a single sample of our EcoTru product taken from a distributor’s
inventory and that the results of such tests raised issues regarding EcoTru’s
labeling claims. In response, during January 2006,
we: (1) voluntarily suspended sales, marketing and distribution of
EcoTru®;
(2)
immediately initiated a retrieval program to recover stocks of
EcoTru®
manufactured during 2005 that were remaining in customer inventories; (3)
promptly commenced
a comprehensive review of our manufacturing procedures; and (4) began a
re-testing program. New test data will be combined with the robust data set
which substantiate the current labeling and marketing claims for the
EcoTru®
products
to support new submissions to EPA and the reintroduction of EcoTru®.
The
EPA
commenced its nation-wide antimicrobial products efficacy program more than
a
decade ago in response to a study issued by the Government Accounting Office
which found that the EPA lacked assurance that antimicrobial products registered
by the EPA were efficacious. Accordingly, we understand that the EPA has
committed itself to re-examining all EPA registered antimicrobial products
that
claim to control pathogenic organisms at specified levels in accordance with
strict standards for performance established by the U.S. government. The EPA,
through use of its own testing laboratory and certain state-run labs, has
completed testing of sterilant products and currently is testing approximately
800 EPA-registered hospital-level disinfectants and 150 tuberculocides.
Although
we believe that the data previously submitted to the EPA supports the current
labeling and marketing claims for our EcoTru®
products
and that any
new
data
generated will be consistent with the numerous studies EnviroSystems generated
over the years and which previously have been submitted to EPA in support of
our
claims, we cannot assure that the EPA will accept such data or that we will
be
able to resume sales, marketing and distribution of our EcoTru products using
identical claims under our prior EPA registration.
EPA
Registration History
EcoTru®
was
first registered by the EPA in October of 1998. The registrations claims were
expanded in 2001 to include additional bacteria, fungi, and viruses, after
development and testing of our emulsion technology. In 2003, further expansion
of EcoTru®’s
claims
were registered with the EPA for mitigating MRSA, VRE and for Hepatitis C.
In
May
2003, EcoTru®
received
authorization by the EPA to include label instructions for use on food contact
surfaces. While current disinfectants specify they may be used in the kitchen,
they are generally not registered for use on food contact surfaces. This
development greatly expands the potential for expanding future applications
of
EcoTru®
to
include use in markets beyond healthcare, industrial and consumer uses
(potentially to include use in restaurants, hotels, cafeterias, kitchens, food
stores, food-processing plants and on food preparation equipment).
Corporate
History
We
were
incorporated in the State of Delaware in August 2004, and prior to January
10,
2006, we had no material assets and/or operations. Effective January 10, 2006,
we completed a reverse merger acquisition transaction with EnviroSystems, Inc.,
whereby EnviroSystems became our indirect wholly owned subsidiary. In connection
therewith, we issued to the preferred stockholders of EnviroSystems 6,400,000
shares of our common stock in exchange for all of the issued and outstanding
preferred stock of EnviroSystems. See “Description of Business - Description of
The Merger.” EnviroSystems was incorporated in the State of Nevada in 1996.
Effective as of January 10, 2006 our business became that of EnviroSystems.
Unless the context otherwise expressly requires, all references to “we,” “us,”
“our business” or “our company” shall mean Telecomm and
EnviroSystems.
Market
Strategy
Our
primary target market has been the healthcare industry, including hospitals,
surgi-centers, dialysis and other clinics, reference laboratories and dental
offices where we believe the demand for EcoTru®
RTU is
greatest. We currently have sales and/or distribution arrangements in the United
States with Stericycle, Crosstex, Medline and Cardinal Healthcare Systems.
In
addition, we have an agreement with Blue Cross Health Services (BCHS) to allow
BCHS to sell EcoTru®
RTU
under the label “TruClean®”
in
the
healthcare market in the United Kingdom. We also have a distribution agreement
with Andpak to distribute EcoTru®
1453 to
the aviation industry and we also sell our cleaning wipes directly to JetBlue
Airlines. While we have initially targeted the healthcare industry and related
markets for our sales efforts, we anticipate offering EcoTru®
and
any
future products to any and all industrial and consumer markets that may benefit
from a disinfecting product such as EcoTru.
Historically
we have focused our efforts on research and development and have not devoted
substantial funds to sales and marketing efforts, and have an accumulated
deficit of $18,109,755 as of March 31, 2006. We have generated limited revenues
and historically have been wholly reliant on the net proceeds raised from the
sales of our securities to fund our operations.
We
believe that the concept of an easy to use and effective broad spectrum
disinfectant that fits with a favorable environmental profile offers us a unique
opportunity to differentiate our products in the surface disinfectant market.
It
is our intention to use our product’s unique characteristics to build acceptance
of EcoTru®
RTU as
an alternative significantly different from other disinfectant products that
currently dominate the marketplace.
Products
EcoTru®
Ready to Use
Our
core
product, EcoTru®
RTU has
been sold to certain segments of the US healthcare market under the brand name
“EcoTru®
Professional” and to the aviation market as “EcoTru®
1453.”
In addition, several distributors sold EcoTru®
RTU as a
private label product including: Stericycle (Sterisafe®)
and
Blue Cross Health Services in the UK. EcoTru®
RTU is
manufactured as a ready-to-use disinfectant/cleanser in 22 ounce spray
containers, 1 gallon bottles, 5 gallon pails and 55 gallon drums.
We
believe that when label claims have been updated EcoTru®
RTU will
be authorized for a wide spectrum of uses and be considered effective as both
an
all-purpose cleaner and as a hospital grade hard surface disinfectant; providing
users with cost-savings in material and labor through the elimination of (i)
the
need to use multiple cleaning/disinfecting products and (ii) the procedures,
disposal techniques, and costs associated with the use of other disinfecting
products. We believe that EcoTru®
RTU will
be unique in its capacity to list multiple pathogens that will be identified
on
the product label while remaining classified within the EPA’s lowest possible
toxicity rating in each of the categories for which the EPA requires acute
toxicity testing (including primary skin, eye, lung irritation and oral and
dermal toxicity). We believe that EcoTru®
labeling
will reflect that it is effective for use on numerous surfaces including metals,
metal alloys, plastics, synthetics, rubber, glass, painted surfaces and vinyl
and is therefore an ideal product to use on hard surfaces that require
disinfecting on a regular basis.
Cleaning
Wipes
We
currently market a line of cleaning wipes and expect soon to begin development
of a line of EcoTru®
Wipes
that will be registered with the EPA as a disinfectant, pre-saturated in
EcoTru®
RTU and
appropriate for use in hospitals and medical clinics, dental offices, veterinary
hospitals, aviation equipment, mass transit and cruise lines.
Potential
Future Products
In
the
future, we may be able to use our technology platform to develop new potential
products with claims similar or identical to EcoTru®
RTU.
These products may include,
an EPA registered wipe (as described above), a sterilant, and a wound cleansing
and topical healing agent for use on animals and humans.
Micro-emulsion
Technology
We
believe that our emulsion technology is one of the few new technologies to
be
applied to disinfectants in more than a quarter of a century. Through the use
of
micro-emulsion technology, we are able to create a highly efficient delivery
mechanism for parachlorometaxylenol, which is the antimicrobial ingredient
used
in our formulations.
We
believe our products manufactured using the micro-emulsion technology
specifically target infectious microorganisms without harming higher life forms
or the environment.
Parachlorometaxylenol
(“PCMX”)
PCMX
is
the active antimicrobial ingredient in our EcoTru®
RTU.
PCMX has been used as an effective antimicrobial disinfectant ingredient for
over five decades, both in the United States and in Europe. PCMX has been
demonstrated to be effective against bacteria, virus, and fungal species. In
other formulations using PCMX, its biocide activity has been limited due to
the
inability of such formulations to deliver PCMX because a water barrier exists
between PCMX and micro-organism membranes, which are both oily. The
EcoTru®
emulsion
technology efficiently enables the delivery of PCMX across this barrier to
the
cell membranes.
In
addition to its broad spectrum of activity, PCMX has a very low instance of
allergic response (it has been used by the cosmetics industry for many years
as
a preservative) and it is rapidly degraded in the environment in both the
presence and the absence of oxygen.
Micro-particle
Anatomy
Observing
the EcoTru®
emulsion
under a very high degree of magnification, one would see a suspension of
micro-particles moving very rapidly in distilled de-ionized water. Many of
these
particles are about 1/200th
the
width of a human hair. The center of the particles is oily or lipophilic, as
is
the target microbial membrane.
Incorporated
into these micro-particles is PCMX biocide. The surface of each particle has
a
negative surface charge that is crucial to the targeting mechanism. There is
an
electrostatic attraction between EcoTru®
particles and the microbes. The selective targeting of the microbes by these
micro-particles is the basis for EcoTru®’s
efficacy.
Micro-Emulsion
Mechanism
The
use
of PCMX in an emulsion is the basis for EcoTru®
RTU’s
efficacy. We believe that the physical/chemical properties of the emulsion
particles and the electrostatic charge on the surface allows the particles
to
successfully target pathogenic microorganisms and deliver the biocide directly
to the microorganisms’ cell membrane, thereby improving efficacy.
By
delivering the PCMX directly to the cell membrane, EnviroSystems has been able
to reduce the concentration of the biocide PCMX to 0.2% and yet achieve
disinfectant efficacy not seen at 15 to 25 fold higher
concentrations.
In
addition, we believe by targeting the membrane, it is not necessary to use
an
oxidizing biocide to kill the organism. Oxidizing biocides, such as bleach
and
hydrogen peroxide, are effective biocides but are indiscriminate, can be
corrosive and require direct access to the microorganism. Also, differences
in
cell surface architecture, which is the key to cellular identity, provide the
mechanism by which EcoTru®
micro-particles discriminate between microorganisms and provides the foundation
and focal point for the antimicrobial effect of EcoTru®.
Manufacturing
Until
recently, we had used different contract manufacturers for our production.
We
are discussing a partnership with an EPA and FDA registered manufacturer that
has the capability to consolidate our manufacturing operations into one
location.
We
believe that our potential manufacturing partner has the manufacturing
capabilities to continue to meet our volume requirements and specifications
through the next several years and until we are ready to conduct our own
in-house manufacturing and/or identify another contract manufacturer. All lots
of EcoTru®
produced
will be subjected to quality control by us before release for use, by selecting
random samples from each lot and subjecting them to testing. Additionally,
we
intend to monitor vendor testing of raw materials and review production records
to ensure EnviroSystems’ procedures and specifications are followed throughout
production.
Future
Possible Self Manufacture Capability
Upon
achieving sufficient levels of sales and revenues, we may pursue the development
of in-house manufacturing capabilities which we believe might reduce our cost
of
goods sold and improve our control over our trade secrets. We believe that
such
a facility would require approximately 20,000 to 80,000 square feet. Such
facility would also need to include quality assurance and research and
development facilities in addition to manufacturing facilities adequate to
produce liquid EcoTru®
products
(anticipated and current) as well as EcoTru®
concentrate. We estimate that once a particular site is chosen and permits
are
obtained, it will take at least six to nine months to complete installation
and
perform short-run production. We currently estimate that the costs for such
a
manufacturing facility would be at least $2.0 million.
Research
and Development
Prior
to
January 10, 2006, we had conducted limited research and development because
of a
lack of capital. Since that time, we have devoted approximately $138,000 to
research and development activities. Our research and development activities
during the transition period have focused on expanded claims and returning
EcoTru®
to the
market.
Government
Regulation
Disinfectant
products are classified as “pesticides” and are subject to regulation by the
United States Environmental Protection Agency (“EPA”), pursuant to the Federal
Insecticide, Fungicide, and Rodenticide Act (FIFRA) as amended by the Food
Quality Protection Act (FQPA) of 1996. FIFRA generally requires that before
any
person can sell or distribute any pesticide in the United States, they must
obtain a registration from the EPA. After completing the registration process
and submission of all required data, an applicant's proposed product
label is stamped when accepted by EPA and returned to the registrant for use
upon the registered product package. Anyone who sells/distributes a pesticide
(including antimicrobial products) also must register that product in every
state in which they intend to sell/distribute the product.
Facilities
at which a pesticide is produced also must be registered with the EPA. Upon
registration, an establishment number is assigned. Annual pesticide production
reports are required to be submitted to the EPA and other books and records
must
be maintained indicating the amount produced, repackaged/relabeled for the
past
year, amount sold/distributed for the past year within and outside of the U.S.,
and the amount to be produced/repackaged/ relabeled for the current year.
Pesticide maintenance fees are required for registed products. Failure to pay
registration and annual maintenance fees or provide necessary test data when
requested by the EPA could result in the cancellation of an EPA
registration.
EPA
regulations also require any registrant to report to the EPA new information
concerning adverse effects associated with their products.
We
have
one product registered with the United States Environmental Protection Agency,
EcoTru®
RTU,
assigned EPA Registration No. 70791-1 which has an EPA registered label.
EcoTru®
RTU is
registered in all of the 50 States in the United States and the District of
Columbia, except that California Department of Pesticide Registration
(CDPR) has conditionally registered EcoTru®
RTU
and ESI must provide additional test data to the CDPR by the end of
2006.
EnviroSystems’
Cleaning Wipes have not been registered with the EPA and are not marketed as
a
disinfectant. We intend to pursue EPA registration of a disinfecting wipe as
soon as possible.
EnviroSystems
facility also is registered and has been assigned EPA Establishment No.
70791-CA-001. All of our contract manufacturers have EPA registered
establishments.
Foreign
Regulation
Although
to date we have not had substantial international sales of our products, when
we
do sell products in foreign jurisdictions, we will be subject to foreign
regulations. For example, before we can introduce our products into certain
markets in the United Kingdom, such products must be listed on the United
Kingdom’s National Registry. We expect that we will have to register our
products in other foreign jurisdictions before we can commence sales in such
jurisdictions. Compliance with foreign requirements could require substantial
expenditures and effort.
Competition
The
market for products such as ours is highly competitive and we face competition
from a number of companies, most of which have substantially greater brand
name
recognition and financial, research and development, production and other
resources than we do.
Healthcare
Our
competitors in the Healthcare market include Johnson & Johnson, Clorox,
Steris Corporation, Caltech Industries, Sybron Dental Specialties, Inc., Reckitt
Benkiser, Sensible Life Products, and Ecolab, Inc.
To
the
best of our knowledge, no competitive products have the same low-toxicity
classifications assigned by the EPA to proprietary EcoTru®
RTU
formulation, as well as the efficacy against a broad range of micro-organisms
and virulent pathogens that EcoTru’s reissued labeling is expected to reflect.
We believe, to date, our competition has used either less expensive toxic
materials, diluted with water, to produce their surface disinfectants or natural
ingredients which do not include the depth of EPA registered effectiveness
claims granted to EcoTru®
RTU.
Hospitality
Aviation, Military
In
the
hospitality, aviation and military industry our primary competitors include
Johnson & Johnson, Ecolab, Inc., Clorox, Sensible Life Products, and Proctor
& Gamble, and others all of which have products with recognized national
brands that include Clorox, Lysol, Pine Sol, and industry specific products.
Products used in the hospitality industry generally compete based upon price.
To
date, relatively higher per unit costs of our product as compared to our
competitors has limited our ability to compete in the hospitality industry.
We
believe that our principal competitive advantages of our future products will
be
their comparatively favorable toxicity profile and anticipated broad range
of
efficacy.
Intellectual
Property
We
have
not applied for patent protection for our proprietary PCMX formulation or for
our emulsion technology and instead rely upon trade secret protection for
protection of our formula, formulation, emulsion technology or manufacturing
process. We continue to review our intellectual property protection policy
and
have evaluated the use of patent versus trade secret protection for our
intellectual property. While we cannot apply for patents on our formulation
or
emulsion technology as a result of the passage of time, in the future we may
seek other available patent protection. In addition, based upon our review
of
industry practice, we determined that it is more common to rely upon trade
secret protection, rather than patents to protect intellectual property,
particularly when such intellectual property involves processes such as ours.
We
have instituted strict internal procedures to protect the trade secrets and
have
confidentiality and non-disclosure agreements in place with our current contract
manufacturers as well as our potential new manufacturing partner.
We
will
continue to evaluate our current trade secret protection and may decide in
the
future, if available, to submit use or design patents in certain areas that
will
not require us to disclose the trade secrets that give EcoTru®
or
future potentially patentable derivative products a competitive advantage.
In
addition, we submitted both the early and the current versions of
EcoTru®
to a
major U.S. de-formulation laboratory to see if they could reverse engineer
our
products. To date, despite their best efforts to reverse engineer our product,
they have not been able to provide us with an accurate report of the
micro-emulsion ingredients or manufacturing process. As new products are brought
to market, we intend to carefully analyze each for the methodology to be
employed in protection of the intellectual property.
Pursuant
to an Intellectual Property Assignment Agreement, effective as of July 30,
1996,
between EnviroSystems, American Children’s Foundation (“ACF”), Richard M. Othus
(“Othus”), Andrew D.B. Lambie (“Lambie”) and Cascade Chemical Corporation
(“Cascade”), each of ACF, Othus, Lambie and Cascade irrevocably assigned to us
all of their rights to the chemical formula which we use in the manufacture
of
our product. In consideration thereof, we agreed to pay to each of Othus and
Lambie a royalty equal to 0.25% of gross revenues received by us from sales
of
our products throughout the world, less credits and returns, for as long as
we
sell products which embody the assigned formula.
Our
products are sold under a variety of trademarks and trade names. We own all
of
the trademarks and trade names we believe to be material to the operation of
our
business. EcoTru®
is
currently registered in the United States, Japan, and Taiwan. We expect to
file
additional registrations in the European Union countries and
Canada.
Except
for the trademarks referred to above, we do not believe any single trademark
is
material to the operations of our business as a whole.
Employees
As
of
June 21, 2006 we had a total of 5 full time employees. None of our employees
are
represented by a trade union. We anticipate hiring additional full time
employees within the next twelve months.
Customers
We
have
traditionally sold the majority of our products to customers in the healthcare
industry, including hospitals, dental offices, physicians’ offices, reference
laboratories, long term care facilities and veterinary offices. In addition,
we
also have also sold our products to airlines, the U.S. Government and customers
in the hospitality industry. As of March 31, 2006 we had approximately 120
customers, most of which are in the healthcare industry and purchased our
products through our distributors. Sales to our top ten customers represented
approximately 78% of our sales for the twelve months ended March 31, 2006.
Of
such sales, approximately 84% consisted of sales of our EcoTru®
RTU and
16% were Cleaning Wipes. In 2005, JetBlue accounted for 85% of sales of our
wipes.
Sales,
Marketing, Distribution
Our
strategy has been to market and sell our products primarily through third party
distributors and to a lesser extent through direct sales. For the twelve months
ended March 31, 2006, sales through distributors accounted for approximately
68%
of our sales. We have entered into distribution agreements with distributors
that service the industry segments that we have targeted for sales of our
products. In the healthcare market, we have entered into distribution agreements
with Stericycle (which markets EcoTru®
under
the private label “Sterisafe®”),
Medline, Crosstex, and Cardinal Health Systems. In the transportation industry,
we have entered into a distribution agreement with Andpak, a distributor to
the
airline industry (which re-packages and markets EcoTru®
under
the private label EcoTru®1453).
We
have
also entered into distribution agreements with distributors to market our
products outside of the United States, such as Blue Cross Health Services which
sells EcoTru®
RTU
under the private label TruClean®
in the
healthcare market in the United Kingdom, and Alpha Scientific Repair Services
which is a distributor in Canada. To date we have had minimal international
sales of our products.
Our
direct sales efforts have been to healthcare facilities, institutions,
commercial airlines and local governments and were intended primarily to help
gain market acceptance, attract major distributors and establish
EcoTru®
as a
brand. For the twelve months ended March 31, 2006, direct sales to customers
accounted for 32% of our sales, with sales to one customer, JetBlue accounting
for 17% of total sales and 53% of direct sales.
The
majority of our products are shipped to customers from our facility at 1900
Wyatt Drive, Santa Clara, CA. We use third party carriers to deliver our
products. From time to time, we will arrange for shipments directly from our
contract manufacturer.
Insurance
Matters
We
maintain a general business liability policy and other coverages specific to
our
industry and operations. We also maintain general products liability coverage
and directors and officers liability coverage. We believe that our insurance
program provides adequate coverage for all reasonable risks associated with
operating our business.
DESCRIPTION
OF THE MERGER
The
Merger
Effective
January 10, 2006, pursuant to the terms of an Agreement and Plan of Merger
(the
“Merger Agreement”), dated as of November 11, 2005 between us, our indirect
wholly owned subsidiary, TSN Acquisition Corporation and EnviroSystems , TSN
merged with and into EnviroSystems, with EnviroSystems as the surviving
corporation (the “Merger”).
Pursuant
to the terms of the Merger Agreement, we issued an aggregate of 6,400,000 shares
of our restricted common stock to the holders of EnviroSystems preferred stock
(including holders of options and warrants to purchase EnviroSystems preferred
stock), which we refer to herein as the “EnviroSystems Preferred Stockholders.”
Each outstanding share of EnviroSystems common stock was cancelled and
extinguished in connection with the merger. The
shares of common stock issued in connection with the merger were issued in
reliance on the exemption from registration afforded by Section 4(2) and
Regulation D (Rule 506) under the Securities Act of 1933, as amended (the
“Securities Act”) and corresponding provisions of state securities laws, which
exempts transactions by an issuer not involving any public
offering.
EnviroSystems
Preferred Stock Conversion
As
of
January 10, 2006, the EnviroSystems Preferred Stockholders held 2,524,472 shares
of EnviroSystems preferred stock and warrants and options to purchase up to
an
additional 838,850 shares of EnviroSystems preferred stock, for an aggregate
of
3,363,322 shares of EnviroSystems preferred stock on a fully diluted basis.
All
of
such shares, including share underlying options and warrants, were exchanged
for
6,400,000 shares of our common stock, which resulted in a conversion ratio
of
approximately 1.092881 shares of our common stock for each share of
EnviroSystems preferred stock, on a fully diluted basis. Included in the
6,400,000 shares are 613,869 shares issuable upon the exercise of warrants
to
purchase EnviroSystems preferred stock and 982,362 shares issuable upon the
exercise of options to purchase EnviroSystems preferred stock. If such options
and/or warrants expire unexercised, the shares of common stock issuable to
such
holders will be distributed pro-rata among the EnviroSystems Preferred
Stockholders. All 6,400,000 shares of common stock have been placed in an escrow
account, described below, for the benefit of the EnviroSystems Preferred
Stockholders.
Escrow
Agreement
The
6,400,000 restricted shares of common stock issuable to the EnviroSystems
Preferred Stockholders, in exchange for their shares of EnviroSystems preferred
stock issued and outstanding and underlying options and warrants to purchase
preferred stock, are subject to an Escrow and Lock-Up Agreement. Pursuant to
the
terms of the Escrow Agreement, the 6,400,000 shares of common stock will be
held
in escrow for a period equal to the longer of 12 months following January 10,
2006 or 9 months after the effective date of a registration statement under
the
Securities Act registering such shares for resale. Provided, however, that
in no
event shall such shares be held in escrow for a period exceeding 15 months
from
January 10, 2006, the effective date of the merger closing. The Escrow Agreement
also provides for earlier release of the shares of common stock in certain
instances. All 6,400,000 shares of common stock are to be held for the benefit
of the EnviroSystems Preferred Stockholders. If any options or warrants to
purchase EnviroSystems preferred stock held in the escrow account expire
unexercised, then the shares of our common stock that would have been issued
upon such exercise, will be distributed among the remaining EnviroSystems
Preferred Stockholders.
ITEM
2. DESCRIPTION OF PROPERTY
Facilities
Our
principal executive offices are currently temporarily located in Mooresville,
North Carolina. We will remain in our Mooresville, North Carolina principal
executive office until we locate more suitable premises in or around Charlotte,
North Carolina.
In
addition, we also maintain offices and space for limited manufacturing
operations and finished goods warehousing in approximately 5,400 square feet
of
leased space at 1900 Wyatt Drive, Suite 15, Santa Clara, California. Rent is
$5,400 per month and monthly common charges are $810. The term of the lease
expired on October 31, 2005 and we have an agreement with the landlord to occupy
and pay rent on a month-to-month basis until we move into more suitable
premises. We also use a chemical warehouse facility located in Gilroy,
California, for storage of concentrate goods inventory. Rent varies based on
usage and has recently been approximately $450 per month on a month to month
basis.
In
June
2006 EnviroSystems entered into a lease agreement for office space at 116
Morlake Drive, Suite 201, Mooresville, North Carolina 28117. The lease has
a two
year term commencing on August 15, 2006, and rent is $6,500 per month, with
no
common charges. We have the option to renew the lease for an additional two
year
term at a reduced rent of $5,200 per month. We intend to move EnviroSystems’
offices currently located in Santa Clara, California to this new space and
consolidate with our principal executive offices.
We
believe that our existing facilities are not adequate for the conduct of our
business as currently configured and as currently contemplated to be conducted
and therefore, as soon as possible, we intend to look for additional laboratory,
warehouse and office.
ITEM
3. LEGAL PROCEEDINGS
In
January 2006, we received notice from the EPA Region 9 that it had conducted
tests of a single sample of our EcoTru product taken from a distributor’s
inventory and that the results of such tests raised issues regarding EcoTru’s
labeling claims. In response, in
January
2006, we: (1) voluntarily suspended sales, marketing and distribution of
EcoTru®;
(2)
initiated a retrieval program to recover stocks of EcoTru®
manufactured during 2005 remaining in customer inventories; (3) commenced
a comprehensive review of our manufacturing procedures; and (4) began a
re-testing program. New test data will be combined with the robust data set
which substantiates the current labeling and marketing claims for the
EcoTru®
products
in order to support new submissions and the reintroduction of EcoTru®.
A final
settlement that resolved EPA’s allegations has been signed by ESI and submitted
to EPA for countersignature. The settlement agreement provides for payment
by
ESI of a civil penalty of approximately $16,500.
Except
for the foregoing, we are not a party to any pending legal
proceedings.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Market
Information
Our
common stock is currently trading on the OTC Bulletin Board under the stock
symbol “TNSW.” The first day on which our shares were traded was September 1,
2005. The
following table shows the reported high and low closing bid prices per share
for
our common stock based on information provided by the OTC Bulletin Board.
The
over-the-counter market quotations set forth for our common stock reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may
not
necessarily represent actual transactions.
| |
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
Period
from January 1, 2006 to March 31, 2006
|
|
$
|
3.25
|
|
$
|
1.40
|
|
|
Period
from October 1, 2005 to December 31, 2005
|
|
$
|
3.45
|
|
$
|
.30
|
|
|
Period
from September 1, 2005 to September 30, 2005
|
|
$
|
.30
|
|
$
|
.05
|
|
Number
of Stockholders
As
of
June 21, 2006, there were approximately 250 holders of record of our common
stock.
Dividend
Policy
Historically,
we have not paid any dividends to the holders of our common stock and we do
not
expect to pay any such dividends in the foreseeable future as we expect to
retain our future earnings for use in the operation and expansion of our
business.
During
the period covered by this Transition Report on Form 10-KSB, we did not complete
any sales of securities that were not registered pursuant to the Securities
Act
of 1933 (the “Securities Act”) except as follows:
Pursuant
to a securities purchase agreement dated as of October 31, 2005, we issued
and
sold to MV Nanotech Corp., 3,230,000 shares of restricted common stock and
a
warrant to purchase up to an additional 4,000,000 shares of common stock. The
warrant is exercisable for a period of 4 years commencing 90 days after the
date
of issuance and has an exercise price of $2.50 per share. We received $80,750
for the common stock and warrant, of which $40,375 was paid in cash and the
remainder of which was paid pursuant to a non-interest bearing promissory note
in the principal amount of $40,375, paid on January 12, 2006. The
shares of common stock and there warrant were issued in reliance on the
exemption from registration afforded by Section 4(2) and Regulation D (Rule
506)
under the Securities Act of 1933, as amended (the “Securities Act”) and
corresponding provisions of state securities laws, which exempts transactions
by
an issuer not involving any public offering.
In
connection with the Merger, we issued 6,400,000 shares of our Common Stock
to
the holders of EnviroSystems preferred stock in exchange for all the issued
and
outstanding shares of EnviroSystems preferred stock. The shares of Common Stock
issued in the Merger were issued were issued in reliance on the exemption from
registration afforded by Section 4(2) and Regulation D (Rule 506) under the
Securities Act of 1933, as amended (the “Securities Act”) and corresponding
provisions of state securities laws, which exempts transactions by an issuer
not
involving any public offering.
Concurrently
with the closing of the Merger, we completed the sale of 4,250,000 shares of
Common Stock in a private placement to accredited investors pursuant to the
terms of a Confidential Private Placement Memorandum, dated November 16, 2005
(the “Offering”). We received gross proceeds of $8,500,000 from the sale of
these shares.
The
Offering was made solely to “accredited investors,” as that term is defined in
Regulation D under the Securities Act. None of the shares of our Common Stock
were registered under the Securities Act, or the securities laws of any state,
and were offered and sold in reliance on the exemption from registration
afforded by Section 4(2) and Regulation D (Rule 506) under the Securities Act
and corresponding provisions of state securities laws, which exempts
transactions by an issuer not involving any public offering. We made this
determination based on the representations of the persons obtaining such
securities which included, in pertinent part, that such persons were “accredited
investors” within the meaning of Rule 501 of Regulation D promulgated under the
Securities Act, and that such persons were acquiring such securities for
investment purposes for their own respective accounts and not as nominees or
agents, and not with a view to the resale or distribution, and that each such
persons understood such securities may not be sold or otherwise disposed of
without registration under the Securities Act or an applicable exemption
therefrom. In connection with the Offering, we paid an aggregate cash fee of
$850,000, to Selling Agents and issued four-year warrants to purchase up to
637,500 shares of our Common Stock at an exercise price of $2.50 per share.
ITEM
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
The
following discussion of our financial condition and our subsidiaries and our
results of operations should be read together with the consolidated financial
statements and related notes that are included later in this Transition Report
on Form 10-KSB. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those set forth under “Risk Factors” or in other parts of this
Transition Report on Form 10-KSB.
Overview
From
our
inception in August 2004, until our acquisition of EnviroSystems in merger
transaction in January 2006, we had no material assets and/or business
operations. As a result of the merger, EnviroSystems became our wholly owned
subsidiary with EnviroSystems and our business became that of EnviroSystems.
EnviroSystems was incorporated in the State of Nevada in 1996.
Through
EnviroSystems, we manufacture and distribute a hard-surface disinfectant product
known as EcoTru®
Ready to
Use (“EcoTru®
RTU”).
EcoTru RTU, which is manufactured using what we believe to be a unique and
proprietary micro-emulsion biocide technology platform, effectively kills
numerous bacteria, fungi, and viruses, including Hepatitis B and C, HIV, herpes
and influenza. In addition to being highly effective as a broad-spectrum
disinfectant, EcoTru®
is
unique in the market place in that it combines this effectiveness in a product
which is non-toxic, non-corrosive, non-flammable and not harmful to the
environment.
Recent
EPA Action and Product Retrieval Program
Historically,
sales of EcoTru RTU accounted for substantially of EnviroSystems’ revenues. In
January 2006, we initiated actions in response to communications with the U.S.
Environmental Protection Agency (EPA) and EnviroSystems voluntarily
suspended sales, marketing and distribution of EcoTru®
disinfectant products and initiated a retrieval program to recover existing
stocks of EcoTru®
manufactured during 2005 that were remaining in customer inventories.
As
a
result, sales of EcoTru RTU during the transition period only reflect sales
from
April 1, 2005 to the middle part of January 2006. At
March
31, 2006, the Company has accrued $270,000 which is its best estimate
of its
obligation regarding the EPA action and voluntary recall.
Change
in Fiscal Year
On
January 26, 2006, our Board of Directors approved a change in our fiscal
year-end from September 30 to March 31 in order to have our fiscal year-end
coincide with the fiscal year of our operating subsidiary, EnviroSystems, Inc.
In the future, we will report on a March 31 year end basis, with our first
three
fiscal quarters ending on June 30, September 30, and December 31. Since Telecomm
is a holding company, with no prior operations, and all current operations
conducted through its subsidiary EnviroSystems, we decided to provide financial
statements for the twelve month period ending March 31, 2006. Accordingly,
this
Transition Report on Form 10-KSB covers the transition period from March 31,
2005 through March 31, 2006. We refer to the period March 31, 2005 through
March
31, 2006 as the "Transition Period" or the "twelve months ended March 31, 2006"
or the “fiscal year ended March 31, 2006.”
Results
of Operations
Year
Ended March 31, 2005 compared to Year Ended March 31, 2006
Revenues.
Our
revenues for the year ended March 31, 2006 and 2005 were $486,568 and $670,214,
respectively. This is a decrease of $183,646 or 27%. This decrease is directly
attributive to the EPA action and the Company’s voluntary recall and suspension
of sales during the last quarter of our fiscal year.
Cost
of Sales.
Cost of
sales for the year ended March 31, 2006 and 2005 were $761,563 and $661,133,
respectively, an increase of $100,430 or 15%. The increase includes $140,000
for
the reserve for returned product due to the EPA action and the voluntary
recall.
Operating
Expenses.
Total
operating expenses for the year ended March 31, 2006 and 2005 were $3,285,549
and $2,309,358, respectively, an increase of $976,191 or 42%.
During
the year ended March 31, 2006, the Company reduced its marketing and sales
efforts and expenses in these areas. This reduction of $279,568 ($118,628 for
marketing; $160,940 for sales) over the previous period was mainly a result
of
the reduction in personnel and travel-related costs due to the Company’s
budgetary constraints. The Company hired its current Vice President of Marketing
& Sales in February 2006. Prior to that date the Company did not have a full
time sales and marketing person or staff for most of the current period.
Product
development increased during the year ended March 31, 2006 from 2005 by
$584,022. The Company changed its estimate of the useful life of its product
development cost during the current period. Due to this change product
development cost increase by $659,254 for the change in estimate of useful
life.
Offsetting decreases in product development from the prior year were due
primarily to a reduction in personnel costs. The Company hired its
current Chief Science Officer in February 2006. Prior to that date the
Company did not have a full time product development person or staff for most
of
the current period.
Liquidity
and Capital Resources
For
the
year ended March 31, 2006, we used $1,936,179 in operating activities, compared
with $1,415,679 used in
operating activities for
the
year ended March 31, 2006. The Company reduced accounts payable balance by
$878,307 during the current period.
We
had
net cash provided by financing activities of $5,280,786 for the year ended
March
31, 2006 compared with $1,384,372 provided by financing activities for the
year
ended March 31, 2005. Cash provided by financing activities for the year ended
March 31, 2006, consisted of $6,951,084 in proceeds from a private offering
(see
below) of our common stock which was completed on January 10, 2006 and
additional proceeds from borrowings of $700,000. Cash used in financing
activities included payments of notes and convertible debt of $2,301,909 and
payment of an amount due to a former officer of $68,389.
We
had
net cash provided from investing activities of $42,766. The Company received
$4,177 in cash in the merger transaction and received payment on a note
receivable of $40,350.
Our
inventory was reduced at March 31, 2006 from March 31, 2005 by $187,040 and
our
accounts receivables were also reduced by $52,974. These reductions are due
to
the EPA action and our voluntary recall and suspension of sales during the
last
quarter of our fiscal year.
We
have
recorded a reserve of $270,000 for anticipated cost associated with the EPA
action.
We
received net proceeds from a private placement of stock during the current
period. We raised a gross amount of $8,500,000. After paying fees ($850,000)
and
related cost associated with the offering ($698,916) we received a net amount
of
$6,951,084.
During
the current period, we were able to pay in full the $2,301,909 in notes,
convertible debt, accrued interest of $110,036 and the amount due to a
former officer in total in the amount of $68,389. We paid these amounts from
the
proceeds of the private placement transaction.
Contractual
Obligations
We
do not
have any long-term material contractual obligations as of March 31, 2006.
Off
Balance Sheet Arrangements
We
currently have no off-balance sheet arrangements that have or are reasonably
likely to have a current or future material effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Management's
discussion and analysis of financial condition and results of operations are
based upon our consolidated financial statements. These statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America. All intercompany balances and transactions have been
eliminated in consolidation.
Use
of estimates in preparation of financial statements
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates, judgments
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, based on
historical experience, and 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 values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The following critical
accounting policies rely upon assumptions, judgments and estimates and were
used
in the preparation of our consolidated financial statements:
Accounts
Receivable
Accounts
receivable are uncollateralized customer obligations due under normal trade
terms requiring payment within thirty days from the invoice date or as specified
by the invoice and are stated at the amount billed to the customer. Customer
account balances with invoices dated over ninety days or ninety days past the
due date are considered delinquent.
The
carrying amount of accounts receivable is reduced by a valuation allowance
that
reflects management's best estimate of the amount that will not be collected.
Management individually reviews all accounts receivable balances that are
considered delinquent and based on an assessment of current credit worthiness,
estimates the portion, if any, of the balance that will not be collected. In
addition, management periodically evaluates the adequacy of the allowance based
on the Company's past experience.
Trade
Secret
The
trade
secret of the formula/formulation of ESI’s product, at the time acquired by the
Company was based upon the valuation of an independent appraiser.
Impairment
of Long Lived Assets
The
Company assesses potential impairment of its long lived assets, which include
its property and equipment and its identifiable intangibles such as its trade
secrets under the guidance of Statement of Financial Standards No. 144
Accounting
for the Impairment or Disposal of Long Lived Assets. Once
annually, or as events and circumstances indicate that an asset may be impaired,
the Company assesses potential impairment of its long lived assets. The Company
determines impairment by measuring the undisclosed future cash flows generated
by the assets, comparing the results to the assets’ carrying value and adjusting
the assets to the lower of the carrying value to fair value and charging currant
operations for any measured impairment.
Revenue
Recognition
Revenue
is generally recognized and earned when all of the following criteria are
satisfied: a) persuasive evidence of sales arrangements exists; b) delivery
has
occurred; c) the sales price is fixed or determinable, and d) collectibility
is
reasonably assured.
Persuasive
evidence of an arrangement is demonstrated via a purchase order from our
customers. Delivery occurs when title and all risks of ownership are transferred
to the purchaser which generally occurs when the products are shipped to the
customer. No right of return exists on sales of product except for defective
or
damaged products. The sales price to the customer is fixed upon acceptance
of
purchase order. To assure that collectibility is reasonably assured we perform
ongoing credit evaluations of all of our customers.
Provision
for Taxes
Income
taxes are provided based upon the liability method of accounting pursuant to
Statement of Financial Accounting Standards No. 109, “Accounting for Income
Taxes” (“SFAS No. 109”). Under this approach, deferred income taxes are recorded
to reflect the tax consequences in future years of differences between the
tax
basis of assets and liabilities and their financial reporting amounts at each
year-end. A valuation allowance is recorded against the deferred tax asset
if
management does not believe the Company has met the “more likely than not”
standard imposed by SFAS No. 109 to allow recognition of such an asset.
Contingent
Liability
In
accordance with Statement of Financial Accounting Standards Interpretation
No.
14, the Company may have certain contingent liabilities with respect to material
existing or potential claims, lawsuits and other proceedings. The Company
accrues liabilities when it is probable that future cost will be incurred and
such cost can be measured.
RISK
FACTORS
You
should carefully consider the following risk factors and the other information
included herein before investing in our common stock. The
risks and uncertainties described below are not the only ones facing us.
Additional risks and uncertainties that we are unaware of, or that we currently
deem immaterial, also may become important factors that affect us. If any of
the
following risks occur, our business, financial condition or results of
operations could be materially and adversely affected. In that case, the trading
price of our common stock could decline, and you could lose all of your
investment.
Risks
Related To Our Business
In
January 2006, we suspended sales, marketing and distribution of EcoTru RTU
and
commenced a voluntary recall of all such products produced since January 2005
which remained in customers’ inventories. We cannot predict when, if ever, we
will recommence sales or the harm such recall will have on our reputation and
business.
In
February 2006, in response to an EPA inquiry, we suspended sales, marketing
and
distribution of EcoTru RTU and commenced a voluntary recall of EcoTru products
produced since January 2005 and remaining in customers’ inventories. As of March
31, 2006, we had accrued $270,000 as our best estimate of the costs to us of
the
EPA action and the recall . We have initiated additional product testing to
be
submitted to the EPA for review. We cannot predict when, if ever, we will be
recommence sales of EcoTru RTU or if we will be able to sell our products with
the efficacy claims originally listed on our labels. If we are not able to
sell,
market or distribute EcoTru RTU, or if we are not permitted to use our prior
efficacy claims, it could have a material adverse effect on our prospects,
business and results of operations. Further, we cannot predict at this time
the
effect the recall has had, or will have, on our reputation and business.
If
our additional product testing do not prove the efficacy of our product or
does
not result in the receipt of EPA authorization, we will not be able to sell
our
products under their prior label claims which could have a material adverse
effect on our ability to market and sell our products.
The
results of our efficacy studies may not show that EcoTru RTU meets the same
standards as previously shown. In that event, we will have to devote significant
financial and other resources to further research and development,
commercialization of our products using our technologies will be delayed or
may
never occur. Although our earlier tests and studies resulted in EPA approval
for
a variety of efficacy claims, the results from these earlier tests may not
be
representative of the results we obtain from any future tests, including our
current tests.
Even
if
our tests do reconfirm the efficacy of our products, we cannot assure that
the
EPA will accept our results without additional testing and review. If the EPA
does not accept the results of our tests, they may require that we conduct
additional tests and studies and submit that data before EPA will reconsider
approval of our product claims. We may need to expend substantial resources
to
conduct further tests and studies to obtain data that EPA believes is
sufficient. Depending on the extent of these tests and studies, this process
could take a significant amount of time and/or may require us to expend more
resources than we may have available. If any of these outcomes occur, we may
be
forced to abandon our applications for approval, which might cause us to cease
operations.
Our
products are subject to periodic random testing by the EPA and we cannot assure
that such tests will not result in further EPA letters of inquiry or other
actions.
Our
products are subject to periodic inspection by the EPA and other authorities,
where applicable, and must comply with the EPA’s standards. Failure to comply
with the statutory and regulatory requirements subjects the manufacturer to
possible legal or regulatory action, such as suspension of manufacturing,
seizure of product or voluntary recall of a product and could result in the
imposition of market restriction through labeling changes or in product removal.
Product authorization may be withdrawn if compliance with regulatory
requirements is not maintained or if problems concerning safety or effectiveness
of the product occur following approval. Further, we rely on distributors for
sales and we cannot control how they store our products. Improper storage could
result in reduced efficacy. If products selected for random testing by the
EPA
have not been properly stored, then the EPA tests may result in a finding that
our products do not meet the efficacy standards on our labels. If EPA testing
results in findings that our products do not meet EPA standards, it could have
a
material adverse effect on our business, reputation and results of
operation.
We
are dependent upon sales of a single product, EcoTru®
RTU to the healthcare industry for most of our sales. If our
EcoTru®
RTU product fails to gain market acceptance our business will suffer.
EcoTru®
RTU is
currently our only product and sales of this product to customers in the
healthcare industry account for substantially all of our revenue. We cannot
provide assurance that we will be successful in convincing additional customers
in the healthcare market to use our product once it returns to distribution
or
if we can successfully branch out into other markets. Certain competitors have
products that are established in our target markets, and we may not be able
to
convince users of those products to switch to EcoTru®
RTU.
Healthcare professionals may be hesitant to utilize our product given our
product pricing structure and the fact that we are a relatively small company.
If our product fails to gain additional acceptance in the healthcare industry,
our business will be harmed.
We
have not applied for patents on our proprietary technology and rely upon trade
secret protection to protect our intellectual property; it may be difficult
and
costly to protect our proprietary rights and we may not be able to ensure their
protection.
We
have
not applied for patent protection for our proprietary formulas and nano-emulsion
technology and have decided instead to rely upon trade secret protection to
protect such intellectual property. Trade secrets are difficult to protect
and
while we use reasonable efforts to protect our trade secrets, we cannot assure
that our employees, consultants, contractors or scientific advisors will not,
unintentionally or willfully, disclose our trade secrets to competitors or
other
third parties. In addition, courts outside the United States are sometimes
less
willing to protect trade secrets. Moreover, our competitors may independently
develop equivalent knowledge, methods and know-how. If we are unable to defend
our trade secrets from illegal use, or if our competitors develop equivalent
knowledge, it could have a material adverse effect on our business.
Any
infringement of our proprietary rights could result in significant litigation
costs, and any failure to adequately protect our proprietary rights could result
in our competitors’ offering similar products, potentially resulting in loss of
a competitive advantage and decreased revenue. Existing patent, copyright,
trademark and trade secret laws afford only limited protection. In addition,
the
laws of some foreign countries do not protect our proprietary rights to the
same
extent as do the laws of the United States. Therefore, we may not be able to
protect our proprietary rights against unauthorized third party use. Enforcing
a
claim that a third party illegally obtained and is using our trade secrets
could
be expensive and time consuming, and the outcome of such a claim is
unpredictable. Litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine
the
validity and scope of the proprietary rights of others. This litigation could
result in substantial costs and diversion of resources and could materially
adversely affect our future operating results.
Potential
claims alleging infringement of third party’s intellectual property by us could
harm our ability to compete and result in significant expense to us and loss
of
significant rights.
From
time
to time, third parties may assert patent, copyright, trademark and other
intellectual property rights to technologies that are important to our business.
Any claims, with or without merit, could be time-consuming, result in costly
litigation, divert the efforts of our technical and management personnel, cause
product shipment delays, disrupt our relationships with our customers or require
us to enter into royalty or licensing agreements, any of which could have a
material adverse effect upon our operating results. Royalty or licensing
agreements, if required, may not be available on terms acceptable to us. If
a
claim against us is successful and we cannot obtain a license to the relevant
technology on acceptable terms, license a substitute technology or redesign
our
products to avoid infringement, our business, financial condition and results
of
operations would be materially adversely affected.
To
date we have had significant operating losses, and an accumulated deficit and
have had limited revenues and do not expect to be profitable for at least the
foreseeable future, and cannot predict when we might become profitable, if
ever.
We
have
been operating at a loss each year since our inception, and we expect to
continue to incur substantial losses for the foreseeable future. As of March
31,
2006, we had an accumulated deficit of approximately $18,681,900. We also have
had limited revenues. Revenues for the twelve months ended March 31, 2005 and
March 31, 2006, were $670,214 and $486,568, respectively. Further, we may not
be
able to generate significant revenues in the future. In addition, we expect
to
incur substantial operating expenses in order to fund the expansion of our
business. As a result, we expect to continue to experience substantial negative
cash flow for at least the foreseeable future and cannot predict when, or even
if, we might become profitable.
Terms
of subsequent financings may adversely impact your
investment.
We
may
have to engage in common equity, debt, or preferred stock financing in the
future. Your rights and the value of your investment in the common stock could
be reduced. Interest on debt securities could increase costs and negatively
impacts operating results. Preferred stock could be issued in series from time
to time with such designations, rights, preferences, and limitations as needed
to raise capital. The terms of preferred stock could be more advantageous to
those investors than to the holders of common stock. In addition, if we need
to
raise more equity capital from sale of common stock, institutional or other
investors may negotiate terms at least as, and possibly more, favorable than
the
terms of your investment. Shares of common stock which we sell could be sold
into the market, which could adversely affect market price.
We
operate in a highly regulated industry, which may delay the introduction of
new
products, cause withdrawal of products from the market, and have other adverse
consequences.
Pursuant
to applicable environmental and safety laws and regulations, we are required
to
obtain and maintain certain governmental permits and approvals, including an
EPA
registration for our core product EcoTru®
RTU.
Permits and approvals may be subject to revocation, modification or denial
under
certain circumstances. While we believe we are in compliance in all material
respects with environmental laws, there can be no assurance that our operations
or activities will not result in administrative or private actions, revocation
of required permits or licenses, or fines, penalties or damages, which could
have an adverse effect on us. In addition, we cannot predict the extent to
which
any legislation or regulation may affect the market for our products or our
cost
of doing business. See “Description of Business - Government
Regulations.”
We
may need to raise capital to fund our operations, and our failure to obtain
funding when needed may force us to delay, reduce or eliminate our product
development efforts.
If
in the
future, if we are not capable of generating sufficient revenues from operations
and our capital resources are insufficient to meet future requirements, we
may
have to raise funds to continue the commercialization, marketing and sale of
our
products.
We
cannot
be certain that funding will be available on acceptable terms, or at all. To
the
extent that we raise additional funds by issuing equity securities, our
stockholders may experience significant dilution. Any debt financing, if
available, may involve restrictive covenants that impact our ability to conduct
our business. If we are unable to raise additional capital if required or on
acceptable terms, it may have to significantly delay, scale back or discontinue
the development and/or commercialization of one or more of our products,
restrict our operations or obtain funds by entering into agreements on
unattractive terms.
Our
independent registered auditors have expressed doubt about our ability to
continue as a going concern and the independent auditors EnviroSystems expressed
doubt about its ability to continue as a going concern.
Telecomm’s
audited financial statements for the period ended September 30, 2005 included
an
explanatory footnote that such financial statements were prepared assuming
that
we would continue as a going concern. Further, EnviroSystems’ audited financial
statements for the year ended March 31, 2005 and 2006, contained a similar
qualification.
We
do not have sufficient internal manufacturing capabilities to produce sufficient
quantities of our product to meet current levels of demand and we rely upon
a
single supplier for our EcoTru®
concentrate and one supplier for final processing and bottling of
EcoTru®
RTU making us vulnerable to supply disruption, which could harm our
business.
We
have
limited manufacturing capabilities and rely upon two outside suppliers: BioRad
Industries produces our EcoTru®
emulsion
concentrate for us, and Royal Chemical converts the concentrate into
EcoTru®
RTU. We
believe that using just two suppliers to produce EcoTru®
RTU
helps us to protect our trade secrets by limiting the number of third parties
that have access to our proprietary information. We do not have contracts with
our suppliers and rely upon purchase orders for purchasing concentrate and
EcoTru®
RTU. If
our suppliers are unable to provide us with product in quantities we require
or
meeting our specifications, or if they raise their prices we would be required
to seek new suppliers. Although we maintain inventories of EcoTru®
concentrate and EcoTru®
RTU
which
we believe would be sufficient to provide us with the time to locate alternative
suppliers, if we are required to find new suppliers, we cannot assure that
we
will find alternative suppliers who will supply us with EcoTru®
concentrate and EcoTru®
RTU
on
similar economic terms, which could increase our costs of goods sold and have
an
adverse effect on our sales and results of operations.
In
addition, if our suppliers encounter problems during manufacturing as a result
of, among other things, failure to follow our protocols and procedures, failure
to comply with applicable regulations, or equipment malfunction, any of which
could delay or impede their ability to meet our demand,
it
could have a material adverse effect on our business. Further, any interruption
or delay in the supply of EcoTru®
concentrate or EcoTru®
RTU, or
our inability to obtain such goods from alternate sources at acceptable prices
in a timely manner, could impair our ability to meet our customers demand and
cause them to cancel orders or switch to competitive products, which would
harm
our business.
We
rely upon a single supplier for parachlorometaxylenol (PCMX), the active
ingredient in EcoTru®
RTU.
We
rely
upon a single supplier, Clariant Corporation, to provide us with PCMX, which
is
the biocide used in our EcoTru®
RTU
products. Clariant Corporation is one of the largest suppliers of PCMX in the
United States with some smaller sources in the United States. There are also
some smaller foreign sources. If Clariant Corporation is unable to supply us
with PCMX in the quantities and on the economic terms that we require, it could
have a material adverse effect on our business. We have no written agreement
with Clariant.
We
lack sales, marketing and distribution capabilities and depend on third parties
to market our product.
We
do not
have an internal sales organization dedicated solely to sales and marketing
of our product and therefore we must rely upon third party distributors to
market and sell our product. These third parties may not be able to market
our
product successfully or may not devote the time and resources to marketing
our
product that we require. We also rely upon third party carriers to distribute
and deliver our product. As such, our deliveries are to a certain extent out
of
our control. If we choose to develop our own sales, marketing or distribution
capabilities, we will need to build a marketing and sales force with technical
expertise and with supporting distribution capabilities, which will require
a
substantial amount of management and financial resources that may not be
available. If we or a third party are not able to adequately sell and distribute
our product, our business will be materially harmed.
We
may face product liability for the products we manufacture and
sell.
Manufacturing,
marketing and sale of our products may subject us to product liability claims.
We currently have insurance coverage against product liability risks up to
an
aggregate annual limit of approximately
$1,000,000.
However,
such insurance coverage may not be adequate to satisfy any liability that may
arise. Regardless of merit or eventual outcome, product liability claims may
result in decreased demand for a product, injury to our reputation and loss
of
revenues. As a result, regardless of whether we are insured, a product liability
claim or product recall may result in losses that could be material to
us.
All
of our operations are conducted at a single location. Any disruption at our
facility could adversely affect our operations and increase our expenses.
All
of
our operations are currently conducted at a single location in Santa Clara,
California. We take precautions to safeguard our facility, including insurance,
health and safety protocols. However, a natural disaster, such as a fire, flood
or earthquake, could cause substantial delays in our operations, damage or
destroy our books
and
records, computer systems, or inventory, and cause us to incur additional
expenses. The insurance we maintain against fires, floods, earthquakes and
other
natural disasters may not be adequate to cover our losses in any particular
case.
If
we are unable to establish sufficient sales and marketing capabilities or enter
into and maintain appropriate arrangements with third parties to sell, market
and distribute our product, our business will be harmed.
We
have
limited experience as a company in the sale, marketing and distribution of
EcoTru®
RTU. We
depend upon third parties to sell our product both in the United States and
internationally. To achieve commercial success, we must develop sales and
marketing capabilities and enter into and maintain successful arrangements
with
others to sell, market and distribute our products.
If
we are
unable to establish and maintain adequate sales, marketing and distribution
capabilities, independently or with others, we may not be able to generate
product revenue and may not become profitable. If our current or future partners
do not perform adequately, or we are unable to locate or retain partners, as
needed, in particular geographic areas or in particular markets, our ability
to
achieve our expected revenue growth rate will be harmed.
We
face competition in our markets from a number of large and small companies,
some
of which have greater financial, research and development, production and other
resources than we have.
Our
products face competition from products which may be used as an alternative
or
substitute therefore. In addition we compete with several large companies in
the
disinfectant business. To the extent these companies, or new entrants into
the
market, offer comparable disinfectant products at lower prices, our business
could be adversely affected. Our competitive position is based principally
on
our micro-emulsion technology, product quality and product safety. Our
competitors can be expected to continue to improve the design and performance
of
their products and to introduce new products with competitive performance
characteristics. There can be no assurance that we will have sufficient
resources to maintain our current competitive position. See “Description of
Business - Competition.”
We
may not be able to manage our growth effectively, which could adversely affect
our operations and financial performance.
The
ability to manage and operate our business as we execute our development and
growth strategy will require effective planning. Significant rapid growth could
strain our internal resources, and other problems that could adversely affect
our financial performance. We expect that our efforts to grow will place a
significant strain on our personnel, management systems, infrastructure and
other resources. Our ability to manage future growth effectively will also
require us to successfully attract, train, motivate, retain and manage new
employees and continue to update and improve our operational, financial and
management controls and procedures. If we do not manage our growth effectively,
our operations could be adversely affected, resulting in slower growth and
a
failure to achieve or sustain profitability.
Our
future success depends on retaining our existing key employees and hiring and
assimilating new key employees. The loss of key employees or the inability
to
attract new key employees could limit our ability to execute our growth
strategy, resulting in lost sales and a slower rate of
growth.
Our
success depends in part on our ability to retain key employees including our
executive officers. Following the Merger we have only entered into an employment
agreement with one of our executives. Also, we do not currently carry "key
man"
insurance on our executives but intend to obtain it in the near future. It
would be difficult for us to replace any one of these individuals. In addition,
as we grow we may need to hire additional key personnel. We may not be able
to
identify and attract high quality employees or successfully assimilate new
employees into our existing management structure.
We
cannot predict the impact of our proposed marketing efforts. If these efforts
are unsuccessful we may not earn enough revenue to become
profitable.
Our
success will depend on investing in marketing resources. Our proposed business
plan includes hiring marketing personnel and a dedicated sales force and
developing a comprehensive marketing plan for our product. Such a marketing
plan
may include attending trade shows and making private demonstrations, advertising
and promotional materials, advertising campaigns in both print and broadcast
media, and advertising/promotion-related operations. We cannot give any
assurance that these marketing efforts will be successful. If they are not,
revenues may be insufficient to cover our fixed costs and we may not become
profitable.
Our
business was recently acquired which means that we have a limited operating
history upon which you can base your investment decision.
Prior
to
January 2006, we were a shell company with no operations and minimal
assets. In January 2006, we acquired EnviroSystems and our business became
that
of EnviroSystems. Accordingly, we have a limited operating history upon which
an
evaluation of our prospects can be made. Our strategy is unproven and the
revenue and income potential from our strategy is unproven. We may encounter
risks and difficulties frequently encountered by companies that have grown
rapidly through acquisition, including the risks described elsewhere in this
section. Our business strategy may not be successful and we may not be able
to
successfully address these risks. If we are unsuccessful in the execution of
our
current strategic plan, we could be forced to reduce or cease our
operations.
Our
management has limited experience running our businesses which may hamper with
our ability to make effective management decisions.
All
of
our operations were acquired in January 2006 and at that time we hired our
executive officers and appointed new board members to run our business.
Therefore, our experience in operating our current business is limited. Our
senior executives have limited experience working with each other. Consequently,
internal communication and business-decision making processes are evolving.
We
may react too slowly or incorrectly to trends that may emerge and affect our
business. Our future success depends on the ability of the senior executives
to
establish an effective organizational structure and to make effective management
decisions despite their limited experience.
We
have experienced a history of losses and expect to incur future losses.
Therefore, we must continue to raise money from investors to fund our
operations. If we are unable to fund our operations, we will cease doing
business.
We
have
recorded very limited revenue from operations to date and we have incurred
a
cumulative loss of approximately $18,681,900 through March 31, 2006. We expect
to incur significant operating losses and negative cash flows over the next
several quarters due to the costs of expanded research and development of our
products. We will need to generate significant revenues in order to achieve
and
maintain profitability. We may not be able to generate these revenues or achieve
profitability in the future. Even if we do achieve profitability, we may not
be
able to sustain or increase profitability. We are a development stage company
focused on developing and implementing our EcoTru RTU products. We have
generated negative revenue to date. Consequently, we must raise money from
investors to maintain our operations. If we can’t fund our operations through
product sales and investments by third parties, we will have to cease
operations.
We
have relied almost entirely on external financing to fund our operations and
acquisitions to date.
Because
we have never generated meaningful revenue and currently operate at a loss,
we
are completely dependent on the continued availability of financing in order
to
continue our business. There can be no assurance that financing sufficient
to
enable us to continue our operations will be available to us in the future.
Our
failure to obtain future financing or to produce levels of revenue to meet
our
financial needs could result in our inability to continue as a going concern
and, as a result, our investors could lose their entire investment.
Relationship
with Principal Stockholders
Prior
holders of EnviroSystems preferred stock beneficially own, or have the right
to
acquire, approximately 40% (6,400,000 shares) of our common stock. As a result,
such persons will have substantial influence in all matters requiring a vote
of
our stockholders. This concentration of ownership could also have the effect
of
delaying or preventing a change in our control or discouraging a potential
acquirer from attempting to obtain control of us, which in turn could have
a
material adverse effect on the market price of the common stock or prevent
our
stockholders from realizing a premium over the market price for their shares
of
common stock.
Our
business may be affected by factors outside of our
control.
Our
ability to increase sales, and to profitably distribute and sell our products,
is subject to a number of risks, including changes in our business relationships
with our principal distributors, competitive risks such as the entrance of
additional competitors into our markets, pricing and technological competition,
risks associated with the development and marketing of new products in order
to
remain competitive and risks associated with changes in demand for disinfectants
which can be affected by economic conditions, health care reform and government
regulation.
Risks
Related To Our Common Stock
The
price of our common stock may fluctuate significantly, which could lead to
losses for stockholders.
The
securities of public companies can experience extreme price and volume
fluctuations, which can be unrelated or out of proportion to the operating
performance of such companies. We expect our common stock price will be subject
to similar volatility. Any negative change in the public’s perception of the
prospects of our company or companies in our market could also depress our
common stock price, regardless of our actual results. Factors affecting the
trading price of our common stock may include:
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variations
in our operating results;
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announcements
of technological innovations, new products or product enhancements,
strategic alliances or significant agreements by us or by our competitors;
|
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recruitment
or departure of key personnel;
|
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litigation,
legislation, regulation or technological developments that adversely
affect our business;
|
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changes
in the estimates of our operating results or changes in recommendations
by
any securities analyst that elect to follow our common stock; and
|
| Ø |
market
conditions in our industry, the industries of our customers and the
economy as a whole.
|
If
securities analysts do not publish research or reports about our business or
if
they downgrade our stock, the price of our stock could
decline.
The
trading market for our common stock may be affected by research and reports
that
industry or financial analysts may in the future publish about us or our
business. We will not control these analysts. There are many large,
well-established publicly traded companies active in our industry and market,
which will mean it will be less likely that we receive widespread, if any,
analyst coverage. Furthermore, if one or more of the analysts who in the future
elect to cover us, downgrade our stock, our stock price would likely decline
rapidly. If one or more of these analysts cease coverage of us, we could lose
visibility in the market, which in turn could cause our common stock price
to
decline.
We
have no intention to pay dividends on our common stock.
For
the
foreseeable future, we intend to retain any remaining future earnings, if any,
to finance our operations and do not anticipate paying any cash dividends with
respect to our common stock. As a result, investors should not expect to receive
dividends on any of the shares of our common stock purchased by them, for a
long
period of time, if ever.
Our
common stock is quoted on the OTC Bulletin Board and there may be a limited
trading market for our common stock.
Our
common stock is quoted on the OTC Bulletin Board. There is extremely limited
and
sporadic trading of our common stock, and no assurance can be given, when,
if
ever, an active trading market will develop or, if developed, that it will
be
sustained. As a result, investors in our common stock may be unable to sell
their shares.
Future
sales of shares of our common stock currently subject to an escrow and lock-up
agreement may decrease the price for such shares.
As
of
March 31, 2006, we had 16,000,000 shares of common stock outstanding. Out of
such shares, an aggregate of 6,400,000 shares of common stock, which we issued
in connection with our acquisition of EnviroSystems are subject to an Escrow
and
Lock-Up Agreement. Included in the 6,400,000 shares subject to the Escrow and
Lock-Up Agreement are 613,869 shares issuable upon the exercise of warrants
and
982,362 shares issuable upon the exercise of options. If such options and/or
warrants expire unexercised, the shares of common stock issuable to such holders
will be distributed to the other EnviroSystems Series A Preferred Stockholders.
When the Escrow and Lock-Up Agreement expires, such shares will be eligible
for
resale on the open market, many without any restrictions as to size or frequency
of such sales. Actual sales, or the prospect of sales by our stockholders,
may
have a negative effect on the market price of the shares of our common
stock.
If
any of
our stockholders either individually or in the aggregate cause a large number
of
securities to be sold in the public market, or if the market perceives that
these holders intend to sell a large number of securities, such sales or
anticipated sales could result in a substantial reduction in the trading price
of shares of our common stock and could also impede our ability to raise future
capital. In addition as of March 31, 2006, we had warrants to purchase up to
an
aggregate of 5,251,369 shares and options to purchase up to 2,139,082 shares
of
common stock outstanding. Further, we have up to an additional 3,700,000 shares
of common stock reserved for future issuance under our 2004 Equity Compensation
Plan and our 2006 Incentive Stock Plan.
Our
common stock is subject to Penny Stock Rules, which could affect
trading.
Broker-dealer
practices in connection with transactions in “penny stocks” are regulated by
certain rules adopted by the SEC. Penny stocks generally are equity securities
with a price of less than $5.00 (other than securities registered on certain
national securities exchanges or quoted on the NASDAQ Stock Market if current
price and volume information with respect to transactions in such securities
is
provided by the exchange or system). The rules require that a broker-dealer,
prior to a transaction in a penny stock not otherwise exempt from the rules,
deliver a standardized risk disclosure document that provides information about
penny stocks and the risks in the penny stock market. The broker-dealer also
must provide the customer with current bid and offer quotations for the penny
stock, the compensation of the broker-dealer and its salesperson in connection
with the transaction and monthly account statements showing the market value
of
each penny stock held in the customer’s account. In addition, the rules
generally require that prior to a transaction in a penny stock the broker-dealer
must make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser’s written agreement to
the transaction. These disclosure requirements may have the effect of reducing
the liquidity of penny stocks. Our common stock comes within the definition
of
“penny stock” and as a result is subject to the penny stock rules. Therefore,
investors in our common stock may find it more difficult to sell their shares
of
common stock.
Our
stockholders may encounter difficulties in obtaining, or may be unable to
obtain, recovery from Weinick Sanders Leventhal & Co., LLP with respect to
its audit of the financial statements of EnviroSystems and the inability to
obtain this consent could negatively affect our ability to access public capital
markets and to file future documents in a timely manner.
As
a
public company we are required to file periodic financial statements with the
SEC that have been audited or reviewed by an independent accountant.
The independent auditor of EnviroSystems, Weinick Sanders Leventhal & Co.,
LLP (“Weinick”), provided a report on EnviroSystems’ financial statements for
the fiscal year ended March 31, 2005. However, Weinick has ceased doing
business and we have been unable to obtain a reissued Weinick report for
EnviroSystems’ financial statements included in this report. Our
stockholders will encounter difficulties in obtaining or will be unable to
obtain from Weinick, with respect to its audits of EnviroSystems’ financial
statements for the year ended March 31, 2005, relief that may be available
to
investors under the federal securities laws against audit firms.
The
inability of Weinick to reissue its audit report or, if necessary, to provide
its consent to the incorporation of its audit report in other public filings
could limit our ability to access the public capital markets or cause us to
incur the additional cost of having the financial statements for the year ended
March 31, 2005.
The
full
text of our audited consolidated financial statements for the twelve month
period from March 31, 2005 to March 31, 2006 (including Notes thereto) and
audited financial statements for EnviroSystems, Inc. for the year ended March
31, 2005 begins on page F-1 of this transition report.
The
audited financial statements for EnviroSystems, Inc. for the year ended March
31, 2005 were prepared by Weinick Sanders Leventhal & Co., LLP ("Weinick").
Weinick ceased operations and no longer provides audit services to any publicly
held company. Consistent with SEC’s guidance in paragraph 65 of AU 9508.15, in
filing this Transition Report on Form 10-KSB, we have included the previously
issued audit report of Weinick and disclosed that (a) the report is a copy
of
the previously issued Weinick report and (b) the report has not been reissued
by
Weinick.
ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not
applicable.
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Exchange Act), as of the end of the period covered by this Transition
Report.
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures will prevent all
errors and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control
system's objectives will be met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues, errors, and instances of fraud,
if
any, have been or will be detected. The inherent limitations include, among
other things, the realities that judgments in decision-making can be faulty,
and
that breakdowns can occur because of simple error or mistake. Controls and
procedures also can be circumvented by the individual acts of some persons,
by
collusion of two or more people, or by management or employee override of the
controls and procedures. The design of any system of controls and procedures
is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls and
procedures may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or procedures. Because
of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected. If and when management
learns that any control or procedure is not being properly implemented, (a)
it
immediately reviews our controls and procedures to determine whether they are
appropriate to accomplish the control objective and, if necessary, modifies
and
improves our controls and procedures to assure compliance with our control
objectives, (b) it takes immediate action to cause our controls and procedures
to be strictly adhered to, (c) it immediately informs all relevant managers
of
the requirement to adhere to such controls, as well as all relevant personnel
throughout our organization, and (d) it implements in our training program
specific emphasis on such controls and procedures to assure compliance with
such
controls and procedures. The development, modification, improvement,
implementation and evaluation of our systems of controls and procedures is
a
continuous project that requires changes and modifications to them to remedy
deficiencies, to improve training, and to improve implementation in order to
assure the achievement of our overall control objectives.
Based
upon the evaluation of our disclosure controls and procedures, our Chief
Executive Officer and Chief Financial Officer have concluded that, subject
to
the limitations noted above, our disclosure controls and procedures as of the
end of the period covered by this Transition Report were effective to ensure
that material information
relating
to us and our consolidated subsidiaries is made known to them by others within
those entities to allow timely decisions regarding required
disclosures.
During
the period covered by this Transition Report, there have been no changes in
our
internal control over financial reporting that has materially effected, or
is
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM
8B. OTHER INFORMATION.
Not
applicable.
ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH
SECTION 16(A) OF THE EXCHANGE ACT.
Directors
and Executive Officers
Set
forth
below are the names, ages, and positions of each of our and EnviroSystems’
executive officers and directors, together with such person's business
experience during the past five (5) years.
|
Name
|
Age
|
Position(s)
|
|
J.
Lloyd Breedlove
|
58
|
President,
Chief Executive Officer, Chairman of the Board of
Directors
|
|
Stephen
Hoelscher
|
47
|
Chief
Financial Officer, Secretary, Director
|
|
Charles
Cottrell
|
62
|
Director
|
|
Jeffrey
Connally
|
58
|
Director
|
|
Stephen
A. Schneider
|
58
|
Director
|
|
Paul
S. Malchesky
|
60
|
Chief
Science Officer, EnviroSystems
|
|
Jeff
Savino
|
53
|
Vice
President, Marketing and Sales,
EnviroSystems
|
J.
Lloyd
Breedlove has been our and EnviroSystems’ President, Chief Executive Officer and
Chairman of the Board of Directors since January 10, 2006 and since 2004, he
has
served as a member of the Board of Directors of EnviroSystems. From June 2003
to
2006, he was the President and Chief Executive Officer of Imalux Corporation
a
corporation in the medical imaging equipment industry. Prior thereto, from
December 2000 to May 2003 he was the President and Chief Executive Officer
of
KIVALO a healthcare technology company with emphasis on disease management.
From
1991to 1999, Mr. Breedlove served as the Executive Vice President and Group
President of Steris Corporation, a developer and manufacturer of infection
and
contamination control products. From 1989 to 1991, he was the President and
Chief Executive Officer of CRI, a developer of a vascular surgery product and
prior thereto he was the Director of Sales and held other sales and management
positions at Mallinckrodt, Inc., a diverse company focusing on supplying
products to the healthcare industry. Mr. Breedlove has a wide range of
experience working with companies in various stages of development from
start-ups to companies with global operations. During Mr. Breedlove’s tenure at
Steris, annual sales increased from $13 million to greater than $820 million.
He
has served on numerous advisory and corporate boards, with an emphasis on
establishing healthcare businesses. Mr. Breedlove received an MBA from Western
Carolina University. Serving in Viet Nam, he was awarded the Bronze Star, Bronze
Star with Oak Leaf Cluster, Vietnamese Cross of Gallantry, Air Medal and Purple
Heart.
Stephen
Hoelscher
Mr.
Hoelscher has been our and EnviroSystems’ Chief Financial Officer, Secretary and
a member of our Board of Directors since January 10, 2006. Mr. Hoelscher is
a
Certified Public Accountant and has 24 years of accounting and auditing
experience. Mr. Hoelscher is a 5% owner of, and also the CFO for, Mastodon
Ventures, Inc., (an affiliate of MV Nanotech) a financial consulting business
in
Austin, Texas, a position that he has held since 2000. MV Nanotech previously
made loans to us in the aggregate amount of $850,000, which amount (plus accrued
but unpaid interest) was repaid out of the net proceeds of our private offering
completed in January 2006. Since May, 2004, Mr. Hoelscher has also served as
the
Chief Financial Officer of EnXnet, Inc, a Tulsa, Oklahoma based publicly traded
technology company, he has provided accounting consulting services to EnXnet
since January 2001. Mr. Hoelscher will continue to provide limited consultation
to Mastodon and will continue to consult with EnXnet but will devote such time
as necessary to the performance of his duties to us. From 1997 to 2000, Mr.
Hoelscher was the Controller for Aperian, Inc. an Austin, Texas based publicly
traded company. Prior to joining Aperian, he was the controller for Protos
Software Company in Georgetown, Texas from 1996 to 1997. Mr. Hoelscher was
Audit
Manager with Brown, Graham and Company, P.C. from 1989 to 1996. Mr. Hoelscher
received a Bachelor of Business Administration from West Texas A&M
University (formerly West Texas State University) in Canyon, Texas in
1981.
Charles
Cottrell has been a member of our and EnviroSystems’ Board of Directors on
January 10, 2006. Since 2001, Mr. Cottrell has served as a principal of Mountain
Green LLC, a manufacturer and distributor of natural cleaning products, located
in Scottsdale, Arizona. Prior thereto, from 1979 to 1999, he served as the
Chairman and Chief Executive Officer of Cottrell Limited, an Englewood, Colorado
based company providing infection control products and services to the national
healthcare market. Mr. Cottrell has over 30 years experience in bringing new
products to market and developing brands. Mr. Cottrell received a Bachelor
of
Science from the University of Pittsburgh, and attended the Wharton School
of
Business’ Entrepreneurial Studies and Growth Programs and the Harvard University
Business School’s Business Owners/President’s Program.
Jeffrey
Connally
Jeffrey
Connally has been a member of our and EnviroSystems’ Board of Directors on
January 10, 2006. Mr. Connally also serves a director of CM IT Solutions, Inc.
Mr. Connally is a partner in Gener8biz, Inc., a sales and marketing consulting
firm which he founded in May of 2003. Mr. Connally leads strategic engagements
for Gener8biz’ high-tech, healthcare and financial services clientele. Prior
thereto, in 1998 Mr. Connally was a founder of UpLink Corporation where he
provided sales and marketing leadership and created the marketing, business
development, sales, installation and support infrastructure for UpLink’s
wireless/GPS-based technology. Mr. Connally has also held executive positions
with several startup technology companies where he was responsible for
establishing the sales process and channel strategy. Mr. Connally received
a
Bachelors in Business Administration from St. Michaels College in 1969 and
an
MBA from the University of Texas in 1993.
Stephen
A. Schneider
Stephen
A. Schneider has been a member of our and EnviroSystems’ Board of Directors on
January 10, 2006. From November 2004 until January 2006, Mr. Schneider served
as
the Interim President and Chief Executive Officer of EnviroSystems. Mr.
Schneider is co-founder and a former director of Alexza Pharmaceuticals, Inc.,
(formerly Alexza Molecular Delivery Corporation), a specialty pharmaceutical
company developing drug products delivered by inhalation using a proprietary
nano/micro-particle vaporization technology. Alexza was formed in December
2001,
through the merger of Alexza Corporation and Molecular Delivery Corporation,
a
company engaged in developing new pharmaceutical delivery methods, founded
in
1997 by Mr. Schneider. From 2001 to 2003, Mr. Schneider served as President
and
Chief Operating Officer of Alexza. Prior thereto, from 1997 to 2001, he served
as the President and Chief Executive Officer of Molecular Delivery Corporation.
From January to March 2004, Mr. Schneider served as a consultant to the founder
and President of TiNi Alloy Company. Mr. Schneider has 20 years experience
in
the pharmaceutical, medical device and medical service industries and has
developed a number of early stage, start-up companies. Mr. Schneider received
a
Bachelor of Arts from Earlham College, a Master of Arts from the University
of
Houston, a JD from Golden Gate University of Law, and attended the Stanford
University Graduate School of Business’ Stanford Leadership Academy, Executive
Program for Growing Companies and Finance and Accounting for Non-Finance
Executive programs.
Paul
S. Malchesky
Paul
S.
Malchesky, D. Eng. has served as the Chief Science Officer of our subsidiary,
EnviroSystems, since January, 2006. Dr. Malchesky is a former Vice President
of
Operations and Discovery and Development for NanoScale Materials, Inc. in
Manhattan, KS. Previously, he served as Vice President of Investigational
Research at STERIS Corporation, Mentor, OH, and Staff Member at the Cleveland
Clinic Foundation in Artificial Organs in Cleveland, OH. As an academician,
Dr.
Malchesky is Associate Professor of Surgery, Baylor College of Medicine,
Houston, Texas, Adjunct Staff in Biomedical Engineering, Cleveland Clinic
Foundation, and Adjunct Professor in Chemical Engineering at Kansas State
University. He is also President of the International Center for Artificial
Organs and Transplantation (ICAOT). Dr. Malchesky is also the Editor-in-Chief
of
Artificial
Organs
and
Managing Editor of Therapeutic
Apheresis and Dialysis. He
holds
a Doctorate in Engineering from Cleveland State University, M.S. degrees in
Chemistry from Case Western Reserve University and in Chemical Engineering
from
Cleveland State University and a B.S. Degree in Chemistry from St. Francis
College (PA).
Jeff
Savino
Jeff
Savino has served as the Vice President of Marketing & Sales of our
subsidiary, EnviroSystems, since January, 2006. Mr. Savino has nearly thirty
years of proven experience in medical marketing and sales, spanning from small
to large corporations. His background includes, new product introductions,
operations experience, and international commerce and business Most recently
he
built and managed a national distribution network at Boehringer Labs.
Previously, Mr. Savino held a number of responsible positions in his ten years
of service with STERIS Corporation, including Vice President, International
Health Care, Latin American Operations. His marketing and sales career began
with Baxter. Mr. Savino holds a B.S. Degree in Biology from City University
of
New York.
Election
of Directors and Officers
Holders
of our common stock are entitled to one (1) vote for each share held on all
matters submitted to a vote of the stockholders, including the election of
directors. Cumulative voting with respect to the election of directors is not
permitted by our Certificate of Incorporation.
The
Board
of Directors shall be elected at the annual meeting of the stockholders or
at a
special meeting called for that purpose. Each director shall hold office until
the next annual meeting of stockholders and until the director’s successor is
elected and qualified. If a vacancy occurs on the Board of Directors, including
a vacancy resulting from an increase in the number of directors, then the
stockholders may fill the vacancy at the next annual meeting or at a special
meeting called for the purpose, or the Board of Directors may fill such
vacancy.
Compensation
of Directors
It
is
intended that each member of our Board of Directors who is not an employee
of
Telecomm (a “non-employee director”) will receive an annual retainer in cash
and/or shares of Common Stock as determined by our Board of Directors and all
directors will be reimbursed for costs and expenses related to attendance at
meetings of the Board of Directors.
Our
employee directors will not receive any additional compensation for serving
on
our Board of Directors or any committee of our Board of Directors, and our
non-employee directors will not receive any compensation from us for their
roles
as directors other than the retainer, attendance fees and stock option grants
described above.
Compliance
with Section 16(a) of the Exchange Act.
Our
common stock is not registered under Section 12 of the Securities Exchange
Act
of 1934, as amended, and therefore our executive officers, directors and
beneficial holders of ten percent or more of our common stock were not subject
to Section 16(a).
Committees
of the Board of Directors
We
have
appointed an Audit Committee and a Compensation Committee. The Board of
Directors appoints the members of each Committee.
Audit
Committee and Code of Ethics.
We
have
appointed an audit committee, consisting of Directors Cottrell, Hoelscher and
Schneider. We have not adopted an audit committee charter or made a
determination as to whether any of our directors would qualify as an audit
committee financial expert. The Company has not yet adopted a code of ethics
applicable to its chief executive officer and chief accounting officer, or
persons performing those functions, because of the small number of persons
involved in management of the Company.
Compensation
Committee
We
have
appointed a Compensation Committee, consisting of Directors Breedlove, Connally
and Schneider. The Compensation Committee is responsible for recommending to
the
Board of Directors compensation payable to our senior officers and
administration of our stock plans.
Family
Relationships
There
are
no family relationships among our officers or directors.
Based
on
our inquiries of all of our officers and directors, we are not aware of any
pending or threatened legal proceedings involving any of our officers or
directors that would be material to an evaluation of our management.
Our
officers, directors and holders of greater than 10% of our outstanding shares
of
common stock are not subject to the reporting requirements of Section 16(a)
of
the Securities Exchange Act.
The
following table sets forth certain information concerning all cash and non-cash
compensation awarded to, earned by or paid to our Chief Executive Officer and
other executive officers whose total compensation exceeded $100,000 for the
Transition Period ended March 31, 2006 (collectively, the "Named Executive
Officers"). For the fiscal years ended September 30, 2004 and 2005, and for
the
period from October 1, 2005 to January 10, 2006, our Chief Executive Officer
and
our other executive officers received no compensation.
|
Summary
Compensation Table
|
| |
|
|
|
|
Long-Term
Compensation
|
| |
|
|
|
Annual
Compensation
|
Awards
|
|
|
Name
and Principal Position
|
|
Year
|
|
Salary
($)*
|
|
Bonus
($)
|
|
Other
Annual
Compensation
($)
|
Restricted
Stock
Awards
|
|
Securities
Underlying
Options
|
|
|
J.
Lloyd Breedlove,
President
and Chief Executive Officer
|
|
2006
|
|
$59,856
|
|
50,000
|
|
0
|
0
|
|
750,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
*
Represents amounts paid for the period from January 10, 2006 to March 31,
2006.
J.
Lloyd
Breedlove became our President and Chief Executive Officer, in January 2006.
Mr.
William Sarine, our former President, Chief Executive and Chief Financial
Officer, and Tony Summerlin, our former, Vice President, each resigned their
respective offices effective January 10, 2006.
Employment
Agreements
We
are
party to an employment agreement with J. Lloyd Breedlove, pursuant to which
Mr.
Breedlove agreed to serve as our President, Chief Executive Officer and Chairman
of the Board, effective January 10, 2006. The agreement has a 3 year term,
commencing as of January 10, 2006. The agreement provides for a base salary
of
$225,000 during the first year of its term and $250,000 during each of the
second and third years of its term. In addition, upon the closing of our January
2006, private offering and acquisition of EnviroSystems, we paid to Mr.
Breedlove a signing bonus of $50,000 and granted to Mr. Breedlove 4 year options
to purchase up to 750,000 shares of our common stock at an exercise price of
$2.50 per share, vesting over a three year period in equal installments. Under
the agreement, we have the right to terminate Mr. Breedlove without cause upon
12 months prior written notice. If Mr. Breedlove is terminated without cause
by
us, he will be entitled to receive a lump sum payment equal to the lesser of
12
months of the base salary then in effect or the balance of this base salary
due
under the agreement for the remainder of the term of the agreement. In addition,
Mr. Breedlove is entitled to participate in all our benefit programs in effect
during the term of the agreement and we have agreed to provide Mr. Breedlove
with a life insurance policy in the face amount of $2,000,000, the beneficiary
of which to be determined by Mr. Breedlove.
Other
Compensation
In
addition to the employment agreement with J. Lloyd Breedlove, we pay Mr.
Hoelscher $80,000 per year in consideration for Mr. Hoelscher serving as our
Chief Financial Officer. We have not entered into an employment agreement with
Mr. Hoelscher.
In
connection with their hiring, we granted to each of Dr. Malchesky and Mr.
Savino, options under our 2006 Stock Incentive Plan to purchase up to 200,000
shares of our common stock at an exercise price of $2.00 per share.
We
may
also issue to our officers and directors stock options on terms and conditions
to be determined by the Compensation Committee of our Board of
Directors.
Stock
Option Plans
2004
Equity Compensation Plan
We
adopted our 2004 Equity Compensation Plan on September 1, 2004. The plan
provides for the grant of options intended to qualify as “incentive stock
options”, options that are not intended to so qualify or “nonstatutory stock
options” and restricted stock. The total number of shares of common stock
reserved for issuance under the plan is 1,300,000 shares, subject to adjustment
in the event of stock split, stock dividend, recapitalization or similar capital
change. No grants have been made under the plan.
The
plan
is administered by the Compensation Committee of our Board of Directors, which
selects the eligible persons to whom options or stock awards shall be granted,
determines the number of shares subject to each option or stock award, the
exercise price therefore and the periods during which options are exercisable,
interprets the provisions of the plan and, subject to certain limitations,
may
amend the plan. Each option or stock award granted under the plan shall be
evidenced by a written agreement between us and the optionee.
Grants
may be made to our employees (including officers) and directors and to certain
consultants and advisors.
The
exercise price for incentive stock options granted under the plan may not be
less than the fair market value of the common stock on the date the option
is
granted, except for options granted to 10% stockholders which must have an
exercise price of not less than 110% of the fair market value of the common
stock on the date the option is granted. The exercise price for nonstatutory
options is determined by the Compensation Committee of our Board of Directors.
Incentive stock options granted under the plan have a maximum term of ten years,
except for grants to 10% stockholders which are subject to a maximum term of
five years. The term of nonstatutory stock options is determined by the
Compensation Committee of our Board of Directors. Options granted under the
plan
are not transferable, except by will and the laws of descent and
distribution.
2006
Telecomm Stock Incentive Plan
In
connection with the merger, our Board of Directors adopted, subject to
shareholder approval, the 2006 Telecomm Stock Incentive Plan (the “2006 Plan”).
The 2006 Plan provides for the grant of incentive stock options, non-statutory
stock options, restricted stock awards and stock appreciation rights. The number
of shares of common stock that may be issued under the 2006 Plan is 2,400,000
shares.
The
2006
Plan will be administered by the Compensation Committee of our Board of
Directors, which will select the eligible persons to whom options or stock
awards shall be granted, determine the number of shares subject to each option
or stock award, the exercise price therefore and the periods during which
options are exercisable, interpret the provisions of the plan and, subject
to
certain limitations, may amend the plan. Each option or stock award granted
under the plan shall be evidenced by a written agreement between us and the
optionee.
Grants
may be made to our employees (including officers) and directors and to certain
consultants and advisors.
The
exercise price for incentive stock options granted under the 2006 Plan may
not
be less than the fair market value of the common stock on the date the option
is
granted, except for options granted to 10% stockholders which must have an
exercise price of not less than 110% of the fair market value of the common
stock on the date the option is granted. The exercise price for nonstatutory
options will be determined by the Compensation Committee of our Board of
Directors. Incentive stock options granted under the 2006 Plan will have a
maximum term of ten years, except for grants to 10% stockholders which are
subject to a maximum term of five years. The term of nonstatutory stock options
will be determined by the Compensation Committee of our Board of Directors.
Options granted under the plan are not transferable, except by will and the
laws
of descent and distribution.
Option
Grants during Transition Period
The
following table sets forth certain information concerning options granted to
the
Named Executive Officers during the Transition Period:
| |
Individual
Grants
|
|
Name
|
Number
of
Shares
Underlying
Options
|
%
of Total Options
Granted
to
Employees
in Fiscal
Year
|
Exercise
Price
|
Expiration
Date
|
|
|
|
|
|
|
|
J.
Lloyd Breedlove
|
750,000
|
65.22%
|
$2.50
|
1/10/2010
|
| |
|
|
|
|
Aggregated
option exercises during Transition Period and option values as of end of
Transition Period
The
following table sets forth information with respect to option exercises during
the transition period ended March 31, 2006 and the number and value of options
outstanding at March 31, 2006 held by the Named Executive Officers:
|
Name
|
Shares
Acquired
on
Exercise
|
Value
Realized
|
Number
of Shares Underlying
Unexercised
Options as of
March
31, 2006
|
Value
of Unexercised In-the-
Money
Options as of
March
31, 2006
|
|
|
|
|
Exercisable
|
Unexercisable
|
Exercisable
|
Unexercisable
|
|
J.
Lloyd Breedlove
|
0
|
0
|
310,892
|
500,000
|
$175,000
|
$350,000
|
| |
|
|
|
|
|
|
(1)
Amounts calculated by subtracting the exercise price of the options from the
market value of the underlying common stock using the closing price on the
OTC
Bulletin Board of $3.20 per share on March 31, 2006.
Securities
Authorized for Issuance under Equity Compensation Plans
The
following table shows information about securities authorized for issuance
under
our equity compensation plans as of March 31, 2006:
|
Plan
Category
|
|
Number
of
Securities
to
be
issued upon
exercise
of
outstanding
options
(a)
|
|
Weighted-
average
exercise
price
of
outstanding
(b)
|
|
Number
of Securities
remaining
for future issuance
under
equity compensation
plans
(excluding securities
reflected
in column (a))
(c)
|
|
Equity
compensation plans approved by security holders
|
|
0
|
|
0
|
|
1,300,000*
|
|
Equity
compensation plans not approved by security holders
|
|
1,150,000
|
|
$2.32
|
|
2,400,000**
|
|
Total
|
|
1,150,000
|
|
$2.32
|
|
3,700,000
|
*
Represents shares issuable under the 2004 Equity Compensation Plan.
**
Represents shares issuable under the 2006 Stock Incentive Plan which was adopted
by the Board of Directors subject to stockholder approval.
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The
following table sets forth certain information as of March 31, 2006 regarding
the beneficial ownership of our common stock by (i) each person who, to our
knowledge, beneficially owns more than 5% of our Common Stock; (ii) each of
our
directors and named executive officers; and (iii) all of our named executive
officers and directors as a group:
|
Name
and address of Beneficial Owner
|
Amount
(1)
|
Percent
of
Class
|
|
Directors
and Named Executive Officers (2):
|
|
|
|
J.
Lloyd Breedlove (3)
|
310,892
|
1.91%
|
|
Steve
Hoelscher (4)
|
3,457,141
|
18.04%
|
|
Charles
Cottrell
|
0
|
*
|
|
Jeffrey
Connally
|
0
|
*
|
|
Stephen
A. Schneider (5)
|
608,922
|
3.67%
|
| |
|
|
|
All
directors and named executive officers as a group (5 persons)
|
4,376,955
|
20.34%
|
| |
|
|
|
Other
5% or Greater Beneficial Owners
|
|
|
|
The
Ferguson Living Trust UDT 8/13/74 (6)
2100
Gold Street
San
Jose, CA 95164
|
3,089,739
|
18.61%
|
|
MV
Nanotech, Inc. (7)
800
Brazos Street
Suite
1010
Austin,
TX 78701
|
3,457,141
|
18.04%
|
*
Less
than 1%.
| |
(1)
|
Beneficial
ownership is calculated based on 16,000,000 shares of our common
stock
issued and outstanding, which includes the 6,400,000 shares issued
in
connection with our acquisition of EnviroSystems subject to the Escrow
and
Lock-Up Agreement. Beneficial ownership is determined in accordance
with
Rule 13d-3 of the Securities and Exchange Commission. The number
of shares
beneficially owned by a person includes shares of common stock subject
to
options or warrants held by that person that are currently exercisable
or
exercisable within 60 days following the date hereof. The shares
issuable
pursuant to those options or warrants are deemed outstanding for
computing
the percentage ownership of the person holding these options and
warrants
but are not deemed outstanding for the purposes of computing the
percentage ownership of any other person. The persons and entities
named
in the table have sole voting and sole investment power with respect
to
the shares set forth opposite the stockholder’s name, subject to community
property laws, where applicable.
|
| |
(2)
|
The
address for the directors and named executive officers is c/o Telecomm
Sales Network, Inc., 561-D River Highway, PMB 297, Mooresville, North
Carolina 28117-6830.
|
| |
(3)
|
Includes
250,000 shares of common stock issuable upon the exercise of warrants
at
an exercise price of $2.50 per share. Also includes 60,892 shares
of
common stock issuable upon exercise of options to purchase shares
of
EnviroSystems Preferred Stock, using a conversion ratio of 1.902881
shares
of our common stock for each share of EnviroSystems Preferred Stock
issuable upon exercise. Mr. Breedlove holds options to purchase 32,000
shares of EnviroSystems Preferred Stock which are exercisable to
purchase
up to 60,892 shares of our common stock based on the conversion ratio.
Such number of shares was determined assuming the exercise of all
options
and warrants to purchase EnviroSystems Preferred Stock. In the event
such
options and/or warrants expire without being exercised, then any
shares of
common stock issuable upon exercise shall be distributed pro-rata
among
the EnviroSystems Preferred Stockholders. In the event of such a
pro-rata
distribution, Mr. Breedlove would be eligible to receive additional
shares
of common stock.
|
| |
(4)
|
Includes
100,000 shares of common stock owned by Mastodon Ventures, Inc. and
193,797 shares of common stock and warrants to purchase up to 3,163,344
shares of common stock owned by MV Nanotech, Inc., a subsidiary of
Mastodon Ventures, Inc. Mr. Hoelscher is a 5% owner and the CFO of
Mastodon Ventures, Inc.
|
| |
(5)
|
Includes
608,922 shares of common stock issuable upon exercise of options
to
purchase shares of EnviroSystems Preferred Stock, using a conversion
ratio
of 1.902881 shares of our common stock for each share of EnviroSystems
Preferred Stock issuable upon exercise. Mr. Schneider holds options
to
purchase 320,000 shares of EnviroSystems Preferred Stock which are
exercisable to purchase up to 608,922 shares of our common stock
based on
the conversion ratio. Such number of shares was determined assuming
the
exercise of all options and warrants to purchase EnviroSystems Preferred
Stock. In the event such options and/or warrants expire without being
exercised, then any shares of common stock issuable upon exercise
shall be
distributed pro-rata among the EnviroSystems Preferred Stockholders.
In
the event of such a pro-rata distribution, Mr. Schneider would be
eligible
to receive additional shares of common stock.
|
| |
(6)
|
Consists
of 2,780,331 shares of common stock issued in exchange for shares
of
EnviroSystems Preferred Stock and 309,408 shares of common stock
issuable
upon exercise of warrants to purchase EnviroSystems Preferred Stock
using
a conversion ratio of 1.902881 shares of our common stock for each
share
of EnviroSystems Preferred Stock held and issuable upon exercise
of
warrants. The Trust holds warrants to purchase 162,600 shares of
EnviroSystems Preferred Stock which are exercisable to purchase up
to
309,408 shares of our common stock based on the conversion ratio.
Such
number of shares was determined assuming the exercise of all options
and
warrants to purchase EnviroSystems Preferred Stock. In the event
such
options and/or warrants expire without being exercised, then any
shares of
common stock issuable upon exercise shall be distributed pro-rata
among
the EnviroSystems Preferred Stockholders. In the event of such a
pro-rata
distribution, the Trust would be eligible to receive additional shares
of
common stock.
|
| |
(7)
|
Includes
193,797 shares of common stock and warrants to purchase up to 3,163,344
shares of common stock owned by MV Nanotech, Inc., and 100,000 shares
of
common stock owned by Mastodon Ventures, Inc., MV Nanotech’s parent
corporation.
|
ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In
September 2005, EnviroSystems entered into a Settlement and Release Agreement
with Diana Hoffman (“Hoffman”), its former President, Chief Executive Officer
and Chairman of the Board and at that time a holder of 850,000 shares (83.19%)
of EnviroSystems’ common stock. Pursuant to the terms of the agreement,
EnviroSystems paid to Hoffman $312,314 as payment of back pay with interest
and
reimbursement of certain expenses, which such amount was paid out of the
proceeds of the Offering. In connection therewith, in September 2005, MV
Nanotech Corp. entered into a Stock Purchase Agreement with Hoffman, pursuant
to
which MV Nanotech purchased 850,000 shares of EnviroSystems common stock from
Hoffman for an aggregate purchase price of $85,000.
In
November 2005, The Ferguson Living Trust UTD 8/13/74 (the “Trust”), the then
owner of 1,461,117 shares of EnviroSystems preferred stock, which represented
approximately 57.89% of the issued and outstanding EnviroSystems preferred
stock, and MV Nanotech Corp. (“MV Nanotech”), the then owner of 850,000 shares
of EnviroSystems common stock, which represented approximately 83.19% of the
issued and outstanding EnviroSystems common stock, entered into a Voting and
Support Agreement, pursuant to which each of the Trust and MV Nanotech agreed
to
vote all of their respective shares of EnviroSystems common stock and
EnviroSystems preferred stock in favor of the Merger Agreement and the
Merger.
Telecomm
Transactions
In
August
2004, one of the Telecomm’s shareholders loaned Telecomm $500. The loan, which
was unsecured, non-interest bearing, and payable on demand, was repaid in
February, 2005.
Telecomm
previously used office space provided at no charge by Skye Source, LLC, an
entity owned by Telecomm’s former director/officers. The value of this space is
not considered materially significant for financial reporting purposes.
In
October 2005, MV Nanotech purchased from Telecomm 3,230,000 shares of common
stock and warrants to purchase up to 4,000,000 shares of common stock for an
aggregate purchase price of $80,750. Half of the purchase price was paid in
cash
and the remaining $40,375 was paid pursuant to a promissory note made by MV
Nanotech in favor of Telecomm, which is payable on or before December 31, 2005.
In fiscal years 2005 and 2006, MV Nanotech, made bridge loans to EnviroSystems
in the aggregate principal amount of $850,000 which were used to fund
EnviroSystems’ operations. All of such aggregate principal amount of bridge
loans (plus accrued but unpaid interest) will be repaid out of the net proceeds
of the Offering.
Immediately
prior to the Closing of the Merger and the Offering, pursuant to two Repurchase
Agreements, each dated as of October 31, 2005, Telecomm repurchased from each
of
William Sarine and Tony Summerlin, Telecomm’s former officers and directors,
1,000,000 shares each of Telecomm common stock for a price of $12,500 ($25,000
for all 2,000,000 shares).
Stephen
Hoelscher, our Chief Financial Officer is a 5% owner of and Chief Financial
Officer of Mastodon Ventures, Inc., the parent corporation to MV Nanotech,
Inc.
ITEM
13. EXHIBITS
(a)
Exhibits
|
Exhibit
Number
|
Exhibit
Description
|
|
|
|
|
3.1
|
Certification
of Incorporation (1)
|
|
3.2
|
By-Laws
(1)
|
|
4.1
|
Specimen
Certificate of Common Stock (1)
|
|
4.2
|
Form
of Warrant (5)
|
|
10.1
|
2004
Equity Compensation Plan (1)
|
|
10.2
|
Securities
Purchase Agreement, dated as of October 31, 2005 between MV Nanotech
Corp.
and Telecomm Sales Network, Inc. (2)
|
|
10.3
|
Agreement
and Plan of Merger, dated as of November 11, 2005 by and between
Telecomm,
TSN Acquisition Corporation and EnviroSystems, Inc. (Nonmaterial
schedules
and exhibits identified in the Agreement and Plan of Merger have
been
omitted pursuant to Item 601b.2 of Regulation S-K. Telecomm Sales
Network,
Inc. agrees to furnish supplementally to the Commission upon request
by
the Commission a copy of any omitted schedule or exhibit.)
(3)
|
|
10.4
|
Form
of Registration Rights Agreement between Telecomm Sales Network,
Inc. and
the other signatories thereto. (5)
|
|
10.5
|
Commercial
Lease Agreement dated June 6, 2006 by and between Morlake Executive
Suites
and EnviroSystems, Inc. (5)
|
|
10.6
|
Telecomm
Sales Network, Inc. 2006 Stock Incentive Plan (5)
|
|
10.7
|
Form
of Incentive Stock Option Agreement (5)
|
|
10.8
|
Form
of Non-Qualified Stock Option Agreement (5)
|
|
10.9
|
Form
of Restricted Stock Agreement (5)
|
|
21.1
|
Subsidiaries
of the Registrant (5)
|
|
31.1
|
Certification
of the CEO Pursuant to Rule 13a-14(a) under the Securities Exchange
Act of
1934, as amended, as adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
(5)
|
|
31.2
|
Certification
of the CEO Pursuant to Rule 13a-14(a) under the Securities Exchange
Act of
1934, as amended, as adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
(5)
|
|
32.1
|
Certification
of the CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley
Act of
2002 (5)
|
|
(1)
|
Filed
as an exhibit to Telecomm’s Registration Statement on Form SB-2 filed on
March 16, 2005 and incorporated herein by reference.
|
|
(2)
|
Filed
as an exhibit to Telecomm’s Current Report on Form 8-K filed on November
11, 2005 and incorporated herein by
reference.
|
|
(3)
|
Filed
as an exhibit to Telecomm’s Current Report on Form 8-K filed on November
17, 2005 and incorporated herein by reference.
|
|
(4)
|
Filed
as an exhibit to Telecomm’s Current Report on Form 8-K filed on January
12, 2006 and incorporated herein by reference.
|
|
(5)
|
Filed
herewith.
|
ITEM
14.
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
Williams
& Webster, P.A. was our independent registered public accounting firm for
the transition period ended March 31, 2006 and for the fiscal years ended
September 30, 2005 and September 20, 2004.
For
the
transition period ended March 31, 2006, Williams & Webster, P.A. billed us
$25,300 for auditing our annual financial statements or services that are
normally provided by accountants in connection with statutory and regulatory
filings for that fiscal year.
For
the
year ended September 30, 2005, Williams & Webster, P.A. billed us $20,200
for auditing our annual financial statements or services that are normally
provided by accountants in connection with statutory and regulatory filings
for
that fiscal year.
Except
as
described above, we have not been billed for any services by Williams &
Webster, P.A. Our audit committee has not authorized Williams & Webster,
P.A. to provide any other services for us.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
June
29, 2006
|
TELECOMM
SALES NETWORK, INC.
|
|
|
|
|
|
By:
/s/ J. Lloyd
Breedlove
|
|
|
Name:
J. Lloyd Breedlove
|
| |
Title:
President and Chief Executive
Officer
|
In
accordance with the Securities Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities
and
on the dates indicated.
|
June
29, 2006
|
/s/
J. Lloyd Breedlove |
|
|
J.
Lloyd Breedlove, President, Chief Executive Officer and
Director
(principal executive officer)
|
|
|
|
| |
|
| |
|
|
June
29, 2006
|
/s/
Stephen Hoelscher |
|
|
Stephen
Hoelscher, Chief Financial Officer and
Director
(principal financial and accounting officer)
|
| |
|
| |
|
| |
|
|
June
29, 2006
|
/s/
Charles Cottrell |
|
|
Charles
Cottrell, Director
|
| |
|
| |
|
|
June
29, 2006
|
/s/
Jeffrey Connally |
| |
Jeffrey
Connally, Director
|
| |
|
|
June
29, 2006
|
/s/
Stephen A. Schneider |
| |
Stephen
A. Schneider, Director
|
Telecomm
Sales Network, Inc.
Index
to
Financial Statements
| |
PAGE
|
|
Report
of Independent Registered Public Accounting Firm
|
|
| |
|
|
Report
of Weinick, Sanders Leventhal & Co., LLP*
|
|
| |
|
|
Balance
Sheet as of March 31, 2005 and 2006
|
F-4
|
| |
|
|
Statement
of Operations for the fiscal years ended March 31, 2005 and
2006
|
F-5
|
| |
|
|
Statements
of Shareholders’ Equity for fiscal years ended March 31, 2005 and
2006
|
F-6
|
| |
|
|
Statement
of Cash Flows for the fiscal years ended March 31, 2005 and
2006
|
F-7
|
| |
|
|
Notes
to Financial Statements
|
F-8
|
*We
have
included in this Transition Report on Form 10-KSB, pursuant to disclosure
requirements of Item 7, the previously issued audit report from Weinick Sanders
Leventhal & Co., LLP (“Weinick”) on the financial statements of
EnviroSystems, Inc., for the fiscal year ended March 31, 2005 and 2004. We
are
not able to obtain the reissued audit report covering the 2005 financials
statements of EnviroSystems because Weinick is no longer practicing public
accounting. Consistent with SEC’s guidance in paragraph 65 of AU 9508.15, in
filing its Transition Report on Form 10-KSB for the twelve months ended March
31, 2006, we have included the previously issued audit report of Weinick and
disclosed that (a) the report is copy of the previously issued Weinick report
and (b) the report has not been reissued by Weinick.
Board
of
Directors
Telecomm
Sales Network, Inc.
Mooresville,
North Carolina
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
have
audited the accompanying consolidated balance sheet of Telecomm Sales Network,
Inc. as of March 31, 2006 and the related consolidated statements of operations,
stockholders’ equity (deficit) and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. The financial statements of
Envirosystems, Inc., a wholly owned subsidiary of Telecomm Sales Network,
Inc.
as of March 31, 2005, were audited by other auditors whose report dated April
24, 2005, except for Note 12 as to which the date is April 29, 2005, included
an
explanatory paragraph that described the conditions present which raised
substantial doubt about the Company’s ability to continue as a going
concern.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Telecomm Sales Network,
Inc., as of March 31, 2006 and the results of its operations, stockholders’
equity (deficit) and its cash flows for the year then ended in conformity
with
accounting principles generally accepted in the United States of
America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses and has an
accumulated deficit at March 31, 2006. These factors raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
/s/
Williams & Webster, P.S.
Williams
& Webster, P.S.
Certified
Public Accountants
Spokane,
Washington
June
27,
2006
Weinick
Sanders Leventhal & Co., LLP
Certified
Public Accountants
INDEPENDENT
AUDITORS’ REPORT
To
the
Board of Directors and Stockholders
Envirosystems,
Inc.
We
have
audited the accompanying balance sheets of Envirosystems, Inc. as at March
31,
2005 and 2004 and the related statements of operations, stockholders’ equity
(deficiency) and cash flows for the years then ended. These financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (Unites States). Those standards require that
we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Envirosystems, Inc. as at March
31,
2005 and 2004 and the results of its operations and its cash flows for the
years
then ended in conformity with accounting principles generally accepted in
the
United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As disclosed in Note 1 to the financial
statements, the Company has incurred losses since inception and has working
capital deficiencies. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
/s/
Weinick Sanders Leventhal & Co., LLP.
New
York,
New York
April
24,
2005 (except for Note 12, as to which
The
date
is April 29, 2005)
THIS
IS A
COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY WEINICK SANDERS LEVENTHAL &
CO., LLP TO ENVIROSYSTEMS, INC. FOR THE YEAR ENDED MARCH 31, 2005 AND 2004.
THIS
AUDIT REPORT HAS NOT BEEN REISSUED BY WEINICK SANDERS LEVENTHAL & CO., LLP
IN CONNECTION WITH THIS TRANSITION REPORT ON FORM 10-KSB.
TELECOMM
SALES NETWORK, INC.
CONSOLIDATED
BALANCE SHEETS
| |
|
March
31,
|
|
| |
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,420,358
|
|
$
|
32,985
|
|
|
Accounts
receivable
|
|
|
11,615
|
|
|
64,589
|
|
|
Prepaid
expenses
|
|
|
45,947
|
|
|
29,255
|
|
|
Inventory
|
|
|
105,192
|
|
|
292,232
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
3,583,112
|
|
|
419,061
|
|
| |
|
|
|
|
|
|
|
|
FIXED
ASSETS
|
|
|
|
|
|
|
|
|
Furniture
& fixtures
|
|
|
135,660
|
|
|
155,593
|
|
|
Machinery
& equipment
|
|
|
44,357
|
|
|
44,357
|
|
|
Capitalized
software
|
|
|
131,843
|
|
|
131,843
|
|
|
Less
accumulated depreciation
|
|
|
(240,476
|
)
|
|
(202,786
|
)
|
|
TOTAL
FIXED ASSETS
|
|
|
71,384
|
|
|
129,007
|
|
| |
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
Product
development, net
|
|
|
-
|
|
|
659,254
|
|
|
Trade
secret
|
|
|
1,400,000
|
|
|
1,400,000
|
|
|
Deposits
|
|
|
16,550
|
|
|
2,658
|
|
|
TOTAL
OTHER ASSETS
|
|
|
1,416,550
|
|
|
2,061,912
|
|
| |
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
5,071,046
|
|
$
|
2,609,980
|
|
| |
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
277,348
|
|
$
|
1,144,786
|
|
|
Reserve
for product returns
|
|
|
270,000
|
|
|
-
|
|
|
Notes
payable
|
|
|
-
|
|
|
1,160,000
|
|
|
Loans
payable
|
|
|
-
|
|
|
380,399
|
|
|
Due
to officers
|
|
|
-
|
|
|
68,389
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
547,348
|
|
|
2,753,574
|
|
| |
|
|
|
|
|
|
|
|
CONVERTIBLE
DEBT
|
|
|
-
|
|
|
61,510
|
|
| |
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
-
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value; 5,000,000 shares authorized,
no
shares issued and outstanding
|
|
|
-
|
|
|
-
|
|
|
Common
stock, $0.0001 par value; 100,000,000 shares authorized,
16,000,000
and 6,400,000 shares issued and outstanding, respectively
|
|
|
1,600
|
|
|
640
|
|
|
Additional
paid-in capital
|
|
|
22,631,853
|
|
|
14,246,142
|
|
|
Accumulated
deficit
|
|
|
(18,109,755
|
)
|
|
(14,451,886
|
)
|
|
TOTAL
STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
4,523,698
|
|
|
(205,104
|
)
|
| |
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
$
|
5,071,046
|
|
$
|
2,609,980
|
|
The
accompanying notes are an integral part of these financial
statements.
TELECOMM
SALES NETWORK, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
| |
|
Year
Ended March 31,
|
|
| |
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
486,568
|
|
$
|
670,214
|
|
| |
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
761,563
|
|
|
661,133
|
|
| |
|
|
|
|
|
|
|
|
Gross
Profit (Loss)
|
|
|
(274,995
|
)
|
|
9,081
|
|
| |
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
Marketing
|
|
|
10,378
|
|
|
129,006
|
|
|
Sales
|
|
|
193,513
|
|
|
354,453
|
|
|
Product
development
|
|
|
844,113
|
|
|
260,091
|
|
|
Corporate
|
|
|
1,885,588
|
|
|
1,062,655
|
|
|
Finance
and administrative
|
|
|
351,867
|
|
|
503,153
|
|
|
Total
Expenses
|
|
|
3,285,459
|
|
|
2,309,358
|
|
| |
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(3,560,454
|
)
|
|
(2,300,277
|
)
|
| |
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(110,036
|
)
|
|
(77,738
|
)
|
|
Loss
on disposition of assets
|
|
|
(7,245
|
)
|
|
(3,846
|
)
|
|
Interest
income
|
|
|
20,666
|
|
|
174
|
|
|
Total
Other Income (Expense)
|
|
|
(96,615
|
)
|
|
(81,410
|
)
|
| |
|
|
|
|
|
|
|
|
LOSS
BEFORE TAXES
|
|
|
(3,657,069
|
)
|
|
(2,381,687
|
)
|
| |
|
|
|
|
|
|
|
|
INCOME
TAX EXPENSE
|
|
|
(800
|
)
|
|
(800
|
)
|
| |
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(3,657,869
|
)
|
$
|
(2,382,487
|
)
|
| |
|
|
|
|
|
|
|
|
BASIC
AND DILUTED NET LOSS PER SHARE
|
|
$
|
(0.43
|
)
|
$
|
(0.44
|
)
|
| |
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF
COMMON
SHARES OUTSTANDING, BASIC AND DILUTED
|
|
|
8,518,767
|
|
|
5,398,767
|
|
The
accompanying notes are an integral part of these financial
statements.
TELECOMM
SALES NETWORK, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
| |
|
|
|
|
|
|
|
Total
|
|
| |
|
|
|
Additional
|
|
|
|
|
|
| |
|
Common
Stock
|
|
Paid-in
|
|
Accumulated
|
|
Equity
|
|
| |
|
Shares
|
|
Amount
|
|
Capital
|
|
(Deficit)
|
|
(Deficit)
|
|
|
Balance,
March 31, 2004
|
|
|
6,153,500
|
|
$
|
615
|
|
$
|
13,673,232
|
|
$
|
(12,069,399
|
)
|
$
|
1,604,448
|
|
|
Shares
issued for cash
|
|
|
254,440
|
|
|
25
|
|
|
504,975
|
|
|
-
|
|
|
505,000
|
|
|
Shares
issued for services
|
|
|
3,396
|
|
|
1
|
|
|
6,739
|
|
|
-
|
|
|
6,740
|
|
|
Purchased
and retirement of shares
|
|
|
(11,336
|
)
|
|
(1
|
)
|
|
(22,499
|
)
|
|
-
|
|
|
(22,500
|
)
|
|
Other
equity issuances
|
|
|
-
|
|
|
-
|
|
|
9,510
|
|
|
-
|
|
|
9,510
|
|
|
Stock
options issued
|
|
|
-
|
|
|
-
|
|
|
74,185
|
|
|
-
|
|
|
74,185
|
|
|
Net
loss for the year ended March 31, 2005
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,382,487
|
)
|
|
(2,382,487
|
)
|
|
Balance,
March 31, 2005
|
|
|
6,400,000
|
|
|
640
|
|
|
14,246,142
|
|
|
(14,451,886
|
)
|
|
(205,104
|
)
|
|
Effect
of reverse merger and recapitalization
|
|
|
5,350,000
|
|
|
535
|
|
|
33,148
|
|
|
-
|
|
|
33,683
|
|
|
Common
stock issued at a price of $2.00 per share
in
private placement on January 10, 2006,
less
related expenses of $1,548,916
|
|
|
4,250,000
|
|
|
425
|
|
|
6,950,659
|
|
|
-
|
|
|
6,951,084
|
|
|
Stock
options and warrants issued
|
|
|
-
|
|
|
-
|
|
|
1,401,904
|
|
|
-
|
|
|
1,401,904
|
|
|
Net
loss for the year ended March 31, 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,657,869
|
)
|
|
(3,657,869
|
)
|
|
Balance,
March 31, 2006
|
|
|
16,000,000
|
|
$
|
1,600
|
|
$
|
22,631,853
|
|
$
|
(18,109,755
|
)
|
$
|
4,523,698
|
|
The
accompanying notes are an integral part of these financial
statements.
TELECOMM
SALES NETWORK, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
| |
|
|
|
| |
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,657,869
|
)
|
$
|
(2,382,487
|
)
|
|
Depreciation
and amortization
|
|
|
52,165
|
|
|
96,875
|
|
|
Loss
on disposition of assets
|
|
|
7,245
|
|
|
-
|
|
|
Stock
issued for services
|
|
|
-
|
|
|
6,740
|
|
|
Stock
options and warrants issued
|
|
|
1,401,904
|
|
|
74,185
|
|
|
Adjustments
to reconcile net loss to net cash used by operations:
|
|
|
|
|
|
|
|
|
Decrease
in product development cost
|
|
|
659,253
|
|
|
-
|
|
|
Decrease
(increase) in accounts receivable
|
|
|
52,974
|
|
|
(30,724
|
)
|
|
Decrease
(increase) in prepaid expenses
|
|
|
(16,692
|
)
|
|
(14,759
|
)
|
|
Decrease
(increase) in inventory
|
|
|
187,040
|
|
|
133,647
|
|
|
Decrease
(increase) in deposits
|
|
|
(13,892
|
)
|
|
19,848
|
|
|
Increase
(decrease) in accounts payable & accrued expenses
|
|
|
(878,307
|
)
|
|
680,996
|
|
|
Increase
(decrease) in reserve for product returns
|
|
|
270,000
|
|
|
-
|
|
|
Net
cash provided (used) by operating activities
|
|
|
(1,936,179
|
)
|
|
(1,415,679
|
)
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net
property sales
|
|
|
-
|
|
|
4,770
|
|
|
Cash
received from acquisition and recapitalization
|
|
|
4,177
|
|
|
-
|
|
|
Proceeds
from collection of notes receivable
|
|
|
40,375
|
|
|
-
|
|
|
Purchase
of equipment
|
|
|
(1,786
|
)
|
|
-
|
|
|
Net
cash provided (used) by investing activities
|
|
|
42,766
|
|
|
4,770
|
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Increase
(decrease) in due to officers
|
|
|
(68,389
|
)
|
|
(7,638
|
)
|
|
Proceeds
from sales of stock and other equity
|
|
|
6,951,084
|
|
|
514,510
|
|
|
Purchase
and retirement of shares
|
|
|
-
|
|
|
(22,500
|
)
|
|
Increase
in notes payables
|
|
|
700,000
|
|
|
900,000
|
|
|
Payment
on notes and convertible debt
|
|
|
(2,301,909
|
)
|
|
-
|
|
|
Net
cash provided by financing activities
|
|
|
5,280,786
|
|
|
1,384,372
|
|
| |
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
3,387,373
|
|
|
(26,537
|
)
|
| |
|
|
|
|
|
|
|
|
CASH
- Beginning of period
|
|
|
32,985
|
|
|
59,522
|
|
| |
|
|
|
|
|
|
|
|
CASH
- End of period
|
|
$
|
3,420,358
|
|
$
|
32,985
|
|
| |
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW DISCLOSURES:
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
110,036
|
|
$
|
-
|
|
|
Income
taxes
|
|
$
|
800
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these financial
statements.
TELECOMM
SALES NETWORK, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
THE
YEARS ENDED MARCH 31, 2006 AND 2005
NOTE
1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Telecomm
Sales Network, Inc. (hereinafter “the Company”) was incorporated in the State of
Delaware on August 26, 2004. The principal business of the Company is a holding
company. The Company’s sole subsidiary is EnviroSystems, Inc. (hereinafter
“ESI”) The Company’s headquarters is located in Mooresville, North Carolina. The
Company’s year end was September 30 and with this report the Company has adopted
a year end of March 31.
ESI
provides infection control products on an international basis through both
direct sales and channels of distribution. While ESI’s current focus is on the
health care market, products are also sold to transportation, military and
industrial/institutional markets. ESI products are manufactured utilizing
nano-emulsion technology, designed to make the products effective against
a
broad spectrum of harmful organisms while safe to people, equipment and
habitat.
Merger
On
January 10, 2006, Telecomm Sales Network, Inc. completed the acquisition
of
EnviroSystems, Inc. (“EnviroSystems”) in a reverse merger transaction pursuant
to an agreement and plan of merger dated as of November 11, 2005 by and among
Telecomm. Effective at the closing of the merger, EnviroSystems became an
indirect, wholly-owned subsidiary of Telecomm and Telecomm ceased its prior
business and going forward its sole business became that of EnviroSystems.
Pursuant to the merger agreement, all of EnviroSystems preferred stock was
converted into an aggregate of 6,400,000 shares of Telecomm common stock,
$0.0001 par value per share.
The
transaction has been treated as a reverse merger and a recapitalization of
EnviroSystems, Inc for reporting purposes. The financial information for
the
year ended March 31, 2006 and 2005 is that of EnviroSystems’ activities
as the
accounting acquirer under this recapitalization. On January 10, 2006, prior
to
the merger, Telecomm had $4,177 in cash, a note receivable of $40,375, and
liabilities of $10,869 with net assets of $33,683.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This
summary of significant accounting policies is presented to assist in
understanding the Company’s financial statements. The financial
statements and notes are representations of the Company’s management, which is
responsible for their integrity and objectivity. These accounting policies
conform to accounting principles generally accepted in the United States
of
America, and have been consistently applied in the preparation of the financial
statements.
Accounting
Method
The
Company’s financial statements are prepared using the accrual basis of
accounting in accordance with accounting principles generally accepted in
the
United States of America.
Accounts
Receivable
Accounts
receivable are uncollateralized customer obligations due under normal trade
terms requiring payment within thirty days from the invoice date or as specified
by the invoice and are stated at the amount billed to the customer. Customer
account balances with invoices dated over ninety days or ninety days past
the
due date are considered delinquent.
The
carrying amount of accounts receivable is reduced by a valuation allowance
that
reflects management's best estimate of the amount that will not be collected.
Management reviews all accounts receivable balances that are considered
delinquent and, based on an assessment of current credit worthiness, estimates
the portion, if any, of the balance that will not be collected. In addition,
management periodically evaluates the adequacy of the allowance based on
the
Company's past experience. Allowance for doubtful accounts amounted to $350
and
$9,550 at March 31, 2006 and 2005, respectively.
Advertising
The
Company expenses advertising costs as they are incurred.
TELECOMM
SALES NETWORK, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
THE
YEARS ENDED MARCH 31, 2006 AND 2005
Basic
and Diluted Loss Per Share
Loss
per
share was computed by dividing the net loss by the weighted average number
of
shares outstanding during the period. The weighted average number of shares
was
calculated by taking the number of shares outstanding and weighting them
by the
amount of time that they were outstanding. At March 31, 2006 and 2005, basic
and
diluted net loss per share are the same, as for the years ended March 31,
2006
and 2005, potentially dilutive securities have not been included in the diluted
loss per common share calculation as they would have been
anti-dilutive.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity
of
three months or less to be cash equivalents.
Compensated
Absences
Employees
earn personal leave time based on hours worked and longevity. These benefits
are
vested when earned and can be carried from year to year as long as they do
not
exceed certain limits. Benefits are accrued as they are earned and are reflected
in the financial statements.
Contingent
Liability
In
accordance with Statement of Financial Accounting Standards Interpretation
No.
14, the Company may have certain contingent liabilities with respect to material
existing or potential claims, lawsuits and other proceedings. The Company
accrues liabilities when it is probable that future cost will be incurred
and
such cost can be measured.
Derivative
Instruments
The
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” as amended by SFAS No. 137, “Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB No. 133”, SFAS
No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging
Activities”, and SFAS No. 149, “Amendment of Statement 133 on Derivative
Instruments and Hedging Activities”, which is effective for the Company as of
its inception. These statements establish accounting and reporting standards
for
derivative instruments, including certain derivative instruments embedded
in
other contracts, and for hedging activities. They require that an entity
recognize all derivatives as either assets or liabilities in the balance
sheet
and measure those instruments at fair value.
If
certain conditions are met, a derivative may be specifically designated as
a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the
fair
value of the hedged asset or liability that are attributable to the hedged
risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. The Company has not entered
into
derivatives contracts to hedge existing risks or for speculative purposes
as of
March 31, 2006 and 2005.
Fair
Value of Financial Instruments
The
Company's financial instruments as defined by Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments,"
may
include cash, receivables, and advances, accounts payable and accrued expenses.
All such instruments are accounted for on a historical cost basis, which,
due to
the short maturity of these financial instruments, approximates fair value
at
March 31, 2006 and 2005.
Fixed
Assets
Equipment
is recorded at cost. Depreciation and amortization are provided using the
straight-line method over the useful lives of the respective assets, typically
3-7 years. Major additions and betterments are capitalized. Upon retirement
or
disposal, the cost and related accumulated depreciation or amortization is
removed from the accounts and any gain or loss is reflected in
operations.
TELECOMM
SALES NETWORK, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
THE
YEARS ENDED MARCH 31, 2006 AND 2005
The
following table summarizes the Company's fixed assets:
| |
|
March
31,
|
|
| |
|
2006
|
|
2005
|
|
|
Office
Equipment
|
|
$
|
49,046
|
|
$
|
49,686
|
|
|
Furniture
& Fixtures
|
|
|
46,350
|
|
|
46,350
|
|
|
Marketing/Trade
Shows
|
|
|
2,659
|
|
|
21,952
|
|
|
Manufacturing
Equipment
|
|
|
44,357
|
|
|
44,357
|
|
|
Laboratory
Furniture
|
|
|
4,600
|
|
|
4,600
|
|
|
Laboratory
Equipment
|
|
|
33,005
|
|
|
33,005
|
|
|
Capitalized
Software
|
|
|
131,843
|
|
|
131,843
|
|
| |
|
|
311,860
|
|
|
331,793
|
|
|
Allowance
for Depreciation
|
|
|
(240,476
|
)
|
|
(202,786
|
)
|
|
Fixed
Assets, net
|
|
$
|
71,384
|
|
$
|
129,007
|
|
Depreciation
expense for the periods ended March 31, 2006 and March 31, 2005 was $52,165
and
$56,717, respectively.
Going
Concern
The
accompanying financial statements have been prepared assuming the Company
will
continue as a going concern.
As
shown
in the financial statements, the Company incurred a net loss for the years
ended
March 31, 2006 and 2005, and has an accumulated deficit since the inception
of
the Company. These factors indicate that the Company may be unable to continue
in existence. The financial statements do not include any adjustments related
to
the recoverability and classification of recorded assets, or the amounts
and
classification of liabilities that might be necessary in the event the Company
cannot continue existence. The Company anticipates its projected business
plan
will require a minimum of $2,850,000 to continue operations in the next twelve
months.
Impairment
of Long Lived Assets
The
Company assesses potential impairment of its long lived assets, which include
its property and equipment and its identifiable intangibles such as its trade
secrets under the guidance of Statement of Financial Standards No. 144,
“Accounting
for the Impairment or Disposal of Long Lived Assets.” On
an
annual basis, or as events and circumstances indicate that an asset may be
impaired, the Company assesses potential impairment of its long lived assets.
The Company determines impairment by measuring the undisclosed future cash
flows
generated by the assets, comparing the results to the assets’ carrying value and
adjusting the assets to the lower of the carrying value to fair value and
charging current operations for any measured impairment.
Inventory
Inventories
are stated at the lower of cost or market (first-in, first out basis) and
include purchased raw materials, work-in-process and finished goods.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and
its
subsidiaries. All significant intercompany transactions and balances have
been
eliminated in consolidation. References herein to the Company include the
Company and its subsidiaries, unless the context otherwise requires.
Provision
for Taxes
Income
taxes are provided based upon the liability method of accounting pursuant
to
Statement of Financial Accounting Standards No. 109, “Accounting for Income
Taxes” (“SFAS No. 109”). Under this approach, deferred income taxes are recorded
to reflect the tax consequences in future years of differences between the
tax
basis of assets and liabilities and their financial reporting amounts at
each
year-end. A valuation allowance is recorded against the deferred tax asset
if
management does not believe the Company has met the “more likely than not”
standard imposed by SFAS No. 109 to allow recognition of such an asset.
TELECOMM
SALES NETWORK, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
THE
YEARS ENDED MARCH 31, 2006 AND 2005
Recent
Accounting Pronouncements
In
March
2006, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 156, “Accounting for Servicing of Financial Assets—an
amendment of FASB Statement No. 140.” This statement requires an entity to
recognize a servicing asset or servicing liability each time it undertakes
an
obligation to service a financial asset by entering into a servicing contract
in
any of the following situations: a transfer of the servicer’s financial assets
that meets the requirements for sale accounting; a transfer of the servicer’s
financial assets to a qualifying special-purpose entity in a guaranteed mortgage
securitization in which the transferor retains all of the resulting securities
and classifies them as either available-for-sale securities or trading
securities; or an acquisition or assumption of an obligation to service a
financial asset that does not relate to financial assets of the servicer
or its
consolidated affiliates. The statement also requires all separately recognized
servicing assets and servicing liabilities to be initially measured at fair
value, if practicable and permits an entity to choose either the amortization
or
fair value method for subsequent measurement of each class of servicing assets
and liabilities. The statement further permits, at its initial adoption,
a
one-time reclassification of available for sale securities to trading securities
by entities with recognized servicing rights, without calling into question
the
treatment of other available for sale securities under Statement 115, provided
that the available for sale securities are identified in some manner as
offsetting the entity’s exposure to changes in fair value of servicing assets or
servicing liabilities that a servicer elects to subsequently measure at fair
value and requires separate presentation of servicing assets and servicing
liabilities subsequently measured at fair value in the statement of financial
position and additional disclosures for all separately recognized servicing
assets and servicing liabilities. This statement is effective for fiscal
years
beginning after September 15, 2006, with early adoption permitted as of the
beginning of an entity’s fiscal year. Management believes the adoption of this
statement will have no immediate impact on the Company’s financial condition or
results of operations.
In
February 2006, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial
Instruments, an Amendment of FASB Standards No. 133 and 140” (hereinafter “SFAS
No. 155”). This statement established the accounting for certain derivatives
embedded in other instruments. It simplifies accounting for certain hybrid
financial instruments by permitting fair value remeasurement for any hybrid
instrument that contains an embedded derivative that otherwise would require
bifurcation under SFAS No. 133 as well as eliminating a restriction on the
passive derivative instruments that a qualifying special-purpose entity (“SPE”)
may hold under SFAS No. 140. This statement allows a public entity to
irrevocably elect to initially and subsequently measure a hybrid instrument
that
would be required to be separated into a host contract and derivative in
its
entirety at fair value (with changes in fair value recognized in earnings)
so
long as that instrument is not designated as a hedging instrument pursuant
to
the statement. SFAS No. 140 previously prohibited
a qualifying special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative
financial instrument. This
statement is effective for fiscal years beginning after September 15, 2006,
with
early adoption permitted as of the beginning of an entity’s fiscal year.
Management believes the adoption of this statement will have no immediate
impact
on the Company’s financial condition or results of operations.
In
May,
2005, The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 154, “Accounting Changes and Error Corrections - a
Replacement of APB Opinion No. 20 and FASB Statement No. 3 (“hereinafter” “SFAS
No. 154”). This statement replaces APB Opinion No. 20, “Accounting Changes” and
FASB Statement No. 3, “Reporting Accounting Changes in Internal Financial
Statements” and revises the requirements regarding accounting for and reporting
a change in accounting principle. This statement requires retrospective
application of the accounting change to the financial statements of prior
periods, unless it is impractical to determine the period-specific effects
or
the cumulative effect of changing to the new accounting principle. This
statement also addresses the reporting issues related to a change in accounting
principle if it is impractical to determine the period-specific effects or
the
cumulative effect of the change. The adoption of this statement had no immediate
material effect on the Company’s financial condition or results of
operations.
TELECOMM
SALES NETWORK, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
THE
YEARS ENDED MARCH 31, 2006 AND 2005
In
December 2004, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standards No. 153 (hereinafter “SFAS No. 109”). This
statement addresses the measurement of exchanges of nonmonetary assets. The
guidance in APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” is
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. The guidance in that opinion,
however, included certain exceptions to that principle. This statement amends
Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges
of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected
to
change significantly as a result of the exchange. The Company has determined
that there was no financial impact from the adoption of this
statement.
In
December 2004, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standards No. 152, “Accounting for Real Estate Time-Shares
Transactions,” an amendment of Statement of Financial Accounting Standards Board
No. 66, “Accounting for Sales of Real Estate,” to reference the financial
accounting and reporting guidance for real estate time-sharing transactions
that
is provided in AICPA Statement of Position (SOP) 04-2, “Accounting for Real
Estate Time-Sharing Transactions.” This statement also amends Financial
Accounting Standards Board Statement No. 67, “Accounting for Costs and Initial
Rental Operations of Real Estate Projects,” to state that the guidance for (a)
incidental operations and (b) costs incurred to sell real estate projects
does
not apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in SOP 04-2. Management believes
the adoption of this statement will have no immediate impact on the financial
statements of the Company.
In
December 2004, the Financial Accounting Standards Board issued a revision
to
Statement of Financial Accounting Standards No. 123(R), “Accounting for Stock
Based Compensations.” This statement supersedes APB Opinion No. 25, “Accounting
for Stock Issued to Employees,” and its related implementation guidance. This
statement establishes standards for the accounting for transactions in which
an
entity exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods
or
services that are based on the fair value of the entity’s equity instruments or
that may be settled by the issuance of those equity instruments. This statement
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. This statement does
not
change the accounting guidance for share based payment transactions with
parties
other than employees provided in Statement of Financial Accounting Standards
No.
123. This statement does not address the accounting for employee share ownership
plans, which are subject to AICPA Statement of Position 93-6, “Employers’
Accounting for Employee Stock Ownership Plans.” The Company has adopted this
statement. See Notes 10 and 11.
In
November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 151, “Inventory Costs— an
amendment of ARB No. 43, Chapter 4”. This statement amends the
guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Paragraph 5 of ARB 43,
Chapter 4, previously stated that “. . . under some circumstances, items
such as idle facility expense, excessive spoilage, double freight, and
rehandling costs may be so abnormal as to require treatment as current period
charges. . . .” This statement requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of “so
abnormal.” In addition, this statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. Management does not believe the adoption of
this
statement will have any immediate material impact on the Company.
TELECOMM
SALES NETWORK, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
THE
YEARS ENDED MARCH 31, 2006 AND 2005
Reclassifications
Certain
amounts have been reclassified from the prior financial statements for
comparative purposes.
Revenue
Recognition
Revenue
is generally recognized and earned when all of the following criteria are
satisfied: a) persuasive evidence of sales arrangements exists; b) delivery
has
occurred; c) the sales price is fixed or determinable; and d) collectibility
is
reasonably assured.
Persuasive
evidence of an arrangement is demonstrated via a purchase order from our
customers. Delivery occurs when title and all risks of ownership are transferred
to the purchaser which generally occurs when the products are shipped to
the
customer. No right of return exists on sales of product except for defective
or
damaged products. The sales price to the customer is fixed upon acceptance
of
purchase order. To assure that collectibility is reasonably assured, credit
evaluations are performed on all customers.
Research
and Development
Research
and development costs are charged to expense as incurred. See Note 13 related
to
a change the Company made in accounting for product development cost during
the
year ended March 31, 2006.
Stock
Based Compensation
The
Company measures compensation cost for its stock based compensation plans
under
the provisions of Statement of Financial Accounting Standards No. 123(R),
“Accounting for Stock Based Compensations.” This statement supersedes APB
Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related
implementation guidance. This statement establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for
goods
or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair
value
of the entity’s equity instruments or that may be settled by the issuance of
those equity instruments. This statement focuses primarily on accounting
for
transactions in which an entity obtains employee services in share-based
payment
transactions. SFAS No. 123(R) , "Accounting for Stock-Based Compensation",
requires companies to include expenses in net income (loss) and earnings
(loss)
for each issuance of options and warrants. The Company uses the Black-Scholes
option valuation model to value its issuance of options and
warrants.
Trade
Secret
The
recorded value of the Company’s trade secret relating to the formula/formulation
of ESI’s products at the time acquired by the Company was based upon the
valuation of an independent appraiser. In accordance with SFAS No. 142, the
Company has determined that its trade secret has an indefinite life.
Accordingly, it is not subject to amortization, but it subject to the Company’s
periodic assessment of prospective impairment.
Use
of
Estimates
The
process of preparing financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
use
of estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
upon settlement, actual results may differ from estimated amounts.
NOTE
3 - CONCENTRATION OF CREDIT RISK
The
Company’s financial instruments that are exposed to concentrations of credit
risk consist primarily of cash. The Company places its cash and cash equivalents
with what management believes to be high credit quality financial institutions.
At times such investments may be in excess of the FDIC insurance limit. The
Company maintains cash balances at several financial institutions. Accounts
at
each institution are insured by the Federal Deposit Insurance Corporation
up to
$100,000. At March 31, 2006, the Company’s uninsured cash balances total was
$3,201,749.
TELECOMM
SALES NETWORK, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
THE
YEARS ENDED MARCH 31, 2006 AND 2005
NOTE
4 - INVENTORIES
Inventories
consist of the following:
|
|
|
March
31,
|
|
| |
|
|
2006
|
|
|
2005
|
|
|
Raw
material
|
|
$
|
134,710
|
|
$
|
249,776
|
|
|
Work-in-progress
|
|
|
-
|
|
|
9,723
|
|
|
Finished
goods
|
|
|
30,482
|
|
|
45,493
|
|
|
Allowance
for obsolescence
|
|
|
(60,000
|
)
|
|
(12,760
|
)
|
|
Inventory,
net
|
|
$
|
105,192
|
|
$
|
292,232
|
|
NOTE
5 - INCOME TAXES
At
March
31, 2006 and 2005, the Company had deferred tax assets calculated at an expected
rate of 34% of approximately $6,157,000 and $4,913,000, respectfully.
As
management of the Company cannot determine that it is more likely than not
that
the Company will realize the benefit of the deferred tax asset, a valuation
allowance equal to the deferred tax asset has been recorded.
The
significant components of the deferred tax assets at March 31, 2006 and 2005
were as follows:
| |
|
March
31,
|
|
| |
|
|
2006
|
|
|
2005
|
|
|
Net
operating loss carryforward:
|
|
$
|
18,110,000
|
|
$
|
14,452,000
|
|
|
Deferred
tax asset
|
|
$
|
6,157,000
|
|
$
|
4,913,000
|
|
|
Deferred
tax asset valuation allowance
|
|
|
(6,157,000
|
)
|
|
(4,913,000
|
)
|
|
Net
deferred tax asset
|
|
$
|
-
|
|
$
|
-
|
|
At
March
31, 2006 and 2005, the Company has net operating loss carryforwards of
approximately $18,110,000 and $14,452,000, respectively, which begin to expire
in the year 2014 through 2026. The change in valuation allowance from March
31,
2005 to March 31, 2006 is $1,244,000.
NOTE
6 - RESERVE FOR PRODUCT RETURNS
During
the period ending March 31, 2006, the Company in response to recent
communications with the U.S. Environmental Protection Agency (EPA) has decided
voluntarily to suspend sales, marketing and distribution of its EcoTru®
disinfectant products and has initiated a retrieval program to recover existing
stocks of EcoTru® that have been distributed since January 2005 and remain in
customer inventories. At March 31, 2006, the Company has accrued $270,000
which
is its best estimate
of its
obligation regarding the EPA action and voluntary recall, which is presented
under the caption “reserve for product returns” in the accompanying balance
sheet.
TELECOMM
SALES NETWORK, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
THE
YEARS ENDED MARCH 31, 2006 AND 2005
NOTE
7 - NOTES, LOANS AND CONVERTIBLE DEBT
Notes
payable at March 31, 2006 and 2005 consist of the following:
| |
|
March
31,
|
|
| |
|
|
2006
|
|
|
2005
|
|
|
3.15%
to 12% secured convertible
notes payable, convertible into a maximum of 403,410 common shares
|
|
$
|
-
|
|
$
|
910,000
|
|
| |
|
|
|
|
|
|
|
|
6%
secured convertible
notes payable, convertible into a maximum of 76,115 common shares
|
|
|
-
|
|
|
100,000
|
|
| |
|
|
|
|
|
|
|
|
9%
secured convertible
notes payable, convertible into a maximum of 154,133 common shares
|
|
|
-
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
$
|
1,160,000
|
|
Loans
payable at March 31, 2006 and 2005 consist of the following:
| |
|
March
31,
|
|
| |
|
|
2006
|
|
|
2005
|
|
|
5%
unsecured loans payable to the former CEO and CFO of ESI
|
|
$
|
-
|
|
$
|
380,399
|
|
Convertible
debt at March 31, 2006 and 2005 consist of the following:
| |
|
March
31,
|
|
| |
|
|
2006
|
|
|
2005
|
|
|
5%
unsecured debt to a former director of ESI with accrued interest
of $-0-
and $16,501.
|
|
$
|
-
|
|
$
|
61,510
|
|
During
the year ended March 31, 2006, the Company received note proceeds from an
outside source of $700,000. On January 10, 2006 all notes, loans and convertible
debt were paid off along with $110,036 accrued interest from the proceeds
of the
private placement of common stock on January 10, 2006.
NOTE
8 - COMMITMENT AND CONTINGENCIES
Operating
Leases
The
Company,
which had
formal
operating leases for all of its office and warehouse space
before
they expired
continues to lease space on a
month to
month basis. Rent expense relating to operating space
leased
was
approximately $90,518 and $139,308 for the years ended March 31, 2006 and
2005,
respectively.
Executive
Employment Contracts
The
Company has entered into a three year employment contract with a key Company
executive that provides for the continuation of salary to the executive if
terminated for reasons other than cause, as defined in those agreements.
At
March 31, 2006, the future employment contract commitment for such key executive
based on this termination clause was approximately $18,750 per month through
January 9, 2009. The Company also issued 750,000 stock options to purchase
750,000 common stock shares at $2.50 per share. Of these, 250,000 were fully
vested at March 31, 2006 with the balance vesting at a rate of 250,000 each
at
Mach 31, 2007 and 2008.
U.S.
Environmental Protection Agency and Product Recall
The
Company announced on February 7, 2006 that in response to recent communications
with the U.S. Environmental Protection Agency (EPA) that EnviroSystems, Inc.,
its wholly owned subsidiary had decided voluntarily to suspend sales, marketing
and distribution of its EcoTru disinfectant products and has initiated a
retrieval program to recover existing stocks of EcoTru that have been
distributed since January 2005 and remain in customer inventories. The Company
believes that it has retrieved all of the known product that was still in
its
distributors’ inventory and has settled all known claims with distributors. The
Company has settled with the EPA for a fine and administrative charges of
$16,358. The Company has re-submitted to the EPA in June 2006 its EcoTru
product
for approval as a limited disinfectant and is continuing to test the product
to
be able to pass the EPA requirement as a hospital grade disinfectant. See
Note
6.
TELECOMM
SALES NETWORK, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
THE
YEARS ENDED MARCH 31, 2006 AND 2005
NOTE
9 - PREFERRED STOCK AND COMMON STOCK
Preferred
Stock
The
Company is authorized to issue 5,000,000 shares of $0.0001 par value preferred
stock, which may be issued in one or more series at the sole discretion of
the
Company’s board of directors. The board of directors is also authorized to
determine the rights, preferences, and privileges and restrictions granted
to or
imposed upon any series of preferred stock. As of March 31, 2006, no preferred
stock has been issued by the Company.
Common
Stock
The
Company is authorized to issue 100,000,000 shares of $0.0001 par value common
stock. All shares have equal voting rights, are non-assessable and have one
vote
per share. Voting rights are not cumulative and, therefore, the holders of
more
than 50% of the common stock could, if they choose to do so, elect all of
the
directors of the Company.
In
the
period ended March 31, 2005, 254,440 shares of common stock were issued for
total cash proceeds of $505,000 and 3,396 shares were issued for services
performed for the Company in the amount of $6,740.
Also
in
the period ended March 31, 2005, 11,336 shares of common stock were purchased
for $22,500 from shareholders and retired. Other equity issuance transactions
in
the period ended March 31, 2005 totaled $9,510.
Sale
of Common Stock
Pursuant
to a securities purchase agreement dated as of October 31, 2005 by and between
Telecomm Sales Network and MV Nanotech Corp., a Texas corporation (“MV
Nanotech”), the Company issued and sold to MV Nanotech 3,230,000 shares of the
Company’s restricted common stock, par value $0.0001 per share and a warrant to
purchase up to an additional 4,000,000 shares of common stock. The warrant
is
exercisable for a period of 4 years commencing 90 days after the date of
issuance and has an exercise price of $2.50 per share. Pursuant to the
agreement, MV Nanotech paid Telecomm Sales Network $80,750 for the securities,
of which $40,375 was paid in cash with the remainder in a non-interest bearing
promissory note receivable, later paid on January 12, 2006.
The
securities were issued to MV Nanotech in a transaction exempt from the
registration requirements of the Securities Act of 1933, as amended in reliance
on Section 4(2) of the Act and the safe harbor private offering exemption
provided by Rule 506 promulgated under the Act, without the payment of discounts
or commissions to any person.
Merger
and Recapitalization
Prior
to
the merger and recapitalization (described below), there were 7,350,000
outstanding shares of Telecomm common stock. This included 4,120,000 common
stock shares issued for cash to Telecomm shareholders, officers and directors
and the 3,230,000 shares issued to MV Nanotech. Telecomm purchased and retired
2,000,000 common stock shares from its former officers and directors immediately
prior to the merger and private placement transactions, leaving 5,350,000
Telecomm common stock shares at the time of the merger and private placement
transactions.
On
January 10, 2006, the Company completed the acquisition of EnviroSystems,
Inc.
(“EnviroSystems”) in a merger transaction. The Company issued 6,400,000 shares
of common stock in exchange for all the outstanding shares, options and warrants
of EnviroSystems, Inc. Pursuant to an agreement and plan of merger dated
as of
November 11, 2005 (the “Merger Agreement”), by and among Telecomm Sales Network,
TSN Acquisition Corporation (“TAC”), a newly formed and wholly owned subsidiary
of Telecomm Sales Network, and EnviroSystems, Inc. (“EnviroSystems”), TAC merged
with and into EnviroSystems, with EnviroSystems as the surviving corporation.
On
January 10, 2006, prior to the merger, Telecomm had $4,177 in cash, a note
receivable of $40,375, and liabilities of $10,869 with net assets of $33,683
and
5,350,000 common stock shares issued and outstanding.
TELECOMM
SALES NETWORK, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
THE
YEARS ENDED MARCH 31, 2006 AND 2005
The
transaction between Telecomm and EnviroSystems has been treated as a reverse
merger and recapitalization of EnviroSystems for reporting purposes. The
financial statements reflect the restatement of EnviroSystems stockholders’
equity for the periods ending March 31, 2006 and 2005. The net effect of
the
merger is that the prior EnviroSystems preferred shareholders received 40%
or
6,400,000 shares of the outstanding stock of Telecomm in the transaction
for
their outstanding shares, warrants and options of EnviroSystems preferred
stock.
All
shares of Telecomm common stock to be issued to the EnviroSystems shareholders,
option holders and warrant holders (6,400,000 shares) in the merger are subject
to a lock-up and held in escrow (the “Escrow Shares”) for a period equal to the
longer of (a) 12 months following the closing or (b) 9 months after the
effective date of a registration statement covering the resale of the shares
of
Telecomm common stock sold in the offering, provided, that such lock-up period
shall not exceed the date 15 months from the closing. The escrow shares will
be
used to secure indemnification obligations of EnviroSystems shareholders
to the
Company under the merger agreement.
Outstanding
options and warrants to purchase EnviroSystems preferred stock were converted
to
options to purchase the Company’s common stock at the merger date. In the
merger, outstanding options to purchase common stock of EnviroSystems were
converted into 982,362 common stock options of the Company. See Note 11.
These
options range in price from $3.40 to $5.00 per option and start to expire
in
approximately 4 years to 8 years.
Also
in
the Merger, outstanding warrants to purchase preferred stock of EnviroSystems
were converted into 613,869 common stock warrants of the Company. These warrants
are priced at $5.00 per warrant and expire in a range from 3 months to 4
years.
See Note 10.
Private
Placement
On
January 10, 2006, the Company also issued 4,250,000 shares of common stock
in a
private placement offering (the “Offering”) in exchange for $8,500,000 in gross
proceeds on January 10, 2006. The Company received $6,951,084 after paying
$1,548,916 in expenses associated with the private placement including legal,
escrow and selling agents fees. The merger agreement called for minimum gross
proceeds from the private placement of $8,500,000 and net offering proceeds
of
$7,200,000. The Company’s net offering proceeds were $248,916 lower then the
agreed upon amount due to increased expenses of the offering including legal
and
other expenses of the private placement. This is a violation of the merger
agreement but had no effect on the Merger transaction.
NOTE
10 - STOCK PURCHASE WARRANTS
Pursuant
to a securities purchase agreement dated October 31, 2005, the Company issued
and sold to MV Nanotech a warrant to purchase up to 4,000,000 shares of common
stock. The warrant is exercisable for a period of 4 years commencing 90 days
after the date of issuance and has an exercise price of $2.50 per share.
See
Note 9. Compensation was required to be recorded for warrants granted to
the MV
Nanotech using the Black-Scholes option-pricing model for the year ended
March
31, 2006 in the amount of $220,033.
In
connection with the private placement offering on January 10, 2006, the Company
issued 637,500 common stock warrants to three selling agents of the private
placement offering for purchase of the Company’s common stock. The warrants are
exercisable for a period of 4 years commencing April 10, 2006 and have an
exercise price of $2.50 per share. Consulting expense was required to be
recorded for warrants granted to the selling agents using the Black-Scholes
option-pricing model for the year ended March 31, 2006 in the amount of
$931,763.
TELECOMM
SALES NETWORK, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
THE
YEARS ENDED MARCH 31, 2006 AND 2005
The
following is a summary of all common stock warrant activity during the two
years
ended March 31, 2006:
|
|
|
|
Number
of
Shares
Under Warrants
|
|
|
Exercise
Price
Per
Share
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Warrants
issued and exercisable at:
March
31, 2004
|
|
|
613,869
|
|
$
|
5.00
|
|
$
|
5.00
|
|
|
Warrants
granted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Warrants
expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Warrants
exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Warrants
issued and exercisable at:
March
31, 2005
|
|
|
613,869
|
|
|
5.00
|
|
|
5.00
|
|
|
Warrants
granted
|
|
|
4,637,500
|
|
|
2.50
|
|
|
2.50
|
|
|
Warrants
expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Warrants
exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Warrants
issued and exercisable at:
March
31, 2006
|
|
|
5,251,369
|
|
$
|
2.50-5.00
|
|
$
|
2.79
|
|
The
following represents additional information related to common stock warrants
outstanding and exercisable at March 31, 2006:
| |
|
Outstanding
and Exercisable
|
|
|
Exercise
Price
|
|
Number
of
Shares
Under
Warrants
|
|
Weighted
Average
Remaining
Contract
Life in
Years
|
|
Weighted
Average
Exercise
Price
|
|
|
$5.00
|
|
|
176,968
|
|
|
0.65
|
|
$
|
5.00
|
|
|
$5.00
|
|
|
105,420
|
|
|
1.48
|
|
|
5.00
|
|
|
$5.00
|
|
|
242,045
|
|
|
2.56
|
|
|
5.00
|
|
|
$2.50
|
|
|
4,637,500
|
|
|
3.86
|
|
|
2.50
|
|
|
$5.00
|
|
|
89,436
|
|
|
4.16
|
|
|
5.00
|
|
| |
|
|
5,251,369
|
|
|
3.65
|
|
$
|
2.79
|
|
The
Company used the Black-Scholes option price calculation to value the warrants
granted in the year ending March 31, 2006 using the following assumptions:
risk-free rate of 4.50%; volatility of 63%; zero dividend yield; half the
actual
exercise term of the warrants granted and the exercise price of warrants
granted.
NOTE
11 - EQUITY COMPENSATION PLAN
The
Company has two stock option plans: (a) the 2006 Stock Incentive Plan which
has
been approved by the Board of Directors and is expected to be presented for
shareholder approval at the next shareholders’ meeting and (b) the 2004 Equity
Compensation Plan which has been approved by both the Board of Directors
and the
shareholders. An aggregate amount of common stock that may be awarded and
purchased under the Plans is 3,700,000 shares of the Company's common
stock.
The
exercise price for incentive stock options
granted under the 2006 and 2004 Plans may not be less than the fair market
value
of the common stock on the date the option is granted, except for options
granted to 10% stockholders which must have an exercise price of not less
than
110% of the fair market value of the common stock on the date the option
is
granted. The exercise price for nonstatutory options is determined by the
Compensation Committee of our Board of Directors. Incentive stock options
granted under the plans have a maximum term of ten years, except for grants
to
10% stockholders which are subject to a maximum term of five years. The term
of
nonstatutory stock options is determined by the Compensation Committee of
our
Board of Directors. Options granted under the plans are not transferable,
except
by will and the laws of descent and distribution.
Under
the
Plans during the years ended March ended March 31, 2006 and 2005, the Company
granted 1,150,000 and -0- stock options to employees. The options were issued
with an exercise prices $2.00-2.50 and will fully vest from two to four years
of
service. The options were valued using the fair value method as prescribed
by
SFAS No. 123 (R), resulting in a total value associated with these options
of
$1,040,409. Pursuant to SFAS No. 123(R), this amount will be accrued to
compensation expense over the expected service term as vested. The accrued
compensation expense related to these options for the year ended March 31,
2006
is $242,060 and has been expensed in the year ended March 31, 2006 pursuant
to
the application of SFAS No. 123(R), and credited to additional paid-in
capital.
TELECOMM
SALES NETWORK, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
THE
YEARS ENDED MARCH 31, 2006 AND 2005
The
Company also issues stock options to consultants to purchase restricted Rule
144
common stock which is not issued under the Plans. During the year ended March
31, 2006 and 2005, the Company granted 6,720 and 106,053 options to consultants
to purchase common stock with exercise prices of $1.61 to $5.00 per share
which
was equal to or higher than the market price at the date of the grant.
Consulting expenses was required to be recorded for options granted to the
consultants using the Black-Scholes option-pricing model for the year ended
March 31, 2006 and 2005 in the amounts of $8,048 and $74,185,
respectively.
The
following is a summary of all common stock option activity during the two
years
ended March 31, 2006:
| |
|
Shares
Under
Options
Outstanding
|
|
Weighted
Average
Exercise
Price
|
|
|
Options
outstanding at March 31, 2004
|
|
|
3,072,345
|
|
$
|
2.35
|
|
|
Options
granted
|
|
|
106,053
|
|
|
2.85
|
|
|
Options
expired
|
|
|
(515,490
|
)
|
|
2.50
|
|
|
Options
exercised
|
|
|
-
|
|
|
-
|
|
|
Options
outstanding at March 31, 2005
|
|
|
2,662,908
|
|
|
2.34
|
|
|
Options
granted
|
|
|
1,156,720
|
|
|
2.32
|
|
|
Options
expired
|
|
|
(1,680,546
|
)
|
|
2.50
|
|
|
Options
exercised
|
|
|
-
|
|
|
-
|
|
|
Options
outstanding at March 31, 2006
|
|
|
2,139,082
|
|
$
|
2.87
|
|
| |
|
Options
Exercisable
|
|
Weighted
Average
Exercise
Price
per
Share
|
|
|
Options
exercisable at March 31, 2005
|
|
|
2,662,908
|
|
$
|
2.34
|
|
| |
|
|
|
|
|
|
|
|
Options
exercisable at March 31, 2006
|
|
|
1,230,217
|
|
$
|
3.31
|
|
The
following represents additional information related to common stock options
outstanding and exercisable at March 31, 2006:
|
Range
of
Exercise
Price
|
|
Number
Outstanding
at
March
31,
2006
|
|
Weighted
Average
Remaining
Contractual
Life
Years
|
|
Weighted
Average
Exercise
Price
(Total
Shares)
|
|
Number
Exercisable
At
March
31,
2006
|
|
Weighted
Average
Exercise
Price
(Exercisable
Shares)
|
|
$3.40
|
|
913,383
|
|
8.59
|
|
$3.40
|
|
908,943
|
|
$3.40
|
|
$5.00
|
|
68,979
|
|
4.64
|
|
$5.00
|
|
68,979
|
|
$5.00
|
|
$1.61
- 2.95
|
|
6,720
|
|
9.76
|
|
$2.11
|
|
2,295
|
|
$2.95
|
|
$2.00
- 2.50
|
|
1,150,000
|
|
6.52
|
|
$2.33
|
|
250,000
|
|
$2.50
|
|
$1.61
- 5.00
|
|
2,139,082
|
|
7.35
|
|
$2.87
|
|
1,230,217
|
|
$3.31
|
Total
compensation cost related to non-vested stock options as of March 31, 2006
was
$798,349.
Weighted
average period of non-vested stock options was 7 years as of March 31,
2006.
The
Company used the Black-Scholes option price calculation to value the options
granted in the year ended March 31, 2006 using the following assumptions:
risk-free rate of 4.5%; volatility of 63%; zero dividend yield; half the
actual
term and exercise price of warrants granted. See Note 9.
TELECOMM
SALES NETWORK, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
THE
YEARS ENDED MARCH 31, 2006 AND 2005
NOTE
12 - RELATED PARTY TRANSACTIONS
In
August
2004, one of the Company’s shareholders loaned the Company $500. The loan, which
was unsecured, non-interest bearing, and payable on demand, was repaid in
February 2005. Other related party loans are listed in Note 7.
The
Company previously used office space provided at no charge by Skye Source,
LLC,
an entity owned by the Company’s former director/officers. The value of this
space is not considered materially significant for financial reporting purposes.
The
Company owed a former officer of EnviroSystems, $68,389 in unpaid payroll
from
prior years. The Company paid this amount from the proceeds of the private
placement in January 2006.
NOTE
13 - CHANGE IN ACCOUNTING ESTIMATE
The
Company, during the current period ended March 31, 2006, changed its estimate
of
the useful life of its capitalized product development cost from a remaining
life of 16 years to less than one year. Prior to changing its estimate of
the
useful life, the Company had recorded product development cost in the amount
of
$803,153 and had amortized $143,899 of the cost using an estimated life of
20
years. During the current period ending March 31, 2006, the Company expensed
the
remaining balance of $659,254.