NOTE 11. EQUITY TRANSACTIONS/ TREASURY STOCK
During the six months ended September 30, 2009, the following stockholder equity events occurred:
On April 20, 2009, the Company agreed to issue 317 shares of ArqueMax Ventures, LLC Series Preferred Stock (IAO Preferred Stock) of the Company. The IAO Preferred Stock, $.01 par value, was sold at $1,000 per share, has a liquidation value of $317,000 and has no voting rights.
At AMVs sole discretion, AMV may either (1) convert some or all of its IAO Preferred Stock into 12,800,000 shares of the Companys common stock pro rata at $0.025 per share; or (2) exchange IAO Preferred Stock for 971,458 Taicom Stock owned by the Company pro rata. The conversion of IAO Preferred Stock into Taicom Stock is automatically triggered in the case of certain events, including delisting from NYSE AMEX, bankruptcy or insolvency.
The Company recorded a deemed dividend of $192,000, upon the issuance of the Preferred Stock, due to the conversion price per share being below market on the date of issuance.
On May 12, 2009, the Company sold 600,000 shares of common stock to A to B Capital Special Situations Fund LP for $30,000 or $0.05 per share, the closing price on May 12, 2009, the date the subscription agreement was signed.
On May 12, 2009, the Company issued warrants for a total of 428,571 shares of common stock to A to B Capital Special Situations Fund LP related to the common stock they purchased on May 12, 2009. The warrants are exercisable at $.07 per share, above the market price on May 12, 2009, and expire on May 14, 2012.
On May 21, 2009, the Company issued
750,000 performance warrants to acquire shares of common stock to the Sterling Group, Inc. in connection with the sale of the
Companys common stock. The warrants are exercisable at $.10 per share and expire on May 20, 2012. If registered, the warrants
may be called by the Company if the share price closes above $.20 for five days.
On May 21, 2009, the Company issued
250,000 performance warrants to acquire shares of common stock to Marc Page in connection with the sale of the Companys common
stock. The warrants are exercisable at $.10 per share and expire on May 20, 2012.
On June 10, 2009, the Company sold 167,500 shares of common stock to Derek Schneideman, its Chief Executive Officer, for $10,050 or $0.06 per share, the closing price on June 10, 2009, the date the subscription agreement was signed.
The common stock was issued to the accredited investors in a transaction that will be exempt from registration pursuant to Section 4(2) of the Securities Act, and/or Regulation D promulgated under the Securities Act.
PRIVATE PLACEMENTS WITH INTER ASSET JAPAN LBO NO. 1 FUND
On August 2, 2009, the Company entered into a Stock Purchase Agreement (Agreement 1) with Inter Asset Japan LBO No 1 Fund, an existing shareholder of the Company (the Shareholder). Under the terms of the Agreement 1, the Company agreed to issue and sell to the Shareholder 1,500,000 shares (the Shares) of the Companys common stock, par value $0.01 per share, for an aggregate purchase price of $60,000, or $0.04 per share (the Purchase Price). The Company issued and sold the Shares to the Shareholder in reliance on the exemption from the registration requirements set forth in the Securities Act provided under Section 4(2) of the Securities Act and Regulation D promulgated by the SEC under the Securities Act.
Agreement 1 contains certain representations and warranties of the Shareholder and the Company, including customary investment-related representations provided by the Shareholder, as well as acknowledgements by the Shareholder that it has reviewed certain disclosures of the Company (including the periodic reports that the Company has filed with the SEC) and that the Companys issuance of the Shares has not been registered with the SEC or qualified under any state securities laws. The Company provided customary representations regarding, among other things, its organization, capital structure, subsidiaries, disclosure reports, absence of certain legal or governmental proceedings, financial statements, tax matters, insurance matters, real property and other assets, and compliance with applicable laws and regulations.
23
Agreement 1 also grants the Shareholder registration rights that it may exercise at its option and provides the Shareholder with a right of first offer if the Company proposes to issue securities in the future (subject to certain customary exceptions). Finally, the Shareholder has the right to demand that the Company redeem all or any portion of the Shares at any time on or after October 31, 2009, for a redemption price equal to the greater of the Purchase Price or the listed market price for the Companys common stock as of the redemption date.
On August 17, 2009, the Company entered into a Stock Purchase Agreement (Agreement 2) with the Shareholder. Under the terms of Agreement 2, the Company agreed to issue and sell to the Shareholder 5,000,000 shares of our common stock for an aggregate purchase price of $200,000, or $0.04 per share.
Also under the terms of the Agreement, the Shareholder has committed to purchase, and the Company agreed to issue and sell to the Shareholder, additional shares of the Companys common stock in accordance with the following schedule:
|
|
2,500,000 shares at a purchase price of US$.04 per share, or an aggregate price of US$100,000 on or before September 4, 2009.
|
|
|
1,250,000 shares at a purchase price of US$.04 per share, or an aggregate price of US$50,000 on or before September 18, 2009.
|
|
|
50,000,000 shares at a purchase price of US$.04 per share, or an aggregate price of US$2,000,000 on or before November 10, 2009.
|
The Shareholders obligation to purchase the foregoing shares by the date specified is conditioned upon the representations and warranties of the Company contained in Agreement 2 being accurate as of the date of such closing.
Finally, the Shareholder has the option, but not the obligation, to purchase, on or before December 31, 2009, an additional 50,000,000 shares of Common Stock at a purchase price of US$.04 per share, or an aggregate price of $2,000,000. The Company expects to extend this date.
Under the terms of the Agreement, as
of September 30, 2009 the Company has agreed to issue and sell to the Investor, 8,250,000 shares at a purchase price of $.04 per
share, or an aggregate price of $330,000.
Under the terms of the Agreement, as
of January 5, 2010 the Company has agreed to issue and sell to the Investor, 71,719,633 shares at a purchase price of $.04 per
share, or an aggregate price of $2,861,000. Further, we expect that a total of $861,000 of the funds can be used for working capital
and the remaining $2,000,000 can be used for investments.
The Company issued and sold the shares of common stock to the Shareholder in reliance on the exemption from the registration requirements set forth in the Securities Act provided under Section 4(2) of the Securities Act and Regulation D promulgated by the SEC under the Securities Act.
Agreement 2 contains certain representations and warranties of the Shareholder and the Company, including customary investment-related representations provided by the Shareholder, as well as acknowledgements by the Shareholder that it has reviewed certain disclosures of the Company (including the periodic reports that the Company has filed with the SEC) and that the Companys issuance of the shares has not been registered with the SEC or qualified under any state securities laws. The Company provided customary representations regarding, among other things, its organization, capital structure, subsidiaries, disclosure reports, absence of certain legal or governmental proceedings, financial statements, tax matters, insurance matters, real property and other assets, and compliance with applicable laws and regulations.
Agreement 2 also grants the Shareholder registration rights that it may exercise at its option and provides the Shareholder with a right of first offer if the Company proposes to issue securities in the future (subject to certain customary exceptions).
24
EQUITY LINE OF CREDIT TRANSACTION WITH ASCENDIANT CAPITAL GROUP, LLC
On September 29, 2009, the Company entered into a Securities Purchase Agreement with Ascendiant Capital Group, LLC (Ascendiant), pursuant to which Ascendiant agreed to purchase up to $5,000,000 worth of shares of the Companys common stock from time to time over a 24-month period, provided that certain conditions are met. The financing arrangement entered into by IA Global and Ascendiant is commonly referred to as an equity line of credit or an equity drawdown facility.
Under the terms of the Securities
Purchase Agreement, Ascendiant will not be obligated to purchase shares of IA Globals common stock unless and until certain
conditions are met, including but not limited to (i) approval of the transaction by the NYSE AMEX, which has not been received as of
January 5, 2010, and (ii) the Company files by November 13, 2009 and the SEC declares effective by January 27, 2010 a Registration
Statement on Form S-1 (the Registration Statement) registering Ascendiants resale of any shares purchased by it
under the equity drawdown facility. The customary terms and conditions associated with Ascendiants registration rights are set
forth in a Registration Rights Agreement that was also entered into by the parties on September 29, 2009.
If and when the SEC declares the Registration Statement effective, IA Global will have the right to sell and issue to Ascendiant, and Ascendiant will be obligated to purchase from IA Global, up to $5,000,000 worth of shares of the Companys common stock over a 24-month period beginning on such date (the Commitment Period). IA Global will be entitled to sell such shares from time to time during the Commitment Period by delivering a draw down notice to Ascendiant. In such draw down notices, IA Global will be required to specify the dollar amount of shares that it intends to sell to Ascendiant, which will be spread over a nine-trading-day pricing period. For each draw, IA Global will be required to deliver the shares sold to Ascendiant in three installments (following the third, sixth and ninth trading days in the pricing period, respectively). Ascendiant is entitled to
liquidated damages in connection with certain delays in the delivery of its shares.
The Securities Purchase Agreement also provides for the following terms and conditions:
|
|
Purchase Price - 90% of IA Globals volume-weighted average price (VWAP).
|
|
|
Threshold Price - IA Global may specify a price below which it will not sell shares during the applicable nine-trading-day pricing period. If the purchase price falls below the threshold price on any day(s) during the pricing period, such day(s) will be removed from the pricing period (and Ascendiants investment amount will be reduced by 1/9 for each such day).
|
|
|
Maximum Draw - 15% of IA Globals total trading volume for the 10-trading-day period immediately preceding the applicable draw down, times the average VWAP during such period (but in no event more than $250,000).
|
|
|
Minimum Time Between Draw Down Pricing Periods - Two trading days.
|
|
|
Minimum Use of Facility - IA Global is obligated to sell at least $1,000,000 worth of shares of its common stock to Ascendiant during the Commitment Period.
|
|
|
Commitment Fees - Upon NYSE AMEX approval, IA Global will be obligated to issue 2,371,917 shares of its common stock to Ascendiant ($125,000 worth of shares based on the Companys closing bid price on the trading day immediately prior to the date of the Securities Purchase Agreement). If and when the SEC declares the Registration Statement effective, IA Global will be obligated to issue another $125,000 worth of shares of its common stock in four installments over a period of 90 days following the effectiveness date.
|
25
|
|
Other Fees and Expenses On October 21, 2009, the Company issued 400,000 shares of common stock valued at $10,000 under the 2007 Stock Incentive Plan as compensation to Ascendiants legal counsel for the legal fees and expenses it incurred in connection with negotiating and documenting the equity line of credit. Pursuant to separate agreements, IA Global has also agreed to pay an aggregate of 3.0% in finders fees (to be paid in connection with each draw down).
|
|
|
Indemnification - Ascendiant is entitled to customary indemnification from IA Global for any losses or liabilities it suffers as a result of any breach by IA Global of any provisions of the Securities Purchase Agreement, or as a result of any lawsuit brought by any stockholder of IA Global (except stockholders who are officers, directors or principal stockholders of IA Global).
|
|
|
Conditions to Ascendiants Obligation to Purchase Shares - Trading in IA Globals common stock must not be suspended by the SEC or the NYSE AMEX (or other applicable trading market); IA Global must not have experienced a material adverse effect; all liquidated damages and other amounts owing to Ascendiant must be paid in full; the Registration Statement must be effective with respect to Ascendiants resale of all shares purchased under the equity drawdown facility; there must be a sufficient number of authorized but unissued shares of IA Global common stock; and the issuance must not cause Ascendiant to own more than 9.99% of the then outstanding shares of IA Global common stock, or more than 19.9% of the number of shares of common stock outstanding on September 29, 2009 to have been issued under the equity drawdown facility (without shareholder
approval).
|
|
|
Termination - The Securities Purchase Agreement will terminate if IA Globals common stock is not listed on one of several specified trading markets (which include the NYSE AMEX, OTC Bulletin Board and Pink Sheets, among others); if IA Global files for protection from its creditors; or if the Registration Statement is not declared effective by the SEC by June 29, 2010. IA Global may terminate the Securities Purchase Agreement if Ascendiant fails to fund a draw down within 10 trading days after the end of the applicable settlement period, or if the SEC provides comments on the Registration Statement requiring certain changes in the transaction structure and/or documents.
|
The Securities Purchase Agreement also contains certain representations and warranties of IA Global and Ascendiant, including customary investment-related representations provided by Ascendiant, as well as acknowledgements by Ascendiant that it has reviewed certain disclosures of the Company (including the periodic reports that the Company has filed with the SEC) and that the Companys issuance of the shares has not been registered with the SEC or qualified under any state securities laws. IA Global provided customary representations regarding, among other things, its organization, capital structure, subsidiaries, disclosure reports, absence of certain legal or governmental proceedings, financial statements, tax matters, insurance matters, real property and other assets, and compliance with applicable laws and regulations. IA Globals representations and warranties are qualified in
their entirety (to the extent applicable) by the Companys disclosures in the reports it files with the SEC. IA Global also delivered confidential disclosure schedules qualifying certain of its representations and warranties in connection with executing and delivering the Securities Purchase Agreement.
The shares to be issued by IA Global to Ascendiant under the Securities Purchase Agreement will be issued in private placements in reliance upon the exemption from the registration requirements set forth in the Securities Act provided for in Section 4(2) of the Securities Act, and the rules promulgated by the SEC thereunder.
In addition to IAJ LBO and share issuances discussed elsewhere in this Form 10-Q, during the three months subsequent to September 30, 2009, the following stockholder equity event occurred:
On November 4, 2009, the Company agreed to issue 600,000 shares of common stock to AIM Capital Corporation in a private placement for $24,000 or $0.04 per share, the closing price on December 28, 2009, the date agreement was reached. The Company agreed to register the shares.
On December 30, 2009, the Company agreed to issue 2,569,850 shares of common stock to former directors of the Company in a private placement for $106,794 or $0.04 per share, the closing price on December 28, 2009, the date agreement was reached. The shares do not have registration rights.
26
NOTE 12. COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
LEGAL PROCEEDING GLOBAL HOTLINE
As has been previously disclosed, the Company pledged its shares of Global Hotline as collateral for certain loans borrowed from H Capital, an unlicensed Japanese lender, for such subsidiary. On May 26, 2009, Global Hotline and IA Global received notices from H Capital demanding repayment of the loans. On May 27, 2009, Global Hotline and SG Telecom did not repay the loans as requested by H Capital. On June 2, 2009, H Capital submitted documents claiming ownership of the Companys 600 shares of Global Hotline. Global Hotlines management previously provided the Companys stock certificates to H Capital in March 2009.
Although the Company has engaged Japanese corporate counsel to challenge the validity of the loans and H Capitals claims with respect to the Companys ownership of Global Hotline, these events have resulted in IA Global losing control over the day-to-day management and operations of Global Hotline. In addition, we no longer have access to the financial records of Global Hotline that are necessary to periodically report our financial position and results of operations as a consolidated subsidiary of IA Global.
On December 8, 2009, the Company
deconsolidated the operations of Global Hotline, effective as of July 1, 2009. As a result, the Company accounted for Global Hotline
as a discontinued operation for periods ending after July 1, 2009. Our reported net profit (loss) will improve by $10.1 million for
the nine months ended December 31, 2009 and our stockholders deficit as of December 31, 2009 will decrease by $10.1 million as
a result of recording the deferred gain from the forfeiture of Global Hotline operations that was recorded during the three months
ended September 30, 2009.
The Companys decision to deconsolidate Global Hotline is not a relinquishment of their claim of ownership of Global Hotline. The Company has engaged Japanese legal counsel and intends to vigorously pursue their legal right with regards to ownership. Management, based on their consultation with Japanese legal counsel, is unable to determine the outcome of this dispute H Capital.
Concurrent with Companys deconsolidation of Global Hotline, management has determined that any obligations that may arise from Global Hotline, that existed prior, or subsequent, to their decision to deconsolidate, is not an obligation of the Company.
Prior to December 8, 2009 Global
Hotline had significant liabilities to Japanese banks in excess of approximately $12,000,000. These loans were unsecured and
personally guaranteed by either the CEO or the CFO of Global Hotline. In addition to theses bank loans, Global Hotline had payroll,
social insurance and other tax liabilities at of approximately 800,000,000 Yen, or approximately $9.0 million at current exchange
rates, as of September 30, 2009.
The status of Global Hotlines bank
loans and tax liabilities is unknown subsequent to December 8, 2009. In addition, the status of trade debt, or any debt or
obligation of Global Hotline is unknown subsequent to December 8, 2009. In addition to debt, Global Hotline has obligation under
various operating leases, the status of which is unknown subsequent to December 8, 2009.
Global Hotline has revenue contracts requiring performance for their various vendors. The status of performance, or any liability for non-performance, is unknown subsequent to December 8, 2009.
With regards to the above referenced liabilities, or potential liabilities of Global Hotline, management of the Company along with their Japanese legal counsel, has determined that the Company has no legal obligation for these liabilities or potential liabilities. Assertions against the Company for Global Hotline liabilities, or potential liabilities, might be sustained. The Company intends to defend themselves against any assertions related to liabilities, or potential liabilities, resulting from Global Hotline prior to, or subsequent to, December 8, 2009. The Company has not accrued for any liabilities related to Global Hotline as of September 30, 2009.
AMV
On April 1, 2009, the Company agreed to issue preferred stock (IAO Preferred Stock), at $1,000 per share, to AMV for $317,000 in the Amendment to Share Exchange Agreement.
27
At AMVs sole discretion, AMV may either (1) convert some or all of its IAO Preferred Stock into 12,800,000 shares of the Companys common stock pro rata at $0.025 per share; or (2) exchange IAO Preferred Stock for 971,458 Taicom Stock owned by the Company pro rata. The conversion of IAO Preferred Stock intoTaicom Stock is automatically triggered in the case of certain events, including delisting from NYSE AMEX, bankruptcy or insolvency. On July 17, 2009 and September 28, 2009, AMV notified us that we were in default under the June 8, 2009 Services Agreement (Agreement) and as a result did not fund the $60,000 due June 30, 2009, July 15, 2009 and July 31, 2009. However, AMV was late in funding as required by the Agreement. On October 30, 2009, the Company agreed to issue 4,000,000 shares based on the $120,000 in funded under this Agreement.
On November 16, 2009, but effective August 4, 2009, AMV claimed ownership of our shares in Taicom. This resulted in a loss on investment of approximately $2,861,000. The parties continue to negotiate over the April 1, 2009 and June 8, 2009 Amendment to Share Exchange and June 8, 2009 Services Agreements.
EMPLOYMENT AGREEMENTS
Agreement with Brian Hoekstra
On November 5, 2009, the Company entered into an Employment Agreement with Brian Hoekstra, the Companys Chief Executive Officer, which is effective as of September 4, 2009.
The Employment Agreement provides for a one-year term and is renewable on a mutually agreeable basis. The Company will pay Mr. Hoekstra an annual base salary of $98,000, and will provide for participation in the Companys benefit programs available to other senior executives (including group insurance arrangements). Mr. Hoekstra is also eligible for discretionary performance bonuses based upon performance criteria to be determined by the Companys Compensation Committee. If Mr. Hoekstras employment is terminated without Cause (as defined in the Employment Agreement), Mr. Hoekstra will be entitled to a payment equal to three months base salary paid at the Companys discretion in a lump sum or over the subsequent year.
The Compensation Committee also awarded Mr. Hoekstra 800,000 shares of restricted stock and an option to purchase 1,200,000 shares of the Companys common stock. The awards were granted at the fair market price of $0.04 per share based on the adjusted closing price of the Companys common stock on November 4, 2009, the last trading day before the Compensation Committee meeting. In accordance with the Companys 2007 Stock Incentive Plan, the restricted stock and the stock option vest in quarterly installments over three years beginning on September 4, 2009. The stock options expire on September 3, 2019.
Agreement with Derek Schneideman
On August 2, 2009, Derek Schneideman resigned as the Companys Chief Executive Officer and as a member of the Board, effective immediately upon the Companys filing of its Annual Report on Form 10-K for the fiscal year ended March 31, 2009, which occurred on September 3, 2009. Mr. Schneideman did not resign from the Board due to any disagreement with the Company relating to the Companys operations, policies or practices.
In connection with Mr. Schneidemans resignation, he and the Company entered into a Separation Agreement and Full Release of Claims (the Separation Agreement), which was effective as of August 2, 2009. Pursuant to the Separation Agreement, the Company made or agreed to make the following severance payments to Mr. Schneideman:
|
|
$100,000 was paid upon the Companys filing of its 2009 Form 10-K on September 3, 2009.
|
|
|
$100,000 was payable as of November 3, 2009 and remains payable as of January 5, 2010, provided that (i) the Companys filings with the SEC are not determined to contain materially inaccurate information, material representations or material omissions, (ii) evidence of fraud or illegal acts on the part of Mr. Schneideman is not discovered, and (iii) Mr. Schneideman has not made any misrepresentations in connection with its purchase of the Shares, as described above.
|
28
Mr. Schneideman did not exercise his limited right to revoke the Separation Agreement and was paid $42,409 and is owed $10,417 as of January 5, 2010 for accrued but unpaid salary, benefits and business expense reimbursements as of the date of the Separation Agreement.
The Separation Agreement provides that Mr. Schneideman will continue to provide services to the Company as a consultant for a period of 12 months following the effective date of his resignation as Chief Executive Officer. In exchange for such services, the Company will pay Mr. Schneideman $2,000 per month. The Company is entitled to terminate the consulting relationship upon 30 days advance notice and payment of the consulting fee to which Mr. Schneideman would be entitled in the 30 days following such notice.
In consideration of and for the severance payments and consulting arrangement described above, Mr. Schneideman provided a broad release in favor of the Company with respect to any and all rights, claims, demands, causes of actions and liabilities of any nature relating to his employment with the Company, the termination of such employment, and/or his entry into the Separation Agreement.
Finally, the Separation Agreement also contains customary provisions with respect to confidentiality, non-disclosure, non-solicitation, non-disparagement and Mr. Schneidemans return of any property of the Company in his possession.
Agreement with Mark Scott
On August 24, 2009, the Company entered into a new Employment Agreement with Mark Scott, which replaces his Employment Agreement dated September 5, 2007.
Mark Scotts Employment Agreement (Scott Agreement) has a one-year term beginning on August 24, 2009, and is renewable on a mutually agreeable basis. The Company will pay Mr. Scott an annual base salary of $96,000, and will provide for participation in the Companys benefit programs available to other senior executives (including group insurance arrangements). Also under the Scott Agreement, Mr. Scott is eligible for discretionary performance bonuses based upon performance criteria to be determined by the Companys Compensation Committee based on criteria under development. If Mr. Scotts employment is terminated without Cause (as defined in the Scott Agreement), Mr. Scott will be entitled to a payment equal to one years annual base salary paid at the Companys discretion in a lump sum or over the next year.
On August 24, 2009, the board of directors awarded Mr. Scott 200,000 shares of restricted common stock. The award was granted at the fair market price of $0.05 per share based on the adjusted closing price on August 20, 2009, the last trading day before the board of directors approved the grant. In accordance with the 2007 Stock Incentive Plan, the restrictions on such shares lapsed on November 23, 2009.
LEASES
The Company is obligated under various non-cancelable operating leases for their various facilities and certain equipment.
The aggregate unaudited future minimum lease payments, to the extent the leases have early cancellation options and excluding escalation charges, are as follows:
Years Ended September 30,
|
|
|
|
2010
|
|
$
|
126,028
|
|
2011
|
|
|
15,436
|
|
2012
|
|
|
0
|
|
2013
|
|
|
0
|
|
2014
|
|
|
0
|
|
Total
|
|
$
|
141,465
|
|
29
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking statements in this report reflect the good-faith judgment of our management and the statements are based on facts and factors as we currently know them. Forward-looking statements are subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, but are not limited to, those discussed below as well as those discussed elsewhere in this report (including in Part II, Item 1A (Risk Factors)). Readers are urged not to place undue reliance on these forward-looking statements because they speak only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report.
INTRODUCTION
During the six months ended September
30, 2009 and 2008, we had approximately in $.1 million and $.3 million in revenues, respectively. During the years ended March 31,
2009 and 2008, we had approximately $.6 million and $0 million in revenues, respectively. During the six months ended September 30,
2009, we had an approximate $8.5 million net loss as compared to a $1.0 million net loss for the six months ended September 30,
2008. During the years ended March 31, 2009 and 2008, we had approximately $20.2 million and $7.1 million in net losses,
respectively.
On December 8, 2009, the Company
deconsolidated the operations of Global Hotline, effective as of July 1, 2009. As a result, the Company accounted for Global Hotline
as a discontinued operation for periods ending after July 1, 2009. Our reported net profit (loss) will improve by $10.1 million for
the nine months ended December 31, 2009 and our stockholders deficit as of December 31, 2009 will decrease by $10.1 million as
a result of recording the deferred gain from the forfeiture of Global Hotline operations that was recorded during the three months
ended September 30, 2009.
Certain recent developments relating to our recent efforts to generate additional liquidity, including through sales of our common stock, are described in more detail in the notes to the financial statements included in this report.
DECONSOLIDATION OF GLOBAL HOTLINE, INC.
As has been previously disclosed, the Company pledged its shares of Global Hotline as collateral for certain loans borrowed from H Capital, an unlicensed Japanese lender, by such subsidiary. On May 26, 2009, Global Hotline and IA Global received notices from H Capital demanding repayment of the loans. On May 27, 2009, Global Hotline and SG Telecom did not repay the loans as requested by H Capital. On June 9, 2009, H Capital submitted documents claiming ownership of the Companys 600 shares of Global Hotline. Global Hotlines management previously provided the Companys stock certificates to H Capital in March 2009.
Although the Company has engaged Japanese corporate counsel to challenge the validity of the loans and H Capitals claims with respect to the Companys ownership of Global Hotline, these events have resulted in IA Global losing control over the day-to-day management and operations of Global Hotline. In addition, we no longer have access to the financial records of Global Hotline that are necessary to periodically report our financial position and results of operations as a consolidated subsidiary of IA Global.
On December 8, 2009, the Company
deconsolidated the operations of Global Hotline, effective as of July 1, 2009. As a result, the Company accounted for Global Hotline
as a discontinued operation for periods ending after July 1, 2009. Our reported net profit (loss) will improve by $10.1 million for
the nine months ended December 31, 2009 and our stockholders deficit as of December 31, 2009 will decrease by $10.1 million as
a result of recording the deferred gain from the forfeiture of Global Hotline operations that was recorded during the three months
ended September 30, 2009.
Set forth below are unaudited pro forma financial statements reflecting managements decision to deconsolidate the operations of Global Hotline. These pro forma financial statements may not be indicative of how future financial statements will appear, regardless of the outcome of the Companys dispute with H Capital. The Company will continue to pursue its civil claim against H Capital, and we are also exploring alternative structures through which we can pursue IA Globals interest in the Japanese BPO business.
30
IA GLOBAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED PROFORMA BALANCE SHEETS
MARCH 31, 2009
ASSETS
|
|
Unadjusted
Balance
Sheet as of
March 31, 2009
|
|
Pro Forma
Adjustment
|
|
Adjusted
Pro Forma
Balance
Sheet as of
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,614,731
|
|
$
|
(3,595,557
|
)
|
$
|
19,174
|
|
Accounts receivable, net of allowance of $909,984 and $1,182, respectively
|
|
|
5,994,117
|
|
|
(5,960,124
|
)
|
|
33,993
|
|
Prepaid expenses
|
|
|
1,184,572
|
|
|
(1,144,060
|
)
|
|
40,512
|
|
Notes receivable
|
|
|
2,353,153
|
|
|
(2,345,069
|
)
|
|
8,084
|
|
Other current assets
|
|
|
124,308
|
|
|
(114,103
|
)
|
|
10,205
|
|
Refundable taxes - foreign
|
|
|
1,419,418
|
|
|
(1,419,418
|
)
|
|
|
|
Net assets - discontinued operations
|
|
|
|
|
|
20,140,122
|
|
|
20,140,122
|
|
Total current assets
|
|
|
14,690,299
|
|
|
5,561,791
|
|
|
20,252,090
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUIPMENT, NET
|
|
|
2,207,849
|
|
|
(2,096,118
|
)
|
|
111,731
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
555,870
|
|
|
|
|
|
555,870
|
|
Investment in Taicom Securities Co Ltd
|
|
|
2,861,365
|
|
|
|
|
|
2,861,365
|
|
Equity investment in Australia Secured Financial Limited
|
|
|
|
|
|
|
|
|
|
|
Equity investment in GPlus Media Co Ltd
|
|
|
|
|
|
|
|
|
|
|
Equity investment in Slate Consulting Co Ltd
|
|
|
1,386,054
|
|
|
|
|
|
1,386,054
|
|
Other assets
|
|
|
3,164,127
|
|
|
(3,146,524
|
)
|
|
17,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,865,564
|
|
$
|
319,149
|
|
$
|
25,184,713
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
Accounts payable - trade
|
|
$
|
1,578,029
|
|
$
|
(978,405
|
)
|
$
|
599,624
|
|
Accrued payroll taxes and social insurance taxes
|
|
|
4,850,887
|
|
|
(4,850,887
|
)
|
|
|
|
Accrued liabilities - other
|
|
|
4,657,363
|
|
|
(3,767,261
|
)
|
|
890,102
|
|
Consumption taxes received
|
|
|
1,307,455
|
|
|
(1,307,455
|
)
|
|
|
|
Note payable - current portion of long term debt
|
|
|
13,391,371
|
|
|
(13,035,730
|
)
|
|
355,641
|
|
Deferred revenue
|
|
|
3,454,692
|
|
|
(3,454,692
|
)
|
|
|
|
Net liabilities - discontinued operations
|
|
|
|
|
|
29,424,802
|
|
|
29,424,802
|
|
Total current liabilities
|
|
|
29,239,797
|
|
|
2,030,372
|
|
|
31,270,169
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
Long term debt
|
|
|
1,898,231
|
|
|
(1,698,731
|
)
|
|
199,500
|
|
Convertible debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,898,231
|
|
|
(1,698,731
|
)
|
|
199,500
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS (DEFICIT) EQUITY:
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, 5,000 authorized, none outstanding
|
|
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 300,000,000 shares authorized,
219,113,889 and 165,303,543, issued and outstanding, respectively
|
|
|
2,191,140
|
|
|
|
|
|
2,191,140
|
|
Additional paid in capital
|
|
|
53,056,216
|
|
|
|
|
|
53,056,216
|
|
Accumulated deficit
|
|
|
(59,572,442
|
)
|
|
|
|
|
(59,572,442
|
)
|
Accumulated other comprehensive loss
|
|
|
(1,694,471
|
)
|
|
(12,492
|
)
|
|
(1,706,963
|
)
|
|
|
|
(6,019,557
|
)
|
|
(12,492
|
)
|
|
(6,032,049
|
)
|
Less common stock in treasury, at cost
|
|
|
(252,907
|
)
|
|
|
|
|
(252,907
|
)
|
Total stockholders (deficit) equity
|
|
|
(6,272,464
|
)
|
|
(12,492
|
)
|
|
(6,284,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,865,564
|
|
$
|
319,149
|
|
$
|
25,184,713
|
|
31
IA GLOBAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED PROFORMA STATEMENTS OF OPERATIONS
|
|
Year Ended
March 31, 2009
|
|
Pro Forma
Adjustment
|
|
Unaudited
Adjusted
Pro Forma
Year Ended
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
$
|
57,107,050
|
|
$
|
(56,555,040
|
)
|
$
|
552,010
|
|
COST OF SALES
|
|
|
13,217,643
|
|
|
(12,777,570
|
)
|
|
440,073
|
|
GROSS PROFIT
|
|
|
43,889,407
|
|
|
(43,777,470
|
)
|
|
111,937
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
53,444,034
|
|
|
(50,493,043
|
)
|
|
2,950,991
|
|
OPERATING LOSS
|
|
|
(9,554,627
|
)
|
|
6,715,573
|
|
|
(2,839,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
19,065
|
|
|
(4,984
|
)
|
|
14,081
|
|
Interest expense and amortization of beneficial conversion feature
|
|
|
(757,478
|
)
|
|
425,782
|
|
|
(331,696
|
)
|
Other income
|
|
|
294,483
|
|
|
(25,292
|
)
|
|
269,191
|
|
Gain (loss) on equity investment in Australia Secured Financial Limited
|
|
|
265,039
|
|
|
|
|
|
265,039
|
|
Gain on equity investment in GPlus Media Co Ltd
|
|
|
12,510
|
|
|
|
|
|
12,510
|
|
Loss on equity investment in Slate Consulting Co Ltd
|
|
|
(10,427
|
)
|
|
|
|
|
(10,427
|
)
|
Loss on equity investment in Taicom Securities Co Ltd
|
|
|
(421,702
|
)
|
|
|
|
|
(421,702
|
)
|
Loss on retirement of debt
|
|
|
(60,395
|
)
|
|
|
|
|
(60,395
|
)
|
Loss on sale of Taicom Securities Co Ltd
|
|
|
(1,736,934
|
)
|
|
|
|
|
(1,736,934
|
)
|
Loss on sale of GPlus Media Co Ltd
|
|
|
(1,286,500
|
)
|
|
|
|
|
(1,286,500
|
)
|
Impairment of equity investment in Australia Secured Financial Limited
|
|
|
(7,195,394
|
)
|
|
|
|
|
(7,195,394
|
)
|
Loss (Gain) on Foreign currency transaction adjustment
|
|
|
(66,025
|
)
|
|
|
|
|
(66,025
|
)
|
Total other expense
|
|
|
(10,943,758
|
)
|
|
395,506
|
|
|
(10,548,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
LOSS (INCOME) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
|
|
(20,498,385
|
)
|
|
7,111,079
|
|
|
(13,387,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes - current (benefit) provision
|
|
|
(256,455
|
)
|
|
217,690
|
|
|
(38,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS FROM CONTINUING OPERATIONS
|
|
|
(20,241,930
|
)
|
|
6,893,389
|
|
|
(13,348,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations
|
|
|
|
|
|
(6,893,389
|
)
|
|
(6,893,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) PROFIT
|
|
$
|
(20,241,930
|
)
|
$
|
|
|
$
|
(20,241,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share of common-
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share from continuing operations
|
|
$
|
(0.10
|
)
|
$
|
0.03
|
|
$
|
(0.06
|
)
|
Basic loss per share from discontinued operations
|
|
|
|
|
|
(0.03
|
)
|
|
(0.03
|
)
|
Total basic loss per share
|
|
$
|
(0.10
|
)
|
$
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted profit (loss) per share from continuing operations
|
|
$
|
*
|
|
$
|
*
|
|
$
|
*
|
|
Diluted profit (loss) per share from discontinued operations
|
|
|
*
|
|
|
*
|
|
|
*
|
|
Total diluted profit (loss) per share
|
|
$
|
*
|
|
$
|
*
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding- basic
|
|
|
205,833,118
|
|
|
205,833,120
|
|
|
205,833,122
|
|
Weighted average shares of common stock outstanding- diluted
|
|
|
*
|
|
|
*
|
|
|
*
|
|
* Diluted calculation is not presented as it is anti-dilutive.
32
IA GLOBAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED PROFORMA STATEMENTS OF OPERATIONS
|
|
Year Ended
March 31, 2008
|
|
Pro Forma
Adjustment
|
|
Unaudited
Adjusted
Pro Forma
Year Ended
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
$
|
38,692,616
|
|
$
|
(38,692,616
|
)
|
$
|
|
|
COST OF SALES
|
|
|
9,977,798
|
|
|
(9,977,798
|
)
|
|
|
|
GROSS PROFIT
|
|
|
28,714,818
|
|
|
(28,714,818
|
)
|
|
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
35,844,189
|
|
|
(33,774,021
|
)
|
|
2,070,168
|
|
OPERATING LOSS
|
|
|
(7,129,371
|
)
|
|
5,059,203
|
|
|
(2,070,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
56,094
|
|
|
(42,255
|
)
|
|
13,839
|
|
Interest expense and amortization of beneficial conversion feature
|
|
|
(1,116,966
|
)
|
|
349,777
|
|
|
(767,189
|
)
|
Other income
|
|
|
690,820
|
|
|
(662,976
|
)
|
|
27,844
|
|
Gain (loss) on equity investment in Australia Secured Financial Limited
|
|
|
(227,412
|
)
|
|
|
|
|
(227,412
|
)
|
Gain on equity investment in GPlus Media Co Ltd
|
|
|
20,386
|
|
|
|
|
|
20,386
|
|
Loss on equity investment in Slate Consulting Co Ltd
|
|
|
(43,519
|
)
|
|
|
|
|
(43,519
|
)
|
Conversion of debenture expense
|
|
|
(120,046
|
)
|
|
|
|
|
(120,046
|
)
|
Loss (Gain) on Foreign currency transaction adjustment
|
|
|
9,520
|
|
|
|
|
|
(1,861
|
)
|
Total other expense
|
|
|
(731,123
|
)
|
|
(355,454
|
)
|
|
(1,086,577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
LOSS (INCOME) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
|
|
(7,860,494
|
)
|
|
4,703,749
|
|
|
(3,156,745
|
)
|
Income taxes - current (benefit) provision
|
|
|
(916,046
|
)
|
|
916,046
|
|
|
|
|
NET LOSS FROM CONTINUING OPERATIONS
|
|
|
(6,944,448
|
)
|
|
3,787,703
|
|
|
(3,156,745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) from disposal of discontinued operations
|
|
|
(110,000
|
)
|
|
|
|
|
(110,000
|
)
|
Gain from discontinued operations
|
|
|
|
|
|
(3,787,703
|
)
|
|
(3,787,703
|
)
|
Total (loss) / gain from discontinued operations
|
|
|
(110,000
|
)
|
|
(3,787,703
|
)
|
|
(3,897,703
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) PROFIT
|
|
$
|
(7,054,448
|
)
|
$
|
|
|
$
|
(7,054,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share of common-
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share from continuing operations
|
|
$
|
(0.04
|
)
|
$
|
0.02
|
|
$
|
(0.02
|
)
|
Basic loss per share from discontinued operations
|
|
|
|
|
|
(0.02
|
)
|
|
(0.02
|
)
|
Total basic loss per share
|
|
$
|
(0.04
|
)
|
$
|
(
|
)
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted profit (loss) per share from continuing operations
|
|
$
|
*
|
|
$
|
*
|
|
$
|
*
|
|
Diluted profit (loss) per share from discontinued operations
|
|
|
*
|
|
|
*
|
|
|
*
|
|
Total diluted profit (loss) per share
|
|
$
|
*
|
|
$
|
*
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding- basic
|
|
|
158,696,823
|
|
|
158,696,825
|
|
|
158,696,825
|
|
Weighted average shares of common stock outstanding- diluted
|
|
|
*
|
|
|
*
|
|
|
*
|
|
* Diluted calculation is not presented as it is anti-dilutive.
33
THE COMPANY AND OUR BUSINESS
We are a services company focused on growing our existing businesses and expanding through mergers and acquisitions in the Pacific Rim region. Our mission is to identify and invest in business opportunities, apply our skills and resources to nurture and enhance the performance of those businesses across key business metrics, and to deliver accelerating shareholder value.
The Company plans to utilize its business partnerships to acquire or invest in growth businesses in certain target sectors and markets at discounted prices. The Company expects to focus on growth opportunities with distressed businesses that require improvements in management, financial processes and liquidity to be successful. Our targets for acquisition or investment include growth and commodity businesses in the energy sector (including oil and gas, solar, biofuels, and other energy markets). The Company also expects to focus on other sectors in which businesses would benefit from our infrastructure and business process expertise, including financial services and technology. The Company expects to leverage its existing presence in Asia in partnerships with US-based companies seeking to expand their Asian business.
BUSINESS PROCESS OUTSOURCING (BPO)
In the Philippines, we acquired 100% of Shift on April 10, 2008 and Asia Premier on May 27, 2008, multi-service call center operations that have now been merged into a single company operating as Global Hotline Philippines.
CORPORATE INFORMATION
We were incorporated in Delaware on November 12, 1998. The Companys executive offices are located at 101 California Street, Suite 2450, San Francisco, CA 94111, with its operating units being located primarily in the Pacific Rim region. The Companys telephone number is (415) 946-8828 and its primary website is located at www.iaglobalinc.com. The information on our website is not a part of this Form 10-Q.
THE COMPANYS COMMON STOCK
Our common stock currently trades on NYSE AMEX under the symbol IAO.
KEY MARKET PRIORITIES
Currently, our key market priorities are, among other things, to:
|
|
Provide an opportunity for U.S. investors to acquire an interest in B2B, B2C and infrastructure companies in Asia, particularly in Japan, Philippines and China.
|
|
|
Capitalize on our funding from IAJ LBO and Ascendiant.
|
|
|
Develop a Japan business process outsourcing business.
|
|
|
Improve profitability at the Philippines BPO business by improving liquidity, closing significant orders servicing the financial sector in the U.S, installing new management, shifting the corporate culture to better service the U.S. financial markets, and improving our reputation through better execution.
|
|
|
Acquire growth businesses at discounted prices in our target sectors and markets in conjunction with business partners. We expect to focus on growth opportunities with distressed businesses that require improvements in management, financial processes and liquidity to be successful.
|
|
|
Acquire growth and commodity businesses in the real estate and energy sectors, including oil & gas, solar, biofuels, and other energy markets. Our sector is expected to benefit from the infrastructure and business processes of IA Global.
|
34
|
|
Leverage our presence in Asia with U.S.-based companies seeking to expand their Asian businesses.
|
|
|
Enhance our investor relations services.
|
PRIMARY RISKS AND UNCERTAINTIES
We are exposed to various risks related to legal claims, our need for additional financing, our level of indebtedness, our NYSE AMEX listing, declining economic conditions, our controlling shareholder groups, the sale of significant numbers of our shares and a volatile market price for our common stock. These risks and uncertainties are discussed in more detail below in this item.
RESULTS OF OPERATIONS
The following table presents certain consolidated statement of operations information and presentation of that data as a percentage of change from period-to-period.
(dollars in thousands)
|
|
Three Months Ended September 30,
|
|
|
|
2009
|
|
2008
|
|
$ Variance
|
|
% Variance
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
Revenue
|
|
$
|
21
|
|
$
|
177
|
|
$
|
(156
|
)
|
-88.1
|
%
|
Cost of sales
|
|
|
30
|
|
|
122
|
|
|
(92
|
)
|
-75.4
|
%
|
Gross profit
|
|
|
(9
|
)
|
|
55
|
|
|
(64
|
)
|
-116.4
|
%
|
Selling, general and administrative expenses
|
|
|
762
|
|
|
830
|
|
|
(68
|
)
|
-8.2
|
%
|
Operating loss
|
|
|
(771
|
)
|
|
(775
|
)
|
|
4
|
|
-0.5
|
%
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and amortization of beneficial conversion feature
|
|
|
(20
|
)
|
|
(88
|
)
|
|
68
|
|
-77.3
|
%
|
Other income
|
|
|
80
|
|
|
|
|
|
80
|
|
100.0
|
%
|
Gain on equity investment in Australia Secured Financial Limited
|
|
|
|
|
|
18
|
|
|
(18
|
)
|
-100.0
|
%
|
Gain on equity investment in GPlus Media Co Ltd
|
|
|
|
|
|
21
|
|
|
(21
|
)
|
-100.0
|
%
|
(Loss) gain on equity investment in Slate Consulting Co Ltd
|
|
|
(28
|
)
|
|
1
|
|
|
(29
|
)
|
-2900.0
|
%
|
Loss on forfeiture of Taicom Securities Co Ltd
|
|
|
(2,861
|
)
|
|
|
|
|
(2,861
|
)
|
-100.0
|
%
|
Loss on investment in Taicom Securities Co Ltd
|
|
|
|
|
|
(114
|
)
|
|
114
|
|
100.0
|
%
|
Loss on sale in Slate Consulting Co Ltd
|
|
|
(1,285
|
)
|
|
|
|
|
(1,285
|
)
|
-100.0
|
%
|
Loss on foreign currency translation adjustment
|
|
|
|
|
|
(63
|
)
|
|
63
|
|
100.0
|
%
|
Total other expense
|
|
|
(4,114
|
)
|
|
(225
|
)
|
|
(3,889
|
)
|
-1728.4
|
%
|
Loss from continuing operations before income taxes
|
|
|
(4,885
|
)
|
|
(1,000
|
)
|
|
(3,885
|
)
|
-388.5
|
%
|
Income taxes- benefit provision
|
|
|
|
|
|
(11
|
)
|
|
11
|
|
100.0
|
%
|
Net loss from continuing operations
|
|
|
(4,885
|
)
|
|
(989
|
)
|
|
(3,896
|
)
|
-393.9
|
%
|
Loss from discontinued operations
|
|
|
|
|
|
(709
|
)
|
|
709
|
|
100.0
|
%
|
Net loss
|
|
$
|
(4,885
|
)
|
$
|
(1,698
|
)
|
$
|
(3,187
|
)
|
-187.7
|
%
|
35
THREE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2008
Net revenue for the three months ended September 30, 2009 decreased $156,000 to $21,000 as compared to $177,000 for the three months ended September 30, 2008.
The decrease was due to cancelled contracts at GHI Philippines.
COST OF SALES
Cost of sales for the three months ended September 30, 2009 decreased $92,000 to $30,000 as compared to $122,000 for the three months ended September 30, 2008.
The decrease resulted from reduced agent and other costs at GHI Philippines.
EXPENSES
Selling, general and administrative expenses for the three months ended September 30, 2009 decreased $68,000 to $762,000 as compared $830,000 for the three months ended September 30, 2008. This was due to reduced operating expenses GHI Philippines. Headcount was reduced during the three months ended September 30, 2009.
The selling, general and administrative expenses consisted primarily of employee and independent contractor expenses, rent, overhead, equipment and depreciation, amortization of identifiable intangible assets and intellectual property, professional and consulting fees, sales and marketing costs, investor relations, legal, stock option and other general and administrative costs.
OTHER INCOME/EXPENSE
Other expense for the three months
ended September 30, 2009 was $4,114,000 as compared to other expense of $225,000 for the three months ended September 30, 2008. The
other expense increase was primarily related to the loss on sale of Taicom Securities Co Ltd of $2,861,000 and the loss on sale of
Slate Consulting Co Ltd of $1,285,000.
The 2008 other expense was primarily
related to interest expense and amortization of beneficial conversion feature of $88,000 and a net loss on equity investments of
$74,000 and a foreign currency translation adjustment of $63,000.
NET LOSS
Net loss for the three months ended
September 30, 2009 was $4,885,000 as compared to a net loss of $1,698,000 for the three months ended September 30, 2008.
36
(dollars in thousands)
|
|
Six Months Ended September 30,
|
|
|
|
2009
|
|
2008
|
|
$ Variance
|
|
% Variance
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
Revenue
|
|
$
|
68
|
|
$
|
323
|
|
$
|
(255
|
)
|
-78.9
|
%
|
Cost of sales
|
|
|
73
|
|
|
217
|
|
|
(144
|
)
|
-66.4
|
%
|
Gross profit
|
|
|
(5
|
)
|
|
106
|
|
|
(111
|
)
|
-104.7
|
%
|
Selling, general and administrative expenses
|
|
|
1,882
|
|
|
1,703
|
|
|
179
|
|
10.5
|
%
|
Operating loss
|
|
|
(1,887
|
)
|
|
(1,597
|
)
|
|
(290
|
)
|
-18.2
|
%
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
14
|
|
|
(14
|
)
|
-100.0
|
%
|
Interest expense and amortization of beneficial conversion feature
|
|
|
(43
|
)
|
|
(290
|
)
|
|
247
|
|
85.2
|
%
|
Other income
|
|
|
80
|
|
|
179
|
|
|
(99
|
)
|
-55.3
|
%
|
Gain on equity investment in Australia Secured Financial Limited
|
|
|
|
|
|
274
|
|
|
(274
|
)
|
-100.0
|
%
|
Gain on equity investment in GPlus Media Co Ltd
|
|
|
|
|
|
53
|
|
|
(53
|
)
|
-100.0
|
%
|
(Loss) gain on equity investment in Slate Consulting Co Ltd
|
|
|
(16
|
)
|
|
23
|
|
|
(39
|
)
|
-169.6
|
%
|
Loss on forfeiture of Taicom Securities Co Ltd
|
|
|
(2,861
|
)
|
|
|
|
|
(2,861
|
)
|
-100.0
|
%
|
Loss on investment in Taicom Securities Co Ltd
|
|
|
|
|
|
(220
|
)
|
|
220
|
|
100.0
|
%
|
Loss on sale in Slate Consulting Co Ltd
|
|
|
(1,285
|
)
|
|
|
|
|
(1,285
|
)
|
-100.0
|
%
|
Loss on foreign currency translation adjustment
|
|
|
|
|
|
(65
|
)
|
|
65
|
|
100.0
|
%
|
Total other expense
|
|
|
(4,125
|
)
|
|
(32
|
)
|
|
(4,093
|
)
|
-12790.6
|
%
|
Loss from continuing operations before income taxes
|
|
|
(6,012
|
)
|
|
(1,629
|
)
|
|
(4,383
|
)
|
-269.1
|
%
|
Income taxes- current benefit
|
|
|
|
|
|
(9
|
)
|
|
9
|
|
100.0
|
%
|
Net loss from continuing operations
|
|
|
(6,012
|
)
|
|
(1,620
|
)
|
|
(4,392
|
)
|
-271.1
|
%
|
(Loss) gain from discontinued operations
|
|
|
(2,336
|
)
|
|
649
|
|
|
(2,985
|
)
|
-459.9
|
%
|
Net loss from discontinued operations before deemed preferred stock dividend
|
|
|
(8,348
|
)
|
|
(971
|
)
|
|
(7,377
|
)
|
-759.7
|
%
|
Deemed preferred stock dividend
|
|
|
(192
|
)
|
|
|
|
|
(192
|
)
|
-100.0
|
%
|
Net loss
|
|
$
|
(8,540
|
)
|
$
|
(971
|
)
|
$
|
(7,569
|
)
|
-779.5
|
%
|
SIX MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER 30, 2008
Net revenue for the six months ended September 30, 2009 decreased $255,000 to $68,000 as compared to $323,000 for the six months ended September 30, 2008.
The decrease was due to cancelled contracts at GHI Philippines.
COST OF SALES
Cost of sales for the six months ended September 30, 2009 decreased $144,000 to $73,000 as compared to $217,000 for the six months ended September 30, 2008.
The decrease resulted from reduced agent and other costs at GHI Philippines.
EXPENSES
Selling, general and administrative
expenses for the six months ended September 30, 2009 increased $179,000 to $1,882,000 as compared $1,703,000 for the six months
ended September 30, 2008. This was due to $410,000 of forensic audit expenses.
37
The selling, general and administrative expenses consisted primarily of employee and independent contractor expenses, rent, overhead, equipment and depreciation, amortization of identifiable intangible assets and intellectual property, professional and consulting fees, sales and marketing costs, investor relations, legal, stock option and other general and administrative costs.
OTHER INCOME/EXPENSE
Other expense for the six months ended September 30, 2009 was $4,125,000 as compared to other expense of $32,000 for the six months ended September 30, 2008. The other expense increase was primarily related to the loss on sale of Taicom Securities Co Ltd of $2,861,000 and the loss on sale of Slate Consulting Co Ltd.
The 2008 other expense was primarily related to interest expense and amortization of beneficial conversion feature of $290,000 and a foreign currency translation adjustment of $63,000, offset by a net gain on equity investments of $130,000 and other income of $179,000.
NET LOSS FROM CONTINUING OPERATIONS
Net loss from continuing operations for the six months ended September 30, 2009 was $6,012,000 as compared to a net loss of $1,620,000 for the six months ended September 30, 2008 for the reasons discussed above.
NET LOSS
Net loss for the six months ended
September 30, 2009 was $8,540,000 as compared to a net loss of $971,000 for the six months ended September 30, 2008. The Company
deconsolidated the operations of Global Hotline, effective as of July 1, 2009. As a result, the Company accounted for Global Hotline
as a discontinued operation for periods ending after July 1, 2009 and recorded a loss from discontinued operations of $2,336,000
during the six months ended September 30, 2009.
LIQUIDITY AND CAPITAL RESOURCES
We had cash of approximately $0 million, a net working capital deficit of approximately $2.4 million and total indebtedness of $.6 million as of September 30, 2009.
IA Global and each subsidiary manage their cash flow independently. IA Global funds its operations from loans, convertible debentures, inter-company borrowings, loans collateralized by stock, management service fees and dividends from its equity investments. Global Hotline Philippines funds its operations from inter-company borrowings.
Each entity will need to obtain additional financing in order to continue our current operations, service our debt repayments and acquire businesses. There can be no assurance that we will be able to secure funding, or that if such funding is available, whether the terms or conditions would be acceptable to us.
Volatility and disruption of financial markets could affect our access to credit. The current difficult economic market environment is causing contraction in the availability of credit in the marketplace. This could potentially reduce or eliminate the sources of liquidity for the Company.
If the Company is unable to obtain additional financing, we may need to restructure our operations, divest all or a portion of our business or file for bankruptcy.
Since our inception, we have financed our operations primarily through sales of our equity securities in our initial public offering and from several private placements, loans and capital contributions, primarily from related parties. Net cash proceeds from these items have totaled approximately $21.3 million as of September 30, 2009, with approximately $8.8 million raised in the initial public offering, $9.0 million raised in private placements and $4.0 million raised in the conversion of debt, offset by $0.7 million used for the share repurchase program. In addition, we have issued equity for non-cash items totaling $32.1 million, including $7.0 million from the ASFL equity investment, $4.1 million from the Taicom equity investment, $1.4 million each from the GPlus and Slate equity investments, $.3 and $.2 million related to the Asia Premier and Shift acquisition, respectively, $7.1
million issued for services, $3.6 million related to a beneficial conversion feature, $3.9 million from debenture conversions, and $3.1 million related to the GHI acquisition. Additional funding was obtained from notes payable and long term debt of approximately $.6 million.
38
OPERATING ACTIVITIES
Net cash used in operating activities
for the six months ended September 30, 2009 was $.9 million. This amount was primarily related to a net loss of $8.3 million, offset
by depreciation and amortization and other non-cash expenses of $ 4.6 million, an increase in accounts payable of $.5 million and
cash net cash provided by operating activities of $2.2 million.
INVESTING ACTIVITIES
Net cash provided by investing
activities for the six months ended September 30, 2009 was $.1 million. This amount was related to the sale of Slate Consulting.
FINANCING ACTIVITIES
Net cash provided by financing
activities for the six months ended September 30, 2009 was $.8 million. This amount was primarily related to the sale of common
stock of $.4 million and $.3 million from the sale of preferred stock.
The Companys unaudited contractual cash obligations as of September 30, 2009 are summarized in the table below (1):
Contractual Cash Obligations
|
|
Total
|
|
Less Than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
Greater Than
5 Years
|
|
Operating leases
|
|
$
|
141,465
|
|
$
|
126,028
|
|
$
|
15,436
|
|
$
|
0
|
|
$
|
0
|
|
Note payable
|
|
|
587,312
|
|
|
387,812
|
|
|
199,500
|
|
|
0
|
|
|
0
|
|
Capital expenditures
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Acquisitions
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
$
|
728,777
|
|
$
|
513,840
|
|
$
|
214,936
|
|
$
|
0
|
|
$
|
0
|
|
(1) Based on the end of period exchange rate.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The application of GAAP involves the exercise of varying degrees of judgment. On an ongoing basis, we evaluate our estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies (see summary of significant accounting policies more fully described in Note 2 to the financial statements set forth in this report), the following policies involve a higher degree of judgment and/or complexity:
INCOME TAXES
We are subject to income taxes in both the U.S. and foreign (Japan and Philippines) jurisdictions. Significant judgment is required in determining the provision for income taxes. We recorded a valuation for the deferred tax assets from our net operating losses carried forward in the US due to IA Global, Inc. not demonstrating any consistent profitable operations. In the event that the actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust the recorded valuation.
STOCK-BASED COMPENSATION
Effective January 1, 2006, we began recording compensation expense associated with stock-based awards and other forms of equity compensation in accordance with SFAS 123R as interpreted by SEC Staff Accounting Bulletin No. 107. We adopted the modified prospective transition method provided for under SFAS 123R and consequently has not retroactively adjusted results from prior periods. Under this transition method, compensation cost associated with stock-based awards recognized in 2006 includes 1) quarterly amortization related to the remaining unvested portion of stock-based awards granted prior to December 15, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123; and 2) quarterly amortization related to stock-based awards granted subsequent to January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of
SFAS 123R. In addition, we record expense over the vesting period in connection with stock options granted. The compensation expense for stock-based awards includes an estimate for forfeitures and is recognized over the expected term of the award on a straight line basis.
39
INVESTMENTS
We account for our investments using the equity method unless its value has been determined to be other than temporarily impaired, in which case we write the investment down to its impaired value. We review these investments periodically for impairment and make appropriate reductions in carrying value when an other-than-temporary decline is evident; however, for non-marketable equity securities, the impairment analysis requires significant judgment. During our review, we evaluate the financial condition of the issuer, market conditions, and other factors providing an indication of the fair value of the investments. Adverse changes in market conditions or operating results of the issuer that differ from expectation, could result in additional other-than-temporary losses in future periods.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors, in addition to the other information contained in this report, should be considered carefully in evaluating us and our prospects. This report (including without limitation the following factors that may affect operating results) contains forward-looking statements (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) regarding us and our business, financial condition, results of operations and prospects. Words such as expects, anticipates, intends, plans, believes, seeks, estimates and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this report. Additionally, statements concerning future matters such as the development
of new products, enhancements or technologies, projections of revenues and profitability, possible changes in legislation and other statements regarding matters that are not historical are forward-looking statements.
THE COMPANY COULD BE EXPOSED TO LEGAL CLAIMS, AND THE OUTCOME OF ANY DISPUTES RESULTING FROM SUCH CLAIMS COULD ADVERSED AFFECT THE COMPANYS FINANCIAL CONDITION OR RESULTS OF OPERATIONS
LEGAL PROCEEDING GLOBAL HOTLINE
As has been previously disclosed, the Company pledged its shares of Global Hotline as collateral for certain loans borrowed from H Capital, an unlicensed Japanese lender, for such subsidiary. On May 26, 2009, Global Hotline and IA Global received notices from H Capital demanding repayment of the loans. On May 27, 2009, Global Hotline and SG Telecom did not repay the loans as requested by H Capital. On June 2, 2009, H Capital submitted documents claiming ownership of the Companys 600 shares of Global Hotline. Global Hotlines management previously provided the Companys stock certificates to H Capital in March 2009.
Although the Company has engaged Japanese corporate counsel to challenge the validity of the loans and H Capitals claims with respect to the Companys ownership of Global Hotline, these events have resulted in IA Global losing control over the day-to-day management and operations of Global Hotline. In addition, we no longer have access to the financial records of Global Hotline that are necessary to periodically report our financial position and results of operations as a consolidated subsidiary of IA Global.
On December 8, 2009, the Company
deconsolidated the operations of Global Hotline, effective as of July 1, 2009. As a result, the Company accounted for Global Hotline
as a discontinued operation for periods ending after July 1, 2009. Our reported net profit (loss) will improve by $10.1 million for
the nine months ended December 31, 2009 and our stockholders deficit as of December 31, 2009 will decrease by $10.1 million as
a result of recording the deferred gain from the forfeiture of Global Hotline operations that was recorded during the three months
ended September 30, 2009.
The Companys decision to deconsolidate Global Hotline is not a relinquishment of their claim of ownership of Global Hotline. The Company has engaged Japanese legal counsel and intends to vigorously pursue their legal right with regards to ownership. Management, based on their consultation with Japanese legal counsel, is unable to determine the outcome of this dispute H Capital.
Concurrent with Companys deconsolidation of Global Hotline, management has determined that any obligations that may arise from Global Hotline, that existed prior, or subsequent, to their decision to deconsolidate, is not an obligation of the Company.
40
Prior to December 8, 2009 Global
Hotline had significant liabilities to Japanese banks in excess of approximately $12,000,000. These loans were unsecured and
personally guaranteed by either the CEO or CFO of Global Hotline. In addition to theses bank loans, Global Hotline had payroll,
social insurance and other tax liabilities at of approximately 800,000,000 Yen, or approximately $9.0 million at current exchange
rates, as of September 30, 2009.
The status of Global Hotlines bank loans and tax liabilities is unknown subsequent to December 8, 2009. In addition, the status of other trade debt, or any debt or obligation of Global Hotline is unknown subsequent to December 8, 2009. In addition to debt, Global Hotline has obligation under various operating leases, the status of which is unknown subsequent to December 8, 2009.
Global Hotline has revenue contracts requiring performance for their various vendors. The status of performance, or any liability for non-performance, is unknown subsequent to December 8, 2009.
With regards to the above referenced liabilities, or potential liabilities of Global Hotline, management of the Company along with their Japanese legal counsel, has determined that the Company has no legal obligation for these liabilities or potential liabilities. Assertions against the Company for Global Hotline liabilities, or potential liabilities, might be sustained. The Company intends to defend themselves against any assertions related to liabilities, or potential liabilities, resulting from Global Hotline prior to, or subsequent to, December 8, 2009. The Company has not accrued for any liabilities related to Global Hotline as of September 30, 2009.
LEGAL PROCEEDING AMV
On April 1, 2009, the Company agreed to issue preferred stock (IAO Preferred Stock), at $1,000 per share, to AMV for $317,000 in the Amendment to Share Exchange Agreement.
At AMVs sole discretion, AMV may either (1) convert some or all of its IAO Preferred Stock into 12,800,000 shares of the Companys common stock pro rata at $0.025 per share; or (2) exchange IAO Preferred Stock for 971,458 Taicom Stock owned by the Company pro rata. The conversion of IAO Preferred Stock intoTaicom Stock is automatically triggered in the case of certain events, including delisting from NYSE AMEX, bankruptcy or insolvency. On July 17, 2009 and September 28, 2009, AMV notified us that we were in default under the June 8, 2009 Services Agreement (Agreement) and as a result did not fund the $60,000 due June 30, 2009, July 15, 2009 and July 31, 2009. However, AMV was late in funding as required by the Agreement. On October 30, 2009, the Company agreed to issue 4,000,000 shares based on the $120,000 in funded under this Agreement.
On November 16, 2009, but effective August 4, 2009, AMV claimed ownership of our shares in Taicom. This resulted in a loss on investment of approximately $2,861,000. The parties continue to negotiate over the April 1, 2009 and June 8, 2009 Amendment to Share Exchange and June 8, 2009 Services Agreements.
WE WILL NEED ADDITIONAL FINANCING TO SUPPORT OUR BUSINESS STRATEGY (WHICH INCLUDES ACQUIRING OR INVESTING IN NEW BUSINESSES) AND ONGOING OPERATIONS
Each entity within our business will need to obtain additional financing in order to continue our current operations, service our debt repayments and acquire businesses. There can be no assurance that we will be able to secure funding, or that if such funding is available, the terms or conditions would be acceptable to us. If the Company is unable to obtain additional financing, we may need to restructure our operations, divest all or a portion of our business or file for bankruptcy by GHI and/or IA Global.
Our recent efforts to generate additional liquidity, including through sales of our common stock, are described in more detail in the financial statement notes set forth in this report.
If we raise additional capital through borrowing or other debt financing, we will incur substantial interest expense. Sales of additional equity securities will dilute on a pro rata basis the percentage ownership of all holders of common stock. When we raise more equity capital in the future, it will result in substantial dilution to our current stockholders.
41
OUR LEVEL OF INDEBTEDNESS AND THE TERMS OF OUR FINANCING ARRANGEMENTS MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our level of indebtedness and the terms of our financing arrangements could result in or contribute to:
|
|
a bankruptcy filing by GHI and/ or IA Global;
|
|
|
a default under the loan agreements;
|
|
|
a collateral call by a lender, including the loss of our Global Hotline subsidiary;
|
|
|
lawsuits with lenders;
|
|
|
our inability to obtain additional financing to support capital expansion plans and for working capital and other purposes on acceptable terms or at all;
|
|
|
a diversion of substantial cash flow from our operations and expansion plans in order to service our debt obligations; and/or
|
|
|
a competitive disadvantage compared to less leveraged competitors and competitors that have better access to capital resources.
|
Our ability to make scheduled payments on our debt and other fixed obligations will depend on our future operating performance and cash flows, which in turn will depend on prevailing economic and political conditions and financial, competitive, regulatory, business and other factors, many of which are beyond our control.
Our ability to renegotiate the terms of our loans will depend on our negotiations with our Japanese banks and H Capital.
We are principally dependent upon our operating cash flows to fund our operations and to make scheduled payments on debt and other fixed obligations. We cannot assure you that we will be able to generate sufficient cash flows from our operations to pay our debt and other fixed obligations as they become due, and if we fail to do so our business could be harmed. If the Company is unable to obtain additional financing or renegotiate the terms of our loans, we may need to restructure our operations, divest all or a portion of our business, provide the Global Hotline business in a collateral call or file for bankruptcy.
WE ARE NOT IN COMPLIANCE WITH CERTAIN NYSE AMEX REQUIREMENTS FOR CONTINUED LISTING
On December 23, 2009, the Company received notice that the NYSE AMEX Stock Exchange (NYSE AMEX) has determined to proceed with an application to the Securities and Exchange Commission to remove the Companys common stock from listing and registration on NYSE AMEX. This determination, which the Company has appealed, was made in light of the Companys failure to comply with certain standards for continued listing on NYSE AMEX set forth in Part 10 of the NYSE AMEX Company Guide. Specifically, the Company is not in compliance with (i) Section 1003(a)(i) of the Company Guide, since its total shareholders equity is less than $2 million and the Company has reported losses from continuing operations and net losses in two out of the three most recent fiscal years; (ii) Section 1003(a)(ii) of the Company Guide, since its total shareholders equity is less than $4
million and the Company has reported losses from continuing operations and net losses in three out of the four most recent fiscal years; (iii) Section 1003(a)(iii) of the Company Guide, since its total shareholders equity is less than $6 million and the Company has reported losses from continuing operations and net losses in the five most recent fiscal years; and (iv) Section 1003(a)(iv) of the Company Guide, since the Company sustained losses so substantial in relation to its overall operations or its existing financial resources or its financial condition has become so impaired that is appears questionable, in the opinion of the NYSE AMEX, that the Company will be able to continue operations and/or meet its obligations as they mature.
In order to maintain its listing on NYSE AMEX, the Company submitted a plan on October 26, 2009, which was subsequently amended on November 5, 2009, that addressed how it intended to regain compliance with Section 1003(a)(iv) of the Company Guide by March 25, 2010 and Section 1003(a)(i), (ii) and (iii) of the Company Guide by March 25, 2011. The Company would be subject to periodic review by NYSE AMEX staff during the extension period.
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In the notice received by the Company on December 23, 2009, NYSE AMEX indicated that it believes that the Companys financial condition, low selling price and lack of definitive documentation do not support the Companys plan to regain compliance by March 25, 2011. On December 30, 2009, the Company appealed the NYSE AMEX staffs determination and requested an oral hearing to present its plan and discuss the Companys progress towards achieving the goals set forth in the plan, including the Companys intent to regain compliance with NYSE AMEX rules by March 25, 2011. The Companys common stock will continue to trade on NYSE AMEX while the Companys appeal is pending.
The Company has not filed its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009. The timely filing of such report is a condition of the Companys continuing listing on NYSE AMEX, as required by Sections 134 and 1101 of the Company Guide. In addition, the Companys failure to file this report is a violation of its listing agreement with NYSE AMEX. Pursuant to 1003(d) of the Company Guide, NYSE AMEX is authorized to suspend, and unless prompt corrective action is taken, remove the Companys security from listing on the exchange. The Company submitted a plan to NYSE AMEX on December 7, 2009 and expects to be in compliance with Sections 134 and 1101 of the Company Guide by February 22, 2010.
The Company also received a deficiency letter from NYSE AMEX on July 10, 2009. In this letter, NYSE AMEX staff determined that the Companys securities had been selling for a low price per share for a substantial period of time and, pursuant to Section 1003(f)(v) of the Company Guide, the Companys continued listing was predicated on it effecting a reverse stock split of its common stock by January 11, 2010. In response to the deficiency letter and in accordance with guidance provided by NYSE AMEXs staff, the Company asked its stockholders to give the board of directors discretion to effect a reverse stock split within a prescribed range of ratios. Such proposal was approved by the Companys stockholders at the Companys 2009 Annual Meeting on December 18, 2009. This reverse stock split is expected to be considered after the completion of the appeal process.
Pursuant to Section 1003(c)(i) of the Company Guide, NYSE AMEX will consider delisting a security where an issuer has disposed of its principal operating assets. On December 8, 2009, the Company deconsolidated the operations of Global Hotline, Inc., its wholly-owned subsidiary engaged in business process outsourcing activities in Japan, effective as of July 1, 2009. As a result, the Company intends to account for Global Hotline, Inc. as a discontinued operation for periods ending after July 1, 2009. The Companys stockholders equity is expected to increase by approximately $12.0 million during the three months ended September 30, 2009 in part as a consequence of this determination.
There is no guarantee that the Company will be successful at maintaining its NYSE AMEX listing. If our securities are delisted from NYSE AMEX, we believe they will be quoted for trading on the Over-The-Counter Bulletin Board (the OTCBB), which may depress demand for our shares and limit market liquidity due to the reluctance or inability of certain investors to buy stocks on the OTCBB. Consequently, an investor may find it more difficult to trade our securities, which may adversely affect the ability to resell securities purchased from the selling stockholders.
WE ARE IN DEFAULT UNDER THE JUNE 8, 2009 SERVICES AGREEMENT WITH ARQUEMAX VENTURES, LLC
On April 1, 2009, the Company agreed to issue preferred stock (IAO Preferred Stock), at $1,000 per share, to ArqueMax Ventures LLC (AMV) for $317,000 in the Amendment to Share Exchange Agreement.
At AMVs sole discretion, AMV may either (1) convert some or all of its IAO Preferred Stock into 12,800,000 shares of the Companys common stock pro rata at $0.025 per share; or (2) exchange IAO Preferred Stock for 971,458 Taicom Stock owned by the Company pro rata. The conversion of IAO Preferred Stock intoTaicom Stock is automatically triggered in the case of certain events, including delisting from NYSE AMEX, bankruptcy or insolvency.
On July 17, 2009 and September 28, 2009, AMV notified us that we were in default under the June 8, 2009 Services Agreement (Agreement) and as a result did not fund the $60,000 due on each of June 30, 2009, July 15, 2009 and July 31, 2009. However, AMV was late in funding as required by the Agreement. On October 30, 2009, the Company agreed to issue 4,000,000 shares based on the $120,000 funded under this Agreement.
On November 16, 2009, but effective August 4, 2009, AMV claimed ownership of our Taicom shares. This resulted in a loss on investment of approximately $2,861,000. The parties continue to negotiate over the agreements.
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DECLINING GENERAL ECONOMIC, BUSINESS, OR INDUSTRY CONDITIONS MAY CAUSE REDUCED REVENUES AND PROFITABILITY
Recently, concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining real estate market in the U.S. have contributed to increased volatility and diminished expectations for the global economy and expectations of slower global economic growth going forward. These factors, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have precipitated an a recession. If the economic climate in the U.S. or abroad does not improve from its current condition or continues to deteriorate, our customers or potential customers could reduce or delay their purchases of our products, which would adversely impact our revenues and our ability to manage inventory levels, collect customer receivables and ultimately our profitability.
Volatility and disruption of financial markets could affect our access to credit. The current difficult economic market environment has caused contraction in the availability of credit in the marketplace. This could potentially reduce or eliminate sources of liquidity for the Company.
OUR CONTROLLING SHAREHOLDER GROUP HAS SUBSTANTIAL INFLUENCE OVER OUR COMPANY
As of January 5, 2010, IAJ LBO Fund,
PBAA Fund Limited, Terra Firma, Inter Asset Japan Co Ltd (IAJ), IA Turkey and Hiroki Isobe, (collectively, the
Controlling Shareholders) collectively hold approximately 49.6% of our common stock. These Controlling Shareholders have
stated in a Schedule 13D that they may be deemed to constitute a group for the purposes of Rule 13d-3 under the Exchange
Act. Hiroki Isobe controls each of our Controlling Shareholders.
IAJ could cause a change of control of our board of directors if in combination with another large shareholder elects candidates of their choice to the board at a shareholder meeting, and approve or disapprove any matter requiring stockholder approval, regardless of how our other shareholders may vote. Further, under Delaware law, IAJ could have a significant influence over our affairs, if in combination with another large shareholder, including the power to cause, delay or prevent a change in control or sale of the Company, which in turn could adversely affect the market price of our common stock.
THE SALE OF A SIGNIFICANT NUMBER OF OUR SHARES OF COMMON STOCK COULD DEPRESS THE PRICE OF OUR COMMON STOCK
Sales or issuances of a large number of shares of common stock (including pursuant to the equity line of credit transaction that we recently entered into with Ascendiant Capital Group, LLC, which is described in more detail elsewhere in this prospectus) in the public market or the perception that sales may occur could cause the market price of our common stock to decline. As of January 7, 2010, there were 299,792,972 shares of common stock issued and outstanding. Significant shares of common stock are held by our principal shareholders, other Company insiders and other large shareholders. As affiliates (as defined under Rule 144 of the Securities Act (Rule 144)) of the Company, our principal shareholders, other Company insiders and other large shareholders may only sell their shares of common stock in the public market pursuant to an effective registration statement
or in compliance with Rule 144.
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE
The market price of our common stock has been and is likely in the future to be volatile. Our common stock price may fluctuate in response to factors such as:
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A bankruptcy filing by GHI and/or IA Global,
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Announcements by us regarding liquidity, significant acquisitions, equity investments and divestitures, strategic relationships, addition or loss of significant customers and contracts, capital expenditure commitments, loan, note payable and agreement defaults, loss of our subsidiaries and impairment of assets and our NYSE AMEX listing,
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Issuance of convertible or equity securities for general or merger and acquisition purposes,
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Issuance or repayment of debt, accounts payable or convertible debt for general or merger and acquisition purposes,
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Alleged manipulation of our stock price,
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Sale of a significant number of our common stock by shareholders,
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General market and economic conditions,
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Quarterly variations in our operating results,
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Defending significant litigation,
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Investor relation activities,
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Announcements of technological innovations,
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New product introductions by us or our competitors,
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Competitive activities,
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Additions or departures of key personnel,
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Issuance of loans to customers or related or affiliated parties, and
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Foreign exchange gains and losses.
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These broad market and industry factors may have a material adverse effect on the market price of our common stock, regardless of our actual operating performance. These factors could have a material adverse effect on our business, financial condition and results of operations.
RISKS ASSOCIATED WITH EQUITY LINE OF CREDIT WITH ASCENDIANT CAPITAL GROUP, LLC
If the price or the trading volume of our common stock does not reach certain levels, we will be unable to draw down all or substantially all of our $5,000,000 equity line of credit with Ascendiant Capital Group, LLC, which may force us to significantly curtail the scope of our operations or alter our business plan.
The maximum draw down amount every 11 trading days under our equity line of credit facility is the lesser of $250,000 or 15% of the total trading volume of our common stock for the 10-trading-day period prior to the draw down multiplied by the volume-weighted average price of our common stock for such period. If our stock price and trading volume remain at current levels, we will not be able to draw down all $5,000,000 available under the equity line of credit and we may be forced to curtail the scope of our operations or alter our business plan if other financing is not available to us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK
We were exposed to foreign currency risks due to our operations in Japan and the Philippines and our proposed investment in Korea. We do not trade in hedging instruments or other than trading instruments and we are exposed to foreign currency exchange risks.
INTEREST RATE RISK
We are not exposed to interest rate risks. The Company does not trade in hedging instruments or other than trading instruments and is exposed to interest rate risks. We believe that the impact of a 10% increase or decline in interest rates would not be material to our financial condition and results of operations.
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ITEM 4. CONTROLS AND PROCEDURES
Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2009. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2009, our disclosure controls and procedures were effective in ensuring that (1) information to be disclosed in reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms promulgated under the Exchange Act and (2) information required to be disclosed in reports filed under the Exchange Act is accumulated and communicated to the principal executive officer and principal financial officer as appropriate to allow timely decisions regarding required disclosure.
There were no changes in the Companys internal control over financial reporting that occurred during the Companys last fiscal quarter that have materially affected or are reasonably likely to materially affect the Companys internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1A. RISK FACTORS
For information regarding factors that could affect our results of operations, financial condition and liquidity, see the risk factors discussed under the heading Factors That May Affect Future Results included in Part I, Item 2 (Managements Discussion and Analysis of Financial Condition and Results of Operations) of this Quarterly Report on Form 10-Q. In addition, the following represent material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.
LOSS OF OPERATIONAL CONTROL OF GLOBAL HOTLINE, INC. AND RELATED DECONSOLIDATION
As has been previously disclosed, the Company pledged its shares of Global Hotline as collateral for certain loans borrowed from H Capital, an unlicensed Japanese lender, by such subsidiary. On May 26, 2009, Global Hotline and IA Global received notices from H Capital demanding repayment of the loans. On May 27, 2009, Global Hotline and SG Telecom did not repay the loans as requested by H Capital. On June 9, 2009, H Capital submitted documents claiming ownership of the Companys 600 shares of Global Hotline. Global Hotlines management previously provided the Companys stock certificates to H Capital in March 2009.
Although the Company has engaged Japanese corporate counsel to challenge the validity of the loans and H Capitals claims with respect to the Companys ownership of Global Hotline, these events have resulted in IA Global losing control over the day-to-day management and operations of Global Hotline. In addition, we no longer have access to the financial records of Global Hotline that are necessary to periodically report our financial position and results of operations as a consolidated subsidiary of IA Global.
On December 8, 2009, the Company
deconsolidated the operations of Global Hotline, effective as of July 1, 2009. As a result, the Company intends to account for
Global Hotline as a discontinued operation for periods ending after July 1, 2009. Our reported net profit (loss) will improve by
$10.1 million for the nine months ended December 31, 2009 and our stockholders deficit as of December 31, 2009 will decrease
by $10.1 million as a result of recording the deferred gain from the forfeiture of Global Hotline operations that was recorded
during the three months ended September 30, 2009.
The Company will continue to pursue its civil claim against H Capital, and we are also exploring alternative structures through which we can pursue IA Globals interest in the Japanese BPO business. If the Company is unsuccessful in such efforts, however, it could result in the ultimate loss of the Companys primary operating subsidiary and a majority of its total assets, and have a material adverse effect on the Companys overall financial condition and results of operations.
POTENTIAL REGULATION UNDER THE INVESTMENT COMPANY ACT OF 1940
Under the Investment Company Act of 1940 (the Investment Company Act), companies that engage primarily in investing or trading in investment securities or primarily engage in some other business but nevertheless hold investment securities that account for a certain percentage (generally, 40-45%) of their total assets are considered investment companies required to register as such an comply with various regulatory obligations under the Investment Company Act. Shares of majority-owned subsidiaries are not considered investment securities for purposes of the Investment Company Act.
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The Company has structured its business and operations in the past, and intends to continue to structure its business and operations in the future, in a manner that makes it exempt from registration and regulation under the Investment Company Act. If, however, the Company is unsuccessful in maintaining or regaining control over Global Hotline (its primary operating subsidiary), there is a risk that its asset portfolio and nature of operations could at least temporarily be consistent with that of an investment company. According, the Company could be subject to regulation under the Investment Company Act in the future. In such event, the Company would be required to register as an investment company and could be expected to incur significant registration and compliance costs. The Company has obtained no formal determination from the SEC as to the status of the Company under the Investment
Company Act and, consequently, any violation of the Investment Company Act could subject the Company to material adverse consequences.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2009, the Company made the following sales (or agreed to make future sales) of equity securities pursuant to the exemption from registration provided under Section 4(2) of the Securities Act:
PRIVATE PLACEMENTS WITH INTER ASSET JAPAN LBO NO. 1 FUND
On August 2, 2009, the Company entered into a Stock Purchase Agreement (Agreement 1) with Inter Asset Japan LBO No 1 Fund, an existing shareholder of the Company (the Shareholder). Under the terms of the Agreement 1, the Company agreed to issue and sell to the Shareholder 1,500,000 shares (the Shares) of the Companys common stock, par value $0.01 per share, for an aggregate purchase price of $60,000, or $0.04 per share (the Purchase Price). The Company issued and sold the Shares to the Shareholder in reliance on the exemption from the registration requirements set forth in the Securities Act provided under Section 4(2) of the Securities Act and Regulation D promulgated by the SEC under the Securities Act.
Agreement 1 contains certain representations and warranties of the Shareholder and the Company, including customary investment-related representations provided by the Shareholder, as well as acknowledgements by the Shareholder that it has reviewed certain disclosures of the Company (including the periodic reports that the Company has filed with the SEC) and that the Companys issuance of the Shares has not been registered with the SEC or qualified under any state securities laws. The Company provided customary representations regarding, among other things, its organization, capital structure, subsidiaries, disclosure reports, absence of certain legal or governmental proceedings, financial statements, tax matters, insurance matters, real property and other assets, and compliance with applicable laws and regulations.
Agreement 1 also grants the Shareholder registration rights that it may exercise at its option and provides the Shareholder with a right of first offer if the Company proposes to issue securities in the future (subject to certain customary exceptions). Finally, the Shareholder has the right to demand that the Company redeem all or any portion of the Shares at any time on or after October 31, 2009, for a redemption price equal to the greater of the Purchase Price or the listed market price for the Companys common stock as of the redemption date.
On August 17, 2009, the Company entered into a Stock Purchase Agreement (Agreement 2) with the Shareholder. Under the terms of Agreement 2, the Company agreed to issue and sell to the Shareholder 5,000,000 shares of our common stock for an aggregate purchase price of $200,000, or $0.04 per share.
Also under the terms of the Agreement, the Shareholder has committed to purchase, and the Company agreed to issue and sell to the Shareholder, additional shares of the Companys common stock in accordance with the following schedule:
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2,500,000 shares at a purchase price of US$.04 per share, or an aggregate price of US$100,000 on or before September 4, 2009.
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1,250,000 shares at a purchase price of US$.04 per share, or an aggregate price of US$50,000 on or before September 18, 2009.
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50,000,000 shares at a purchase price of US$.04 per share, or an aggregate price of US$2,000,000 on or before November 10, 2009.
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The Shareholders obligation to purchase the foregoing shares by the date specified is conditioned upon the representations and warranties of the Company contained in Agreement 2 being accurate as of the date of such closing.
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Finally, the Shareholder has the option, but not the obligation, to purchase, on or before December 31, 2009, an additional 50,000,000 shares of Common Stock at a purchase price of US$.04 per share, or an aggregate price of US$2,000,000.
Under the terms of the Agreement, as
of September 30, 2009 the Company has agreed to issue and sell to the Investor, 8,250,000 shares at a purchase price of $.04 per
share, or an aggregate price of $330,000.
Under the terms of the Agreement, as
of January 5, 2010 the Company has agreed to issue and sell to the Investor, 71,719,633 shares at a purchase price of $.04 per
share, or an aggregate price of $2,861,000. Further, we expect that a total of $861,000 of the funds can be used for working capital
and the remaining $2,000,000 can be used for investments.
The Company issued and sold the shares of common stock to the Shareholder in reliance on the exemption from the registration requirements set forth in the Securities Act provided under Section 4(2) of the Securities Act and Regulation D promulgated by the SEC under the Securities Act.
Agreement 2 contains certain representations and warranties of the Shareholder and the Company, including customary investment-related representations provided by the Shareholder, as well as acknowledgements by the Shareholder that it has reviewed certain disclosures of the Company (including the periodic reports that the Company has filed with the SEC) and that the Companys issuance of the shares has not been registered with the SEC or qualified under any state securities laws. The Company provided customary representations regarding, among other things, its organization, capital structure, subsidiaries, disclosure reports, absence of certain legal or governmental proceedings, financial statements, tax matters, insurance matters, real property and other assets, and compliance with applicable laws and regulations.
Agreement 2 also grants the Shareholder registration rights that it may exercise at its option and provides the Shareholder with a right of first offer if the Company proposes to issue securities in the future (subject to certain customary exceptions).
EQUITY LINE OF CREDIT TRANSACTION WITH ASCENDIANT CAPITAL GROUP, LLC
On September 29, 2009, the Company entered into a Securities Purchase Agreement with Ascendiant Capital Group, LLC (Ascendiant), pursuant to which Ascendiant agreed to purchase up to $5,000,000 worth of shares of the Companys common stock from time to time over a 24-month period, provided that certain conditions are met. The financing arrangement entered into by IA Global and Ascendiant is commonly referred to as an equity line of credit or an equity drawdown facility.
Under the terms of the Securities
Purchase Agreement, Ascendiant will not be obligated to purchase shares of IA Globals common stock unless and until certain
conditions are met, including but not limited to (i) approval of the transaction by the NYSE AMEX, which has not been received by
January 5, 2010, and (ii) the Company files by November 13, 2009 and the SEC declares effective by January 27, 2010 a Registration
Statement on Form S-1 (the Registration Statement) registering Ascendiants resale of any shares purchased by it
under the equity drawdown facility. The customary terms and conditions associated with Ascendiants registration rights are set
forth in a Registration Rights Agreement that was also entered into by the parties on September 29, 2009.
If and when the SEC declares the Registration Statement effective, IA Global will have the right to sell and issue to Ascendiant, and Ascendiant will be obligated to purchase from IA Global, up to $5,000,000 worth of shares of the Companys common stock over a 24-month period beginning on such date (the Commitment Period). IA Global will be entitled to sell such shares from time to time during the Commitment Period by delivering a draw down notice to Ascendiant. In such draw down notices, IA Global will be required to specify the dollar amount of shares that it intends to sell to Ascendiant, which will be spread over a nine-trading-day pricing period. For each draw, IA Global will be required to deliver the shares sold to Ascendiant in three installments (following the third, sixth and ninth trading days in the pricing period, respectively). Ascendiant is entitled to
liquidated damages in connection with certain delays in the delivery of its shares.
The Securities Purchase Agreement also provides for the following terms and conditions:
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Purchase Price - 90% of IA Globals volume-weighted average price (VWAP).
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Threshold Price - IA Global may specify a price below which it will not sell shares during the applicable nine-trading-day pricing period. If the purchase price falls below the threshold price on any day(s) during the pricing period, such day(s) will be removed from the pricing period (and Ascendiants investment amount will be reduced by 1/9 for each such day).
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Maximum Draw - 15% of IA Globals total trading volume for the 10-trading-day period immediately preceding the applicable draw down, times the average VWAP during such period (but in no event more than $250,000).
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Minimum Time Between Draw Down Pricing Periods - Two trading days.
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Minimum Use of Facility - IA Global is obligated to sell at least $1,000,000 worth of shares of its common stock to Ascendiant during the Commitment Period.
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Commitment Fees - Upon NYSE AMEX approval, IA Global will be obligated to issue 2,371,917 shares of its common stock to Ascendiant ($125,000 worth of shares based on the Companys closing bid price on the trading day immediately prior to the date of the Securities Purchase Agreement). If and when the SEC declares the Registration Statement effective, IA Global will be obligated to issue another $125,000 worth of shares of its common stock in four installments over a period of 90 days following the effectiveness date.
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Other Fees and Expenses On October 21, 2009, we issued 400,000 shares of common stock valued at $10,000 under the 2007 Stock Incentive Plan as compensation to Ascendiants legal counsel for the legal fees and expenses it incurred in connection with negotiating and documenting the equity line of credit. Pursuant to separate agreements, IA Global has also agreed to pay an aggregate of 3.0% in finders fees (to be paid in connection with each draw down).
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Indemnification - Ascendiant is entitled to customary indemnification from IA Global for any losses or liabilities it suffers as a result of any breach by IA Global of any provisions of the Securities Purchase Agreement, or as a result of any lawsuit brought by any stockholder of IA Global (except stockholders who are officers, directors or principal stockholders of IA Global).
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Conditions to Ascendiants Obligation to Purchase Shares - Trading in IA Globals common stock must not be suspended by the SEC or the NYSE AMEX (or other applicable trading market); IA Global must not have experienced a material adverse effect; all liquidated damages and other amounts owing to Ascendiant must be paid in full; the Registration Statement must be effective with respect to Ascendiants resale of all shares purchased under the equity drawdown facility; there must be a sufficient number of authorized but unissued shares of IA Global common stock; and the issuance must not cause Ascendiant to own more than 9.99% of the then outstanding shares of IA Global common stock, or more than 19.9% of the number of shares of common stock outstanding on September 29, 2009 to have been issued under the equity drawdown facility (without shareholder
approval).
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Termination - The Securities Purchase Agreement will terminate if IA Globals common stock is not listed on one of several specified trading markets (which include the NYSE AMEX, OTC Bulletin Board and Pink Sheets, among others); if IA Global files for protection from its creditors; or if the Registration Statement is not declared effective by the SEC by June 29, 2010. IA Global may terminate the Securities Purchase Agreement if Ascendiant fails to fund a draw down within 10 trading days after the end of the applicable settlement period, or if the SEC provides comments on the Registration Statement requiring certain changes in the transaction structure and/or documents.
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The Securities Purchase Agreement also contains certain representations and warranties of IA Global and Ascendiant, including customary investment-related representations provided by Ascendiant, as well as acknowledgements by Ascendiant that it has reviewed certain disclosures of the Company (including the periodic reports that the Company has filed with the SEC) and that the Companys issuance of the shares has not been registered with the SEC or qualified under any state securities laws. IA Global provided customary representations regarding, among other things, its organization, capital structure, subsidiaries, disclosure reports, absence of certain legal or governmental proceedings, financial statements, tax matters, insurance matters, real property and other assets, and compliance with applicable laws and regulations. IA Globals representations and warranties are qualified in
their entirety (to the extent applicable) by the Companys disclosures in the reports it files with the SEC. IA Global also delivered confidential disclosure schedules qualifying certain of its representations and warranties in connection with executing and delivering the Securities Purchase Agreement.
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The shares to be issued by IA Global to Ascendiant under the Securities Purchase Agreement will be issued in private placements in reliance upon the exemption from the registration requirements set forth in the Securities Act provided for in Section 4(2) of the Securities Act, and the rules promulgated by the SEC thereunder.
EQUITY ISSUANCES TO CERTAIN EXECUTIVE OFFICERS
On August 24, 2009, the board of directors awarded Mr. Scott 200,000 shares of restricted common stock. The award was granted at the fair market price of $0.05 per share based on the adjusted closing price on August 20, 2009, the last trading day before the board of directors approved the grant. In accordance with the 2007 Stock Incentive Plan, the restrictions on such shares lapsed on November 23, 2009.
On November 5, 2009, the Compensation Committee awarded Mr. Hoekstra 800,000 shares of restricted stock and an option to purchase 1,200,000 shares of the Companys common stock. The awards were granted at the fair market price of $0.04 per share based on the adjusted closing price of the Companys common stock on November 4, 2009, the last trading day before the Compensation Committee meeting. In accordance with the Companys 2007 Stock Incentive Plan, the restricted stock and the stock option vest in quarterly installments over three years beginning on September 4, 2009. The stock options expire on September 3, 2019.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The indebtedness of IA Global and our subsidiaries, including GHI, is described in detail in Note 11 of the notes to the financial statements set forth in this report (see Part I, Item 1 (Financial Statements)). As disclosed therein, IA Global and its subsidiaries had $15.5 million of total indebtedness as of June 30, 2009, and we are currently in default with respect to $15.5 million of that amount due to late payments of principal and/or interest under certain loan agreements. Reference is also made to our dispute with H Capital regarding IA Globals and GHIs obligations to such entity under certain loan agreements.
On December 8, 2009, the Company deconsolidated the operations of Global Hotline, effective as of July 1, 2009. As a result, the Company intends to account for Global Hotline as a discontinued operation for periods ending after July 1, 2009.
ITEM 5. OTHER INFORMATION
As has been previously disclosed, the Company pledged its shares of Global Hotline as collateral for certain loans borrowed from H Capital, an unlicensed Japanese lender, by such subsidiary. On May 26, 2009, Global Hotline and IA Global received notices from H Capital demanding repayment of the loans. On May 27, 2009, Global Hotline and SG Telecom did not repay the loans as requested by H Capital. On June 9, 2009, H Capital submitted documents claiming ownership of the Companys 600 shares of Global Hotline. Global Hotlines management previously provided the Companys stock certificates to H Capital in March 2009.
Although the Company has engaged Japanese corporate counsel to challenge the validity of the loans and H Capitals claims with respect to the Companys ownership of Global Hotline, these events have resulted in IA Global losing control over the day-to-day management and operations of Global Hotline. In addition, we no longer have access to the financial records of Global Hotline that are necessary to periodically report our financial position and results of operations as a consolidated subsidiary of IA Global.
On December 8, 2009, the Company
deconsolidated the operations of Global Hotline, effective as of July 1, 2009. As a result, the Company accounted for Global Hotline
as a discontinued operation for periods ending after July 1, 2009. Our reported net profit (loss) will improve by $10.1 million for
the nine months ended December 31, 2009 and our stockholders deficit as of December 31, 2009 will decrease by $10.1 million as
a result of recording the deferred gain from the forfeiture of Global Hotline operations that was recorded during the three months
ended September 30, 2009.
On August 17, 2009, the Company signed a Stock Purchase Agreement (Agreement) with Inter Asset Japan LBO No 1 Fund (Investor), an existing shareholder of the Company. Under the terms of the Agreement, the Company has agreed to issue and sell to the Investor, 71,719,633 shares at a purchase price of $.04 per share, or an aggregate price of $2,861,000. Further, we expect that a total of $861,000 of the funds can be used for working capital and the remaining $2,000,000 can be used for investments.
On April 1, 2009, the Company agreed to issue preferred stock (IAO Preferred Stock), at $1,000 per share, to ArqueMax Ventures LLC (AMV) for $317,000 in the Amendment to Share Exchange Agreement.
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At AMVs sole discretion, AMV may either (1) convert some or all of its IAO Preferred Stock into 12,800,000 shares of the Companys common stock pro rata at $0.025 per share; or (2) exchange IAO Preferred Stock for 971,458 Taicom Stock owned by the Company pro rata. The conversion of IAO Preferred Stock into Taicom Stock is automatically triggered in the case of certain events, including delisting from NYSE AMEX, bankruptcy or insolvency.
On July 17, 2009 and September 28, 2009, AMV notified us that we were in default under the June 8, 2009 Services Agreement (Agreement) and as a result did not fund the $60,000 due June 30, 2009, July 15, 2009 and July 31, 2009. However, AMV was late in funding as required by the Agreement. On October 30, 2009, the Company agreed to issue 4,000,000 shares based on the $120,000 in funded under this Agreement.
On November 16, 2009, but effective August 4, 2009, AMV claimed ownership of our shares in Taicom. This resulted in a loss on investment of approximately $2,861,000. The parties continue to negotiate over the April 1, 2009 and June 8, 2009 Amendment to Share Exchange and June 8, 2009 Services Agreements.
ITEM 6. EXHIBITS
10.1
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Separation Agreement and
Full Release of Claims dated August 2, 2009 by and between IA Global, Inc. and Derek Schneideman (2)
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10.2
|
Amended and Restated
Employment Agreement dated August 24, 2009 by and between IA Global, Inc. and Mark Scott (2)
|
10.3
|
Employment Agreement dated
November 5, 2009 but effective September 4, 2009 by and between IA Global, Inc. and Brian Hoekstra (2)
|
10.4
|
Loan Agreement dated May
29, 2009 by and between Inforidge, Inc. and Neutral, Inc. (Translated from Japanese) (2)
|
10.5
|
Stock Purchase Agreement dated August 17, 2009 by and between IA Global, Inc. and Inter Asset Japan LBO No. 1 Fund (1)
|
10.6
|
Securities Purchase Agreement dated September 29, 2009 by and between IA Global, Inc. and Ascendiant Capital Group, LLC (1)
|
10.7
|
Registration Rights Agreement dated September 29, 2009 by and between IA Global, Inc. and Ascendiant Capital Group, LLC (1)
|
31.1
|
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
|
31.2
|
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
|
32
|
Section 906 Certifications
|
__________________
(1)
|
Filed as an exhibit to Companys Registration Statement on Form S-1 (File No. 333-163612), filed with the SEC on December 9, 2009, and incorporated herein by reference.
|
|
|
(2)
|
Filed as an exhibit to
Companys initial Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009, filed with the SEC on January 8,
2010, and incorporated herein by reference.
|
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: February 1, 2010
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IA GLOBAL, INC.
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(Registrant)
|
By:
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/s/ Brian Hoekstra
Brian Hoekstra
Chief Executive Officer
(Principal Executive Officer)
|
|
By:
|
/s/ Mark Scott
Mark Scott
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
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EXHIBIT INDEX
10.1
|
Separation Agreement and
Full Release of Claims dated August 2, 2009 by and between IA Global, Inc. and Derek Schneideman (2)
|
10.2
|
Amended and Restated
Employment Agreement dated August 24, 2009 by and between IA Global, Inc. and Mark Scott (2)
|
10.3
|
Employment Agreement dated
November 5, 2009 but effective September 4, 2009 by and between IA Global, Inc. and Brian Hoekstra (2)
|
10.4
|
Loan Agreement dated May
29, 2009 by and between Inforidge, Inc. and Neutral, Inc. (Translated from Japanese) (2)
|
10.5
|
Stock Purchase Agreement dated August 17, 2009 by and between IA Global, Inc. and Inter Asset Japan LBO No. 1 Fund (1)
|
10.6
|
Securities Purchase Agreement dated September 29, 2009 by and between IA Global, Inc. and Ascendiant Capital Group, LLC (1)
|
10.7
|
Registration Rights Agreement dated September 29, 2009 by and between IA Global, Inc. and Ascendiant Capital Group, LLC (1)
|
31.1
|
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
|
31.2
|
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
|
32
|
Section 906 Certifications
|
__________________
(1)
|
Filed as an exhibit to Companys Registration Statement on Form S-1 (File No. 333-163612), filed with the SEC on December 9, 2009, and incorporated herein by reference.
|
|
|
(2)
|
Filed as an exhibit to
Companys initial Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009, filed with the SEC on January 8,
2010, and incorporated herein by reference.
|
53