Attached files

file filename
EX-32.1 - CERTIFICATION - Unified Signal, Inc.qumi_321.htm
EX-31.1 - CERTIFICATION - Unified Signal, Inc.qumi_311.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
———————
FORM 10-Q
———————
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2010
 
or
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: __________ to ___________
 
 
 QUAMTEL, INC.
 (Exact name of small business issuer as specified in its charter)
 
 
Nevada
 
000-31757
 
98-0233452
(State or Other Jurisdiction
 
(Commission
 
(I.R.S. Employer
of Incorporation)
 
File Number)
 
Identification No.)

14911 Quorum Drive, Suite 140, Dallas, Texas 75254
(Address of Principal Executive Office) (Zip Code)
 
(972) 361-1980
(Issuer’s telephone number, including area code)
 
 
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer
¨
   
Accelerated filer
¨
 
Non-accelerated filer
¨
   
Smaller reporting company
þ
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨  No þ
 
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Check whether the registrant filed all documents and reports required to be filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes ¨  No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares outstanding of each of the issuer's classes of common equity, as of April 30, 2010 is 19,006,175.
 


 
 

 
 
QUAMTEL, INC.
 
TABLE OF CONTENTS
 
 
     
Page
 
PART I - FINANCIAL INFORMATION
    3  
           
Item 1.
Financial Statements
    3  
           
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
    13  
           
Item 3.
Qualitative and Quantitative Disclosure About Market Risk
    16  
           
Item 4T.
Controls and Procedures
    16  
           
PART II - OTHER INFORMATION
    18  
           
Item 1.
Legal Proceedings
    18  
           
Item 1A.
Risk Factors
    18  
           
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    18  
           
Item 3.
Defaults Upon Senior Securities
    18  
           
Item 4.
Submission of Matters to a Vote of Security Holders
    18  
           
Item 5.
Other Information
    18  
           
Item 6.
Exhibits
    18  
           
SIGNATURES
    19  

 
 
 

 
 
PART I – FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
 Quamtel, Inc.
 Consolidated Balance Sheets
 
             
   
March 31,
2010
   
December 31,
2009
 
   
(Unaudited)
       
 ASSETS
           
             
 Current assets:
           
 Cash and cash equivalents
  $ 525,601     $ 94,003  
 Accounts receivable, net
    16,286       30,367  
 Income tax receivable
    11,678       11,678  
 Inventory
    6,625       61,750  
 Prepaid expenses and deposits
    137,918       449,704  
 Total current assets
    698,108       647,502  
                 
 Property and equipment, net
    424,247       404,472  
 Intangible assets
    2,731,299       2,653,109  
 Other assets
    25,000       -  
                 
 TOTAL ASSETS
  $ 3,878,654     $ 3,705,083  
                 
                 
 LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
 Current liabilities:
               
 Accounts payable
  $ 469,951     $ 383,234  
 Accrued expenses
    80,112       113,901  
 Unearned revenue
    340,589       445,347  
 Advances from related party
    479,309       758,781  
 Stock-based payable
    26,000       26,000  
 Current portion of notes payable
    222,772       250,336  
 Total current liabilities
    1,618,733       1,977,599  
                 
 Noncurrent portion of notes payable
    867,937       14,496  
                 
 TOTAL LIABILITIES
    2,486,670       1,992,095  
                 
 Shareholders' equity:
               
 Common stock - $0.001 par value; 200,000,000 shares authorized;
               
     18,981,175 and 18,662,175 shares issued and outstanding at
               
     March 31, 2010 and December 31, 2009, respectively
    18,981       18,662  
 Preferred stock - $0.001 par value; 50,000,000 shares authorized;
               
     no shares issued and outstanding
    -       -  
 Additional paid-in capital
    4,172,454       3,624,338  
 Retained earnings (deficit)
    (2,799,451 )     (1,930,012 )
 Total shareholders' equity
    1,391,984       1,712,988  
                 
 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 3,878,654     $ 3,705,083  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
3

 
 
 Quamtel, Inc.
 Consolidated Income Statements (Unaudited)
Three Months Ended March 31, 2010 and 2009
 
 
   
2010
   
2009
 
             
 Revenues
  $ 703,748     $ 712,850  
                 
 Cost of sales
    490,762       407,595  
                 
 Gross profit
    212,986       305,255  
                 
 Operating expenses:
               
 Compensation, consulting and related expenses
    667,669       229,063  
 General and administrative expenses
    345,232       123,426  
 Depreciation and amortization
    34,185       16,070  
      Total operating expenses
    1,047,086       368,559  
                 
 Loss from operations before income taxes
    (834,100 )     (63,304 )
                 
 Other expense:
               
 Interest and financing expense
    35,339       2,592  
       Total other expense
    35,339       2,592  
                 
Loss before income taxes
    (869,439 )     (65,896 )
                 
Income tax expense (benefit)
    -       (971 )
                 
Net loss
  $ (869,439 )   $ (64,925 )
                 
                 
 Basic and diluted loss per share:
               
                 
 Loss from operations before income taxes
  $ (0.05 )   $ (0.06 )
 Income tax expense (benefit)
    -       -  
                 
 Loss per share
  $ (0.05 )   $ (0.06 )
                 
 Weighted average number of shares outstanding
    18,805,064       1,020,000  
           
The accompanying notes are an integral part of these consolidated financial statements.
 
 
4

 
 
 Quamtel, Inc.
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
 Three Months Ended March 31, 2010
 
                               
    Common Stock    
Additional
Paid-in
Capital
   
Retained
Earnings
(Deficit)
       
   
Shares
   
Amount
           
Total
 
                               
Balance as of December 31, 2009
    18,662,175     $ 18,662     $ 3,624,338     $ (1,930,012 )   $ 1,712,988  
                                         
Common stock issued for services
    129,000       129       321,081       -       321,210  
Common stock issued for cash
    165,000       165       164,810       -       164,975  
Common stock issued for domain name acquisition
    25,000       25       62,225       -       62,250  
Net loss for the period
            -       -       (869,439 )     (869,439 )
                                         
Balance as of March 31, 2010
    18,981,175     $ 18,981     $ 4,172,454     $ (2,799,451 )   $ 1,391,984  
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
 
5

 
 
 Quamtel, Inc.
 Consolidated Statements of Cash Flows (Unaudited)
 For the Three Months Ended March 31, 2010 and 2009
 
 
   
2010
   
2009
 
             
 CASH FLOWS FROM OPERATING ACTIVITIES
           
 Net loss
  $ (869,439 )   $ (64,925 )
 Adjustments to reconcile net income (loss) to net cash
               
   used in operating activities:
               
 Depreciation and amortization
    34,185       16,070  
 Noncash compensation and consulting expense
    321,210       -  
 Changes in operating assets and liabilities net of assets
               
   and liabilities acquired:
               
Accounts receivable
    14,080       3,498  
Inventory
    55,125       -  
Prepaid expenses and deposits
    311,787       19,179  
Income tax payable
    -       (971 )
Accounts payable
    86,717       71,683  
Accrued expenses
    (33,788 )     10,809  
Unearned revenue
    (104,758 )     17,893  
 Net cash provided by (used in) operating activities
    (184,881 )     73,236  
                 
 CASH FLOWS FROM INVESTING ACTIVITIES
               
 Purchase of property & equipment
    (44,524 )     (80,558 )
 Acquisition of intangible assets
    (25,377 )     -  
 Deposit paid
    (25,000 )        
 Net cash used in investing activities
    (94,901 )     (80,558 )
                 
 CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from common stock issuances
    164,975       20,000  
Proceeds from issuance of notes payable
    1,050,000       -  
Net advances from (repayments to) related party
    (279,472 )     (10,575 )
Repayment of notes payable
    (224,123 )     (527 )
 Net cash provided by financing activities
    711,380       8,898  
                 
 Net increase in cash
    431,598       1,576  
                 
 Cash and cash equivalents at beginning of period
    94,003       11,562  
 Cash and cash equivalents at end of period
  $ 525,601     $ 13,138  
                 
                 
 Supplemental cash flow information:
               
 Cash paid for taxes
  $ -     $ -  
 Cash paid for interest
  $ 20,825     $ 2,592  
                 
 Noncash investing and financing activities:
               
 Issuance of common stock for intangible assets
  $ 62,250     $ -  
           
The accompanying notes are an integral part of these consolidated financial statements.
 
 
6

 
 
QUAMTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS

Quamtel, Inc., formerly known as Atomic Guppy, Inc., XTX Energy, Inc. and Glen Manor Resources Inc., (the “Company”) was incorporated on November 16, 1999 under the laws of the State of Nevada.  Prior to the closing of the share exchange agreement described below, the Company was a “shell” corporation as that term is defined in Rule 405 of the Securities Act and Rule 12b-2 of the Exchange Act, as well as SEC Release Number 33-8407.

On January 13, 2009, the Company executed a Share Exchange Agreement (the “Share Exchange Agreement”), pursuant to which the shareholders of WQN, Inc. were entitled to receive a total of 15,000,000 post-split shares of the Company’s common stock. All conditions for closing were satisfied or waived, and the transaction closed on July 28, 2009. As a result of the Exchange, the shareholders of WQN, Inc. owned approximately 91% of the outstanding Common Stock of Quamtel. In conjunction with closing the Share Exchange Agreement, certain outstanding obligations of Quamtel including officers and director’s compensation, notes and amounts payable to officers and directors and third party loans outstanding, were exchanged for 1,275,000 post-split shares of Quamtel’s common stock.
 
As a result of the Share Exchange Agreement, WQN, Inc. became a wholly-owned subsidiary of Quamtel, through which its operations are now conducted. On September 8, 2009, Quamtel filed an amendment to its Articles of Incorporation concluding a one-for-ten reverse split of its common stock and increasing its authorized stock to 200,000,000 common shares and 50,000,000 preferred shares.
 
The Share Exchange Agreement has been accounted for as a reverse merger, and as such the historical financial statements of WQN, Inc. are being presented herein as those of the Company.  Also, the capital structure of the Company for all periods presented herein is different from that appearing in the historical financial statements of the Company due to the recapitalization accounting.
 
On December 9, 2009, the Company acquired all of the outstanding  membership interests of Mobile Internet Devices, LLC, a Florida limited liability company (“Mobile Devices”), for a combination of common stock, stock warrants, and a royalty based on future earnings and new subscribers of the acquired company.  Mobile Devices was subsequently renamed and reorganized as Data Jack, Inc., a Texas corporation (“Data Jack”).

The financial information presented herein should be read in conjunction with the financial statements of Quamtel for the year ended December 31, 2009, as presented in the Company’s Form 10-K filed on March 31, 2010. The accompanying financial statements for the three months ended March 31, 2010 and 2009 are unaudited but, in the opinion of management, include all adjustments (which are normal and recurring in nature) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of results for a full year. Therefore, the results of operations for the three months ended March 31, 2010 are not necessarily indicative of operating results to be expected for the full year or future interim periods.
 
 
7

 
 
QUAMTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
 
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Significant accounting policies are detailed in Quamtel’s financial statements for the year ended December 31, 2009 as presented in the Company’s Form 10-K filed on March 31, 2010.
 
NOTE C - PROPERTY AND EQUIPMENT, NET
 
At March 31, 2009 and December 31, 2009, respectively, property and equipment consisted of the following:
 
   
March 31,
2010
   
December 31,
2009
 
   
(Unaudited)
       
             
Computers and equipment
  $ 563,668     $ 519,144  
Automobile
    32,123       32,123  
Furniture & Fixtures
    12,274       12,274  
  Total
    608,065       563,541  
Less accumulated depreciation
    (183,818 )     (159,069 )
  Total
  $ 424,247     $ 404,472  
 
Depreciation expense for the three months ended March 31, 2010 and 2009 amounted to $24,749 and $16,070, respectively.
 
NOTE D - INTANGIBLE ASSETS
 
At March 31, 2010 and December 31, 2009, respectively, intangible assets consisted of the following:
 
             
   
March 31,
2010
   
December 31,
2009
 
   
(Unaudited)
       
             
Goodwill associated with the acquisition of WQN, Inc.
  $ 367,589     $ 367,589  
Goodwill associated with the acquisition of Data Jack, Inc.
    1,919,957       1,919,957  
Acquisition of 800.com domain name
    317,500       317,500  
Acquisition of DataJack.com domain name
    56,000       56,000  
Acquisition of other domain names
    87,627       -  
  Total
    2,748,673       2,661,047  
Less accumulated amortization
    (17,374 )     (7,938 )
  Total
  $ 2,731,299     $ 2,653,109  
                 
Amortization expense for the three months ended March 31, 2010 and 2009 amounted to $9,436 and $0, respectively.
 
 
The goodwill amounts of $367,589 and $1,919,957 were recorded primarily in connection with the WQN, Inc. acquisition in June, 2007, and the Data Jack acquisition in December, 2009, respectively.
 
In August 2009, the Company issued 25,000 of its common shares, valued at $67,500, to Mr. Loren Stocker to acquire an option to purchase the URL 800.com (the “800 Domain Name”). Steven Ivester, an agent of iTella, Inc., (“Assignor”), subsequently acquired the 800 Domain Name in a Bankruptcy Court auction for the sum of $250,000. The acquisition was made for the benefit of the Company. Effective September 30, 2009, in return for the Company reimbursing to Assignor his $250,000 cost, Assignor assigned to the Company all right, title and interest in and to the 800 Domain Name. The total cost of the 800 Domain Name was $317,500 which is less than its estimated fair value, and is being amortized over a period of 10 years.
 
In December 2009, the Company purchased the URL DataJack.com (the "DataJack Domain Name”) for a cash payment of $30,000, plus a commitment to issue 10,000 of the Company’s common shares which were valued at $26,000.  The shares have not yet been issued, and the liability is reflected as a stock-based payable on the Company’s consolidated balance sheet at March 31, 2010.  The total cost of the DataJack Domain Name was $56,000 which is less than its estimated fair value, and is being amortized over a period of 10 years.

In January 2010, the Company purchased the URL machine2machine.com and similarly-named domains (the "M2M Domain Names”) for a cash payment of $25,377, plus 25,000 of the Company’s common shares which were valued at $62,250.  The total cost of the M2M Domain Names was $87,627 which is less than its estimated fair value, and is being amortized over a period of 10 years.
 
 
8

 
 
QUAMTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

NOTE E – RELATED PARTY TRANSACTIONS
 
From time to time, Steven Ivester, the Company’s former sole shareholder, who is currently the Assistant Secretary of and also a consultant to the Company through a Consulting Services Agreement with iTella, Inc., has made personal advances to the Company under an Unsecured Revolving Promissory Note (the "Unsecured Note"). The Unsecured Note has a maximum amount of $1,000,000, is repayable upon demand, is non-interest bearing and is unsecured.  Advances under the Unsecured Note amounted to $479,309 and $785,781 at March 31, 2010 and December 31, 2009, respectively. See also Note D for the 800 Domain Name transaction involving Mr. Ivester.

Effective August 1, 2009 and subsequently amended, the Company executed a Restated Consulting Services Agreement with iTella, Inc., whereby iTella, Inc. provides, at the reasonable request of the Company’s management, advanced business strategy, financing, product development and marketing advice including but not limited to day to day operations. The initial term of this agreement is for five years, and automatically renews for additional one year terms if approved by both parties. During this agreement’s term and at the Company’s expense, iTella, Inc. will be provided an office and administrative support in Weston, Florida. iTella, Inc.’s compensation consists of the following:

1.      
Cash payments totaling $8,333 for the first two months, payable monthly;
2.      
Cash payments totaling $66,667 for the next four months, payable monthly;
3.      
Annual cash payments of $250,000 thereafter, payable monthly;
4.      
Nine percent of the Company’s consolidated gross revenue, payable quarterly (except the first two months, in which the rate is one percent of gross revenues), subject to an annual calendar year cap of $800,000;
5.      
Employees of Consultant  may be eligible for grants of stock options pursuant to the Company’s Equity Incentive  Plan, in such amounts as may from time to time be determined by the Company, at its sole discretion; and
6.      
Reimbursement of reasonable, related business expenses.

Expenses under the Restated Consulting Services Agreement for the three months ended March 31, 2010 and year ended December 31, 2009, respectively, were $121,671 and $109,761.  Prior to closing the Restated Consulting Services Agreement, Quamtel did not have expertise in the management and financing of a public company, and required the services of iTella, Inc. as outlined in the Restated Consulting Services Agreement. The Restated Consulting Services Agreement is not cancellable by either party in advance of its contractual term, except under a defined change in control.
 
On August 20, 2009, the Company also executed a one-year consulting agreement with Mr. Warren Gilbert, who is the president of Gilder Funding Corp., a shareholder of the Company, whereby Mr. Gilbert will provide advice and counsel regarding the Company’s financial management and strategic opportunities. As compensation, Mr. Gilbert was issued 300,000 shares of the Company’s common stock, which were registered on a registration statement on Form S-8 on November 9, 2009.
 
 
9

 
 
QUAMTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
 
 
NOTE F - NOTES PAYABLE
 
             
At March 31, 2010 and December 31, 2009, notes payable consisted of the following:
       
             
   
March 31,
2010
   
December 31,
2009
 
   
(Unaudited)
       
             
Secured promissory note payable - shareholder
  $ 1,000,000     $ -  
Promissory note payable - shareholder
    -       200,000  
Notes payable - CIT Bank
    36,858       35,899  
Note payable - American Honda Finance Corporation
    18,829       20,256  
Note payable - Total Bank
    5,022       8,677  
Other note payable
    30,000       -  
                 
Total notes payable
    1,090,709       264,832  
                 
Less current portion
    (222,772 )     (250,336 )
                 
Noncurrent portion
  $ 867,937     $ 14,496  
                 
 
On February 27, 2010, the Company executed a $1,000,000 Senior Secured Promissory Note payable to Gilder Funding Corp., a company controlled by Mr. Warren Gilbert (the “Secured Note”) for cash.  The proceeds were used to repay the $200,000 note payable to Mr. Gilbert discussed in the following paragraph, plus accrued interest.  Interest on the Secured Note is payable monthly at 15% per annum beginning April 5, 2010, with the principal and any unpaid interest due on or before February 27, 2016. The Secured Note is secured by substantially all of the Company’s assets.

On December 15, 2009, the Company issued an unsecured $200,000 promissory note payable to Gilder Funding Corp. for cash.  This note bore interest at 18% per year and was repaid in conjunction with the Secured Note discussed in the preceding paragraph.

The CIT bank notes are associated with computer purchases in 2007, are repayable in 36 equal monthly payments through August and September 2010, are unsecured, and bear interest at 24.49% per year. The Company is currently in arrears on payments.

The American Honda Finance Corporation note is related to an automobile purchase in 2008, is repayable in 60 equal monthly payments through June 2013, is secured by the automobile, and bears interest at 9.45% per year.

The Total Bank note is associated with an insurance policy, is repayable in equal monthly payments of $1,283 through July 2010, is unsecured, and bears interest at 10.34% per year.

The Other note payable represents an advance from a person related to the Company’s President, is non-interest bearing, and is repayable on demand.
 
The noncurrent portion of notes payable at December 31, 2009 is substantially payable by the end of 2011.
 
See Note E for a discussion of advances to the Company under an unsecured revolving promissory note from Steven Ivester, who is the Company’s former sole shareholder and currently is the Assistant Secretary of and also a consultant to the Company through a Consulting Services Agreement with iTella, Inc.
 
 
10

 
 
QUAMTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

 
NOTE G – FINANCING AND OTHER TRANSACTIONS
 
 In the first quarter of 2010, the Company issued 319,000 shares of common stock valued at $548,435 as follows:
 
·  
165,000 shares were issued and sold to four accredited investors for net proceeds of $164,975.
 
·  
100,000 shares valued at $249,000 were issued to Stuart Ehrlich, the Company’s President and Chief Executive Officer, as partial compensation for his employment in 2010.
 
·  
24,000 shares valued at $59,760 were issued to Robert Picow as compensation for minor consultation services performed from time-to-time for the Company.
 
·  
5,000 shares valued at $12,450 were issued to Marc Moore in exchange for consultation services.
 
·  
25,000 shares valued at $62,250 were issued in connection with the Company’s acquisition of the M2M Domain Names.
 
NOTE H - INCOME TAXES
 
The components of the Company's income tax expense (benefit) are as follows:
       
             
   
Three Months Ended March 31,
 
   
2010
   
2009
 
             
Current benefit
  $ -     $ (971 )
Deferred benefit
    -       -  
  Net income tax benefit
  $ -     $ (971 )
                 
The reconciliation of the income tax provision at the statutory rate to the reported income tax expense is as follows:
 
                 
Computed at statutory rate
    34.0 %     34.0 %
Stock-related compensation and consulting expenses
    -12.6 %     0.0 %
Valuation allowance
    -21.4 %     -34.0 %
    Total
    0.0 %     0.0 %
                 
At March 31, 2010, the Company's net deferred tax asset consisted of the following:
         
                 
Net operating loss carryforward
  $ 567,843          
Less valuation allowance
    (567,843 )        
    Total
  $ -          
                 
The Company's net operating loss carryforward for federal income tax purposes was approximately $1,671,096 as of March 31, 2010, expiring beginning in 2022. In accordance with Internal Revenue Code Section 382, the Company may be limited in its ability to recognize the benefit of future net operating loss carry-forwards. Consequently, the Company did not recognize a benefit from operating loss carry-forwards. The Company is only subject to federal income taxes.
 
 
 
11

 

QUAMTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
 
NOTE I – COMMITMENTS AND CONTINGENCIES

Leases
 
The Company is obligated under a non-cancelable operating lease for its primary office facilities, which expires on February 28, 2015. The Company is also obligated under a non-cancelable operating lease for its Fort Lauderdale office facilities, which expires on February 28, 2013. Future minimum lease payments under these operating leases as of March 31, 2010 are as follows:
 
                                 
2014 and
 
   
Total
   
2010
   
2011
   
2012
   
2013
   
Thereafter
 
                                     
Dallas
  $ 304,164     $ 46,398     $ 61,864     $ 61,864     $ 61,864     $ 72,175  
Ft Lauderdale
    92,388       17,325       29,589       36,090       9,384       -  
    $ 396,552     $ 63,723     $ 91,453     $ 97,954     $ 71,248     $ 72,175  
 
Rent expense for these operating leases (net of a month-to-month sublease for a small portion of the primary office premises in 2009) for the three months ended March 31, 2010 and 2009 was $25,191and $13,812 respectively.
 
Consulting Agreement
 
See Note E for a discussion of the Consulting Services Agreement with iTella, Inc. and the Consulting Agreement with Mr. Warren Gilbert.
 
 
12

 

 
ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Management’s Discussion and Analysis contains various “forward looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding future events or the future financial performance of the Company that involve risks and uncertainties. Certain statements included in this Form 10-Q, including, without limitation, statements related to anticipated cash flow sources and uses, and words including but not limited to “anticipates”, “believes”, “plans”, “expects”, “future” and similar statements or expressions, identify forward looking statements. Any forward-looking statements herein are subject to certain risks and uncertainties in the Company’s business, including but not limited to, reliance on key customers and competition in its markets, market demand, product performance, technological developments, maintenance of relationships with key suppliers, difficulties of hiring or retaining key personnel and any changes in current accounting rules, all of which may be beyond the control of the Company. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth therein.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the financial statements included herein. Further, this quarterly report on Form 10-Q should be read in conjunction with the Company’s Financial Statements and Notes to Financial Statements included in its Annual Report on Form 10-K filed on March 31, 2010.
 
On January 13, 2009, Quamtel, Inc. (formerly Atomic Guppy, Inc.) (“Quamtel”) and WQN, Inc., a Texas corporation (“WQN”) (individually and collectively also referred to as the “Company”) executed a Share Exchange Agreement (the “Share Exchange Agreement”), pursuant to which the shareholders of WQN were entitled to receive a total of 15,000,000 post-split shares of Common Stock. All conditions for closing were satisfied or waived, and the transaction closed on July 28, 2009. As a result of the Exchange, the shareholders of WQN own approximately 91% of the outstanding Common Stock of Quamtel. In conjunction with closing the Share Exchange Agreement, certain outstanding obligations of Quamtel including officers and director’s compensation, notes and amounts payable to officers and directors and third party loans outstanding, were exchanged for 1,275,000 post-split shares of Quamtel’s common stock.
 
As a result of the Share Exchange Agreement, WQN became a wholly-owned subsidiary of Quamtel, through which its operations will be conducted. On September 8, 2009, Quamtel filed an amendment to its Articles of Incorporation concluding a one-for-ten reverse split of its common stock, and increasing its authorized stock to 200,000,000 common shares and 50,000,000 preferred shares.
 
On December 9, 2009, the Company acquired all of the outstanding  membership interests of Mobile Internet Devices, LLC, a Florida limited liability company (“Mobile Devices”), for a combination of common stock, stock warrants, and a royalty based on future earnings and new subscribers of the acquired company.  Mobile Devices was subsequently renamed and reorganized as Data Jack, Inc., a Texas corporation (“Data Jack”).

Overview
 
WQN was formed as a Texas corporation in June 2007, when it acquired an operating business that was originally founded in 1996. WQN provides prepaid and postpaid enhanced telecommunications services with an emphasis on transporting calls that originate from the United States and Canada and terminate to specific regions of the world. Customers utilize WQN’s Voice Over Internet Protocol (“VoIP”) network to place quality international calls at discounted rates. The voice quality of WQN’s VoIP calls is nearly the same as an international telephone call carried over a traditional telephone line. A substantial portion of WQN’s revenue is derived from the sale of prepaid service to customers calling from the United States to India. WQN’s products and services are provisioned and sold online via its websites.
 
Data Jack was formed in February 2009, and its revenues prior to the Company’s acquisition were $96,113.  Data Jack specializes in delivering nationwide mobile 3G data coverage for a competitive fixed monthly price, through a proprietary USB device connected to any computer with a Windows or Mac operating system.
 
 
13

 
 
Results of Operations for the Three Months ended March 31, 2010 Compared to the Same Period in 2009
 
Revenues
 
Our revenues for the three months ended March 31, 2010 and 2009 were $703,748 and $712,850, respectively. Revenues decreased primarily because the retail rates to India, one of the Company’s primary markets, have been rapidly declining due to increased competition.  This trend is expected to continue, in turn putting further downward pressure on revenues and margins. Data Jack revenues were $149,239 for three months ended March 31, 2010 (none in the corresponding 2009 period, since Data Jack was acquired in December 2009), partially offsetting the India-based revenue decline.
 
Revenues are derived primarily from our prepaid international calling services and our consumer based internet telephony and wireless internet access services. Inflation has not had a material effect on net sales and revenues or on income from continuing operations during the past two fiscal years.
 
Cost of Sales and Gross Profit
 
Cost of sales was $490,762 and $407,595 for the three months ended March 31, 2010 and 2009, respectively. This resulted in gross profit of $212,986 (30.3%) and $305,255 (42.8%) for the respective 2010 and 2009 periods. The decreased gross margin in 2010 was due to lowering our effective sales prices on our India traffic due to competitive market pressures, while our vendor cost reductions have not kept pace. Our aggregate gross profit decline during the three months ended March 31, 2010 versus the corresponding 2009 period was otherwise due primarily to our decreased revenues during that period.
 
Operating Expenses
 
Operating expenses were $1,047,086 and $368,559 for the three months ended March 31, 2010 and 2009, respectively. Compensation and consulting expenses increased from $229,063 to $667,669 during these three month periods due primarily to the $321,210 noncash compensation and consulting services as described in Note G to the Company’s consolidated financial statements, and to a lesser extent the iTella, Inc. consulting agreement entered into in 2009, as described in Note E to the Company’s consolidated financial statements. General and administrative (“G&A”) expenses increased from $123,426 in the 2009 period to $345,232 in 2010, primarily due to increased legal and audit fees associated with the Share Exchange Agreement and becoming a publicly reporting company, and generally increased advertising, rent and travel expenses.
 
Other Expenses
 
Interest and financing expenses increased from $2,592 in the first quarter of 2009 to $35,339 in the first quarter of 2010, due primarily to the secured and unsecured promissory notes payable discussed in Note E and Note F to the Company’s consolidated financial statements.
 
Net Income (Loss)

The revenue and gross margin decreases coupled with the operating and other expense increases noted above, combined to result in a net loss of $869,439 and $64,952, in the 2010 and 2009 periods, respectively.

Liquidity and Capital Resources
 
Cash and cash equivalents were $525,601 at March 31, 2010. Our net cash used in operating activities for the three months ended March 31, 2010 was $184,881, due primarily to our cash-based net loss during this period, partially offset by a decrease in our prepaid expenses and deposits, and other working capital changes. Our primary sources of funding, have been through the proceeds of the $1,000,000 secured promissory note payable received in the first quarter of 2010 as discussed in Note F to the Company’s consolidated financial statements, and from advances from a former shareholder under an unsecured revolving non-interest bearing promissory note payable with a maximum amount of $1,000,000 as described in Note E to the Company’s consolidated financial statements, and sales of common stock and other notes payable for cash. Advances under the unsecured revolving promissory note totaled $479,309 at March 31, 2010.
 
 
14

 
 
Our accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The Company has incurred operating losses and negative cash flows from operations since the Share Exchange Agreement, has incurred a retained earnings deficit of $2,799,451 through March 31, 2010, and has been dependent on issuances of debt and equity instruments to fund its operations.  The Company intends to increase its future profitability and seek new sources or methods of financing or revenue to pursue its business strategy.  However, there can be no certainty that the Company will be successful in this strategy.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.  Accordingly, the Company's independent auditors added an explanatory paragraph to their opinion on the Company's consolidated financial statements for the year ended December 31, 2009, based on substantial doubt about the Company's ability to continue as a going concern.

            These consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. In this regard, Management is proposing to raise any necessary additional funds through loans and additional sales of its common stock. There is no assurance that the Company will be successful in raising additional capital.

On February 27, 2010, the Company executed a $1,000,000 Senior Secured Promissory Note payable to Gilder Funding Corp., a company that is a shareholder of the Company and is controlled by Mr. Warren Gilbert (the “Secured Note”) for cash.  The proceeds were used to repay the $200,000 note payable to Mr. Gilbert referred to in Note F to the consolidated financial statements, plus accrued interest.  Interest on the Secured Note is payable monthly at 15% per annum beginning April 5, 2010, with the principal and any unpaid interest due on or before February 27, 2016. The Secured Note is secured by substantially all of the Company’s assets.
 
Capital Expenditure Commitments
 
We did not have any substantial outstanding commitments to purchase capital equipment at March 31, 2010.
 
Plan of Operations
 
By adjusting our operations and development to the level of capitalization, we believe that we have sufficient capital resources to meet projected cash flow requirements. However, if during that period or thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations, liquidity and financial condition.
 
Our future cash requirements include those associated with maintaining our status as a reporting entity. We believe that on an annual basis those costs would not exceed an average of $25,000 per month.
 
We presently do not have any available credit, bank financing or other external sources of liquidity. Due to our brief operating history and lack of substantial historical operating profits, our operations have not been a source of liquidity. We will need to obtain additional capital in order to fund our operations and become profitable. In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders. There can be no assurance that we will be successful in obtaining additional funding.
 
 
 
 
15

 
Critical Accounting Policies

The application of our accounting policies, which are important to our financial position and results of operations, requires significant judgments and estimates on the part of management. These estimates bear the risk of change due to the inherent uncertainty attached to each estimate and are likely to differ to some extent from actual results. A description of our critical accounting policies follows:

       1.      
In accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," the Company tests its intangible asset (goodwill) for impairment at least annually by comparing the fair value of this asset to its carrying value. If in the future the carrying value of our goodwill exceeds its fair value, the Company will recognize an impairment charge in an amount equal to that excess. For purposes of these tests, the excess of the fair value of the Company over the amounts assigned to its identified assets and liabilities is the implied fair value of its goodwill.

       2.      
Our revenues are primarily derived from fees charged to terminate voice services over the Company's network and from related monthly recurring charges. Variable revenue is earned based on the number of minutes during a call and is recognized upon completion of a call. Revenue from each customer is calculated from information received through the Company's network switches. The Company tracks the information received from the switch and analyzes the call detail records and applies the respective revenue rate for each call. Fixed revenue is earned from monthly recurring services provided to customers that are fixed and recurring in nature, and are connected for a specified period of time. Revenues are recognized as the services are provided and continue until the expiration of the contract or until cancellation of the service by the customer. Cash fees received prior to call completion are recorded on the Company’s balance sheet as unearned revenue.

Payments Due by Period
 
The following table illustrates our outstanding debt, purchase obligations, and related payment projections as of March 31, 2010:
 
         
2010
                     
2014 and
 
   
Total
   
(Remainder)
   
2011
   
2012
   
2013
   
Thereafter
 
                                     
Advances from related party
  $ 479,309     $ 479,309     $ -     $ -     $ -     $ -  
Notes payable (principal)
    1,090,709       184,421       175,497       188,469       218,766       323,556  
   Subtotals
    1,570,018       663,729       175,497       188,469       218,766       323,556  
                                                 
Purchase obligations
    -       -       -       -       -       -  
Operating leases
    396,552       63,723       91,453       97,954       71,248       72,175  
   Totals
  $ 1,966,570     $ 727,452     $ 266,950     $ 286,423     $ 290,014     $ 395,731  
 
ITEM 3.   QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable.
 
ITEM 4T.   CONTROLS AND PROCEDURES
 
(a)   Evaluation of Disclosure Controls and Procedures.
 
As required by Rule 13a-15(b) under the Exchange Act as of March 31, 2010, our management conducted an evaluation with the participation of our President who also serves as our principal financial and accounting officer (the “Certifying Officer”) regarding the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act).
 
A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects a company’s ability to initiate, authorize, record, process or report external financial data reliably in accordance with generally accepted accounting principles, such that there is more than a remote likelihood that a misstatement of our annual or interim financial statements that is more than inconsequential will not be prevented or detected. A material weakness is a significant deficiency, or combination of significant deficiencies, that result in more than a remote likelihood that a material misstatement of a company’s consolidated financial statements will not be prevented or detected. 
 
 
16

 

Based on this evaluation and in accordance with the requirements of Auditing Standard No. 2 of the Public Company Accounting Oversight Board, our Certifying Officer concluded that our disclosure controls and procedures were ineffective as of March 31, 2010. Our President, who is our sole executive officer, is not a financial or accounting professional, and we do not have a chief financial officer or sufficient accounting staff.  Until we are able to engage a qualified financial officer, and/or accounting staff, we may continue to experience material weaknesses in our disclosure controls that may adversely affect our ability to timely file our quarterly and annual reports.
 
Our management, including the Certifying Officer, does not expect that our disclosure controls and procedures will prevent all errors and all improper conduct. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, a design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of improper conduct, if any, have been detected. These inherent limitations include the realities that judgments and decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more persons, or by management override of the control. Further, the design of any system of controls is also based in part upon assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations and a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

(b)           Changes in Internal Control over Financial Reporting.

During the quarter ended March 31, 2010, there was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
17

 
 
PART II – OTHER INFORMATION
 
ITEM 1.   LEGAL PROCEEDINGS 
 
None
 
ITEM 1A.   RISK FACTORS
 
See the risk factors set forth in our Annual Report on Form 10-K filed on March 31, 2010.
 
ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
In the first quarter of 2010, the Company issued 319,000 shares of common stock valued at $548,435 as follows:
 
·  
165,000 shares were issued and sold to four accredited investors for net proceeds of $164,975.
 
·  
100,000 shares valued at $249,000 were issued to Stuart Ehrlich, the Company’s President and Chief Executive Officer, as partial compensation for his employment in 2010.
 
·  
24,000 shares valued at $59,760 were issued to Robert Picow as compensation for minor consultation services performed from time-to-time for the Company.
 
·  
5,000 shares valued at $12,450 were issued to Marc Moore in exchange for consultation services.
 
·  
25,000 shares valued at $62,250 were issued in connection with the Company’s acquisition of the M2M Domain Names.
 
All of these issuances were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 on the basis of the sophistication and small number of purchasers, and the restrictions placed on the certificates representing the shares and the representation received from the purchasers.
 
ITEM 3.   DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4.   (REMOVED AND RESERVED)
 
ITEM 5.   OTHER INFORMATION
 
None.
 
ITEM 6.   EXHIBITS
 
Exhibit No.
 
Description
4.1
 
Senior Secured Promissory Note issued to Gilder Funding Corp. on February 27, 2010. (1)
4.2
 
Security Agreement issued in conjunction with the Senior Secured Promissory Note payable to Gilder Funding Corp, dated February 27, 2010. (1)
4.3
 
Unsecured Revolving Promissory Note issued to S. Ivester, dated March 18, 2010. (1)
31.1
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.*
32.1
 
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.*
    
* Filed herewith
(1) Incorporated by reference to the 2009 Annual Report on Form 10-K as filed on March 31, 2010.
 
    
        
 
 
18

 
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
QUAMTEL, INC.
 
       
Dated: May 17, 2010
By:
/s/ Stuart Ehrlich  
   
Stuart Ehrlich
 
   
President and Chief Executive Officer
 
       
 
19