GOCH Geeks On Call Holdings Inc (CE)

 

Registration No. 333-150319

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 1

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

GEEKS ON CALL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware	7377	20-8097265
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

 

814 Kempsville Road, Suite 106

Norfolk, VA 23502

(757) 466-3448

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Richard T. Cole

Chief Executive Officer

814 Kempsville Road, Suite 106

Norfolk, VA 23502

(757) 466-3448

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copy to:

Harvey J. Kesner, Esq.

Haynes and Boone, LLP

153 East 53   rd   Street, Suite 4900

New York, NY 10022

Phone: (212) 659-7300

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

 

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering. o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

 

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

 

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

In connection with, and subsequently to, the closing of the Merger, we issued 365 units in a private placement (the “Private Placement”), consisting of an aggregate of 3,650,000 shares of our common stock and five-year warrants to purchase an aggregate of an additional 1,825,000 shares of common stock at an initial cash exercise price of $1.50 per share, at $10,000 per unit. In connection with the Private Placement, the Placement Agent received five-year warrants to purchase an aggregate of 292,000 shares of common stock at an initial exercise price of $1.50 per share. In the event that we are not in material compliance with our registration obligations set forth on Exhibit A to the Subscription Agreement entered into with the investors in the Private Placement, then the investors and the Placement Agent will also have a cashless exercise option upon exercising their warrants.

 

The Private Placement was made solely to “accredited investors,” as that term is defined in Regulation D under the Securities Act. The securities sold in the Private Placement were not registered under the Securities Act, or the securities laws of any state, and were offered and sold in reliance on the exemption from registration afforded by Section 4(2) and Regulation D (Rule 506) under the Securities Act and corresponding provisions of state securities laws, which exempt transactions by an issuer not involving any public offering.

 

Our principal executive offices are located at 814 Kempsville Road, Suite 106, Norfolk, Virginia 23502 and our telephone number is (757) 466-3448. We maintain a website at www.geeksoncall.com which contains a description of our company, but this website is not part of this prospectus. Please note that you should not view this website as part of this prospectus and should not rely on it in making a decision to invest in our common stock.

Our expansion plans outside the United States may not succeed.

 

We have current plans to expand into Canada and we are considering other markets outside the United States, including the United Kingdom and other countries within the European Union. Any expansion to markets outside the United States will present different and successive risks, expenses and difficulties with regard to applying or modifying our business model to different countries and regions of the world. In addition, certain countries regulate the offer of franchises and certain aspects of the franchisor/franchisee relationship and such foreign regulations may prevent or delay our expansion plans abroad. There can be no assurance that any of our efforts to expand outside the United States will prove successful, that we will not continue to incur operating losses in the future as a result of these efforts or that such efforts will not have a material adverse impact on us.

 

We will need additional financing to execute our business plan and fund operations, which additional financing may not be available.

 

We are dependent upon our managers and skilled professional technicians and if the supply of this labor pool is reduced in the future, then our operating expenses could be substantially increased as we attempt to replace such persons.  

 

Our success depends, in part, on the availability of technically qualified persons who are willing to service our customer base at earning and income levels consistent with industry standards. Our success in managing and expanding our business will depend upon (a) our ability to attract, hire and incorporate managers for our operations and (b) the ability of our franchisees to hire, train and supervise additional personnel and deal with turnover. To date we have not experienced a discernable shortage of qualified candidates to fill positions of managers or skilled technicians for company owned or franchised operations.   There is no assurance that either we can attract, hire and maintain experienced managers for our operations or that our franchisees can attract and retain such technically qualified persons. Moreover, if the supply of this labor pool is reduced in the future for reasons within or outside our control, then the expenses for our operations could be substantially increased as we attempt to replace such persons without our receiving offsetting increased revenues. 

 

Our industry is extremely competitive, and since most of these competitors have greater marketing, financial and other resources than we do, we may not be successful in implementing our marketing or operational strategies.  

 

The computer services industry is characterized by intense competition among numerous service providers (Geek Squad®, FireDog, etc.), computer retailers (e.g., CompUSATM) and others. Most of these competitors are more established than we are, with substantially greater marketing, financial, personnel and other resources than are currently available to us. There are few significant barriers to entry into the industry or to the adoption by competitors of some or all of our marketing or operational strategies. 

 

Our revenue growth is dependent upon the sale of franchises and the operation of franchises by third parties outside of our direct control.

 

We are subject to government regulation, which can result in increased costs, delays and limits on our operating flexibility.  

 

We must comply with federal and state laws that regulate the offer and sale of franchises and certain aspects of the franchisor/franchisee relationship. In addition, to the extent that we expand our operations abroad, we will be required to comply with foreign laws that regulate the offer of franchises and certain aspects of the franchisor/franchisee relationship. The common and statutory law of many states impose restrictions on the content and/or enforceability of the franchise agreement, including non-competition provisions and the termination or non-renewal of a franchise. Some states require that franchise materials be registered before franchises can be offered or sold in the state. There are substantial costs associated with complying with such regulations, and the failure to comply with federal, state and/or foreign laws, rules and regulations governing franchisors could have a material adverse effect on us and on our franchisees. In addition, we are subject to federal, state and local statutes, ordinance and regulations applicable to business generally. The costs of compliance with such statutes and regulations and timing issues related to regulatory action and approval may have a material adverse impact upon our financial condition and results of operations. The need to make certain disclosures related to the corporate restructuring resulting from the Merger and other transactions related to the Private Placement may cause us to delay our franchise filings in certain states, which, in turn, would prevent us from engaging in the offer and sale of new franchises until we are able to update our franchise disclosure documents. This delay may have a material adverse impact upon our financial condition and results of operations.

 

We may not recover the advertising costs necessary to penetrate new markets, which could have a material adverse effect on us.  

 

In order to open certain markets, we may be required to invest in advertising, marketing and other related expenses, including yellow page advertising, prior to franchisees beginning business operations and/or before there are enough franchisees operating to cover the cost of such advertising and marketing. Such advertising costs may not be recovered through continued franchise sales and/or franchisee operations and could have a material adverse effect on our financial condition and results of operations. 

 

Our rebranding efforts may not succeed, which could have a material adverse effect on us.  

 

 

Government regulation of the Geek Link System product could impair our ability to sell such product in certain markets.

 

It is our intent to utilize a portion of the proceeds of the Private Placement to purchase inventory of the “Geek Link System” private label powerline communication product pursuant to our agreement with Telkonet Inc. (“Telkonet”) and to hire additional sales representatives and technicians to market Geek Link System in metropolitan areas outside of our present foot print of 33 cities throughout the U.S. We are considering ways to integrate the sale of the Geek Link technology into our network of franchisees across the country. Given recent changes in the technology, we are evaluating Telkonet’s new system which will allow us to reach additional markets. We have the contractual right but not the obligation to purchase the Geek Link technology from Telkonet. The Geek Link System product will be subject to regulation by the Federal Communications Commission (“FCC”). FCC rules permit the operation of unlicensed digital devices that radiate radio frequency emissions if the manufacturer complies with certain equipment authorization procedures, technical requirements, marketing restrictions and product labeling requirements. Differing technical requirements apply to “Class A” devices intended for use in commercial settings, and “Class B” devices intended for residential use to which more stringent standards apply. An independent, FCC-certified testing lab has verified that Telkonet’s iWire System ^TM product suite (the technology which will serve as the basis for the Geek Link System product) complies with the FCC technical requirements for Class A and Class B digital devices. No further testing of these devices is required and the devices may be manufactured and marketed for commercial and residential use. Additional devices designed for commercial and residential use will be subject to the FCC rules for unlicensed digital devices. Moreover, if in the future the FCC changes its technical requirements for unlicensed digital devices, further testing and/or modifications of devices may be necessary. Failure to comply with any FCC technical requirements could impair our ability to sell the Geek Link System product in certain markets and could have a negative impact on our business and results of operations.

 

Infringement by third parties on the proprietary technology incorporated into the Geek Link System product, and development of substantially equivalent proprietary technology by competitors could negatively impact our business.  

 

Our success with respect to the sale and marketing of the Geek Link System product depends partly on the patent and trade secret protection obtained by Telkonet on the technology incorporated to the Geek Link System product, Telkonet’s ability to obtain future patents and licenses with respect to this technology, and Telkonet’s ability to manufacture the Geek Link System product without infringing on the proprietary rights of third parties. There can be no assurance that the measures Telkonet has taken to protect its intellectual property, including those integrated to its Telkonet iWire System ^TM product suite (the technology which will serve as the basis for the Geek Link System product), will prevent misappropriation or circumvention. In addition, there can be no assurance that any patent application, when filed, will result in an issued patent, or that the existing patents, or any patents that may be issued in the future, will provide significant protection against competing products. Moreover, there can be no assurance that any patents issued to, or licensed by, Telkonet will not be infringed upon or circumvented by others. Infringement by third parties on Telkonet’s proprietary technology could negatively impact our business.

 

Telkonet also relies to a lesser extent on unpatented proprietary technology, and no assurance can be given that others will not independently develop substantially equivalent proprietary information, techniques or processes or that Telkonet can meaningfully protect its rights to such unpatented proprietary technology. Development of substantially equivalent technology by Telkonet’s competitors could negatively impact our business.

 

In addition, the agreement pursuant to which Telkonet is obligated to supply the Geek Link System product to us is terminable in the event that, among other things, Telkonet determines in its reasonable business judgment that the Geek Link System product infringes upon the rights of a third party. If Telkonet is unable to modify the Geek Link System product in the event of a claim of infringement or is unable to come to a commercially reasonable agreement pursuant to which it agrees to license the infringing technology from the third party owner, Telkonet may elect to terminate the private label agreement with us. If the private label agreement is terminated, we would be required to stop selling the Geek Link System product which could negatively impact our revenue and results of operations.

 

 

Products sold by competitors could become more popular than the Geek Link System product or render the Geek Link System product obsolete, which could have a material adverse effect on us.   

 

The market for powerline communications products is highly competitive. These include Linksys (a Cisco company), Intel, GE, Motorola, Netgear, Sony and Samsung. In addition, there can be no assurance that other companies will not develop powerline communications products that also compete with the Geek Link System product in the future. Some of these competitors have longer operating histories, greater name recognition and substantially greater financial, technical, sales, marketing and other resources. These competitors may, among other things, undertake more extensive marketing campaigns, adopt more aggressive pricing policies, obtain more favorable pricing from suppliers and manufacturers and exert more influence on the sales channel than us. As a result, we may not be able to compete successfully with these potential competitors and these potential competitors may develop or market technologies and products that are more widely accepted than the Geek Link System product or that would render the Geek Link System product obsolete or noncompetitive. If any of these companies are successful in competing against us with respect to the Geek Link System product, our revenue could decline, our margins could be negatively impacted, and we could lose market share, any of which could seriously harm our business and results of operations.

 

Risks Relating to Our   Common Stock

 

The requirements of being a public company may strain our resources and distract management.

 

As a public company, we are subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act of 2002. These requirements are extensive. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls for financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight is required. This may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.

 

As a public company, it may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance personnel in order to develop and implement appropriate internal controls and reporting procedures. If we are unable to comply with the internal controls requirements of the Sarbanes-Oxley Act, we may not be able to obtain the independent accountant certifications required by such Act, if applicable.

 

If we fail to establish and maintain an effective system of internal control, we may not be able to report our financial results accurately. Any inability to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price of our common stock.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will be required to include in each Annual Report beginning with our fiscal year ending August 31, 2008, management’s assessment of the effectiveness of our internal control over financial reporting. Furthermore, beginning with our fiscal year ending on August 31, 2009 our independent registered public accounting firm will be required to attest to whether management’s assessment of the effectiveness of internal controls over financial reporting is fairly stated in all material respects and separately report on whether it believes we maintained, in all material respects, effective internal control over financial reporting. If we fail to timely complete the development of our internal controls and management is unable to make this assessment, or, once required, if the independent registered public accounting firm cannot timely attest to this assessment, we could be subject to regulatory sanctions and a loss of public confidence in our internal control and the reliability of our financial statements, which ultimately could negatively impact our stock price. 

 

Any future material changes in our operations likely will require us to expand and possibly revise our disclosure controls and procedures, internal controls and related corporate governance policies. In addition, the new and changed laws and regulations are subject to varying interpretations in many cases due to their lack of specificity and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. If our efforts to comply with new or changed laws and regulations differ from the conduct intended by regulatory or governing bodies due to ambiguities or varying interpretations of the law, we could be subject to regulatory sanctions, our reputation may be harmed and our stock price may be adversely affected.

 

Public company compliance may make it more difficult to attract and retain officers and directors.

 

The Sarbanes-Oxley Act and new rules subsequently implemented by the Securities Exchange Commission (the “SEC” ) have required changes in corporate governance practices of public companies. As a public company, we expect these new rules and regulations to increase our compliance costs in 2008 and beyond and to make certain activities more time consuming and costly than if we were not a public company. As a public company, we also expect that these new rules and regulations may make it more difficult and expensive for us to obtain director and officer liability insurance in the future and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.

 

Persons associated with securities offerings, including consultants, may be deemed to be broker dealers.

 

In the event that any of our securities are offered without engaging a registered broker-dealer we may face claims for rescission and other remedies. If any claims or actions were to be brought against us relating to our lack of compliance with the broker-dealer requirements, we could be subject to penalties, required to pay fines, make damages payments or settlement payments, or repurchase such securities. In addition, any claims or actions could force us to expend significant financial resources to defend ourselves, could divert the attention of our management from our core business and could harm our reputation.

 

Our stock price may be volatile in response to market and other factors.

 

The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:

 

·		competitive pricing pressures;
·		our ability to obtain working capital financing;
·		additions or departures of key personnel;
·		limited “public float” following the Merger, in the hands of a small number of persons whose sales or lack of sales could result in positive or negative pricing pressure on the market price for our common stock;
·		sales of our common stock (particularly following effectiveness of this resale registration statement);
·		our ability to execute our business plan;
·		operating results that fall below expectations;
·		loss of any strategic relationship;
·		regulatory developments;
·		economic and other external factors; and
·		period-to-period fluctuations in our financial results.

 

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.

 

We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock.

 

We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates.

 

The market for our common stock is limited, and you may not be able to sell the shares of our common stock that you hold.

 

Our common stock is currently traded on the OTC Bulletin Board, not on a national securities exchange. Therefore, our common stock is thinly traded, the market for purchases and sales of our common stock is limited and the sale of a limited number of shares could cause the price to fall significantly. Accordingly, it may be difficult to sell shares of our common stock quickly without significantly depressing the value of the stock. Unless we are successful in developing continued investor interest in our stock, sales of our stock could continue to result in major fluctuations in the price of the stock.

 

Our common stock may be deemed a “penny stock”, which would make it more difficult for our investors to sell their shares.

 

Our common stock may be subject to the “penny stock” rules adopted under Section 15(g) of the Exchange Act. The penny stock rules apply to companies whose common stock is not listed on the Nasdaq Stock Market or other national securities exchange and trades at less than $5.00 per share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we remain subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities. If our securities are subject to the penny stock rules, investors will find it more difficult to dispose of our securities.

 

Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.

 

If our stockholders sell substantial amounts of our common stock in the public market, or upon the expiration of any statutory holding period, under Rule 144, or expiration of lock-up periods applicable to outstanding shares, or issued upon the exercise of outstanding options or warrants, it could create a circumstance commonly referred to as an “overhang” and in anticipation of which the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. All of the shares of common stock issued to our officers, directors, and greater than 10% stockholders in the Merger are subject to a lockup agreement prohibiting sales of such shares for a period of 6 months following the filing date of this “resale” registration statement with the SEC that covers all of the common stock included within the units sold in the Private Placement (including the shares of common stock underlying the warrants). Following such date, all of those shares will become freely tradable, subject to securities laws and SEC regulations regarding sales by insiders. In addition, the shares of common stock sold in the Private Placement (including the shares underlying the warrants) will be freely tradable upon the earlier of: (i) effectiveness of a registration statement covering such shares; and (ii) the date on which such shares may be sold without registration pursuant to Rule 144 under the Securities Act.

 

As a result of members of our management being our largest stockholders, they can exert significant control over our business and affairs and have actual or potential interests that may depart from those of other stockholders .

 

Our executive management team owns or controls a significant percentage of our common stock. Additionally, this does not reflect the increased percentages that they may have in the event that they exercise any of the options or warrants they may hold or in the future be granted, or if they otherwise acquire additional shares of our common stock. The interests of such persons may differ from the interests of other stockholders, including purchasers of units in the Private Placement. As a result, in addition to their positions with us, such persons will have significant influence over all corporate actions requiring stockholder approval, irrespective of how our other stockholders, including purchasers in the Private Placement, may vote, including the following actions:

 

·		elect or defeat the election of our directors;
·		amend or prevent amendment of our Certificate of Incorporation or Bylaws;
·		effect or prevent a merger, sale of assets or other corporate transaction; and
·		control the outcome of any other matter submitted to the stockholders for vote.

 

In addition, such persons’ stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.

 

We may not be able to achieve secondary trading of our stock in certain states because our common stock is not nationally traded, which could subject our stockholders to significant restrictions and costs.

 

Because our common stock is not listed for trading on a national securities exchange, our common stock is subject to the securities laws of the various states and jurisdictions of the United States in addition to federal securities law. These laws cover any primary offering we might attempt and all secondary trading by our stockholders. While we may register our common stock or qualify for exemptions for our common stock in one of more states, if we fail to do so the investors in those states where we have not taken such steps may not be allowed to purchase our stock or those who presently hold our stock may not be able to resell their shares without substantial effort and expense. These restrictions and potential costs could be significant burdens on our stockholders.

 

Our certificate of incorporation allows for our board to create new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock.

 

Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of directors also has the authority to issue preferred stock without further stockholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders.

 

		Three months ended
		February 29, 2008			February 28, 2007
Selling, general and administrative expenses		$	1,688,374		$	924,880

 

For the three months ended February 29, 2008, selling, general and administrative expenses were $1,688,374 as compared to $924,880 for the three months ended February 28, 2007. The increase in selling, general and administrative expenses of $763,494 are attributable to these three areas:

 

·

Costs associated with meeting the requirements of being a public company. We have incurred significant costs relating to entering the public sector including professional fees relative to the preparation and completion of the reporting and filing requirements. Although future costs will continue to exceed pre-public level, we expect future costs should decrease since the “start up” costs are completed as we internally develop the expertise within our own staffing base, the use of outside support should diminish.

·	We have added technical support staff to service customers of our company owned territories. Additionally, as discussed above, we intend to expand our corporate services both to larger customers and to our existing and future franchise operations.

·

Stock based compensation. In our effort to retain and recruit qualified employees, we introduced a non qualified stock option plan during the last quarter. As such, we granted incentive stock options to officers and key employees as incentives. During the three months ended February 29, 2008 we incurred a non cash cost of vested options in the amount of $264,900.

 

 

 

		Six months ended
		February 29,  2008			February 28,  2007
Net cash used in investing activities		$	64,975		$	239,207

 

Net cash used in investing activities totaled $64,975 for the six months ended February 29, 2008, as compared to $239,207 for the six months ended February 28, 2007. A decrease in the repayments of loans to franchisees and others was mainly attributable for the decline. 

 

Richard Cole employment agreement.  On February 8, 2008, we entered into an employment agreement with Richard Cole, to serve as our Chief Executive Officer. The term of the agreement is five years. Mr. Cole receives an annual base salary of $275,000, which may be increased annually at the discretion of our board of directors; provided, however, that Mr. Cole receives an annual cost of living increase of not less than 3% over the prior year’s base salary. In addition to a base salary, Mr. Cole is eligible to receive a bonus tied to certain milestones, which amount is also to be determined by our board of directors. Mr. Cole also receives a company car to use during the term of his agreement.

 

If Mr. Cole’s employment is terminated without cause (as defined in his agreement) or if he resigns for good reason (as defined in his agreement), we will be obligated to pay him, as severance, his then current annual base salary for eighteen months. If Mr. Cole is terminated with cause or if he voluntarily resigns (other than for good reason), he is prohibited from competing with us for eighteen months after the termination of his employment.

 

Mr. Cole received, immediately upon the consummation of the Merger, 1,000,000 options with a six year term. Twenty percent of the options vested immediately and 20% of the balance of the options will vest on each of the first four anniversaries of the date of grant. The options have an exercise price of $1.00 per share.

 

Richard Artese employment agreement.  On February 8, 2008, we entered into an employment agreement with Richard Artese, to serve as our Vice President and Chief Information Officer. The term of the agreement is five years. Mr. Artese receives an annual base salary of $150,000, which may be increased annually at the discretion of our board of directors. In addition to a base salary, Mr. Artese is eligible to receive a bonus tied to certain milestones, which amount is also to be determined by our board of directors.

 

On March 28, 2008, our board of directors adopted resolutions appointing Mr. Artese to the position of Executive Vice President and Chief Operating Officer. In connection therewith, Mr. Artese's annual salary was increased from $150,000 to $200,000.

 

 

 

GEEKS ON CALL AMERICA, INC.

NOTES TO FINANCIAL STATEMENTS

AUGUST 31, 2007 AND 2006

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Allowance for doubtful accounts

The Company periodically reviews its trade and notes receivables in determining its allowance for doubtful accounts. As of August 31, 2007 and 2006, allowance for doubtful accounts balance for trade receivables was $15,893 and $13,031, respectively.  There was no allowance for doubtful accounts for the notes receivable as of August 31, 2007 and 2006 as they are deemed fully collectible.

Investments

The Company determines the appropriate classification of marketable debt and equity securities at the time of purchase and re-evaluates such designation as of each balance sheet date.  At August 31, 2006, the Company’s investments consisted of certificates of deposit classified as held-to-maturity and are carried at their face value, which was equivalent to their face value.  The Company redeemed all of these certificates of deposit at their maturity dates during 2007.  

Inventories

Inventories, totaling $69,453 and $79,875 as of August 31, 2007 and 2006, respectively are stated at the lower of cost (first in, first out) or net realizable value, and consist primarily of business forms, marketing and promotional supplies for sale to the Company’s franchisees.  Inventories are included in prepaid expenses and other current assets in the accompanying balance sheets.

Concentration of Credit Risk

Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents, trade receivable and notes receivable.  The Company keeps its cash and temporary cash investments with high credit quality institutions.  At times, such investments may be in excess of the FDIC insurance limit.

 

 

GEEKS ON CALL AMERICA, INC.

NOTES TO FINANCIAL STATEMENTS

AUGUST 31, 2007 AND 2006

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Impairment of Long-Lived Assets

The Company follows Statement of Financial Accounting Standards No. 144, “ Accounting for the Impairment or Disposal of Long-Lived Assets ” (“SFAS No. 144”). SFAS No. 144 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted discounted cash flows. Should impairment in value be indicated, the carrying value of the long-lived assets and certain identifiable intangibles will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset.  SFAS No. 144 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less disposal costs.

Stock Based Compensation

On December 16, 2004, the FASB issued FASB SFAS No. 123(R) (revised 2004), “ Share-Based Payment ” which is a revision of SFAS No. 123, “ Accounting for Stock-Based Compensation ”. SFAS No. 123(R) supersedes APB opinion No. 25, “ Accounting for Stock Issued to Employees ”, and amends SFAS No. 95, “ Statement of Cash Flows ”. Generally, the approach in SFAS No. 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro-forma disclosure is no longer an alternative. The effective date for our application of SFAS No. 123(R) is September 1, 2006. Management has elected to apply SFAS No. 123(R) commencing on that date.

 

There were no grants of employee options during the years ended August 31, 2007 and 2006. There were no unvested options outstanding as of the date of adoption of SFAS No. 123(R).

Segment reporting

 

The Company adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”). SFAS establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions how to allocate resources and assess performance. The information disclosed herein, materially represents all of the financial information related to the Company's principal operating segment.

 

Income taxes

The Company follows SFAS No. 109, “ Accounting for Income Taxes ” (SFAS No. 109) for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability during each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.

 

Loss per share

In accordance with SFAS No. 128, “ Earnings per Share ”, the basic loss per share is computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding.  Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding as if the potential common shares had been issued and if the additional common shares were dilutive.  Common equivalent shares are excluded from the computation of the diluted loss per share as their effect would be anti-dilutive.

 

 

GEEKS ON CALL AMERICA, INC.

NOTES TO FINANCIAL STATEMENTS

AUGUST 31, 2007 AND 2006

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent accounting pronouncements (continued)

In September 2006 the FASB issued its SFAS No. 158, “ Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) ” (“SFAS No. 158”). SFAS No. 158 improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. SFAS No. 158 also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. The effective date for an employer with publicly traded equity securities is as of the end of the fiscal year ending after December 15, 2006. The Company does not expect adoption of this standard will have a material impact on its financial position, results of operations or cash flows.

In December 2006, the FASB issued FSP EITF 00-19-2, “ Accounting for Registration Payment Arrangements ” (“ FSP 00-19 -2”) which addresses accounting for registration payment arrangements. FSP 00-19 -2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with SFAS No. 5, “Accounting for Contingencies”. FSP 00-19 -2 further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable generally accepted accounting principles without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to  the issuance of EITF 00-19-2, this guidance shall be effective for financial statements issued for fiscal years beginning after December 15, 2006 and interim periods within those fiscal years. The Company does not expect adoption of this standard will have a material impact on its financial position, results of operations or cash flows  

In February 2007, the FASB issued SFAS No. 159, “ The Fair Value Option for Financial Assets and Financial Liabilities ” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments, and certain other items, at fair value. SFAS No. 159 applies to reporting periods beginning after November 15, 2007. The adoption of SFAS No. 159 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS No. 141(R)"), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141R is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008.  Earlier adoption is prohibited and the Company is currently evaluating the effect, if any, that the adoption will have on its financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51" (“SFAS No. 160”), which will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets.  SFAS No. 160 is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008.  Earlier adoption is prohibited and the Company is currently evaluating the effect, if any, that the adoption will have on its financial position, results of operations or cash flows.

 

GEEKS ON CALL AMERICA, INC.

NOTES TO FINANCIAL STATEMENTS

AUGUST 31, 2007 AND 2006

NOTE 2 - GOING CONCERN MATTERS

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements, the Company incurred a net loss available to common stockholders of $1,387,489 and $1,751,909 (included $239,835 and $184,382 preferred stock dividends, respectively) for the year ended August 31, 2007 and 2006, respectively. Additionally, the Company has negative working capital of $737,215 and an accumulated deficit of $5,370,659 as of August 31, 2007. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.

The Company’s continued existence is dependent upon management’s ability to develop profitable operations and resolve its liquidity problems. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

 

The Company is actively pursuing additional equity financing through discussions with investment bankers and private investors. There can be no assurance that the Company will be successful in its effort to secure additional equity financing.

NOTE 3 - NOTES RECEIVABLE

Note receivables are recorded at cost, less allowance for doubtful accounts, if applicable.  Repayment of the notes receivable is dependent on the performance of the underlying franchises that collateralize the notes receivable.  An allowance, if applicable, is estimated based on a comparison of amounts due to the estimated fair value of the underlying franchise.

At August 31, 2007 and 2006, the notes receivable consists of bridge loans offered to franchises during the period which the franchise is establishing their permanent financing with a third party lender.  The notes receivable bear an interest rate of 9% per annum and are recorded at face value.  Interest is recognized over the life of the note receivable.

A summary of the notes receivable are as follows:

		August 31, 2007			August 31, 2006
Notes receivable, 9% per annum, secured by franchise		$	552,891		$	51,516
Less:  Current portion:			(145,892	)		(17,822	)
Long term portion:		$	406,999		$	33,694

 

GEEKS ON CALL AMERICA, INC.

NOTES TO FINANCIAL STATEMENTS

AUGUST 31, 2007 AND 2006

 

NOTE 11 - COMMITMENTS AND CONTINGENCIES (continued)

 

Litigation

The Company is subject to other legal proceedings and claims, which arise in the ordinary course of its business.  Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity.  There was no outstanding litigation as of August 31, 2007 and 2006.

 

NOTE 12 - SHARES SUBJECT TO MANDATORY REDEMPTION

Class D - Preferred Stock

During the year ended August 31, 2007, the Company sold an aggregate of 123,201 shares of its Class D preferred stock at an average price of $5.56 per share, mandatorily redeemable on the fifth anniversary from the date of issuance at market value of the Company multiplied by the put fraction as described in the Articles of Incorporation.  The put fraction numerator is the number of shares of common stock the Class D - Preferred stock is convertible into and the denominator is the sum of these shares plus the then outstanding common stock.

The Class D - Preferred Stock is not convertible into common stock or any other equity instrument of the Company (See Note 13) except as noted above and carries voting rights and is entitled to receive, when and as declared by the board of directors, cumulative annual dividends at an annual rate of $0.56 per share and is fully participating with any dividends declared or paid in respect to common stock.  The dividends accumulate and accrue on a day to day basis whether or not earned or declared.  Unless all accumulative dividends of Class D - Preferred stock for all past and current dividend periods have been paid or declared, no dividends other than a dividend solely in common stock will be paid or declared by the Company.  The Company cannot sell, redeem or acquire shares of its common stock or Class D - Preferred stock unless all cumulative dividends of Class D preferred stock have been paid or declared.  

Class D - Preferred stock has a liquidation value of $685,000 and $-0- plus any accrued and unpaid dividends of $39,372 and $-0- as of August 31, 2007 and 2006, respectively.  The Company has properly classified the Class D - Preferred stock as liabilities at August 31, 2007 because these instruments embody obligations to repurchase the Company’s equity shares that require the Company to settle by transferring its assets at the holders’ option not the issuer’s option.

 

NOTE 13 - STOCKHOLDERS’ EQUITY

Preferred stock

The Company is authorized four classes of preferred stock: Class A has 200,000 authorized shares; Class B has 167,130 authorized shares; Class C has 128,870 authorized shares and Class D has 179,860 authorized shares (See Note 12 above).  All classes have no par value.

Class A - Preferred stock

Class A - Preferred stock does not carry voting rights and is redeemable upon demand at the original purchase price plus any accrued dividends.  Each share is convertible by the holder into one share of common stock after a holding period of one year.  As of May 6, 2004; all outstanding shares of Class A - Preferred stock were converted into common shares.

Class B - Preferred stock

Class B - Preferred stock carries voting rights and is entitled to receive, when and as declared by the board of directors, cumulative annual dividends at an annual rate of $1.077 per share.  The dividends accumulate and accrue on a day to day basis whether or not earned or declared.  Unless all accumulative dividends of Class B - Preferred stock for all past and current dividend periods have been paid or declared, no dividends other than a dividend solely in common stock will be paid or declared by the Company.  The Company cannot sell, redeem or acquire shares of its common stock or Class A - Preferred stock unless all cumulative dividends of Class B preferred stock have been paid or declared.  

 

 

GEEKS ON CALL AMERICA, INC.

NOTES TO FINANCIAL STATEMENTS

AUGUST 31, 2007 AND 2006

 

NOTE 13 - STOCKHOLDERS’ EQUITY (continued)

Class B preferred stock has a liquidation value of $1,727,551 plus any accrued and unpaid dividends of $601,912 and $429,156 as of August 31, 2007 and 2006, respectively.

All, but not less than all, of Class B - Preferred stock are be convertible, at the option of the holders, at any time into shares of the Company’s common stock at a conversion price of $10.75 per share adjusted for stock dividends, splits or issuances of common stock below the initial conversion price of $10.77.

Holders of the Class B - Preferred stock can require the Company to repurchase the shares five years from the date of issuance at market value of the Company multiplied by the put fraction.  The put fraction numerator is the number of shares of common stock the Class B - Preferred stock is convertible into and the denominator is the sum of the total number of shares of common stock into which all securities of the Company convertible into common stock then outstanding could be converted (including all such shares included in the numerator of the put fraction).

Class B - Preferred stock (continued)

In December 2005, the Company redeemed 2,669 shares of Class B preferred stock at $21.54 per share.

In March 2006, the Company redeemed 4,057 shares of Class B preferred stock at $21.54 per share.

Class C - Preferred stock

Class C - Preferred stock carries voting rights and is entitled to receive, when and as declared by the board of directors, cumulative annual dividends at an annual rate of $0.56 per share.  The dividends accumulate and accrue on a day to day basis whether or not earned or declared.  Unless all accumulative dividends of Class C - Preferred stock for all dividend periods have been paid or declared, no dividends other than a dividend solely in common stock will be paid or declared by the Company.  The Company cannot sell, redeem or acquire shares of its common stock unless all cumulative dividends of Class C preferred stock have been paid or declared.  

Class C - Preferred stock has a liquidation value of $666,000 plus any accrued and unpaid dividends of $75,291 and $8,212 as of August 31, 2007 and 2006, respectively.

All, but not less than all, of Class C - Preferred stock are be convertible, at the option of the holders, at any time into shares of the Company’s common stock at a conversion price of $5.56 per share.

Holders of the Class C - Preferred stock can require the Company to repurchase the shares commencing five years from the date of issuance at market value of the Company multiplied by the put fraction.  The put fraction numerator is the number of shares of common stock the Class C - Preferred stock is convertible into and the denominator is the sum of the total number of shares of common stock into which all securities of the Company convertible into common stock then outstanding could be converted (including all such shares included in the numerator of the put fraction).

During the year ended August 31, 2006, the Company sold an aggregate of 119,784 shares of its Class C preferred stock at an average price of $5.56 per share adjusted for stock dividends, splits or issuances of common stock below the initial conversion price.

Common stock

The Company is authorized to issue 5,000,000 shares of its no par value common stock. As of August 31, 2007 and 2006, there were 2,224,710 and 2,222,786 shares of common stock issued and outstanding, respectively.

During the year ended August 31, 2006, the Company sold an aggregate of 43,500 shares of its common stock at an average price of $9.54 per share.

 

 

GEEKS ON CALL AMERICA, INC.

NOTES TO FINANCIAL STATEMENTS

AUGUST 31, 2007 AND 2006

Common stock (continued)

In March 2006, the Company repurchased 6,990 shares of its common stock at an average repurchase price of $2.00 per share originally issued with a restricted stock award program.  

In March 2006, the Company issued 3,524 shares of its common stock with the exercise of a restricted stock award program at $10.00 per share.

In March 2007, the Company issued 1,924 shares of its common stock with the exercise of a restricted stock award program at $5.00 per share.  

NOTE 14 - WARRANTS AND OPTIONS

The Company does not have any outstanding warrants or options as of August 31, 2007

Restricted Stock Awards.

The Company provided a restricted stock award plan to employees whereby the Company may grant shares with vesting over a four year period.  The Company also has a right to, but no obligation to re-purchase awarded shares to any employee terminated within the first two years of any grant. As of August 31, 2007, all employees were fully vested and the restricted award program was canceled.

NOTE 15 - SUBSEQUENT EVENTS

On December 6, 2007, the Company reincorporated under the laws of the State of Delaware.

On December 14, 2007, the Company filed an “Amended and Restated Certificate of Incorporation” with the State of Delaware. With the amendment and restatement, the Company is authorized to issue two classes of stock to be designated, respectively, “Common Stock” and “Preferred Stock”. The total number of shares the Company is authorized to issue is five million seven hundred thousand (5,700,000) shares.  Five million (5,000,000) shares shall be $0.001 par value Common Stock and seven hundred (700,000) shares shall be $0.001 par value preferred stock.   The Preferred Stock authorized by the Amended and Restated Certificate of Incorporation may be issued from time to time in one or more class.

The Board of Directors of the Company is authorized to fix or alter the preferences, limitations and respective rights granted to and imposed upon additional class of Preferred Stock and the number of shares constituting any such class and the designation thereof.

The class of Preferred Stock designated are as follows:

Class B Preferred Stock

Dividends

The Class B Preferred Stock shall consist of one hundred sixty-seven thousand one-hundred thirty (167,130) shares. The holders of the then outstanding Class B Stock will be entitled to receive, when and as declared by the Board of Directors and out of funds legally available therefore, cumulative annual dividends at an annual rate of $1.077 per share.  Dividends will accumulate and accrue from the date of its original issue and will accrue from day to day thereafter, whether or not earned or declared.  Such dividends will be cumulative.

Participation

Fully participating

 

 

GEEKS ON CALL AMERICA, INC.

NOTES TO FINANCIAL STATEMENTS

AUGUST 31, 2007 AND 2006

NOTE 15 - SUBSEQUENT EVENTS (continued)

Voting Rights

Each holder of shares of Class B Stock will be entitled to vote on all matters including the election of directors unless expressly provided and will be entitled to the number of votes per share of Class B Stock equal to the largest number of full shares of Common Stock into which all shares of Class B Stock held by the holder could be converted.

Conversion

The holder of Class B Stock will have the right to convert all, but not less than all, of the Class B Stock at the option of the holder at any time into Common Stock.  The number of shares of Common Stock is determined as follows:  the sum of the Conversion Ratio Share Number and the Return of Capital Share Number.  For purposes of such calculation, the following terms shall have the following meanings:

“Conversion Ratio Share Number” means the product of (A) 1.00186 and (B) the sum of (y) the number of shares being converted multiplied by 3 and (z) the Dividend Accrual Share Number

“Dividend Accrual Share Number” means all earned but unpaid dividends with respect to converted shares, whether or not declared, to and including, the time of conversion, divided by 10.77.

“Return of Capital Share Number” means the quotient of (A) 10.77 multiplied by the number of shares being converted, divided by (B) 3.85

Class C Preferred Stock

Dividends

The Class C Preferred Stock shall consist of One hundred twenty-eight thousand eight hundred seventy (128,870) shares. The holders of the then outstanding Class C Stock will be entitled to receive, when and as declared by the Board of Directors and out of funds legally available therefore, cumulative annual dividends at an annual rate of $0.56 per share.  Dividends will accumulate and accrue from the date of its original issue and will accrue from day to day thereafter, whether or not earned or declared.  Such dividends will be cumulative.

Participation

Fully participating

Voting Rights

Each holder of shares of Class C Stock will be entitled to vote on all matters including the election of directors unless expressly provided and will be entitled to the number of votes per share of Class C Stock equal to the largest number of full shares of Common Stock into which all shares of Class C Stock held by the holder could be converted.

Conversion

The holder of Class C Stock will have the right to convert all, but not less than all, of the Class C Stock at the option of the holder at any time into Common Stock.  The number of shares of Common Stock is determined as follows:  the sum of (A) the number of shares being converted plus (B) all earned but unpaid dividends with respect to converted shares, whether or not declared, to and including the time of conversion, divided by 5.56 plus (C) a fraction, numerator of which is 5.56 multiplied by the number of shares being converted, and the denominator of which is 3.85.

 

 

GEEKS ON CALL AMERICA, INC.

NOTES TO FINANCIAL STATEMENTS

AUGUST 31, 2007 AND 2006

NOTE 15 - SUBSEQUENT EVENTS (continued)

Class D Preferred Stock

Dividends

The Class D Preferred Stock shall consist of One hundred seventy-nine thousand eight hundred sixty (179,860) shares. The holders of the then outstanding Class D Stock will be entitled to receive, when and as declared by the Board of Directors and out of funds legally available therefore, cumulative annual dividends at an annual rate of $0.56 per share.  Dividends will accumulate and accrue from the date of its original issue and will accrue from day to day thereafter, whether or not earned or declared.  Such dividends will be cumulative.

Participation

Fully participating

Voting Rights

Each holder of shares of Class D Stock will be entitled to vote on all matters including the election of directors unless expressly provided and will be entitled to the number of votes per share of Class D Stock equal to the largest number of full shares of Common Stock into which all shares of Class D Stock held by the holder could be converted.

Conversion

The holder of Class D Stock will have the right to convert all, but not less than all, of the Class D Stock at the option of the holder at any time into Common Stock.  The number of shares of Common Stock is determined as follows:  the sum of (A) the number of shares being converted plus (B) all earned but unpaid dividends with respect to converted shares, whether or not declared, to and including the time to conversion, divided by 5.56 plus (C) a fraction, numerator of which is 5.56 multiplied by the number of shares being converted, and the denominator of which is 3.85.

In December 14, 2007, the Company issued 930,938 shares of common stock in exchange for 160,404 shares of Class B-Preferred Stock (representing all) and issued 60,502 shares of common stock in settlement of accumulative and unpaid dividends.

In December 14, 2007, the Company issued 292,778 shares of common stock in exchange for 119,784 shares of Class C-Preferred Stock (representing all) and issued 17,012 shares of common stock in settlement of accumulative and unpaid dividends

In December 14, 2007, the Company issued 252,770 shares of common stock in exchange for 103,417 shares of Class D-Preferred Stock and issued 8,222 shares of common stock in settlement of accumulative and unpaid dividends.  Additionally, the Company issued a promissory note in exchange for the remaining 19,784 shares of Class D-Preferred Stock.

Related Party Transaction

In October 2007, the Company entered into an exclusive private label/marketing agreement (the “Agreement”) with Telkonet, Inc. (a major supplier of the Company) for products under the trade name Geek Link System.  Pursuant to the Agreement, the Company is to resale these private labeled products to customers through the Company’s existing network of franchisees.  In addition, the Company, Telkonet, Inc. and certain stockholders of the Company entered into an agreement whereby Telkonet, Inc. acquired 1,160,043.435 shares of the Company’s common stock from these existing stockholders, which in effect transferred 39.6% ownership in the Company to Telkonet, Inc. by these stockholders.  With the effect of the December 14, 2007 preferred stock conversion, Telkonet, Inc.’s ownership of the Company decreased to 30.68%.

 

 

GEEKS ON CALL HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION

FEBRUARY 29, 2008

(unaudited)

 

NOTE 12 - RELATED PARTY TRANSACTIONS

As of February 29, 2008, the Company was due for travel and other advances from officers and employees of $65,761. Subsequent to February 29, 2008, all advances have been repaid.

In October 2007, the Company entered into an exclusive private label/marketing agreement (the “Agreement”) with Telkonet, Inc. (a major supplier of the Company) for products under the trade name Geek Link System. Pursuant to the Agreement, the Company is to resale these private labeled products to customers through the Company’s existing network of franchisees. In addition, the Company, Telkonet, Inc. and certain stockholders of the Company entered into an agreement whereby Telkonet, Inc. acquired 1,160,043.435 shares of the Company’s common stock from these existing stockholders, which in effect transferred 39.6% ownership in the Company to Telkonet, Inc. by these stockholders. With the effect of the December 14, 2007 preferred stock conversion, Telkonet Inc.’s ownership of the Company decreased to 30.68%.

NOTE 13 - SUBSEQUENT EVENTS

On March 12, 2008, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Mr. Gregory C. Hutson (the “Seller”).

Pursuant to the Agreement, the Company acquired from the Seller certain software or protocol known as quiXsupport Helpdesk Software, together with related intellectual property rights, including the rights to the domain names RemoteMe.com, Virtual-Geek.com and MrHelpdesk.com (the “TTS Process”). In consideration for the acquired assets, the Company agreed to pay the Seller $100,000 in cash and 125,000 shares of unregistered common stock. The Agreement does not prohibit the Company from licensing or otherwise acquiring other technology in the future which may be similar to the TTS Process.

In connection with the acquisition of the assets, the Company entered into a consulting agreement with the Seller expiring on September 30, 2009 (the “Consulting Agreement”). The consulting fees payable to the Seller are approximately $76,000 over the term of the Consulting Agreement.