United American Corp. 10QSB mainbody
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-QSB
[X]
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Quarterly
Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
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For
the quarterly period ended March
31, 2006
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[
]
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Transition
Report pursuant to 13 or 15(d) of the Securities Exchange Act of
1934
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For
the transition period _________
to __________
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Commission
File Number: 000-27621
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United
American Corporation
(Exact
name of small business issuer as specified in its charter)
Florida
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95-4720231
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(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer Identification No.)
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1080
Beaver Hall, Suite 1555, Montreal, Quebec, Canada H2Z
1S8
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(Address
of principal executive offices)
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514-313-6010
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(Issuer’s
telephone number)
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_______________________________________________________________
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(Former
name, former address and former fiscal year, if changed since last
report)
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Check
whether the issuer (1) 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 issuer was required to file such reports),
and
(2) has been subject to such filing requirements for the past 90 days [X] Yes
[
] No
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). [ ] Yes [X] No
State
the
number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date: 49,969,985 Common Shares as of April 6,
2006
Transitional
Small Business Disclosure Format (check one): Yes [ ] No [X]
Our
unaudited condensed consolidated financial statements included in
this
Form 10-QSB are as follows:
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These
unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of
America for interim financial information and the SEC instructions to Form
10-QSB. In the opinion of management, all adjustments considered necessary
for a
fair presentation have been included. Operating results for the interim period
ended March 31, 2006 are not necessarily indicative of the results that can
be
expected for the full year.
CONDENSED
CONSOLIDATED BALANCE SHEET
MARCH
31, 2006
(UNAUDITED)
ASSETS
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(IN
US$)
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Current
Assets:
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Cash
and cash equivalents
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$
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-
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Accounts
receivable, net
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125,952
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Investment
tax credit receivable
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16,429
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Inventory
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20,014
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Prepaid
expenses and other current assets
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27,314
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Total
Current Assets
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189,709
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Fixed
assets, net of depreciation
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590,601
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TOTAL
ASSETS
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$
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780,310
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LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
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LIABILITIES
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Current
Liabilities:
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Bank
overdraft
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$
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15,380
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Loan
payable
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77,775
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Loan
payable - related parties
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142,584
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Convertible
debentures
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90,961
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Derivative
liability
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9,039
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Accounts
payable and accrued expenses
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598,521
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Total
Current Liabilities
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934,260
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Total
Liabilities
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934,260
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STOCKHOLDERS'
EQUITY (DEFICIT)
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Common
stock, $.001 Par Value; 125,000,000 shares authorized
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and
49,969,985 shares issued and outstanding
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49,970
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Additional
paid-in capital
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4,219,448
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Accumulated
deficit
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(4,939,717)
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Accumulated
other comprehensive income (loss)
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45,496
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Noncontrolling
interest
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470,853
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Total
Stockholders' Equity (Deficit)
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(153,950)
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TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
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$
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780,310
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The
accompanying notes are an integral part of the condensed financial
statements.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE
INCOME (LOSS)
FOR
THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
ASSETS |
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2006
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2005
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OPERATING
REVENUES
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Sales
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$
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2,463,170
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$
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428,667
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COST
OF SALES
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Inventory,
beginning of period
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51,652
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44,059
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Purchases
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2,293,893
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315,786
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Inventory,
end of period
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(20,014)
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(121,236)
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Total
Cost of Sales
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2,325,531
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238,609
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GROSS
PROFIT
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137,639
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190,058
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OPERATING
EXPENSES
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Selling
and promotion
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26,988
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55,708
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Professional
and consulting fees
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70,836
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196,614
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Commissions
and wages
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255,584
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73,251
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Other
general and administrative expenses
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37,529
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11,826
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Depreciation,
amortization and impairment
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56,745
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50,001
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Total
Operating Expenses
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447,682
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387,400
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LOSS
BEFORE OTHER INCOME (EXPENSE)
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(310,043)
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(197,342)
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OTHER
INCOME (EXPENSE)
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Interest
expense
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(4,266)
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(3,000)
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Total
Other Income (Expense)
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(4,266)
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(3,000)
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NET
LOSS BEFORE PROVISION FOR INCOME TAXES
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AND
NONCONTROLLING INTEREST
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(314,309)
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(200,342)
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Noncontrolling
interest
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27,828
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1,178
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NET
LOSS BEFORE PROVISION FOR INCOME TAXES
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(286,481)
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(199,164)
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Provision
for Income Taxes
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-
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-
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NET
LOSS APPLICABLE TO COMMON SHARES
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$
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(286,481)
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$
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(199,164)
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NET
LOSS PER BASIC AND DILUTED SHARES
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$
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(0.01)
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$
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(0.00)
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WEIGHTED
AVERAGE NUMBER OF COMMON
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SHARES
OUTSTANDING
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49,969,985
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45,199,985
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COMPREHENSIVE
INCOME (LOSS)
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Net
loss
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$
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(286,481)
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$
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(199,164)
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Other
comprehensive income (loss)
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Currency
translation adjustments
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6,474
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144,873
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Comprehensive
income (loss)
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$
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(280,007)
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$
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(54,291)
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The
accompanying notes are an integral part of the condensed financial
statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
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IN
US$
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2006
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2005
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CASH
FLOWS FROM OPERATING ACTIVITIES
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Net
loss
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$
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(286,481)
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$
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(199,164)
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Adjustments
to reconcile net loss to net cash
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used
in operating activities:
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Depreciation,
amortization and impairment
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56,745
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50,001
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Shares
issued for services
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-
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140,000
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Changes
in assets and liabilities
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(Increase)
decrease in accounts receivable
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60,878
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(128,751)
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(Increase)
in investment tax credit receivable
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73
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-
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(Increase)
decrease in inventory
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31,638
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(77,177)
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(Increase)
decrease in prepaid expenses and other current assets
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6,240
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(7)
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Increase
(decrease) in accounts payable and
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and
accrued expenses
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(9,455)
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28,003
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Total
adjustments
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146,119
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12,069
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Net
cash (used in) operating activities
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(140,362)
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(187,095)
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CASH
FLOWS FROM INVESTING ACTIVITIES
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Acquisitions
of fixed assets
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(7,245)
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(29,413)
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Net
cash (used in) investing activities
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(7,245)
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(29,413)
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CASH
FLOWS FROM FINANCING ACTIVITES
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(Decrease)
in bank overdraft
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(1,525)
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-
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Proceeds
from loan payable, net
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74
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(25,579)
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Proceeds
from loan payable - related parties
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142,584
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(16,438)
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Proceeds
from convertible debentures
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-
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29,469
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Net
cash provided by (used in) financing activities
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141,133
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(12,548)
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Effect
on foreign currency
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6,474
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144,873
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NET
INCREASE (DECREASE) IN
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CASH
AND CASH EQUIVALENTS
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-
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(84,183)
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CASH
AND CASH EQUIVALENTS -
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BEGINNING
OF PERIOD
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-
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84,254
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CASH
AND CASH EQUIVALENTS - END OF PERIOD
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$
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-
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$
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71
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CASH
PAID DURING THE PERIOD FOR:
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Interest
expense
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$
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3,000
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$
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-
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The
accompanying notes are an integral part of the condensed financial
statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2006 AND 2005
NOTE
1-
ORGANIZATION
AND BASIS OF PRESENTATION
The
unaudited condensed consolidated financial statements included herein have
been
prepared, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (“SEC”). The condensed consolidated financial statements
and notes are presented as permitted on Form 10-QSB and do not contain
information included in the Company’s annual consolidated statements and notes.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to
such
rules and regulations, although the Company believes that the disclosures
are
adequate to make the information presented not misleading. It is suggested
that
these condensed consolidated financial statements be read in conjunction
with
the December 31, 2005 audited consolidated financial statements and the
accompanying notes thereto. While management believes the procedures followed
in
preparing these condensed consolidated financial statements are reasonable,
the
accuracy of the amounts are in some respects dependent upon the facts that
will
exist, and procedures that will be accomplished by the Company later in the
year.
These
condensed consolidated unaudited financial statements reflect all adjustments,
including normal recurring adjustments which, in the opinion of management,
are
necessary to present fairly the consolidated operations and cash flows for
the
periods presented.
United
American Corporation (the “Company”) was incorporated under the laws of the
State of Florida on July 17, 1992 under the name American Financial Seminares,
Inc. with authorized common stock of 1,000 shares at $1.00 par value. Since
its
inception the Company has made several name changes and increased the authorized
common stock to 50,000,000 shares with a par value of $.001. On February
5,
2004, the name was changed to United American Corporation.
The
Company was first organized for the purpose of marketing a software license
known as “Gnotella”, however, in late 2001 this activity was
abandoned.
On
July
18, 2003, the Company entered into a share exchange agreement with 3874958
Canada Inc. (a Canadian corporation and an affiliate of the Company by common
officers) to transfer 26,250,000 shares of its common stock for 100 shares
of
American United Corporation (a Delaware corporation and wholly owned subsidiary
of 3874958 Canada Inc.) which represented 100% of the outstanding shares
of
American United Corporation. The Company in this transaction acquired internet
telecommunications equipment valued at $874,125. These assets did not go
into
service until 2004. The 26,250,000 shares of the Company were issued into
an
escrow account on October 6, 2003, the effective date of the transaction.
Later,
American United Corporation was dissolved. The equipment value was based
on an
independent valuation. The shares issued were to 3874958 Canada Inc., whose
sole
owner at the time, was the President and CEO of the Company. This transaction
did not constitute a reverse merger even though the Company issued in excess
of
50% of its then current issued and outstanding shares.
UNITED
AMERICAN CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH
31, 2006 AND 2005
NOTE
1-
ORGANIZATION
AND BASIS OF PRESENTATION
(CONTINUED)
In
January 2004, the Company took ownership of all 100 shares issued and
outstanding of 3894517 Canada, Inc. (a Canadian corporation), whose 100%
owner
was at the time President and CEO of the Company. At this time, 3894517 Canada,
Inc. became the operating unit of the Company for the services they were
providing utilizing the equipment acquired in 2003 from American United
Corporation. There was no consideration paid for these 100 shares.
On
August
27, 2004, the Company entered the telecommunications business by the creation
of
United American Telecom, a division focused on terminating call traffic in
the
Caribbean, and by the creation of Teliphone, a division focused on providing
Voice-over-Internet -Protocol (VoIP) calling services to residential and
business customers.
Teliphone,
Inc. was founded in order to develop a VoIP network which enables users to
connect an electronic device to their internet connection at the home or
office
which permits them to make telephone calls to any destination phone number
anywhere in the world. VoIP is currently growing in scale significantly in
North
America. Industry experts predict the VoIP offering to be one of the fastest
growing sectors from now until 2009. This innovative new approach to
telecommunications has the benefit of drastically reducing the cost of making
these calls as the distances are covered over the Internet instead of over
dedicated lines such as traditional telephony. Teliphone has grown primarily
in
the Province of Quebec, Canada through the sale of its product offering in
retail stores and over the internet. During this time, Teliphone also expanded
its network in order to offer services outside of the Province of Quebec,
mainly
in the Province of Ontario and the State of New York.
In
March
2005, Teliphone Inc. issued 4 shares of stock to management. After this
transaction, the Company owned 96% of Teliphone, Inc. Therefore, a
noncontrolling interest is reflected in the consolidated financial statements.
Subsequently, on April 28, 2005, the Company entered into a merger and
reorganization agreement with OSK Capital II Corp., a Nevada corporation,
where
OSK Capital II Corp. became a majority owned subsidiary of the Company, and
Teliphone, Inc. became a wholly owned subsidiary of OSK Capital II Corp.
Going
Concern
As
shown
in the accompanying condensed consolidated financial statements the Company
has
incurred recurring losses of $286,481 and $199,164 for the three months ended
March 31, 2006 and 2005, and has a working capital surplus of $744,551 as
of
March 31, 2006. The Company had emerged from the development stage and as
of
March 31, 2004 has started generating revenues.
UNITED
AMERICAN CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH
31, 2006 AND 2005
NOTE
1-
ORGANIZATION
AND BASIS OF PRESENTATION
(CONTINUED)
Going
Concern
(Continued)
There
is
no guarantee that the Company will be able to raise enough capital or generate
revenues to sustain its operations. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern for a reasonable
period.
Management
believes that the Company’s capital requirements will depend on many factors.
These factors include the increase in sales through existing channels as
well as
the Company’s ability to continue to expand its distribution points and
leveraging its technology into the commercial small business segments. The
Company’s strategic relationships with telecommunications interconnection
companies, internet service providers and retail sales outlets has permitted
the
Company to achieve consistent monthly growth in acquisition of new customers.
In
the
near term, the Company will continue to pursue bridge financing, in addition
to
the approximately $100,000 it raised through convertible debentures in 2004
to
assist them in meeting their current working capital needs. The Company’s
ability to continue as a going concern for a reasonable period is dependent
upon
management’s ability to raise additional interim capital and, ultimately,
achieve profitable operations. There can be no assurance that management
will be
able to raise sufficient capital, under terms satisfactory to the Company,
if at
all.
The
condensed consolidated financial statements do not include any adjustments
relating to the carrying amounts of recorded assets or the carrying amounts
and
classification of recorded liabilities that may be required should the Company
be unable to continue as a going concern.
NOTE
2-
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
condensed consolidated financial statements include the accounts of the Company
and all of its wholly owned and majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
All noncontrolling interests are reflected in the condensed consolidated
financial statements.
UNITED
AMERICAN CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH
31, 2006 AND 2005
NOTE
2-
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, the Company evaluates
its
estimates, including, but not limited to, those related to bad debts, income
taxes and contingencies. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid debt instruments and other short-term
investments with an initial maturity of three months or less to be cash
equivalents.
Comprehensive
Income
The
Company adopted Statement of Financial Accounting Standards No, 130, “Reporting
Comprehensive Income,” (SFAS No. 130). SFAS No. 130 requires the reporting of
comprehensive income in addition to net income from operations.
Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of information that historically has not been recognized in the
calculation of net income.
Inventory
Inventory
is valued at the lower of cost or market determined on a first-in-first-out
basis. Inventory consisted only of finished goods.
Fair
Value of Financial Instruments (other than Derivative Financial
Instruments)
The
carrying amounts reported in the condensed consolidated balance sheet for
cash
and cash equivalents, and accounts payable approximate fair value because
of the
immediate or short-term maturity of these financial instruments. For the
notes
payable, the carrying amount reported is based upon the incremental borrowing
rates otherwise available to the Company for similar borrowings. For the
convertible debentures, fair values were calculated at net present value
using
the Company’s weighted average borrowing rate for debt instruments without
conversion features applied to total future cash flows of the
instruments.
UNITED
AMERICAN CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH
31, 2006 AND 2005
NOTE
2-
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Currency
Translation
For
subsidiaries outside the United States that prepare financial statements
in
currencies other than the U.S. dollar, the Company translates income and
expense
amounts at average exchange rates for the year, translates assets and
liabilities at year-end exchange rates and equity at historical rates. The
Company’s reporting currency is that of the US dollar while its functional
currency is that of the Canadian dollar. The Company records these translation
adjustments as accumulated other comprehensive income (loss). Gains and losses
from foreign currency transactions commenced in 2004 when the Company utilized
a
Canadian subsidiary to record all of the transactions. The Company recognized
a
gain (loss) of $6,474 and $144,873 for the three months ended March 31, 2006
and
2005.
Research
and Development
The
Company annually incurs costs on activities that relate to research and
development of new products. Research and development costs are expensed
as
incurred. Certain of these costs are reduced by government grants and investment
tax credits where applicable.
Revenue
Recognition
In
2004,
when the Company emerged from the development stage with the acquisition
of
American United Corporation/ 3874958 Canada Inc. and after assuming ownership
of
3894517 Canada Inc. as well as the establishment of Teliphone, Inc. they
began
to recognize revenue from their VoIP services when the services were rendered
and collection was reasonably assured in accordance with SAB 101.
Accounts
Receivable
The
Company conducts business and extends credit based on an evaluation of the
customers’ financial condition, generally without requiring collateral. Exposure
to losses on receivables is expected to vary by customer due to the financial
condition of each customer. The Company monitors exposure to credit losses
and
maintains allowances for anticipated losses considered necessary under the
circumstances. The Company has recorded an allowance for doubtful accounts
of
$7,232 as of March 31, 2006.
Accounts
receivable are generally due within 30 days and collateral is not required.
Unbilled accounts receivable represents amounts due from customers for which
billing statements have not been generated and sent to the
customers.
UNITED
AMERICAN CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH
31, 2006 AND 2005
NOTE
2-
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income
Taxes
The
Company accounts for income taxes utilizing the liability method of accounting.
Under the liability method, deferred taxes are determined based on differences
between financial statement and tax bases of assets and liabilities at enacted
tax rates in effect in years in which differences are expected to reverse.
Valuation allowances are established, when necessary, to reduce deferred
tax
assets to amounts that are expected to be realized.
Convertible
Instruments
The
Company reviews the terms of convertible debt and equity securities for
indications requiring bifurcation, and separate accounting, for the embedded
conversion feature. Generally, embedded conversion features where the ability
to
physical or net-share settle the conversion option is not within the control
of
the Company are bifurcated and accounted for as a derivative financial
instrument. (See Derivative Financial Instruments below). Bifurcation of
the
embedded derivative instrument requires allocation of the proceeds first
to the
fair value of the embedded derivative instrument with the residual allocated
to
the debt instrument. The resulting discount to the face value of the debt
instrument is amortized through periodic charges to interest expense using
the
Effective Interest Method.
Derivative
Financial Instruments
The
Company generally does not use derivative financial instruments to hedge
exposures to cash-flow or market risks. However, certain other financial
instruments, such as warrants or options to acquire common stock and the
embedded conversion features of debt and preferred instruments that are indexed
to the Company’s common stock, are classified as liabilities when either (a) the
holder possesses rights to net-cash settlement or (b) physical or net share
settlement is not within the control of the Company. In such instances, net-cash
settlement is assumed for financial accounting and reporting, even when the
terms of the underlying contracts do not provide for net-cash settlement.
Such
financial instruments are initially recorded at fair value and subsequently
adjusted to fair value at the close of each reporting period. Fair value
for
option-based derivative financial instruments is determined using the
Black-Scholes Valuation Method.
Advertising
Costs
The
Company expenses the costs associated with advertising as incurred. Advertising
expenses for the three months ended March 31, 2006 and 2005 are included
in
general and administrative expenses in the
condensed
consolidated statements of operations.
UNITED
AMERICAN CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH
31, 2006 AND 2005
NOTE
2-
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fixed
Assets
Fixed
assets are stated at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets; automobiles - 3 years,
computer and internet telecommunications equipment - 5 years, and furniture
and
fixtures - 5 years.
When
assets are retired or otherwise disposed of, the costs and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss
is
recognized in income for the period. The cost of maintenance and repairs
is
charged to income as incurred; significant renewals and betterments are
capitalized. Deduction is made for retirements resulting from renewals or
betterments.
Impairment
of Long-Lived Assets
Long-lived
assets, primarily fixed assets, are reviewed for impairment whenever events
or
changes in circumstances indicate that the carrying amount of the assets
might
not be recoverable. The Company does not perform a periodic assessment of
assets
for impairment in the absence of such information or indicators. Conditions
that
would necessitate an impairment assessment include a significant decline
in the
observable market value of an asset, a significant change in the extent or
manner in which an asset is used, or a significant adverse change that would
indicate that the carrying amount of an asset or group of assets is not
recoverable. For long-lived assets to be held and used, the Company recognizes
an impairment loss only if its carrying amount is not recoverable through
its
undiscounted cash flows and measures the impairment loss based on the difference
between the carrying amount and estimated fair value. The Company, determined
based upon an independent valuation performed on its equipment acquired from
American United Corporation that their was impairment of $1,750,875 (on October
6, 2003) based upon the fair value of the stock issued for the equipment.
This
amount is reflected as impairment in the December 31, 2003 financial
statements.
(Loss)
Per Share of Common Stock
Basic
net
(loss) per common share is computed using the weighted average number of
common
shares outstanding. Diluted earnings per share (EPS) includes additional
dilution from common stock equivalents, such as stock issuable pursuant to
the
exercise of stock options and warrants. Common stock equivalents were not
included in the computation of diluted earnings per share when the Company
reported a loss because to do so would be antidilutive for periods
presented.
UNITED
AMERICAN CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH
31, 2006 AND 2005
NOTE
2-
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(Loss)
Per Share of Common Stock
(Continued)
The
following is a reconciliation of the computation for basic and diluted
EPS:
Stock-Based
Compensation
The
Company measures compensation expense for its employee stock-based compensation
using the intrinsic-value method. Under the intrinsic-value method of accounting
for stock-based compensation, when the exercise price of options granted
to
employees and common stock issuances are less than the estimated fair value
of
the underlying stock on the date of grant, deferred compensation is recognized
and is amortized to compensation expense over the applicable vesting period.
In
each of the periods presented, the vesting period was the period in which
the
options were granted. All options were expensed to compensation in the period
granted rather than the exercise date.
The
Company measures compensation expense for its non-employee stock-based
compensation under the Financial Accounting Standards Board (FASB) Emerging
Issues Task Force (EITF) Issue No. 96-18, “Accounting
for Equity Instruments that are Issued to Other Than Employees for Acquiring,
or
in Conjunction with Selling, Goods or Services”.
The
fair value of the option issued is used to measure the transaction, as this
is
more reliable than the fair value of the services received. The fair value
is
measured at the value of the Company’s common stock on the date that the
commitment for performance by the counterparty has been reached or the
counterparty’s performance is complete. The fair value of the equity instrument
is charged directly to compensation expense and additional paid-in
capital.
UNITED
AMERICAN CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH
31, 2006 AND 2005
NOTE
2-
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Segment
Information
The
Company follows the provisions of SFAS No. 131, “Disclosures
about Segments of an Enterprise and Related Information”.
This
standard requires that companies disclose operating segments based on the
manner
in which management disaggregates the Company in making internal operating
decisions. Commencing with the creation of Teliphone, Inc. the Company began
operating in two segments, and two geographical locations.
Recent
Accounting Pronouncements
On
December 16, 2004, the Financial Accounting Standards Board (“FASB”) published
Statement of Financial Accounting Standards No. 123 (Revised 2004),
“Share-Based
Payment”
(“SFAS
123R”). SFAS 123R requires that compensation cost related to share-based payment
transactions be recognized in the financial statements. Share-based payment
transactions within the scope of SFAS 123R include stock options, restricted
stock plans, performance-based awards, stock appreciation rights, and employee
share purchase plans. The provisions of SFAS 123R, as amended, are effective
for
small business issuers beginning as of the next interim period after December
15, 2005.
In
February 2006, the FASB issued Statement of Financial Accounting Standard
No.
155, “Accounting
for Certain Hybrid Instruments”
(“SFAS
155”). FASB 155 allows financial instruments that have embedded derivatives to
be accounted for as a whole (eliminating the need to bifurcate the derivative
from its host) if the holder elects to account for the whole instrument on
a
fair value basis. This statement is effective for all financial instruments
acquired or issued after the beginning of an entity’s first fiscal year that
begins after September 15, 2006. The Company will evaluate the impact of
SFAS
155 on its consolidated financial statements.
In
May
2005, the FASB issued Statement of Financial Accounting Standard No. 154,
“Accounting
Changes and Error Corrections”
(“SFAS
154”). SFAS 154 is a replacement of APB No. 20, “Accounting
Changes”,
and
SFAS No. 3, “Reporting
Accounting Changes in Interim Financial Statements”.
SFAS
154 applies to all voluntary changes in accounting principle and changes
the
requirements for accounting and reporting of a change in accounting principle.
This statement establishes that, unless impracticable, retrospective application
is the required method for reporting of a change in accounting principle
in the
absence of explicit transition requirements specific to the newly adopted
accounting principle. It also requires the reporting of an error correction
which involves adjustments to previously issued financial statements similar
to
those generally applicable to reporting an accounting change retrospectively.
SFAS 154 is effective for accounting changes and corrections of errors made
in
fiscal years beginning after December 15, 2005. The Company believes the
adoption of SFAS 154 will not have a material impact on its consolidated
financial statements.
UNITED
AMERICAN CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH
31, 2006 AND 2005
NOTE
3-
FIXED
ASSETS
Fixed
assets as of March 31, 2006 were as follows:
|
Estimated
Useful
|
|
|
Lives
(Years)
|
|
|
|
|
Computer
equipment
|
5
|
$1,020,419
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
(429,818)
|
Fixed
assets, net
|
|
$590,601
|
There
was
$56,745 and $50,001 depreciation charged to operations for the three months
ended March 31, 2006 and 2005, respectively.
The
Company acquired telecommunications equipment in its acquisition of American
United Corporation valued at $874,125, net of impairment of $1,750,875 in
the
issuance of the 26,250,000 shares of common stock. This equipment however,
was
not placed into service until 2004, therefore no depreciation was recorded
for
those assets in 2003.
NOTE
4-
LOANS
PAYABLE
The
Company beginning in 2004 entered into unsecured loans payable with non-related
parties. There was $77,775 outstanding as of March 31, 2006.
NOTE
5-
RELATED
PARTY LOANS
Beginning
in April 2005, the Company’s subsidiary entered into non-interest bearing loans
with OSK Capital II Corp, a company with common officers and directors. There
were no amounts outstanding as of March 31, 2006.
Additionally,
the Company had loans with various directors that were non-interest bearing.
There was $142,584 outstanding as of March 31, 2006.
NOTE
6-
CONVERTIBLE DEBENTURES
On
October 18, 2004, the Company entered into 12% Convertible Debentures (the
“Debentures”) with Strathmere Associates International Limited in the amount of
$100,000. The Debentures have a maturity date of October 31, 2006, and incur
interest at a rate of 12% per annum, payable every six months.
UNITED
AMERICAN CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH
31, 2006 AND 2005
NOTE 6-
CONVERTIBLE
DEBENTURES (CONTINUED)
The
Debentures can either be paid to the holders on October 31, 2006 or converted
at
the holders’ option any time up to maturity at a conversion price equal of $.20
per share. The convertible debentures met the definition of hybrid instruments,
as defined in SFAS 133, Accounting
for Derivative Instruments and Hedging Activities
(SFAS
No. 133). The hybrid instruments are comprised of a i) a debt instrument,
as the
host contract and ii) an option to convert the debentures into common stock
of
the Company, as an embedded derivative. The embedded derivative derives its
value based on the underlying fair value of the Company’s common stock. The
Embedded Derivative is not clearly and closely related to the underlying
host
debt instrument since the economic characteristics and risk associated with
this
derivative are based on the common stock fair value. The Company has separated
the embedded derivative from the hybrid instrument based on an independent
valuation of $43,537 based on 500,000 shares ($100,000 at a $.20 exercise
price).
For
disclosure purposes, the fair value of the derivative is estimated on the
date
of issuance of the debenture (October 18, 2004) using the Black-Scholes
option-pricing model, which approximates fair value, with the following
weighted-average assumptions used for March 31, 2006 and 2005; no annual
dividends, volatility of 125%, risk-free interest rate of 3.28%, and expected
life of 2 years. For disclosure purposes as of March 31, 2006 and 2005 the
derivative call option was approximately $.018 and $.057 per share, therefore
there was a decrease of $0 and $14,996 in the derivative liability recognized
for the three months ended March 31, 2006 and 2005, respectively.
The
embedded derivative did not qualify as a fair value or cash flow hedge under
SFAS No. 133.
Interest
expense for the three months ended March 31, 2006 and 2005 was $3,000 and
$3,000, respectively. At March 31, 2006, there was $5,419 of interest
accrued.
UNITED
AMERICAN CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH
31, 2006 AND 2005
NOTE
7-
COMMITMENTS
On
October 12, 2004, the Company entered into a carrier agreement with XO
Communications, Inc. This carrier agreement provides the Company with the
ability to purchase telephone numbers in any of thirty-seven major metropolitan
markets in the United States. As a result, services can be provided to consumers
in any of these markets with each consumer being assigned a telephone number
with a local area code. Prior to this agreement, we were only able to provide
phone numbers with Canadian area codes.
Additionally,
the Company in 2004 and 2005 entered into various agreements with wireless
Internet access providers, to provide VoIP services to the Company’s customers.
On November 3, 2004, the Company also entered into a telecommunications
agreement with Kore Wireless Canada, Inc., a supplier of global systems for
mobile communications.
On
March
1, 2005, the Company entered into a distribution agreement with MSBR
Communication Inc. for the purpose of accessing the retail consumer portion
of
the Company’s target market through retail and Internet-based sales. The
territory for this distribution is the Province of Quebec in Canada exclusive
of
Sherbrooke, Quebec. This is a renewable two-year agreement.
On
March
11, 2005, the Company entered into a marketing and distribution rights with
Podar Infotech Ltd. The five-year renewable agreement grants Podar the exclusive
marketing and distribution rights for the Company’s products and services for
India, China, Sri Lanka, Russia and UAE for which the Company will receive
contractually agreed payments.
NOTE
8-
STOCKHOLDERS’
EQUITY (DEFICIT)
Common
Stock
As
of
March 31, 2006, the Company has 50,000,000 shares of common stock authorized
with a par value of $.001.
The
Company has 49,969,985 shares issued and outstanding as of March 31,
2006.
The
Company has not issued any shares for the three months ended March 31,
2006.
During
the year ended December 31, 2005, the Company issued 1,400,000 for services
at
$.10 per share and 4,450,000 at $.075 per share for a value of
$473,750.
During
2004, the Company issued 926,743 for services at a fair market value of $.10
or
$92,674; and 2,250,000 shares of common stock for services at a fair market
value of $.15 per share or $337,500.
The
Company has not issued any options or warrants.
UNITED
AMERICAN CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH
31, 2006 AND 2005
NOTE
9-
PROVISION
FOR INCOME TAXES
Deferred
income taxes are determined using the liability method for the temporary
differences between the financial reporting basis and income tax basis of
the
Company’s assets and liabilities. Deferred income taxes are measured based on
the tax rates expected to be in effect when the temporary differences are
included in the Company’s tax return. Deferred tax assets and liabilities are
recognized based on anticipated future tax consequences attributable to
differences between financial statement carrying amounts of assets and
liabilities and their respective tax bases.
At
March
31, 2006 and 2005, deferred tax assets consist of the following:
At
March
31, 2006, the Company had a net operating loss carryforward in the approximate
amount of $4,939,717, available to offset future taxable income through 2026.
The Company established valuation allowances equal to the full amount of
the
deferred tax assets due to the uncertainty of the utilization of the operating
losses in future periods.
A
reconciliation of the Company’s effective tax rate as a percentage of income
before taxes and federal statutory rate for the periods ended March 31, 2006
and
2005 is summarized as follows:
|
|
|
|
|
2006
|
|
2005
|
Federal
statutory rate
|
(34.0)%
|
|
(34.0)%
|
State
income taxes, net of federal benefits
|
3.3
|
|
3.3
|
Valuation
allowance
|
30.7
|
|
30.7
|
|
0%
|
|
0%
|
NOTE
10-
SEGMENT
INFORMATION
The
Company’s reportable operating segments include wholesale VoIP services which is
the physical buying of minutes (3894517 Canada Inc.), and the VoIP connection
services (Teliphone, Inc.). The Company also has corporate overhead expenses.
The wholesale services are essentially provided in the Caribbean, and the
connection services are provided in North America. The segment data presented
below details the allocation of cost of revenues and direct operating expenses
to these segments.
UNITED
AMERICAN CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH
31, 2006 AND 2005
NOTE
10-
SEGMENT
INFORMATION
(CONTINUED)
Operating
segment data for the three months ended March 31, 2006 are as follows:
|
|
|
|
Wholesale
|
|
Connection
|
|
|
|
|
Corporate
|
|
Services
|
|
Services
|
|
Total
|
Sales
|
$
|
-
|
$
|
2,355,452
|
$
|
107,718
|
$
|
2,463,170
|
Cost
of sales
|
|
-
|
|
2,220,013
|
|
105,518
|
|
2,325,531
|
Gross
profit (loss)
|
|
-
|
|
135,439
|
|
2,200
|
|
137,639
|
Operating
expenses
|
|
25,368
|
|
260,970
|
|
104,599
|
|
390,937
|
Depreciation,
amortization and impairment
|
|
44.610
|
|
3.480
|
|
8,655
|
|
56.745
|
Interest
(net)
|
|
(3,000)
|
|
(1,010)
|
|
(256)
|
|
(4,266)
|
Net
income (loss)
|
|
(72,978)
|
|
(130,021)
|
|
(111,310)
|
|
(314,309)
|
Segment
assets
|
|
401,490
|
|
136,551
|
|
242,269
|
|
780,310
|
Fixed
Assets, net of depreciation
|
|
401,490
|
|
42,942
|
|
146,169
|
|
590,601
|
Operating
segment data for the three months ended March 31, 2005 are as follows:
|
|
|
|
Wholesale
|
|
Connection
|
|
|
|
|
Corporate
|
|
Services
|
|
Services
|
|
Total
|
Sales
|
$
|
-
|
$
|
385,960
|
$
|
42,707
|
$
|
428,667
|
Cost
of sales
|
|
-
|
|
217,691
|
|
20,918
|
|
238,609
|
Gross
profit (loss)
|
|
-
|
|
168,269
|
|
21,789
|
|
190,058
|
Operating
expenses
|
|
140,000
|
|
95,351
|
|
102,048
|
|
337,399
|
Depreciation,
amortization and impairment
|
|
37,175
|
|
2,473
|
|
10,353
|
|
50,001
|
Interest
(net)
|
|
(3,000)
|
|
(0)
|
|
(0)
|
|
(3,000)
|
Net
income (loss)
|
|
(180,175)
|
|
70,445
|
|
(90,612)
|
|
(200,342)
|
Segment
assets
|
|
557,625
|
|
176,401
|
|
271,812
|
|
1,005,838
|
Fixed
Assets, net of depreciation
|
|
557,625
|
|
36,651
|
|
108,366
|
|
702,642
|
Forward-Looking
Statements
Historical
results and trends should not be taken as indicative of future operations.
Management’s statements contained in this report that are not historical facts
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934 (the “Exchange Act”), as amended. Actual results may differ
materially from those included in the forward-looking statements. We intend
such
forward-looking statements to be covered by the safe-harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and is including this statement for purposes of complying with
those safe-harbor provisions. Forward-looking statements, which are based on
certain assumptions and describe future plans, strategies and expectations,
are
generally identifiable by use of the words “believe,” “expect,” “intend,”
“anticipate,” “estimate,” “project,” “prospects,” or similar expressions. Our
ability to predict results or the actual effect of future plans or strategies
is
inherently uncertain. Factors which could have a material adverse affect on
our
operations and future prospects on a consolidated basis include, but are not
limited to: changes in economic conditions, legislative/regulatory changes,
availability of capital, interest rates, competition, and generally accepted
accounting principles. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed
on
such statements. Further information concerning this Company and its business,
including additional factors that could materially affect our financial results,
is included herein and in our other filings with the SEC.
Overview
We
were
incorporated on July 17, 1992, under the laws of the state of Florida. Since
our
inception, we sought out various business opportunities. None proved successful
over a sustained period of time. We explored opportunities to acquire products
or businesses that had the potential for profit.
On
July
18, 2003, we entered into a share exchange agreement with 3874958 Canada Inc.
whereby we agreed to transfer to 3874958 Canada Inc. 26,250,000 common shares
of
our common stock in exchange for the transfer of 100 shares of American United
Corporation, a Delaware corporation (“AUC”). The 100 shares of AUC represent all
of the issued and outstanding shares of the company. The agreement was
contingent on the parties’ due diligence and completion of several conditions
prior to sale. On October 6, 2003, these conditions were satisfied and the
sale
was consummated. Following the consummation of this sale, AUC became a
wholly-owned subsidiary of our company. AUC was later dissolved.
Benoit
Laliberté, our CEO, CFO, and Director at the time, was also the sole officer,
director, and shareholder of American United Corporation at the time that the
share exchange agreement was entered into and when the sale was consummated.
In
addition, Mr. Laliberté was the sole officer, director, and shareholder of
3874958 Canada, Inc. As a result, Mr. Laliberté was the beneficial holder of the
100 shares of AUC held by 3874958 Canada, Inc. and is now the beneficial holder
of the 26,250,000 shares we issued to 3874958 Canada, Inc. in the transaction
described above.
On
February 3, 2004, a majority of the shareholders approved a change in the name
of our company to United American Corporation. Management considered it in
the
best interests of the company to change
our
name
to reflect the acquisition of American United Corporation shares and the new
direction of our business.
Description
of Business
Following
the acquisition of AUC, we revised our business plan and implemented the
business plan of AUC. AUC began its operations in 2002 as a holding company
focused on the acquisition of network-centric technology and telecommunication
companies. Given the rapid changes in the telecommunications marketplace, and
the strong need for a competitive edge, they revised their business plan and
set
out on a new course in 2003 to provide Voice over Internet Protocol (VoIP)
solutions.
VoIP
means that the technology used to send data over the Internet is now being
used
to transmit voice as well. The technology is known as packet switching. Instead
of establishing a dedicated connection between two devices (computers,
telephones, etc.) and sending the message "in one piece," this technology
divides the message into smaller fragments, called 'packets'. These packets
are
transmitted separately over a decentralized network and when they reach the
final destination, they're reassembled into the original message.
VoIP
allows a much higher volume of telecommunications traffic to flow at much higher
speeds than traditional circuits do, and at a significantly lower cost. VoIP
networks are significantly less capital intensive to construct and much less
expensive to maintain and upgrade than legacy networks or what is commonly
referred to as traditional circuit-switched networks. Since VoIP networks are
based on internet protocol, they can seamlessly and cost-effectively interface
with the high-technology, productivity-enhancing services shaping today's
business landscape. These networks can seamlessly interface with web-based
services such as virtual portals, interactive voice response (IVR), and unified
messaging packages, integrating data, fax, voice, and video into one
communications platform that can interconnect with the existing
telecommunications infrastructure.
Initially,
we sought to provide retail
consumers and small and medium sized companies with
a
mobile or landline phone that utilizes VoIP as opposed to traditional cell
phone
technology. A mobile phone that is connected to a Wi-Fi router, which is
interconnected to a hi-speed Internet modem, cable or ADSL transmits telephone
calls by connecting to the Internet using a high-speed Internet connection.
Use
of this technology offers large savings to consumers because a majority of
the
telephone call is now being transmitted over the Internet replacing what was
previously an established telecommunication line. When a VoIP network is
utilized, an established telecommunication line is only utilized to transmit
the
call from our servers to the termination point of a call. The VoIP network
is
utilized with intellectual property to transmit the call from its origination
point to our servers. The ability to minimize the use of established
telecommunication lines reduces the cost of transmitting telephone calls. As
a
result, our ability to strategically establish computer servers in specified
geographical areas will maximum the cost-savings benefit to those that utilize
our service.
We
constructed our first VoIP network which we refer to as CaribbeanONE. To
construct this network, we established servers in Haiti that utilize our
intellectual property to connect with our servers located in Montreal, Quebec,
Canada. Following the successful testing of our servers in Haiti, the
CaribbeanONE network was completed in March 2004. The establishment of the
CaribbeanONE network was critical in that it enables us to charge significantly
less than other providers that exclusively utilize established telecommunication
lines for calls that originate in North America and terminate in any country
in
the Caribbean. When one of our consumers originates a call in North America,
our
VoIP network will receive the call and transmit the call to our server in Haiti
and an established telecommunication line will only be utilized to transmit
the
call from our server in Haiti to the termination point of the call in the
Caribbean.
The establishment of the CaribbeanONE network was our first step in
strategically
establishing computer servers in specified geographical areas
to
construct an international VoIP network. Since the establishment of the
CaribbeanONE network, we have worked to improve this VoIP network by added
additional capacity.
In
August
2004, we incorporated Teliphone, Inc. (“Teliphone”), a Canadian corporation,
which became a wholly-owned subsidiary of our company. We formed Teliphone
as a
wholly-owned subsidiary for the purpose handling the origination, management,
and billing of calls. Teliphone also handles servicing and providing
businesses
and individuals with a mobile or landline phone to access our VoIP network.
The
management of calls refers to the routing of calls from the origination point
to
the termination point. The billing of calls refers to the collection of charges
for utilization of our VoIP network.
At
this
stage our of business plan, we were successfully able to provide businesses
and
individuals with the ability to utilize our VoIP
network to transmit communications through the use of a mobile and landline
phone that connects to the Internet. Our ability to grow beyond the Montreal,
Quebec geographical area was inhibited at this point because our agreement
with
Rogers Business Solutions Inc. limited the telephone numbers that we were able
to provide to our consumers to numbers that contained Canadian area codes.
Consumers generally desire area codes for the telephone numbers they are
assigned which are consistent with the geographical area where they primarily
conduct business or reside.
In
recognition of this limitation, our management entered into a carrier agreement
with XO Communications, Inc.(“XO”), a Delaware corporation, on October 12, 2004.
This carrier agreement with XO provides us with the ability to purchase
telephone numbers in any of thirty seven (37) major metropolitan markets in
the
United States. As a result, we are capable of providing our service to consumers
in any of these major metropolitan markets in the United States and each
consumer could now be assigned a telephone number with a local area
code.
Also
under the terms of this carrier agreement with XO, we acquired the ability
to
purchase
and utilize voice channels that
maintain within the United States. The ability to purchase and utilize these
voice channels is beneficial to our consumers that originate calls that
terminate in the United States. Use of these voice channels enables us route
calls to their termination point without utilizing carriers outside of our
network that would likely charge higher fees to route the call to its
termination point. This completion of the carrier agreement with XO further
established our VoIP network and positioned us with the ability to compete
with
other providers of VoIP in certain major metropolitan markets in the United
States.
Our
management identified that another limitation of our service is that access
to
our VoIP network requires individuals or businesses to utilize a mobile and
landline phone that connects to the Internet. Traditional cellular phones do
not
require an Internet connection for their utilization. As a result, users of
traditional cellular phones can physically be more mobile while maintaining
telephone service. In contrast, the mobility of our consumers is limited to
areas where an Internet connection can be maintained. Our management concluded
that the appeal of our service will be enhanced by broadening the physical
areas
in which our consumers can utilize their mobile phone while maintaining service.
To broaden the physical areas in which our consumers can utilize their mobile
phone, our management began to negotiate agreements with retail establishments
that
have
a Wi-Fi router. A Wi-Fi router is interconnected to a hi-speed Internet modem,
cable or ADSL enabling telephone calls made in their retail establishment to
connect to the Internet. As a result, our consumers would be able access our
VoIP network through the use their mobile phone when physically present in
a
particular retail
establishment.
On
November 13, 2004, we entered into an agreement with Ta-Daa High Speed Wireless.
(Ta-Daa), a provider of wireless Internet access in various retails
establishments located in Montreal, Quebec. At the present time, our consumers
do not incur any additional cost for originating calls from these cafés.
Additional agreements were entered into for the same purpose on substantially
the same terms with other providers of wireless Internet access in various
retails establishments throughout Montreal, Quebec. On November 30, 2004, we
entered into a similar agreement with Eye-In Inc. and also on March 10, 2005
we
entered into a similar agreement with Experience Wifi Inc.
In
an
attempt to further broaden the physical areas in which our consumers can utilize
their mobile phone, we entered into a telecommunications services agreement
on
November 3, 2004 with Kore Wireless Canada Inc. (“Kore”), a supplier of global
systems for mobile communications (“GSM”). This agreement will enable us to
offer a mobile phone that is compatible with both our VoIP network and a GSM
network utilized for traditional cellular phone use. Our consumers will benefit
because they will now be able to utilize one mobile phone that integrates the
use of both a VoIP and GSM network resulting in an expanding coverage area
for
mobile phones which we provide service to. When an Internet connection cannot
be
maintained, calls can still be placed using traditional cellular phone
technology. For our consumers that utilize this service, we have the ability
to
integrate into a single bill charges for calls placed utilizing both the VoIP
and GSM networks. Prior to this agreement with Kore, we were unable to offer
phone service to consumers at times when they did not maintain an Internet
connection.
This
agreement with Kore has broadened our knowledge in the area of integration
and
call control that occurs between VoIP networks and that of cellular networks
when a consumer utilizes a mobile phone that is compatible with both a VoIP
network and a GSM network utilized by traditional cellular phones. As a result,
we have enhanced our services to customers using their own cellular phones
with
our VoIP services. These integration services offer the following benefits
to
this specific consumer type:
· |
A
single phone number that can be utilized with a consumer’s multiple land,
VoIP, and cellular phone line without the need to secure additional
phone
numbers
|
· |
One
voicemail to receive messages regardless of whether the call is received
on the VoIP or GSM network
|
· |
The
ability for our customer to select a phone number from any city within
our
inbound network and have all of those calls forwarded to him/her,
across
our network, for a fixed monthly
charge.
|
· |
Our
customers can access one of our local access numbers in order for
us to
terminate their phone call over our network, thereby gaining the
long
distance portion of the revenue for each call
made.
|
Once
the
requisite infrastructure was in place and operational, we sought to establish
agreements and incentives for retailers of telephone products to make available
to retail
consumers and small and medium sized companies a
mobile
or landline phone that utilizes our VoIP network. In furtherance of this
objective to provide our target market with a product that is compatible with
our VoIP network, we entered
into a distribution agreement with Distribution Car-Tel, Inc.
(“Car-Tel”) on July 28, 2004. During Q4 2004, unfortunately, our agreement with
Car-Tel did not result in the volume of increased sales of our service that
was
originally contemplated. As a result, we terminated our agreement with Car-Tel,
and sought to renew our efforts to build our retail distribution network in
the
Montreal, Quebec area.
We
succeeded in meeting our objectives when we entered into a distribution
agreement with MSBR Communication Inc. (“MSBR”) on March 1, 2005 for the purpose
accessing the retail consumer portion of our target market through retail and
Internet-based sales. Under the terms of this agreement, MSBR
was
granted the exclusive right to distribute mobile or landline phones that utilize
our VoIP network via Internet-based sales or direct sales to retail
establishments in the territory consisting of the Province of Quebec in Canada
exclusive of Sherbrooke, Quebec. This agreement was entered into for a term
of
two (2) years with automatic renewals for additional one year terms unless
either party provides notice within 90 days of the initial two year term. This
agreement is subject to termination upon the occurrence of specified events
triggering default. MSBR will receive a pre-determined commission based upon
sales of mobile or landline phones that utilize our VoIP network and revenues
derived from retailer consumers who activated their VoIP service through
distribution channels used by MSBR. As a result of this agreement, MSBR
Communications Inc. has succeeded in building a distribution network of over
70
points of retail sale, telemarketing sales partners and small business
telecommunications interconnect companies. This distribution network is the
current driver of our new customer acquisition in the retail segment of our
business. MSBR has recently restructured and now conducts business as BC
Communications.
On
March
11, 2005, we continued our attempt to build an international VoIP network by
entering into a marketing and distribution agreement with Podar Enterprise
(“Podar”) of Mumbai, India. Podar is a distributor of telecommunications that
will make mobile or landline phones that utilize our VoIP network available
to
consumers in Central, South, and East Asia, Eastern Europe, and parts of the
Middle East. Under the terms of this agreement, Podar was granted the exclusive
marketing and distribution rights for our products and services in India, China,
Sri Lanka, United Arab Emirates, and Russia. The term of this agreement is
five
(5) years subject to early termination with 60 days notice following any default
under the agreement.
Accounts
activated in any of the geographical markets serviced by Podar will be assigned
a North American telephone number. For this reason, we anticipate that our
target market in these geographical areas will be small and medium sized
businesses that frequently transact business in North America.
As
part
of our growth plan in 2005, we expanded our long distance VoIP termination
services outside of the Caribbean and into additional routes in South and
Central America, as well as Africa.
During
the third quarter of 2005, we expanded our Long Distance VoIP termination
services into Africa, expanding our current infrastructure to build a VoIP
gateway in Gabon, Africa. Similar to our CaribbeanONE infrastructure located
in
Haiti, we are now able to offer wholesale termination services to global Tier1
and Tier 2 telecommunications companies to utilize our VoIP link between
Montreal, Canada and Gabon in order to terminate their long distance calls.
This
gateway installation permits us to expand the number of voice channels that
we
have in operation in our global network and hence sell more long distance
termination minutes to our existing and future customers.
A
critical component of our ability to expand our business and increase our
sales
presence internationally requires that we have the ability to offer local
phone
numbers in an increasing amount of geographical areas. If we are unable to
offer
consumers area codes in their local, we will be unable to compete with other
providers that have the ability to offer local area codes to a consumer.
During
the third quarter of 2005, our subsidiary, Teliphone, Inc., entered into
an
agreement with RNK Telecom (“RNK”), a Massachusetts corporation, which provides
us with the ability to offer potential consumers phone numbers with area
codes
in over 200 metropolitan markets throughout the United States and Canada.
This
agreement also provides us with access to international affiliates of RNK
that
will enable us to offer local phone number in various international cities
in
Europe, Asia and Latin America.
Subsequent
to the reporting period in May 2006, we completed and now have an operational
VoIP gateway in Mali, Africa.
Subsidiary
Spin-off
In
March
2005, our management proposed to spin-off one of our subsidiaries, Teliphone,
Inc., subject to the approval of the stockholders. At the time of this proposal,
we owned 100 common shares of the 104 common shares issued and outstanding
in
Teliphone. Under the terms of this proposal, our shareholders would have
received 1 share of Teliphone for each share of our company they owned.
Our
board
of directors believed that spinning-off Teliphone would accomplish an important
objective. The spin-off would enable Teliphone to focus on handling
the origination, management, and billing of calls and allow us to concentrate
on
building an international VoIP focused primarily on call termination.
This
will
allow both companies that have operations that are focused on different
objectives to better prioritize the allocation of their management and their
financial resources for achievement of their corporate objectives.
In
April
2005, our management was presented with an opportunity where Teliphone would
enter into a merger with a wholly-owned subsidiary of OSK Capital II Corp.
(“OSK”), a public reporting company under Section 12(g) of the Securities
Exchange Act of 1934. As a result of this opportunity, we did not present our
original proposal to the shareholders for their consideration and approval.
On
April
28, 2005, OSK completed its acquisition of Teliphone, pursuant to an Agreement
and Plan of Merger and Reorganization. At the effective time of the merger,
OSK
acquired all of the outstanding shares of Teliphone and Teliphone merged with
OSK II Acquisition Corp., a Florida corporation and wholly-owned subsidiary
of
OSK Capital II, Corp. Following the merger, Teliphone was the surviving
corporation. OSK issued 25,000,000 common shares in exchange for all of the
issued and outstanding shares of Teliphone and these shares of OSK were issued
to the shareholders Teliphone shareholders on a pro rata basis. We owned 100
common shares of the 104 common shares issued and outstanding in Teliphone.
As a
result, we received 24,038,462 shares of OSK. Following the effectiveness of
the
merger, OSK had 30,426,000 common shares issued and outstanding. Consequently,
Teliphone became a wholly owned subsidiary of OSK and OSK is currently a
majority-owned subsidiary of our company.
Our
management proposed to spin-off our majority-owned subsidiary, OSK. To complete
the spin-off, we propose to distribute the 24,038,462 shares of OSK that we
own
on a pro rata basis to our shareholders. A record date to present the proposed
spin-off to our shareholders has not yet been set.
Results
of Operations for Three Months Ending March 31, 2006 and
2005
For
the
three month period ended March 31, 2006, we generated total revenue of
$2,463,170, compared to total revenue of $428,667 generated in the three months
ended March 31, 2005. Our revenue was generated by sales of retail domestic
and
international voice and data products and services using VoIP. Our
increased generation of revenue for the three month period ended March 31,
2006
when compared to the same reporting period in the prior year is primarily
attributable to increases in sales of VoIP termination services in our
CarribbeanONE network and new constructed Gabon network. Sales of VoIP
termination services in our CaribbeanONE network accounted for $2,355,452 of
our
total revenue generated for the three months ended March 31, 2006. Retail sales
of VoIP services in Canada through our subsidiary, OSK Capital II
Corp./Teliphone, accounted for $107,718 of our total revenue generated for
the
three months ended March 31, 2006. We anticipate that our revenues will increase
based upon our offering of VoIP termination services utilizing out VoIP gateway
in Gabon, Africa.
Our
cost
of revenues for the three months ended March 31, 2006 was $2,325,531. Our cost
of revenues for the three months ended March 31, 2005 was $238,609. The increase
in our cost of revenues reflects a
significant
increase in purchases of voice and data products that utilize VoIP and purchases
of inventory of hardware. The additional purchases have been required to service
our expanding consumer base. Our purchases for the three months ended March
31,
2006 was $2,293,893, compared to $315,786 for the same period in the prior
year.
Gross
profit for the three months ended March 31, 2006 was $137,639, while our gross
profit for the three months ended March 31, 2005 was $190,058. The decrease
in
gross profit for the three months ended March 31, 2006 when compared to the
same
reporting period in the prior year is attributable to increased purchases of
inventory to services and provide product to our increasing customer base.
The
decrease was also primarily attributable to lower gross profit margins on call
termination traffic in Africa as compared to greater margins on our CaribbeanOne
network.
For
the
three month period ended March 31, 2006, we incurred operating expenses in
the
amount of $447,682, compared to operating costs of $387,400 in the same three
month period in the prior year. The increase in operating expenses for the
three
months ended March 31, 2006 when compared to the same reporting period in the
prior year is attributable to a significant increase in the payment of
commissions and wages. We incurred commission and wage expenditures of $255,584
in the three months ended March 31, 2006, compared to commission and wage
expenditures of $73,251 in the same three month period in the prior year. We
paid commissions based upon sales of VoIP termination services. As a result
of a
significant increase in the sales of VoIP termination services, our commissions
and wages increased correspondingly.
For
the
three month period ended March 31, 2006, we had a net loss of $286,481. We
had a net loss of $199,164 for the three month period ended March 31,
2005.
Liquidity
and Capital Resources
As
of
March 31, 2006, we had total current assets of $189,709 and no cash on hand.
Our
current assets consisted of net accounts receivable of $125,952, an investment
tax credit receivable of $16,249, inventory of $20,014, and prepaid expenses
and
other current assets of $27,314. Our total current liabilities as of March
31,
2006 were $934,260. As a result, we had a working capital deficit of $744,551
as
of March 31, 2006.
Operating
activities used $140,362 in cash for the three months ended March 31, 2006.
Our
net loss of $286,481 was the primary component of our negative operating cash
flow. Our net cash used in investing activities for the period ended March
31,
2006 was $7,245. Investing activities during the three months ended March 31,
2006 relate to the acquisition of fixed assets. These fixed assets are
attributable to our new gateway installations in Gabon and Mali Africa. Cash
flows provided by financing activities during the three months ended March
31,
2006 consisted of $141,133. We primarily relied on revenues and proceeds from
loans payable from related parties to fund our operations during the three
months ended March 31, 2006.
The
success of our business plan beyond the next 12 months is contingent upon us
obtaining additional financing. We intend to fund operations through debt and/or
equity financing arrangements, which may be insufficient to fund our capital
expenditures, working capital, or other cash requirements. We do not have any
formal commitments or arrangements for the sales of stock or the advancement
or
loan of funds at this time. There can be no assurance that such additional
financing will be available to us on acceptable terms, or at all.
Off
Balance Sheet Arrangements
As
of
March 31, 2006, there were no off balance sheet arrangements.
Going
Concern
As
shown
in the accompanying condensed consolidated financial statements, we have
incurred recurring losses of $286,481 and $199,164 for the three months ended
March 31, 2006 and 2005, and had a working capital surplus of $744,551 as of
March 31, 2006. We have recently emerged from the development stage and started
generating revenues as of March 31, 2004. There is no guarantee that we will
be
able to raise enough capital or generate revenues to sustain our operations.
These conditions raise substantial doubt about our ability to continue as a
going concern for a reasonable period.
Management
believes that our capital requirements will depend on many factors. These
factors include the increase in sales through existing channels as well as
our
ability to continue to expand our distribution points and leveraging our
technology into the commercial small business segments. Our strategic
relationships with telecommunications interconnection companies, internet
service providers and retail sales outlets has permitted us to achieve
consistent monthly growth in acquisition of new customers.
In
the
near term, we will continue to pursue bridge financing to assist us in meeting
our current working capital needs. Our ability to continue as a going concern
for a reasonable period is dependent upon management’s ability to raise
additional interim capital and, ultimately, achieve profitable operations.
There
can be no assurance that management will be able to raise sufficient capital,
under terms satisfactory to us, if at all.
Critical
Accounting Policies
In
December 2001, the SEC requested that all registrants list their most “critical
accounting polices” in the Management Discussion and Analysis. The SEC indicated
that a “critical accounting policy” is one which is both important to the
portrayal of a company’s financial condition and results, and requires
management’s most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. We believe that the following accounting policies fit this
definition.
Currency
Translation
For
subsidiaries outside the United States that prepare financial statements in
currencies other than the U.S. dollar, we translates income and expense amounts
at average exchange rates for the year, translates assets and liabilities at
year-end exchange rates and equity at historical rates. Our reporting currency
is that of the US dollar while its functional currency is that of the Canadian
dollar. We record these translation adjustments as accumulated other
comprehensive income (loss). Gains and losses from foreign currency transactions
commenced in 2004 when we utilized a Canadian subsidiary to record all of the
transactions. We recognized a gain (loss) of $6,474 and $144,873 for the three
months ended March 30, 2006 and 2005.
Revenue
Recognition
In
2004,
when we emerged from the development stage with the acquisition of American
United Corporation/ 3874958 Canada Inc. and after assuming ownership of 3894517
Canada Inc. as well as the
establishment
of Teliphone, Inc., we began to recognize revenue from our VoIP services when
the services were rendered and collection was reasonably assured in accordance
with SAB 101.
Impairment
of Long-Lived Assets
Long-lived
assets, primarily fixed assets, are reviewed for impairment whenever events
or
changes in circumstances indicate that the carrying amount of the assets might
not be recoverable. We do not perform a periodic assessment of assets for
impairment in the absence of such information or indicators. Conditions that
would necessitate an impairment assessment include a significant decline in
the
observable market value of an asset, a significant change in the extent or
manner in which an asset is used, or a significant adverse change that would
indicate that the carrying amount of an asset or group of assets is not
recoverable. For long-lived assets to be held and used, we recognize an
impairment loss only if its carrying amount is not recoverable through its
undiscounted cash flows and measures the impairment loss based on the difference
between the carrying amount and estimated fair value. We, determined based
upon
an independent valuation performed on our equipment acquired from American
United Corporation that there was impairment of $1,750,875 (on October 6, 2003)
based upon the fair value of the stock issued for the equipment. This amount
is
reflected as impairment in the December 31, 2003 financial
statements.
Recent
Accounting Pronouncements
On
December 16, 2004, the Financial Accounting Standards Board (“FASB”) published
Statement of Financial Accounting Standards No. 123 (Revised 2004),
“Share-Based
Payment”
(“SFAS
123R”). SFAS 123R requires that compensation cost related to share-based payment
transactions be recognized in the financial statements. Share-based payment
transactions within the scope of SFAS 123R include stock options, restricted
stock plans, performance-based awards, stock appreciation rights, and employee
share purchase plans. The provisions of SFAS 123R, as amended, are effective
for
small business issuers beginning as of the next interim period after December
15, 2005.
In
February 2006, the FASB issued Statement of Financial Accounting Standard No.
155, “Accounting
for Certain Hybrid Instruments”
(“SFAS
155”). FASB 155 allows financial instruments that have embedded derivatives to
be accounted for as a whole (eliminating the need to bifurcate the derivative
from its host) if the holder elects to account for the whole instrument on
a
fair value basis. This statement is effective for all financial instruments
acquired or issued after the beginning of an entity’s first fiscal year that
begins after September 15, 2006. We will evaluate the impact of SFAS 155 on
our
consolidated financial statements.
In
May
2005, the FASB issued Statement of Financial Accounting Standard No. 154,
“Accounting
Changes and Error Corrections”
(“SFAS
154”). SFAS 154 is a replacement of APB No. 20, “Accounting
Changes”,
and
SFAS No. 3, “Reporting
Accounting Changes in Interim Financial Statements”.
SFAS
154 applies to all voluntary changes in accounting principle and changes the
requirements for accounting and reporting of a change in accounting principle.
This statement establishes that, unless impracticable, retrospective application
is the required method for reporting of a change in accounting principle in
the
absence of explicit transition requirements specific to the newly adopted
accounting principle. It also requires the reporting of an error correction
which involves adjustments to previously issued financial statements similar
to
those generally applicable to reporting an accounting change retrospectively.
SFAS 154 is effective for accounting changes and corrections of errors made
in
fiscal years beginning after December 15, 2005. We believe the adoption of
SFAS
154 will not
have
a
material impact on our consolidated financial statements.
Disclosure
controls and procedures are controls and other procedures that are designed
to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act are recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
our
reports filed under the Exchange Act is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure.
We
carried out an evaluation of the effectiveness of the design and operation
of
our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of March 31, 2006. This evaluation was carried
out
under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer, Mr. Simon Lamarche. Based upon that evaluation,
our
Chief Executive Officer and Chief Financial Officer concluded that, as of March
31, 2006, our disclosure controls and procedures are not effective. There have
been no significant changes in our internal controls over financial reporting
during the quarter ended March 31, 2006 that have materially affected or are
reasonably likely to materially affect such controls.
Our
board
of directors are currently working towards implementing significant changes
in
our internal controls over financial reporting that are expected to materially
affect such controls. Our board of directors is seeking to retain a consultant
to recommend for implementation specific disclosure controls and procedures
to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act are recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and
forms.
Limitations
on the Effectiveness of Internal Controls
Our
management does not expect that our disclosure controls and procedures or our
internal control over financial reporting will necessarily prevent all fraud
and
material error. Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving our objectives and our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures are effective at that reasonable assurance level. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in 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 people, or by management override of the internal control. The design
of
any system of controls also is based in part upon certain assumptions about
the
likelihood of future events, and there can be no assurance that any design
will
succeed in achieving its stated goals under all potential future conditions.
Over time, control may become inadequate because of changes in conditions,
or
the degree of compliance with the policies or procedures may deteriorate.
We
are
not a party to any pending legal proceeding. We are not aware of any pending
legal proceeding to which any of our officers, directors, or any beneficial
holders of 5% or more of our voting securities are adverse to us or have a
material interest adverse to us.
None
None
No
matters have been submitted to our security holders for a vote, through the
solicitation of proxies or otherwise, during the quarterly period ended March
31, 2006.
None
Exhibit
Number
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Description
of Exhibit
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SIGNATURES
In
accordance with the requirements of the Securities and Exchange Act of 1934,
the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
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UNITED
AMERICAN CORPORATION
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|
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Date:
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May
19, 2006
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|
|
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By: /s/
Simon Lamarche
Simon
Lamarche
Title: Chief
Executive Officer, Chief Financial Officer, and
Director
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