Struggling telecommunications business NetTalk.com Inc. is being sued by a lender that says the business failed to convert part of a note into company stock, and thus violated a contract and certain antifraud provisions.

Miami Gardens, Florida-based NetTalk.com provides cloud-based telephone services.

The business had liquidity problems before the lawsuit was levied, saying in a filing with the U.S. Securities and Exchange Commission that recurring losses from operations and a dependence on outside financing created substantial doubt about the company’s ability to continue as a going concern, or without the threat of liquidation. 

KBM Worldwide Inc., which lent the company $53,500 through convertible notes in December, says that NetTalk didn't maintain sufficient shares of common stock that should have been used for note conversion. KBM invests in small publicly traded companies that have a hard time finding financing. The company provides capital in exchanges for shares it can buy at a discount.

The lender issued a conversion on May 28, seeking to exchange about $13.3 million for 8.86 million shares of common stock, which NetTalk was supposed to convert within three business days, according to the suit. NetTalk did not complete the conversion, and KBM alleges that it is owed $2,000 per day until the shares are issued.

The complaint, filed in the U.S. District Court for the Eastern District of New York on Sept. 2, alleges that NetTalk CEO Anastasios Kyriakides, CFO Steven Healy and board member Kenneth Hosfeld violated antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934. The lender is also seeking recovery of damages from NetTalk shareholder Telestrata LLC, and Samar Bishay, who controls Telestrata, because it says they have interfered with the KBM's contractual rights.

Now, NetTalk is in default on the note and KBM is seeking $107,000, plus interest.

NetTalk warns that its current cash resources combined with anticipated future cash flow may not be sufficient to fund operations, and that it is looking for additional capital, in the company's latest quarterly filing with the SEC, filed Aug. 19.

For the previous edition of Turnaround Tuesday, see Feeling Cash Squeeze, Mojo Organics Receives Infusion. For a list of other struggling companies, see Mergers & Acquisitions' Distressed Company Watch List

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