Pursuant
to Rule 424(b)(3)
Registration
Number 333-121211
PROSPECTUS
SUPPLEMENT NUMBER THREE
(TO
PROSPECTUS DATED JANUARY 5, 2005)
4,349,000
Shares
VoIP,
Inc.
COMMON
STOCK
This
prospectus supplement supplements the prospectus dated January 5,
2005
relating to the offer and sale by the selling stockholders identified in
the
prospectus of up to 4,349,000 shares of our common stock. This prospectus
supplement includes our Quarterly Report on Form 10-QSB for the quarterly
period ended September 30, 2005 which was filed with the Securities and Exchange
Commission on November 21, 2005 and our Amended Annual Report on Form 10-KSB/A
for the year ended December 31, 2004 which was filed with the Securities
and
Exchange Commission on November 23, 2005.
The
information contained in such reports is dated as of the date of such reports.
This prospectus supplement should be read in conjunction with the prospectus
dated January 5, 2005, which is to be delivered with this prospectus
supplement. This prospectus supplement is qualified by reference to the
prospectus except to the extent that the information in this prospectus
supplement updates and supercedes the information contained in the prospectus
dated January 5, 2005, including any supplements or amendments
thereto.
Investing
in the shares involves risks. See “Risk Factors” beginning on page 5 of the
prospectus dated January 5, 2005.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
is
truthful or complete. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus supplement is November 23, 2005.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
--------------------------------------------------------------------------------
(Mark one)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
-----------
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
-----------
OF 1934
For the transition period from _________ to ________
--------------------------------------------------------------------------------
Commission File Number: 000-28985
-------
VoIP, Inc.
(Exact name of small business issuer as specified in its charter)
Texas 75-2785941
------------------------ -----------------------
(State of incorporation) (IRS Employer ID Number)
12330 SW 53rd Street, Suite 712, Fort Lauderdale, FL 33330
----------------------------------------------------------
(Address of principal executive offices)
(954) 434-2000
(Issuer's telephone number)
--------------------------------------------------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 126-2 of the Exchange Act). YES |_| NO |X|
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: November 2, 2005: 59,650,842.
Transitional Small Business Disclosure Format (check one): YES |_| NO |X|
Registrant is an accelerated filer (check one): YES |_| NO |X|
VoIP, Inc.
Form 10-QSB for the Quarter ended September 30, 2005
Table of Contents
Page
----
Part I - Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3 Controls and Procedures 32
Part II - Other Information
Item 1 Legal Proceedings 33
Item 2 Changes in Securities 33
Item 3 Defaults upon Senior Securities 33
Item 4 Submission of Matters to a Vote of Security Holders 33
Item 5 Other Information 33
Signatures 35
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
VoIP, Inc.
Consolidated Balance Sheets
September 30, 2005 December 31, 2004
------------------ -----------------
(Unaudited) (As Restated)
ASSETS
Current assets:
Cash and cash equivalents $ 3,238,941 $ 1,141,205
Accounts receivable, net of allowance of
$113,817 and $136,795 respectively 704,451 818,071
Due from related parties 259,806 245,402
Inventory 561,245 187,451
Assets from discontinued operations less
valuation allowance of $392,000 in 2005 -- 412,419
Other current assets 364,929 43,702
------------ ------------
Total current assets 5,129,372 2,848,250
Property and equipment, net 8,352,155 419,868
Goodwill and other intangible assets 29,996,814 6,923,854
Other assets 272,434 23,580
------------ ------------
TOTAL ASSETS $ 43,750,775 $ 10,215,552
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 9,009,315 $ 1,224,974
Loans payable 7,240,444 760,000
Convertible notes payable 815,991 --
Other current liabilities 2,058,630 123,140
------------ ------------
Total current liabilities 19,124,380 2,108,114
Convertible notes payable-long term 611,934 --
Other debt 164,631 --
------------ ------------
Total Liabilities 19,900,945 2,108,114
------------ ------------
Shareholders' equity:
Common stock - $0.001 par value;
100,000,000 shares authorized;
56,588,004 and 24,258,982 shares
issued and outstanding, respectively 56,588 24,259
Additional paid-in capital 43,698,121 14,107,328
Accumulated deficit (19,904,879) (6,024,149)
------------ ------------
Total shareholders' equity 23,849,830 8,107,438
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 43,750,775 $ 10,215,552
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
VoIP, Inc.
Consolidated Statements of Operations
(Unaudited)
Nine Months Ended September 30 Three Months Ended September 30
------------------------------------------------------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
(As Restated) (As Restated)
Revenues $ 6,452,832 $ 1,015,065 $ 2,535,912 $ 929,767
Cost of sales 6,258,049 737,904 3,153,203 678,981
------------ ------------ ------------ ------------
Gross profit (loss) 194,783 277,161 (617,291) 250,786
Operating expenses:
Compensation and benefits 4,419,207 3,404,151 2,636,126 3,165,826
Commissions and fees
to third parties 2,456,588 57,416 1,383,826 57,416
Advertising and marketing 482,050 115,180 133,635 88,289
Professional and legal 1,178,639 238,527 489,806 128,012
Depreciation and
amortization 1,821,214 38,315 1,253,779 22,604
Other 3,717,815 503,757 2,332,830 297,218
------------ ------------ ------------ ------------
Total operating expenses 14,075,513 4,357,346 8,230,002 3,759,365
------------ ------------ ------------ ------------
Loss from operations (13,880,730) (4,080,185) (8,847,293) (3,508,579)
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Net loss $(13,880,730) $ (4,080,185) $ (8,847,293) $ (3,508,579)
============ ============ ============ ============
Basic and diluted loss per share: $ (0.39) $ (0.31) $ (0.18) $ (0.18)
============ ============ ============ ============
Weighted average number of
shares outstanding 35,918,087 13,037,347 49,665,036 19,642,390
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
VoIP, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30
--------------------------------
2005 2004
------------ ------------
(As Restated)
Cash flows from operating activities:
Net loss $(13,880,730) $ (4,080,185)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,821,214 38,315
Compensation, interest, and other expenses for stock and
warrants issued and vesting stock options 5,364,394 3,333,981
Provision for bad debt 113,816 --
Provision for assets of discontinued operations 392,000 --
Changes in operating assets and liabilities net of
assets and liabilities acquired:
Accounts receivable (62,584) (4,583)
Inventory (373,794) (37,580)
Other current assets 311,668 (76,760)
Accounts payable (1,577,852) (10,618)
Other current liabilities (1,111,689) 52,598
------------ ------------
Net cash used in operating activities (9,003,557) (784,832)
------------ ------------
Cash flows from investing activities:
Cash from acquisitions -- 104,862
Purchases of property and equipment (176,875) (43,550)
Purchase of other assets -- (13,092)
------------ ------------
Net cash provided by (used in) investing activities (176,875) 48,220
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable 3,730,339 --
Payments on notes payables (722,797) --
Due to affiliates -- (151,166)
Net proceeds under capital leases 195,863 --
Proceeds from sales of common stock 8,074,763 1,121,803
------------ ------------
Net cash provided by financing activities 11,278,168 970,637
------------ ------------
Increase in cash and cash equivalents 2,097,736 234,025
Cash and cash equivalents at beginning of period 1,141,205 3,499
------------ ------------
Cash and cash equivalents at end of period $ 3,238,941 $ 237,524
============ ============
Non-cash investing and financing activities:
Goodwill and intangible assets recorded on acquisition $(24,101,000) $ --
Issuance of common stock and warrants
on acquisitions $ 13,819,119 $ --
Issuance of stock for debt conversion $ 1,996,478 $ --
Net liabilities assumed net of cash $ 8,285,403 $ --
Cash paid for interest $ 262,833 $ --
The accompanying notes are an integral part of these
consolidated financial statements.
5
VoIP, Inc.
Notes to Financial Statements
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
VoIP, Inc. (the "Company") was incorporated on August 3, 1998 under its original
name of Millennia Tea Masters under the laws of the State of Texas. In February
2004 the Company exchanged 12,500,000 shares for the assets of two start-up
telecommunication businesses, eGlobalphone, Inc. and VoIP Solutions, Inc. The
Company changed its name to VoIP, Inc. in April 2004 and acquired DTNet
Technologies, Inc., a hardware supplier, and VoIP Americas, Inc., a VoIP related
company, in June and September, respectively, of 2004. The Company decided to
exit its former tea business in December 2004 and focus its efforts and
resources in the Voice over Internet Protocol telecommunications industry. In
May 2005 the Company acquired Caerus, Inc., a VoIP carrier and service provider.
In October 2005 the Company purchased substantially all of the assets of WQN
Inc.'s voice over internet protocol business.
The Company is an emerging global provider of advanced communications services
utilizing Voice over Internet Protocol (VoIP) technology. Internet Protocol
telephony is the real time transmission of voice communications in the form of
digitized "packets" of information over the Internet or a private network,
similar to the way in which e-mail and other data is transmitted. VoIP services
are expected to allow consumers and businesses to communicate in the future at
dramatically reduced costs compared to traditional telephony networks.
The Company owns its network and its technology and offers the ability to
provide complete product and service solutions, including wholesale carrier
services for call routing and termination, outsourced customer service and
hardware fulfillment. The Company is a certified Competitive Local Exchange
Carrier (CLEC) and Interexchange Carrier (IXC.) The Company provides a portfolio
of advanced telecommunications technologies, enhanced service solutions, and
broadband products to the VoIP industry. Customers include RBOCs, CLECs, IXCs,
wireless carriers, resellers, internet service providers, cable multiple system
operators and other providers of telephony services in the United States and
various countries around the world.
The Company's operations consist of one segment.
The financial information presented herein should be read in conjunction with
the consolidated financial statements for the year ended December 31, 2004. The
accompanying consolidated financial statements for the three and nine months
ended September 30, 2005 and 2004 are unaudited but, in the opinion on
management, include all adjustments (which are of normal and recurring in
nature) necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented. Interim results are
not necessarily indicative of results for a full year. Therefore, the results of
operations for the three and nine months ended September 30, 2005 are not
necessarily indicative of operating results to be expected for the full year or
future interim periods.
Significant accounting policies are detailed in the Company's annual report on
Form 10-KSB for the year ended December 31, 2004.
All intercompany accounts and transactions have been eliminated in
consolidation.
NOTE B - RESTATEMENT OF FINANCIAL STATEMENTS
The Company accounts for options and warrants issued to employees in accordance
with Statement of Financial Accounting Standards No. 123 "Accounting for Stock
Based Compensation." During the preparation of its financial statements for the
quarterly period ended September 30, 2005 the Company discovered that it did not
recognize in its 2004 interim or annual financial statements the amount of
compensation expense required to be recognized under SFAS 123 for the vested
portion of approximately 4 million stock options issued to employees during the
year ended December 31, 2004. This compensation expense amounted to $645,590,
and $786,215 for the three and nine months ended September 30, 2004,
respectively. The Company also incorrectly recorded $1,316,400 more in
compensation expense for the three months ended September 30, 2004 related to
warrants issued to employees than should have been recognized during that
quarterly period under SFAS No.123. The Company therefore decided that it would
be appropriate to restate its financial statements for 2004. The following table
sets forth the impact of the restatement on certain amounts previously reported
in the consolidated statements of operations for the three and nine months ended
September 30, 2004 and the consolidated balance sheet at December 31, 2004.
6
As Previously
Consolidated Balance Sheet at December 31, 2004 Reported As Restated
------------ ------------
Additional paid-in capital $ 12,722,565 $ 14,107,328
Accumulated deficit $ (4,639,386) $ (6,024,149)
Consolidated Statement of Operations for the nine months
ended September 30, 2004:
Total operating expenses $ 4,887,531 $ 4,357,346
Loss from operations $ (4,610,370) $ (4,080,185)
Net loss $ (4,610,370) $ (4,080,185)
Loss per share $ (0.42) $ (0.37)
Consolidated Statement of Operations for the three months
ended September 30, 2004:
Total operating expenses $ 4,430,175 $ 3,759,365
Loss from operations $ (4,179,389) $ (3,508,579)
Net loss $ (4,179,389) $ (3,508,579)
Loss per share $ (0.21) $ (0.18)
NOTE C - LIQUIDITY
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplates continuation of the Company as a going concern.
The Company has incurred operating losses and negative cash flows from
operations since inception of its business in 2004 and has been dependent on
issuances of debt and equity instruments to fund its operations and capital
expenditures.
At September 30, 2005 the Company's contractual obligations for debt, leases and
capital expenditures totaled approximately $11.5 million. Included in this
amount is approximately $5.1 million due on a loan from a lending institution.
The Company is not in compliance with certain covenants under the loan agreement
for this debt and also owes amounts in arrears on this loan of approximately
$280,000. To date the lending institution has not declared a default on this
loan.
The Company will need to raise additional debt or equity capital to provide the
funds necessary to restructure or repay its $5.1 million loan, meet its other
contractual commitments, and continue its operations. The Company is actively
seeking to raise this additional capital but may not be successful in obtaining
further debt or equity financing. The accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
asset amounts or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
7
NOTE D - GOODWILL AND OTHER INTANGIBLE ASSETS
a) As of September 30, 2005 goodwill consisted of the following: Amount
---------------
Acquisition of Caerus, Inc. $ 10,301,000
Acquisition of DTNet Technologies, Inc. 5,210,553
Acquisition of Voipamericas, Inc. 1,408,301
---------------
Sub total 16,919,854
---------------
b) As of September 30, 2005 intangible assets consisted of the following:
Intangibles with finite lives: Useful Life Years Amount
-------------------- -----------------
Technology - Caerus, Inc. 4.0 $ 6,000,000
Customer relationships - Caerus, Inc. 6.0 5,800,000
Trade names - Caerus, Inc. 9.0 1,300,000
Non-compete agreements - Caerus, Inc. 1.0 500,000
Carrier licenses - Caerus, Inc. Unamortized 200,000
-----------------
Sub total 13,800,000
Less accumulated amortization (1,028,040)
-----------------
Sub total 12,771,960
Intangibles with undeterminable lives:
Intellectual property 305,000
-----------------
Sub total 13,076,960
-----------------
Total $ 29,996,814
=================
The goodwill on the acquisition of DTNet Technologies, Inc. (DTNet) represents
the fair market value of DTNet liabilities as of the date of the acquisition
plus $4,750,000 which represents the market value of 2,500,000 shares of Company
stock issued pursuant to its acquisition.
The goodwill on the acquisition of Voipamericas represents the fair market value
of Voipamericas liabilities as of the date of the acquisition plus $1,100,000
which represents the market value of 1,000,000 shares of the Company's stock
issued pursuant to this acquisition.
Intellectual property is carried at cost which is comprised of $200,000 paid in
cash and the value assigned to 100,000 Company common shares and 400,000
warrants issued pursuant to this transaction.
Intellectual property consists of the following:
a) all rights of the Company of Record in the telephone numbers
1(800)TALKTIME, 1(888)TALKTIME, AND 1(877)TALKTIME.COM
b) all rights to the URL's (domain names) 800TALKTIME.COM,
1800TALKTIME.COM, and 1-800-TALKTIME.COM
c) all rights to U.S. Trademark Registration No. 2,209,316 directed to
1-800-TALKTIME and the goodwill associated therewith.
NOTE E - ACQUISITION OF CAERUS, INC.
On May 31, 2005 the Company acquired 100 percent of Caerus, Inc. and its wholly
owned subsidiaries Volo Communications, Inc., Caerus Networks, Inc., and Caerus
Billing, Inc. in exchange for 16.9 million of the Company's common shares. The
acquisition was accounted for as a business combination in accordance with
Statement of Financial Accounting Standard No. 141 "Business Combinations"
("SFAS No. 141").
8
The purchase price was allocated to the identifiable net assets acquired
including the identifiable intangible assets based on their estimated fair
market values at the date of acquisition. The goodwill, intangible assets and
property recorded for the acquisition of Caerus, Inc. (Caerus) represent the
fair market value of liabilities as of the date of acquisition, plus $13,819,118
which represents the value of the Company's common stock and options issued
pursuant to the acquisition, plus acquisition-related costs. The common stock
issued to acquire Caerus was valued at the closing market price of the stock on
the date of the acquisition, less a 25% discount due to restrictions on the
shares. The amortizable lives of the intangible assets recorded for Caerus range
from one to nine years.
The fair market value of the assets acquired on May 31, 2005 is as follows:
Fair Value of
Assets Acquired
---------------
Cash $ 66,485
Accounts receivable 285,578
Deposits 108,500
Other current assets 156,659
Property and equipment, net 8,451,763
Other assets 271,609
Accounts payable (9,382,323)
Note payable (6,960,818)
Customer deposits (1,026,750)
Other current liabilities (2,252,703)
------------
Sub total (10,282,000)
Intangible assets 13,800,000
Goodwill 10,301,000
------------
Sub total 24,101,000
------------
Purchase price $ 13,819,000
============
NOTE F - LOANS PAYABLE
As of September 30, 2005 loans payable consist of the following:
a. Note Payable to Shareholder $ 994,626
b. Note Payable 1,000,000
c. Note Payable - Other 115,000
d. Note Payable to lending institution 5,130,818
---------------
Total $ 7,240,444
===============
a. Represents the balance due a shareholder at an interest rate of 3.75% with
a maturity date of December 31, 2005.
9
b. On August 5, 2005 the Company received an advance for $1,000,000 related
to the asset acquisition performed on October 6, 2005 (see NOTE K).
c. Represents 50% of a note issued pursuant to a subscription agreement. On
October 20, 2005 the investor completed 100% of the agreement by investing
an additional $115,000, and converted the $230,000 principal balance of
this note into 287,500 shares of common stock.
d. Represents the balance of a loan payable to a lending institution. These
borrowings are repayable over a three-year period and bear interest at
12.5% per annum. Additional borrowings under this facility are contingent
upon, among other things, the Company raising certain levels of additional
equity financing. The loan agreement contains customary covenants and
restrictions and provides the lender the right to a perfected
first-priority, secured interest in all of Caerus, Inc.'s assets, as well
as rights to preferred stock warrants. The Company is in violation of
certain requirements of the debt facility. Accordingly, the full amount of
the note at September 30, 2005 has been classified as current. No default
on this loan has been declared by the lender.
NOTE G - CONVERTIBLE NOTES PAYABLE
Convertible notes payable represents notes issued pursuant to a subscription
agreement, immediately convertible at the option of the note holders into
1,784,895 shares of common stock. The notes are repayable beginning in October
2005 in equal monthly installments of $67,999 in principal and $5,440 in
interest. In connection with these notes the note holders also received warrants
to purchase 829,448 shares of common stock at $1.60 per share and 829,448 shares
of common stock at $1.43 per share. The fair market value of these warrants as
calculated using the Black-Scholes pricing model is $1,356,620 and this amount
has been expensed as a financing cost during the three months ended September
30, 2005 due to the fact that the related notes are convertible at any time into
common stock.
The subscription agreement for these notes also gave the note holders the option
to purchase, within five business days following the effective date of a Company
registration statement, an additional $1,427,925 in convertible notes on the
same terms as those for the convertible notes outstanding at September 30, 2005.
In October 2005 a Company registration statement was declared effective and the
note holders purchased the additional $1,427,925 in convertible notes. Warrants
were issued in connection with these notes to purchase 829,448 shares of stock
at $1.60 per share and 829,448 shares of stock at $1.65 per share.
NOTE H - LITIGATION
On April 8, 2005, Volo Communications, Inc. ("Volo") (a wholly-owned subsidiary
of Caerus, Inc.) filed suit against MCI Worldcom Network Services, Inc. d/b/a
UUNET ("MCI"). Volo alleges that MCI engaged in a pattern and practice of
over-billing Volo for the telecommunications services it provided pursuant to
the parties' Services Agreement, and that MCI refused to negotiate such
overcharges in good faith. Volo also seeks damages arising out of MCI's
fraudulent practice of submitting false bills by, among other things, re-routing
long distance calls over local trunks to avoid access charges, and then billing
Volo for access charges that were never incurred. On April 4, 2005, MCI declared
Volo in default of its obligations under the Services Agreement, claiming that
Volo owes a past due amount of $8,365,980, and threatening to terminate all
services to Volo within 5 days. By this action Volo alleges claims for (1)
breach of contract; (2) fraud in the inducement; (3) primary estoppel; and (4)
deceptive and unfair trade practices. Volo also seeks a declaratory judgment
that (1) MCI is in breach of the Services Agreement; (2) $8,365,980 billed by
MCI is not "due and payable" under that agreement; and (3) MCI's default letter
to Volo is in violation of the Services Agreement. Volo seeks direct, indirect
and punitive damages in an amount to be determined at trial.
On May 26, 2005, MCI filed an Answer, Affirmative Defenses, Counterclaim and
Third-Party Complaint naming Caerus, Inc. as a third-party defendant. MCI
asserts a breach of contract claim against Volo, a breach of guarantee claim
against Caerus, Inc., and a claim for unjust enrichment against both parties,
seeking an amount to be determined at trial. On July 11, 2005, Volo and Caerus,
Inc. answered the counterclaim and third-party complaint, and filed a
third-party counterclaim against MCI for declaratory judgment, fraud in the
inducement, and breach of implied duty of good faith and fair dealing. Volo and
Caerus, Inc. seek direct, indirect, and punitive damages in an amount to be
determined at trial.
On August 1, 2005, MCI moved to strike most of Volo's and Caerus' affirmative
defenses and demand for attorney's fees, and to dismiss Caerus' counterclaims.
On October 6, 2005, the Court denied the motions in part, granted them in part
with leave to amend, and deferred ruling on the motions in part. On October 13,
2005, Volo and Caerus filed amended affirmative defenses, and Caerus filed
amended counterclaims.
This litigation is in the discovery stage. The Company is currently unable to
assess the likelihood of a favorable or unfavorable outcome.
10
NOTE I - OTHER DEBT
During the quarter ended September 30, 2005 the Company refinanced certain
telecommunications equipment with capital leases. At September 30, 2005 the
related future minimum lease payments under these capital leases were as
follows:
Fiscal
2006 $ 58,003
2007 58,003
2008 58,003
2009 58,003
2010 44,059
---------
Subtotal 276,071
Less imputed interest necessary
to reduce the net minimum lease
payments to their estimated
present value (80,208)
---------
Total obligation at
September 30, 2005 195,863
Less current portion (31,232)
---------
Non-current portion $ 164,631
=========
NOTE J - STOCK BASED COMPENSATION
A total of 4,000,000 shares of common stock has been reserved for issuance under
the Company's 2004 Employee Stock Option Plan. The activity in this 2004 Option
Plan for the nine months ended September 30, 2005 is as follows:
Exercise Wtd. Avg.
Number Price Range Exercise Price
---------- ---------------- --------------
Options outstanding at December 31, 2004 3,650,000 $0.85 - $1.56 $ 1.14
Options returned to the plan due
to employee terminations (600,000) $0.85 - $1.10 $ 0.95
Options granted 325,000 $1.01 - $1.17 $ 1.12
----------
Options outstanding at September 30, 2005 3,375,000 $0.85 - $1.56 $ 1.17
==========
The Company recorded compensation expense of $263,806 and $645,590 for the three
months ended September 30, 2005 and 2004, respectively, and $409,569 and
$786,215 for the nine months ended September 30, 2005 and 2004 respectively in
connection with options granted under the 2004 Stock Option Plan.
During the three months ended September 30, 2004 the Company issued to two
employees warrants to purchase 4,400,000 shares of common stock for $1.00 per
share. The Company recognized $2,217,600 (the estimated fair market value of the
warrants) in compensation expense in connection with the issuance of these
warrants during the three months ended September 30, 2004. During the three
months ended March 31, 2005 the Company issued 750,000 shares of common stock in
exchange for 2,200,000 of these warrants and recognized additional compensation
expense of $239,500 for the excess of the fair market value of the common stock
issued over the fair market value of the warrants received. During the three
months ended September 30, 2005 the Company issued 1,275,630 shares of common
stock for the remaining 2,200,000 warrants and recognized additional
compensation expense of $1,328,801 for the excess of the fair market value of
the stock issued over the fair market value of warrants received.
NOTE K - SUBSEQUENT EVENTS
On October 6, 2005, the Company purchased substantially all of the assets of
WQN, Inc. relating to WQN's "Voice over Internet Protocol" business. Such assets
consist of WQN's properties and infrastructure for its services platform for
both retail and wholesale voice over internet business. The acquired business
currently provides (i) enhanced Internet-based and other telephony services
under various brand names to individual consumers primarily seeking to make
international calls; (ii) enhanced Internet-based and other telephony services
to resellers, corporations and service providers under their brand names; (iii)
and carrier transmission services whereby WQN sells excess capacity to other
long-distance carriers.
Pursuant to the Asset Purchase Agreement, the Company purchased the assets for
(1) a Convertible Promissory Note, in the principal amount of $3,700,000 and
convertible into 3,557,692 shares of the Company's common stock (the "Purchase
Note"), (2) 1,250,000 restricted shares of the Company's common stock, par value
$0.001 per share (the "Common Stock") and (3) a warrant (the "Purchase Warrant")
to purchase 5,000,000 shares of Common Stock for $0.001 per share. In addition,
the Asset Purchase Agreement provides that, in the event that the accounts
payable of WQN transferred to the Company in the Asset Purchase exceed the
accounts receivable transferred to the Company in the Asset Purchase, WQN will
pay the Company the difference. If WQN is required to pay such difference, the
Company will issue additional shares of Common Stock at the rate of one share
per dollar of such excess, up to 500,000 shares.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
This quarterly report contains forward-looking statements relating to events
anticipated to happen in the future. These forward-looking statements are based
on the beliefs of our management, as well as assumptions made by and information
currently available to our management. Forward-looking statements also may be
included in other written and oral statements made or released by us. You can
identify forward-looking statements by the fact that they do not relate strictly
to historical or current facts. The words "believe," "anticipate," "intend,"
"expect," "estimate," "project" and similar expressions are intended to identify
forward-looking statements. Forward-looking statements describe our expectations
today of what we believe is most likely to occur or may be reasonably achievable
in the future, but they do not predict or assure any future occurrence and may
turn out to be wrong. Forward-looking statements are subject to both known and
unknown risks and uncertainties and can be affected by inaccurate assumptions we
might make. Consequently, no forward-looking statement can be guaranteed. Actual
future results may vary materially. We do not undertake any obligation to
publicly update any forward-looking statements to reflect new information or
future events or occurrences. These statements reflect our current views with
respect to future events and are subject to risks and uncertainties about us,
including, among other things:
o our ability to market our services successfully to new subscribers;
o our ability to retain a high percentage of our customers;
o the possibility of unforeseen capital expenditures and other upfront
investments required to deploy new technologies or to effect new business
initiatives;
o our ability to access markets and finance network developments and operations;
o our expansion, including consumer acceptance of new price plans and bundled
offerings;
o additions or departures of key personnel;
12
o competition, including the introduction of new products or services by our
competitors;
o existing and future laws or regulations affecting our business and our ability
to comply with these laws or regulations;
o our reliance on the systems and provisioning processes of regional Bell
operating companies;
o technological innovations;
o the outcome of legal and regulatory proceedings;
o general economic and business conditions, both nationally and in the regions
in which we operate; and
o other factors described in this document, including those described in more
detail below.
We caution you not to place undue reliance on these forward-looking statements,
which speak only as of the date of this document.
RISK FACTORS
You should carefully consider each of the following risk factors and all of the
other information in this quarterly report. If any of the following risks and
uncertainties develops into actual events, our business, financial condition or
results of operations could be materially and adversely affected. If that
happens, the trading price of our shares could decline significantly. The risk
factors below contain forward-looking statements regarding our company. Actual
results could differ materially from those set forth in the forward-looking
statements.
13
RISKS RELATED TO OUR COMPANY
We have a history of losses and negative cash flows from operations and we
anticipate such losses and negative cash flows will continue.
We have incurred significant losses since inception, and we may continue to
incur significant losses for the foreseeable future. We reported net losses of
approximately $13.9 million for the nine months ended September 30, 2005. As of
September 30, 2005, our accumulated deficit was approximately $19.9 million. We
had negative cash flows from operations of approximately $9.0 million for the
nine months ended September 30, 2005. Our revenues may not grow or even continue
at their current level. We will need to increase our revenues to become
profitable. In order to increase our revenues, we need to attract and maintain
customers to increase the fees we collect for our services. If our revenues do
not increase as much as we expect or if our expenses increase at a greater pace
than revenues, we may never be profitable or, if we become profitable, we may
not be able to sustain or increase profitability on a quarterly or annual basis.
We have a limited operating history upon which you can evaluate us.
We have only a limited operating history upon which you can evaluate our
business and prospects. We commenced operations of our current business in 2004
and in 2005 we completed two significant acquisitions. You should consider our
prospects in light of the risks, expenses and difficulties we may encounter as
an early stage company in the new and rapidly evolving market for IP
communications services. These risks include our ability:
o to increase acceptance of our enhanced VoIP communications services, thereby
increasing the number of users of our IP telephony services;
o to compete effectively, and;
o to develop new products and keep pace with developing technology.
In addition, because we expect an increasing percentage of our revenues to be
derived from our enhanced IP communications services, our past operating results
may not be indicative of our future results.
We may not be able to expand our revenue base and achieve profitability.
Our business strategy is to expand our revenue sources to include the IP
communications services to several different customer groups. We can neither
assure you that we will be able to accomplish this nor that this strategy will
be profitable. Currently, our revenues are generated primarily by providing
routing and termination services to other carriers and, to a lesser extent,
through hardware sales. Routing and termination services, substantially all of
which were derived from one customer, accounted for 83% of our revenues for the
quarter ended September 30, 2005. These services have not been profitable to
date and may not be profitable in the future.
In the future, we intend to generate increased revenues by expanding our number
of facilities-based carrier customers and from enhanced IP communications
services from multiple sources, many of which are unproven. We expect that our
revenues for the foreseeable future will be dependent on, among other factors:
o acceptance and use of IP telephony;
o growth in the number of our customers;
o expansion of service offerings;
o traffic levels on our network;
o the effect of competition, regulatory environment, international long distance
rates and access and transmission costs on our prices, and;
o continued improvement of our global network quality.
14
We cannot assure you that a market for our services will develop. Our market is
new and rapidly evolving. Our ability to sell our services may be inhibited by,
among other factors, the reluctance of some end-users to switch from traditional
communications carriers to IP communications carriers and by concerns with the
quality of IP telephony and the adequacy of security in the exchange of
information over the Internet, and the reluctance of our resellers and service
providers to utilize outsourced solutions providers. End-users in markets
serviced by recently deregulated telecommunications providers are not familiar
with obtaining services from competitors of these providers and may be reluctant
to use new providers such as us. We will need to devote substantial resources to
educate customers and end-users about the benefits of IP communications
solutions in general and our services in particular. If enterprises and their
customers do not accept our enhanced IP communications services as a means of
sending and receiving communications, we will not be able to increase our number
of paid users or successfully generate revenues in the future.
We may incur goodwill and intangible asset impairment charges.
Our balance sheet at September 30, 2005 includes approximately $17.0 million in
goodwill and approximately $13.0 million in intangible assets recorded in
connection with our acquisitions. We expect to record significant additional
amounts of goodwill and intangible assets as a result of our acquisition in
October 2005 of substantially all of the assets relating to the VoIP business of
WQN, Inc.
In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," we test our goodwill and our intangible
assets for impairment at least annually by comparing the fair values of these
assets to their carrying values, and we may be required to record impairment
charges for these assets if in the future their carrying values exceed their
fair values. Such accounting charges related to impairment would be reflected in
our consolidated statement of operations as an operating expense, and could have
a material adverse impact on our results of operations and financial condition.
We are not in compliance with the terms of our loan agreement.
We are not in compliance with certain covenants of the agreement for our loan
from a lending institution (which amounted to approximately $5.1 million at
September 30, 2005) and we owe principal, interest and costs in arrears on this
loan of approximately $282,000. Our lender has not declared a default under the
loan agreement. We expect to repay or restructure this loan by raising
additional debt or equity capital. If we experience delays in raising capital or
are unable to raise a sufficient amount of capital, we could be required to seek
modifications to the terms of the loan agreement or another source of financing
to continue operations.
Potential fluctuations in our quarterly financial results may make it difficult
for investors to predict our future performance.
Our quarterly operating results may fluctuate significantly in the future as a
result of a variety of factors, many of which are outside our control.
The factors generally within our control include:
o the amount and timing of capital expenditures to expand our infrastructure;
o the amount and timing of expenses to enhance marketing and promotion efforts;
and
o the timing of announcements or introductions of new or enhanced services by
us.
The factors outside our control include:
o the timing of announcements or introductions of new or enhanced services by
our competitors;
o technical difficulties or network interruptions in the Internet or our
privately-managed network;
o general economic and competitive conditions specific to our industry.
15
The foregoing factors also may create other risks affecting our long-term
success, as discussed in the other risk factors. We believe that
quarter-to-quarter comparisons of our historical operating results may not be a
good indication of our future performance, nor would our operating results for
any particular quarter be indicative of our future operating results.
We expect to need additional capital to continue our operations.
We intend to continue to enhance and expand our network in order to maintain our
competitive position and meet the increasing demands for service quality,
capacity and competitive pricing. Also, the introduction of new products and/or
service will require significant marketing and promotional expenses that we
often incur before we begin to receive the related revenue. Our cash flows from
operations has not been sufficient to meet our capital expenditure and working
capital requirements. We anticipate we will need to raise additional capital to
continue our operations. We may not be able to raise additional capital, and if
we are able to raise additional capital through the issuance of additional
equity, our current investors could experience dilution. If we are unable to
obtain additional capital, we may be required to reduce the scope of our
business or our anticipated growth, which would reduce our revenues.
Our network may not be able to accommodate our capacity needs.
We expect the volume of traffic we carry over our network to increase
significantly as we expand our operations and service offerings. Our network may
not be able to accommodate this additional volume. In order to ensure that we
are able to handle additional traffic, we may have to enter into long-term
agreements for leased capacity. To the extent that we overestimate our capacity
needs, we may be obligated to pay for more transmission capacity than we
actually use, resulting in costs without corresponding revenues. Conversely, if
we underestimate our capacity needs, we may be required to obtain additional
transmission capacity from more expensive sources. If we are unable to maintain
sufficient capacity to meet the needs of our users, our reputation could be
damaged and we could lose users.
Additionally, our success depends on our ability to handle a large number of
simultaneous calls. We expect that the volume of simultaneous calls will
increase significantly as we expand our operations. If this occurs, additional
stress will be placed upon the network hardware and software that manages our
traffic. We cannot assure stockholders of our ability to efficiently manage a
large number of simultaneous calls. If we are not able to maintain an
appropriate level of operating performance, or if our service is disrupted, then
we may develop a negative reputation and our business, results of operations and
financial condition would be materially adversely affected.
We face a risk of failure of the computer and communications systems used in our
business.
Our business depends on the efficient and uninterrupted operation of our
computer and communications systems as well as those that connect to our
network. We maintain communications systems (i.e. Network Access Points) in
facilities in Orlando, Atlanta, New York, Dallas, Los Angeles and we are
currently constructing a NAP in Chicago. Our systems and those that connect to
our network are subject to disruption from natural disasters or other sources of
power loss, communications failure, hardware or software malfunction, network
failures and other events both within and beyond our control. Any system
interruptions that cause our services to be unavailable, including significant
or lengthy telephone network failures or difficulties for users in communicating
through our network or portal, could damage our reputation and result in a loss
of users.
Our computer systems and operations may be vulnerable to security breaches.
Our computer infrastructure is potentially vulnerable to physical or electronic
computer viruses, break-ins and similar disruptive problems and security
breaches that could cause interruptions, delays or loss of services to our
users. We believe that the secure transmission of confidential information over
the Internet, such as credit card numbers, is essential in maintaining user
confidence in our services. We rely on licensed encryption and authentication
technology to effect secure transmission of confidential information, including
credit card numbers. It is possible that advances in computer capabilities, new
technologies or other developments could result in a compromise or breach of the
technology we use to protect user transaction data. A party that is able to
circumvent our security systems could misappropriate proprietary information or
cause interruptions in our operations. Security breaches also could damage our
reputation and expose us to a risk of loss or litigation and possible liability.
Although we have experienced no security breaches to date of which we are aware,
we cannot guarantee you that our security measures will prevent security
breaches.
16
Online credit card fraud can harm our business.
The sale of our products and services over the Internet exposes us to credit
card fraud risks. Many of our products and services, including our VoIP
services, can be ordered or established (in the case of new accounts) over the
Internet using a major credit card for payment. As is prevalent in retail
telecommunications and Internet services industries, we are exposed to the risk
that some of these credit card accounts are stolen or otherwise fraudulently
obtained. In general, we are not able to recover fraudulent credit card charges
from such accounts. In addition to the loss of revenue from such fraudulent
credit card use, we also remain liable to third parties whose products or
services are engaged by us (such as termination fees due telecommunications
providers) in connection with the services which we provide. In addition,
depending upon the level of credit card fraud we experience, we may become
ineligible to accept the credit cards of certain issuers. We are currently
authorized to accept American Express, Visa, MasterCard, and Discover. The loss
of eligibility for acceptance of credit cards could significantly and adversely
affect our business. We will attempt to manage fraud risks through our internal
controls and our monitoring and blocking systems. If those efforts are not
successful, fraud could cause our revenue to decline significantly and our
business, financial condition and results of operations to be materially and
adversely affected.
We depend on highly qualified technical and managerial personnel.
Our future success also depends on our continuing ability to attract, retain and
motivate highly qualified technical expertise and managerial personnel necessary
to operate our businesses. We may need to give retention bonuses and stock
incentives to certain employees to keep them, which can be costly to us. The
loss of the services of members of our management team or other key personnel
could harm our business. Our future success depends to a significant extent on
the continued service of key management, client service, product development,
sales and technical personnel. We do not maintain key person life insurance on
any of our executive officers and do not intend to purchase any in the future.
Although we generally enter into non-competition agreements with our key
employees, our business could be harmed if one or more of our officers or key
employees decided to join a competitor or otherwise compete with us.
We may be unable to attract, assimilate or retain highly qualified technical and
managerial personnel in the future. Wages for managerial and technical employees
are increasing and are expected to continue to increase in the future. We may
have difficulty in hiring and retaining highly skilled employees with
appropriate qualifications. If we were unable to attract and retain the
technical and managerial personnel necessary to support and grow our businesses,
our businesses would likely be materially and adversely affected.
Operating internationally exposes us to additional and unpredictable risks.
We intend to continue to enter additional markets in Eastern Europe, the Middle
East, Latin America, Africa and Asia and to expand our existing operations
outside the United States. International operations are subject to inherent
risks, including:
o potentially weaker protection of intellectual property rights;
o political and economic instability;
o unexpected changes in regulations and tariffs;
o fluctuations in exchange rates;
o varying tax consequences, and;
o uncertain market acceptance and difficulties in marketing efforts due to
language and cultural differences.
17
Our entry into new lines of business, as well as potential future acquisitions,
joint ventures or strategic transactions entails numerous risks and
uncertainties that could have an adverse effect on our business.
We may enter into new or different lines of business, as determined by
management and our Board of Directors. Our acquisitions, as well as any future
acquisitions or joint ventures could result, and in some instances have resulted
in numerous risks and uncertainties, including:
o potentially dilutive issuances of equity securities, which may be issued at
the time of the transaction or in the future if certain performance or other
criteria are met or not met, as the case may be. These securities may be freely
tradable in the public market or subject to registration rights which could
require us to publicly register a large amount of our Common Stock, which could
have a material adverse effect on our stock price;
o diversion of management's attention and resources from our existing
businesses;
o significant write-offs if we determine that the business acquisition does not
fit or perform up to expectations;
o the incurrence of debt and contingent liabilities or impairment charges
related to goodwill and other long-lived assets;
o difficulties in the assimilation of operations, personnel, technologies,
products and information systems of the acquired companies;
o regulatory and tax risks relating to the new or acquired business;
o the risks of entering geographic and business markets in which we have no or
limited prior experience;
o the risk that the acquired business will not perform as expected; and
o material decreases in short-term or long-term liquidity.
We depend upon a contract manufacturer for our hardware products and any
disruption in its business may cause us to fail to meet the demands of our
customers and damage our customer relationships.
We rely on iCable System Co. Ltd., a South Korean company, to manufacture
certain of our hardware products. iCable provides comprehensive manufacturing
services, including assembly of our products and procurement of materials.
iCable directly ships finished products from Korea to our customers around the
world. We do not have a long-term supply contract with iCable and they are not
required to manufacture products for any specified period. Qualifying a new
contract manufacturer and commencing commercial-scale production is expensive
and time consuming and could result in a significant interruption in the supply
of our products. If a change in contract manufacturers results in delays of our
fulfillment of customer orders or if a contract manufacturer fails to make
timely delivery of orders, we may lose revenues and suffer damage to our
customer relationships.
Additionally, iCable currently purchases the primary chipset used in our
customer premise equipment (CPE) from Broadcom. Currently, there is an available
supply path and rapid delivery for these chipsets. It is not anticipated that
there will be any significant shortfalls in the ability to produce equipment or
deliver equipment, given past experience and current operating procedures, even
under heavy volume sales. Our customers rely upon our ability to meet committed
delivery dates, and any disruption in the supply of key components would
seriously impact our ability to meet these dates and could result in legal
action by our customers, loss of customers or harm to our ability to attract new
customers.
RISKS RELATED TO OUR INDUSTRY
Our future success depends on the growth in the use of the Internet as a means
of communications.
If the market for IP communications, in general, and our services in particular,
does not grow at the rate we anticipate or at all, we will not be able to
increase our number of users or generate revenues we anticipate. To be
successful, IP communications requires validation as an effective, quality means
of communication and as a viable alternative to traditional telephone service.
Demand and market acceptance for recently introduced services are subject to a
high level of uncertainty. The Internet may not prove to be a viable alternative
to traditional telephone service for reasons including:
18
o inconsistent quality or speed of service;
o traffic congestion on the Internet;
o potentially inadequate development of the necessary infrastructure;
o lack of acceptable security technologies;
o lack of timely development and commercialization of performance improvements,
and;
o unavailability of cost-effective, high-speed access to the Internet.
If Internet usage grows, the Internet infrastructure may not be able to support
the demands placed on it by such growth, or its performance or reliability may
decline. In addition, Web sites may from time to time experience interruptions
in their service as a result of outages and other delays occurring throughout
the Internet network infrastructure. If these outages or delays frequently occur
in the future, Internet usage, as well as usage of our communications portal and
our services, could be adversely affected.
Intense competition could reduce our market share and harm our financial
performance.
Competition in the market for IP communications services is becoming
increasingly intense and is expected to increase significantly in the future.
The market for Internet and IP communications is new and rapidly evolving. We
expect that competition from companies both in the Internet and
telecommunications industries will increase in the future. Our competitors
include both start-up IP telephony service providers and established traditional
communications providers. Many of our existing competitors and potential
competitors have broader portfolios of services, greater financial, management
and operational resources, greater brand-name recognition, larger subscriber
bases and more experience than we have. In addition, many of our IP telephony
competitors use the Internet instead of a private network to transmit traffic.
Operating and capital costs of these providers may be less than ours,
potentially giving them a competitive advantage over us in terms of pricing. We
also compete against the growing market of discount telecommunications services
including calling cards, prepaid cards, call-back services, dial-around or 10-10
calling and collect calling services. In addition, some Internet service
providers have begun to aggressively enhance their real time interactive
communications, focusing on instant messaging, PC-to-PC and PC-to-phone, and/or
broadband phone services.
In addition, traditional carriers, cable companies and satellite television
providers are bundling services and products not offered by us with internet
telephony services. While this provides us with the opportunity to offer these
companies our products and services as a way for them to offer internet
telephony services, it also introduces the risk that they will introduce these
services on their own utilizing other options while at the same time making it
more difficult for us to compete against them with direct to consumer offerings
of our own. If we are unable to provide competitive service offerings, we may
lose existing users and be unable to attract additional users. In addition, many
of our competitors, especially traditional carriers, enjoy economies of scale
that result in a lower cost structure for transmission and related costs, which
cause significant pricing pressures within the industry. In order to remain
competitive we intend to increase our efforts to promote our services, and we
cannot be sure that we will be successful in doing this.
In addition to these competitive factors, recent and pending deregulation in
some of our markets may encourage new entrants. We cannot assure you that
additional competitors will not enter markets that we plan to serve or that we
will be able to compete effectively.
Decreasing telecommunications rates may diminish our revenues and profitability.
International and domestic telecommunications rates have decreased significantly
over the last few years in most of the markets in which we operate, and we
anticipate that rates will continue to be reduced in all of the markets in which
we do business or expect to do business. Users who select our services to take
advantage of the current pricing differential between traditional
telecommunications rates and our rates may switch to traditional
telecommunications carriers as such pricing differentials diminish or disappear,
and we will be unable to use such pricing differentials to attract new customers
in the future. In addition, our ability to market our carrier transmission
services to telecommunications carriers depends upon the existence of spreads
between the rates offered by us and the rates offered by traditional
telecommunications carriers, as well as a spread between the retail and
wholesale rates charged by the carriers from which we obtain wholesale service.
Continued rate decreases will require us to lower our rates to remain
competitive could reduce our revenues and reduce or possibly eliminate our gross
profit from our carrier transmission services. If telecommunications rates
continue to decline, we may lose users for our services.
19
We may not be able to keep pace with rapid technological changes in the
communications industry.
Our industry is subject to rapid technological change. We cannot predict the
effect of technological changes on our business. In addition, widely accepted
standards have not yet developed for the technologies we use. We expect that new
services and technologies will emerge in the market in which we compete. These
new services and technologies may be superior to the services and technologies
that we use, or these new services may render our services and technologies
obsolete. To be successful, we must adapt to our rapidly changing market by
continually improving and expanding the scope of services we offer and by
developing new services and technologies to meet customer needs. Our success
will depend, in part, on our ability to license leading technologies and respond
to technological advances and emerging industry standards on a cost-effective
and timely basis. We may need to spend significant amounts of capital to enhance
and expand our services to keep pace with changing technologies.
Third parties might infringe upon our proprietary technology.
We cannot assure you that the steps we have taken to protect our intellectual
property rights will prevent misappropriation of our proprietary technology. To
protect our rights to our intellectual property, we rely on a combination of
trademark and trade secret protection, confidentiality agreements and other
contractual arrangements with our employees, affiliates, strategic partners and
others. We may be unable to detect the unauthorized use of, or take appropriate
steps to enforce, our intellectual property rights. Effective copyright and
trade secret protection may not be available in every country in which we offer
or intend to offer our services. Failure to adequately protect our intellectual
property could harm our brand, devalue our proprietary content and affect our
ability to compete effectively. Further, defending our intellectual property
rights could result in the expenditure of significant financial and managerial
resources.
If we are not able to obtain necessary licenses of third-party technology at
acceptable prices, or at all, some of our products may become obsolete.
From time to time, we may be required to license technology from third parties
to develop new products or product enhancements. Third-party licenses may not be
available or continue to be available to us on commercially reasonable terms.
The inability to maintain or re-license any third-party licenses required in our
current products, or to obtain any new third-party licenses to develop new
products and product enhancements could require us to obtain substitute
technology of lower quality or performance standards or at greater cost, and
delay or prevent us from making these products or enhancements, any of which
could seriously harm the competitiveness of our products. We currently license
third party technology for products acquired through the WQN acquisition. We
anticipate migrating these products to our internal technology over the next six
to 12 months at which point we will have no current reliance on third party
technology.
Government regulation and legal uncertainties relating to IP telephony could
harm our business.
Historically, voice communications services have been provided by regulated
telecommunications common carriers. We offer voice communications to the public
for international and domestic calls using IP telephony, and we do not operate
as a licensed telecommunications common carrier in any jurisdiction. Based on
specific regulatory classifications and recent regulatory decisions, we believe
we qualify for certain exemptions from telecommunications common carrier
regulation in many of our markets. However, the growth of IP telephony has led
to close examination of its regulatory treatment in many jurisdictions making
the legal status of our services uncertain and subject to change as a result of
future regulatory action, judicial decisions or legislation in any of the
jurisdictions in which we operate. Established regulated telecommunications
carriers have sought and may continue to seek regulatory actions to restrict the
ability of companies such as ours to provide services or to increase the cost of
providing such services. In addition, our services may be subject to regulation
if regulators distinguish phone-to-phone telephony service using IP technologies
over privately-managed networks such as our services from integrated PC-to-PC
and PC-originated voice services over the Internet. Some regulators may decide
to treat the former as regulated common carrier services and the latter as
unregulated enhanced or information services. Application of new regulatory
restrictions or requirements to us could increase our costs of doing business
and prevent us from delivering our services through our current arrangements. In
such event, we would consider a variety of alternative arrangements for
providing our services, including obtaining appropriate regulatory
authorizations for our local network partners or ourselves, changing our service
arrangements for a particular country or limiting our service offerings. Such
regulations could limit our service offerings, raise our costs and restrict our
pricing flexibility, and potentially limit our ability to compete effectively.
Further, regulations and laws which affect the growth of the Internet could
hinder our ability to provide our services over the Internet.
20
Recent regulatory enactments by the FCC will require us to provide enhanced
Emergency 911 dialing capabilities to our subscribers as part of our standard
VoIP services and to comply with certain notification requirements with respect
to such capabilities, these requirements will result in increased costs and
risks associated with the delivery of our VoIP services.
On June 3, 2005, the FCC released the "IP-Enabled Services and E911 Requirements
for IP-Enabled Service Providers, First Report and Order and Notice of Proposed
Rulemaking" (the "E911 Order"). The E911 Order requires, among other things,
that VoIP service providers that interconnect to the public switched telephone
network ("Interconnected VoIP Providers") supply enhanced emergency 911 dialing
capabilities ("E911") to their subscribers no later than 120 days from the
effective date of the E911 Order. The effective date of the E911 Order is July
29, 2005. As part of such E911 capabilities, Interconnected VoIP Providers are
required to mimic the 911 emergency calling capabilities offered by traditional
landline phone companies. Specifically, all Interconnected VoIP Providers must
deliver 911 calls to the appropriate local public safety answering point
("PSAP"), along with call back number and location, where the PSAP is able to
receive that information. Such E911 capabilities must be included in the basic
service offering of the Interconnected VoIP Providers; it cannot be an optional
or extra feature. The PSAP delivery obligation, along with call back number and
location information must be provided regardless of whether the service is
"fixed" or "nomadic." User registration of location is permissible initially,
although the FCC is committed to an advanced form of E911 that will determine
user location without user intervention, one of the topics of the further Notice
of Proposed Rulemaking to be released.
Additionally, the E911 Order required that, by July 29, 2005 (the effective date
of the E911 Order), each Interconnected VoIP Provider must have:
(1) specifically advised every new and existing subscriber, prominently and in
plain language, of the circumstances under which the E911 capabilities service
may not be available through its VoIP services or may in some way be limited by
comparison to traditional landline E911 services; (2) obtained and kept a record
of affirmative acknowledgement from all subscribers, both new and existing, of
having received and understood the advisory described in the preceding item (1);
and (3) distributed to its existing subscribers warning stickers or other
appropriate labels warning subscribers if E911 service may be limited or not
available and instructing the subscriber to place them on or near the equipment
used in conjunction with the provider's VoIP services. We have complied with the
requirements set forth in the preceding items (1) and (3). However, despite
engaging in significant efforts, as of October 12, 2005, we had received the
affirmative acknowledgements required by the preceding item (2) from less than
15% of our VoIP subscribers.
On July 26, 2005, noting the efforts made by Interconnected VoIP Providers to
comply with the E911 Order's affirmative acknowledgement requirement, the
Enforcement Bureau of the FCC (the "EB") released a Public Notice communicating
that, until August 30, 2005, it would not initiate enforcement action against
any Interconnected VoIP Provider with respect to such affirmative
acknowledgement requirement on the condition that the provider file a detailed
report with the FCC by August 10, 2005. The report must set forth certain
specific information relating to the provider's efforts to comply with the
requirements of the E911 Order. Furthermore, the EB stated its expectation that
that if an Interconnected VoIP Provider has not received such affirmative
acknowledgements from 100% of its existing subscribers by August 29, 2005, then
the Interconnected VoIP Provider would disconnect, no later than August 30,
2005, all subscribers from whom it has not received such acknowledgements. On
August 26, 2005, the EB released another Public Notice communicating that it
would not, until September 28, 2005, initiate enforcement action regarding the
affirmative acknowledgement requirement against those providers that: (1)
previously filed reports on or before August 10, 2005 in accordance with the
July 26 Public Notice; and (2) file two separate updated reports with the FCC by
September 1, 2005 and September 22, 2005 containing certain additional required
information relating to such provider's compliance efforts with respect to the
E911 Order's requirements. The EB further stated in the second Public Notice its
expectation that, during the additional period of time afforded by the
extension, all Interconnected VoIP Providers that qualified for such extension
would continue to use all means available to them to obtain affirmative
acknowledgements from all of their subscribers.
21
Our VoIP services that are subject to the E911 Order account for a material
portion of our current VoIP revenues. However, our VoIP retail net revenues were
not substantial for the nine months ending September 30, 2005 as they were
approximately $30,000. Since the E911 Order, we have fully complied with the
mandated FCC reporting requirements and the FCC has acknowledged that
enforcement will not be pursued.
With the recent acquisition on WQN, Inc.'s VoIP Assets we have confirmed that
WQN has filed and complied with the E911 order. We will be filing the required
acknowledgment letter relating to WQN RocketVoIP Subscribers on October 25,
2005. The most recent E911 compliance deadline is November 29, 2005.
On October 9, 2005 we announced a new service called v911 to support E911 not
only for our customers but as a service to be resold to Service Providers that
need E911 compliance.
Although the EB has thus far granted three extensions to its deadline for
obtaining affirmative acknowledgements from 100% of Interconnected VoIP
Providers' subscribers, the EB may or may not provide additional extensions to
such deadline and the Company may or may not qualify for such extensions. If we
are required by the EB to suspend VoIP service to a material portion of our VoIP
subscribers for a material period of time due to our non-compliance with the
E911 Order, our revenues and operating results from our current VoIP operations
will deteriorate.
Even assuming our full compliance with the E911 Order, such compliance and our
efforts to achieve such compliance, will increase our cost of doing business in
the VoIP arena and may adversely affect our ability to deliver our VoIP
telephony services to new and existing customers in all geographic regions.
Our products must comply with industry standards, FCC regulations, state,
country-specific and international regulations, and changes may require us to
modify existing products.
In addition to reliability and quality standards, the market acceptance of
telephony over broadband IP networks is dependent upon the adoption of industry
standards so that products from multiple manufacturers are able to communicate
with each other. There is currently a lack of agreement among industry leaders
about which standard should be used for a particular application, and about the
definition of the standards themselves. These standards, as well as audio and
video compression standards, continue to evolve. We also must comply with
certain rules and regulations of the Federal Communications Commission (FCC)
regarding electromagnetic radiation and safety standards established by
Underwriters Laboratories, as well as similar regulations and standards
applicable in other countries. Standards are continuously being modified and
replaced. As standards evolve, we may be required to modify our existing
products or develop and support new versions of our products. The failure of our
products to comply, or delays in compliance, with various existing and evolving
industry standards could delay or interrupt volume production of our IP
telephony products, which would have a material adverse effect on our business,
financial condition and operating results.
Increased costs associated with corporate governance compliance may
significantly affect our results of operations.
The Sarbanes-Oxley Act of 2002 will require changes in some of our corporate
governance and securities disclosure and compliance practices, and will require
a thorough documentation and evaluation of our internal control procedures. We
expect this to increase our legal compliance and financial reporting costs. This
could also make it more difficult and more expensive for us to obtain director
and officer liability insurance, and we may be required to accept reduced
coverage or incur higher costs to obtain coverage. In addition, they could make
it more difficult for us to attract and retain qualified members of our board of
directors, or qualified executive officers. We are presently evaluating and
monitoring regulatory developments and cannot estimate the timing or magnitude
of additional costs we may incur in this regard.
22
Our internal controls over financial reporting may not be adequate and our
independent auditors may not be able to certify as to their adequacy, which
could have a significant and adverse effect on our business and reputation.
Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations of
the Securities Exchange Commission associated with this Act, which we refer to
as Section 404, require a reporting company to, among other things, annually
review and disclose its internal controls over financial reporting, and evaluate
and disclose changes in its internal controls over financial reporting
quarterly. Under Section 404 a reporting company is required to document and
evaluate such internal controls in order to allow its management to report on,
and its independent auditors attest to, these controls. We will be required to
comply with Section 404 not later than our fiscal year ending December 2007. We
are currently evaluating our strategy to begin performing the system and process
documentation, evaluation and testing required (and any necessary remediation)
in an effort to comply with management certification and auditor attestation
requirements of Section 404. In the course of our ongoing evaluation, we may
identify areas of our internal controls requiring improvement, and plan to
design enhanced processes and controls to address issues that might be
identified through this review. As a result, we expect to incur additional
expenses and diversion of management's time. We cannot be certain as to the
timing of completion of our documentation, evaluation, testing and remediation
actions or the impact of the same on our operations and may not be able to
ensure that the process is effective or that the internal controls are or will
be effective in a timely manner. If we are not able to implement the
requirements of Section 404 in a timely manner or with adequate compliance, our
independent auditors may not be able to certify as to the effectiveness of our
internal control over financial reporting and we may be subject to sanctions or
investigation by regulatory authorities, such as the Securities and Exchange
Commission. As a result, there could be an adverse reaction in the financial
markets due to a loss of confidence in the reliability of our financial
statements. In addition, we may be required to incur costs in improving our
internal control system and the hiring of additional personnel. Any such actions
could adversely affect our results.
RISKS RELATED TO OUR STOCK
Our stock price has been and may continue to be volatile.
The market for technology stocks in general and our common stock in particular,
has been and will likely continue to be extremely volatile. The following
factors could cause the market price of our common stock to fluctuate
significantly:
o the addition or loss of any major customer;
o changes in the financial condition or anticipated capital expenditure
purchases of any existing or potential major customer;
o quarterly variations in our operating results;
o changes in financial estimates by securities analysts;
o speculation in the press or investment community;
o announcements by us or our competitors of significant contracts, new products
or acquisitions, distribution partnerships, joint ventures or capital
commitments;
o sales of common stock or other securities by us or by our shareholders in the
future;
o securities and other litigation;
o announcement of a stock split, reverse stock split, stock dividend or similar
event;
o economic conditions for the telecommunications, networking and related
industries; and
o worldwide economic instability.
23
We expect to seek to raise additional capital in the future, which may not be
available to us, and if it is available, may dilute the ownership of our common
stock.
In the future, we expect to seek to raise additional funds through public or
private debt or equity financings in order to:
o fund ongoing operations and capital requirements;
o take advantage of opportunities, including more rapid expansion or acquisition
of complementary products, technologies or businesses;
o develop new products; or
o respond to competitive pressures.
Any additional capital raised through the sale of convertible debt or equity may
further dilute an investor's percentage ownership of our common stock.
Furthermore, additional financings may not be available on terms favorable to
us, or at all. A failure to obtain additional funding could prevent us from
making expenditures that may be required to grow or maintain our operations.
We do not expect to pay dividends.
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. We intend to retain profits, if any, to fund growth and
expansion.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Restatement of Financial Statements
We account for options and warrants issued to employees in accordance with
Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation." During the preparation of its financial statements for the
quarterly period ended September 30, 2005 we discovered that we did not
recognize in our 2004 interim or annual financial statements the amount of
compensation expense for the vested portion of approximately 4 million stock
options issued to employees during the year ended December 31, 2004. This
compensation expense amounted to $645,590, and $786,215 for the three and nine
months ended September 30, 2004, respectively. We also incorrectly recorded
$1,316,400 more in compensation expense for the three months ended September 30,
2004 for warrants issued to employees than should have been recognized during
that quarterly period under SFAS No.123. The Company therefore decided that it
would be appropriate to restate its financial statements for 2004. The following
table sets forth the impact of the restatement on certain amounts previously
reported in the consolidated Statements of Operations for the three and nine
months ended September 30, 2004 and the Consolidated Balance Sheet at December
31, 2004.
As Previously
Consolidated Balance Sheet at December 31, 2004 Reported As Restated
------------ ------------
Additional paid-in capital $ 12,722,565 $ 14,107,328
Accumulated deficit $ (4,639,386) $ (6,024,149)
Consolidated Statement of Operations for the nine months
ended September 30, 2004:
Total operating expenses $ 4,887,531 $ 4,357,346
Loss from operations $ (4,610,370) $ (4,080,185)
Net loss $ (4,610,370) $ (4,080,185)
Loss per share $ (0.42) $ (0.37)
Consolidated Statement of Operations for the three months
ended September 30, 2004:
Total operating expenses $ 4,430,175 $ 3,759,365
Loss from operations $ (4,179,389) $ (3,508,579)
Net loss $ (4,179,389) $ (3,508,579)
Loss per share $ (0.21) $ (0.18)
We completed the acquisition of Caerus, Inc. on May 31, 2005. Caerus, a VoIP
carrier and service provider, provides us with important technology, including
the Voice One network, intellectual capital and VoIP expertise, VoIP enhanced
service solutions and key customers and business relationships.
The following unaudited Proforma combined financial information has been
prepared assuming the Caerus acquisition occurred as of the first day of each
period reported.
Nine Months Ended September 30 Three Months Ended
2005 2004 September 30, 2004
------------ ------------ ------------------
Revenues $ 13,087,612 $ 9,335,515 $ 3,880,592
Net loss $(20,120,750) $(10,817,543) $ (6,742,755)
Loss per share $ (0.45) $ (0.39) $ (0.19)
As discussed in the following paragraphs the addition of Caerus Inc. impacts the
comparability of our results of operations for the three and nine months ended
September 30, 2005 to our results for the corresponding periods of 2004.
24
Comparison Of Three Months Ended September 30, 2005 And 2004
Our net loss for the three months ended September 30, 2005 was $(8,847,293)
($0.18 per share), as compared to a net loss of $3,508,579 ($0.18 per share) for
the three months ended September 30, 2004.
Revenues for the current quarter totaled $2,535,912, an increase of
approximately $1.6 million over the revenues reported for the three months ended
September 30, 2004. Routing and termination services revenues amounted to
$2,103,770 and $237,176, for the three months ended September 30, 2005 and 2004,
respectively. The increase in these revenues is attributable to the addition of
Caerus' Voice One Network. These additional revenues from our network were
offset by a $414,535 decrease in our revenues from VoIP hardware sales. One
customer accounted for 83% of our revenues during the three months ended
September 30, 2005.
Our gross profit for the three months ended September 30, 2005 was a negative
$617,291, as compared to a positive gross profit of $250,786 for the same period
in 2004. The negative gross profit for this quarter is principally attributable
to the costs we incurred to operate our network and the fees paid to third-party
carriers to terminate calls on our behalf. Our combined operating costs and
third party fees exceeded the revenues generated by the current level of traffic
on our network.
We incurred operating expenses of $8,230,002 and $3,759,365 for the three months
ended September 30, 2005 and 2004 respectively. The additional operating
expenses for 2005 reflect in part the expansion of our operations due to our
recent acquisition of Caerus. The $4.7 million rise in operating expenses is
comprised primarily of additional commissions and fees paid to third parties
(primarily relating to our capital raising efforts) of approximately $1.3
million and increases in professional and legal fees ($361,794), depreciation
($333,332), amortization of intangible assets ($897,843) and other expenses
($2,035,612). Other expenses for 2005 include, interest and financing costs of
approximately $1.5 million for our debt issuances.
Comparison Of Nine Months Ended September 30, 2005 And 2004
Our net loss for the nine months ended September 30, 2005 was $13,880,730 ($0.39
per share), as compared to a loss of $4,080,185 ($0.31 per share) for the nine
months ended September 30, 2004.
Revenues for the current nine months totaled $6,452,832, an increase of
approximately $5.4 million over that reported for the nine months ended
September 30, 2004. Revenues generated by Caerus' Voice One Network for routing
and termination services amounted to $2,752,551 for the nine months ended
September 30, 2005. The remainder of the revenue increase is due to growth in
hardware sales and international service termination. One customer accounted for
43% of our sales during the nine months ended September 30, 2005.
Our gross profit for the nine months ended September 30, 2005 was $194,783, as
compared to $277,161 for the same period in 2004. The decline in gross profit
for this nine month period principally reflects our network operating costs and
the fees we paid to third-party carriers to terminate calls on our behalf. These
combined operating costs and third party fees exceeded the revenues generated by
the level of traffic on our network.
We incurred operating expenses of $14,075,513 and $4,357,346 for the nine months
ended September 30, 2005 and 2004 respectively. The additional operating
expenses for 2005 reflect in part the expansion of our operations due to our
recent acquisition of Caerus. The $9.7 million dollar rise in operating expenses
is comprised of increases in compensation ($1,015,056), added professional and
legal fees ($940,112), depreciation ($598,762), amortization of intangible
assets ($1,184,137) additional commissions and fees of 2.4 million paid to third
parties in connection with our capital raising efforts, and increased other
expenses. The increase of other expenses reflects provisions for bad debts and
discontinued assets of $604,000 and interest and finance costs of $1.6 million
for our debt issuances.
Total assets at September 30, 2005 were $43,750,775, up $33,535,223 from
December 31, 2004. This increase in assets (which includes additions to property
of almost $7.9 million) and the corresponding increase in accounts payable and
other current liabilities are almost entirely related to the acquisition of
Caerus on May 31, 2005. We recorded significant amounts of goodwill and
intangible assets in connection with the acquisition of Caerus and for the
acquisition of DTNet. Goodwill and intangible assets comprised 69% of our total
assets at September 30, 2005. We expect to record additional amounts of goodwill
and intangible assets in connection with our WQN, Inc. acquisition, which was
completed on October 6, 2005.
25
Under SFAS 142 we are required to periodically evaluate the carrying value of
our goodwill and intangible assets. If in the future such carrying values exceed
fair market value, we will be required to record an impairment charge in our
statement of operations. Such an impairment charge could have a significant
adverse impact on both our operating results and stock price.
Outlook for Remainder of 2005
As discussed in Note K to the accompanying Consolidated Financial Statements we
acquired the assets of WQN, Inc.'s VoIP business in October 2005. WQN reported
revenues, gross profit, and an operating loss of approximately $15.6 million,
$650,000, and $2.1 million, respectively, for the six months ended June 30,
2005.
We anticipate revenue growth during the fourth quarter of 2005 due to the
addition of WQN's customers. However, we also expect to report a net loss and
negative cash flows from operations for the three months ending December 31,
2005.
Liquidity and Capital Resources
Cash and cash equivalents increased by $2,097,737 for the nine months ended
September 30, 2005 to $3,238,941. Our operating activities for the nine months
ended September 30, 2005 used $9.0 million in cash. We funded our operating
activities principally through issuances of notes payable that generated net
proceeds of $3,007,542 and sales of common stock in private transactions that
provided $8,074,763. In total our financing activities provided us with net cash
of $11,278,168 for the nine months ended September 30, 2005.
Since inception of our Voice over Internet Protocol business in 2004 we have
never been profitable. We have experienced negative cash flows from operations,
and have been dependent on the issuance of debt, issuances of common stock in
exchange for services and as compensation, and sales of common stock in private
transactions to support our operations.
At September 30, 2005 our contractual obligations totaled approximately $9.5
million. Included in this amount is an outstanding balance of approximately $5.1
million on a loan from a lending institution. We are not in compliance with
certain covenants of the agreement for this loan, and we owe principal, interest
and costs in arrears on this loan of $280,000. To date our lender has not
declared a default under this loan agreement.
We anticipate that we will continue to experience negative cash flows from
operations. We expect we will need to raise additional debt or equity capital to
provide the funds necessary to repay or restructure our $5.1 million loan, meet
our other current contractual obligations and continue our operations. We are
actively seeking to raise this additional capital and believe such capital will
be available to us. However, we may not be successful in obtaining further
equity or debt financing for our business.
Capital Expenditure Commitments
We have outstanding commitments to purchase capital equipment of approximately
$2.0 million. We anticipate financing these purchases with leasing facilities.
Payments Due by Period
The following table illustrates our outstanding debt and the terms of that
debt as of September 30, 2005:
26
Less than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years
------------------------------------------------------------------------------------------
Convertible Notes $1,427,925 $ 815,991 $ 611,934 $ --
Loans Payable $7,240,444 $7,240,444 $ -- $ --
Operating Leases $ 594,905 $ 149,905 $ 445,000 $ --
Long Term Liabilities $ 195,864 $ 31,233 $ 164,631 $ --
Purchase Obligations $ -- $ -- $ -- $ --
---------- ---------- ---------- ----------
Total $9,459,138 $8,237,573 $1,221,565 $ --
========== ========== ========== ==========
27
VOIP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
The following unaudited pro forma condensed combined statements of operations
are derived from and should be read in conjunction with the historical
consolidated financial statements and related notes of VOIP, INC. ("VOIP" or the
"Company"), and CAERUS, INC. ("CAERUS"). On September 1, 2005, the Company, and
Caerus announced the closing of the merger of Volo Acquisition Corp., a
wholly-owned subsidiary of the Company with and into Caerus, with Caerus as the
surviving corporation (the "Merger"). The Merger was completed pursuant to an
Agreement and Plan of Merger (the "Merger Agreement"), executed on May 31, 2005.
The unaudited pro forma condensed statements of operations for the nine months
ended September 30, 2005 and 2004, and the three months ended September 30,
2004, give effect to the merger of Caerus and the Company with the conversion of
all Caerus capital stock into 16,434,470 shares of common stock, par value
$0.001, of the Company.
The unaudited pro forma condensed combined statements of operations assume that
the Merger was consummated at the beginning of the respective report.
The unaudited pro forma condensed combined Statement of Operations have been
prepared based on currently available information and assumptions that are
deemed appropriate by the Company's management. The pro forma information is for
informational purposes only and is not intended to be indicative of the actual
consolidated results that would have been reported had the transactions occurred
on the dates indicated, nor does the information represent a forecast of the
consolidated financial position at any future date or the combined financial
results of the Company and Caerus for any future period.
28
VoIP, Inc
Proforma Condensed Combined Statement of Operations (Unaudited)
Three Months Ended September 30, 2004
VoIP, Inc Caerus, Inc Adjustments Consolidated
------------ ------------ ------------ ------------
(As Restated)
Revenues $ 929,767 $ 2,950,825 $ $ 3,880,592
Cost of sales 678,981 3,195,681 3,874,662
------------ ------------ ------------ ------------
Gross profit 250,786 (244,856) -- 5,930
Operating expenses 3,759,365 2,211,543 777,777 6,748,685
------------ ------------ ------------ ------------
Loss from operations (3,508,579) (2,456,399) (777,777) (6,742,755)
Provision for income taxes -- -- --
------------ ------------ ------------ ------------
Net loss ($ 3,508,579) ($ 2,456,399) ($ 777,777) ($ 6,742,755)
============ ============ ============ ============
Basic and diluted loss per share: $ (0.19)
============
Weighted average number of shares outstanding 36,076,860
============
The accompanying notes are an integral part of this
proforma condensed combined statement of operations.
29
VoIP, Inc
Proforma Condensed Combined Statement of Operations (Unaudited)
Nine Months Ended September 30, 2005
VoIP, Inc Caerus, Inc Adjustments Consolidated
------------ ------------ ------------ ------------
Revenues $ 3,700,281 $ 9,387,331 $ -- $ 13,087,612
Cost of sales 2,995,413 11,740,551 -- 14,735,964
------------ ------------ ------------ ------------
Gross profit 704,868 (2,353,220) -- (1,648,352)
Operating expenses 10,662,681 6,513,422 1,296,295 18,472,398
------------ ------------ ------------ ------------
Loss from operations (9,957,813) (8,866,642) (1,296,295) (20,120,750)
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Net loss ($ 9,957,813) ($ 8,866,642) ($ 1,296,295) ($20,120,750)
============ ============ ============ ============
Basic and diluted loss per share: $ (0.45)
============
Weighted average number of shares outstanding 45,048,348
============
The accompanying notes are an integral part of this proforma
condensed combined statement of operations.
30
VoIP, Inc
Proforma Condensed Combined Statement of Operations (Unaudited)
Nine Months Ended September 30, 2004
VoIP, Inc Caerus, Inc Adjustments Consolidated
------------ ------------ ------------ ------------
(As Restated)
Revenues $ 1,015,065 $ 8,320,450 $ -- $ 9,335,515
Cost of sales 737,904 8,544,273 -- 9,282,177
------------ ------------ ------------ ------------
Gross profit 277,161 (223,823) -- 53,338
Operating expenses 4,357,346 4,957,981 1,555,554 10,870,881
------------ ------------ ------------ ------------
Loss from operations (4,080,185) (5,181,804) (1,555,554) (10,817,543)
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Net loss ($ 4,080,185) ($ 5,181,804) ($ 1,555,554) ($10,817,543)
============ ============ ============ ============
Basic and diluted loss per share: $ (0.39)
============
Weighted average number of shares outstanding 27,424,460
============
The accompanying notes are an integral part of this
proforma condensed combined statement of operations.
31
VOIP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF OPERATIONS
(1) VoIP, Inc. Basis of Presentation
Financial information for VoIP, Inc. has been derived from VoIP, Inc.
historical financial statements.
(2) Caerus, Inc. Basis of Presentation
Financial information for Caerus, Inc. has been derived from Caerus, Inc's
historical financial statements.
(3) VoIP, Inc. and Caerus, Inc. Merger
On September 1, 2005, the Company, and Caerus, Inc. announced the closing
of the merger of Volo Acquisition Corp., a wholly-owned subsidiary of the
Company with and into Caerus, Inc. with Caerus, Inc. as the surviving
corporation (the "Merger"). The Merger was completed pursuant to an
Agreement and Plan of Merger (the "Merger Agreement"), executed on May 31,
2005 by the conversion of all Caerus, Inc. capital stock into 16,434,470
shares of common stock, par value $0.001, of the Company. See NOTE D to
the Financial Statements.
(4) Adjustments
Adjustments represent amortization of certain intangible assets recorded
in connection with the acquisition.
Item 3. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, the Company
performed an evaluation of the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. This
evaluation was done under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer. In connection
with this evaluation and a review of the financial information reported for the
current prior periods, the Company discovered certain errors requiring
restatement of amounts previously reported for the three and nine month periods
ended September 30, 2004 and for the year ended December 31, 2004. These
restatements correct the compensation expense for stock options and warrants
issued to employees during those periods. These items are discussed in further
detail in Note B of the Consolidated Financial Statements at Item 2. These
errors arose because the Company did not possess sufficient personnel
experienced with the implementation of Statement of Financial Accounting
Standards No. 123 and with U. S. generally accepted accounting principles.
In October 2005 the Company hired a new Chief Executive Officer and a new Chief
Financial Officer. Based upon the control deficiency and restatements discussed
above, the Company's Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures at September 30,
2005 were not effective in gathering, analyzing and disclosing information
needed to satisfy the Company's disclosure obligations under the Exchange Act.
The Company expects to begin to implement measures to improve its disclosure
controls beginning with the quarterly period ending December 31, 2005.
32
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company is involved from time to time in legal proceedings and litigation
incidental to the conduct of its business.
See NOTE J to the Financial Statements for discussion of litigation between Volo
Communications, Inc (a wholly-owned subsidiary of Caerus, Inc.) and MCI WorldCom
Network Services, Inc. d/b/a UUNET.
Item 2 - Changes in Securities
The following unregistered securities have been issued during the second
quarter of 2005:
In July 2005, Registrant issued 239,097 shares of common
stock for services provided to the Company.
In July 2005, registrant issued 166,667 shares of common
stock in connection with the conversion of a convertible note.
In July 2005, registrant sold 201,130 shares of common stock to 19
accredited investors for $160,906, and issued 160,500 warrants.
In August 2005, registrant sold 1,100,000 shares of common stock to
5 accredited investors for $880,000, and issued 462,500 warrants.
In September 2005, registrant issued 1,275,631 shares of
common stock in exchange for 2,200,000 warrants.
In September 2005, registrant issued 737,898 shares of common stock
to 63 accredited investors for services provided to the company.
In September 2005, registrant sold 4,057,451 shares of
common stock for $4,331,232, and issued 1,782,562 warrants.
In August 2005, registrant issued 1,375,000 class C warrants and
1,375,000 class D warrants to one accredited investor.
All such shares were issued pursuant to exemptions provided by
Section 4(2) of the Securities Act of 1933 and Regulation D.
On October 17, 2005 the Company filed a Registration Statement for
the resale of up to 15,377,245 shares by 185 selling shareholders.
Item 3 - Defaults on Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
The Company has held no regularly scheduled, called or special meetings of
shareholders during the reporting period.
Item 5 - Other Information
None
33
Item 6 - Exhibits
(a) Exhibits
No. Description
31.1 Certification by CEO pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification by CFO pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification by CEO pursuant to 18 USC Section 1350 as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by CFO pursuant to 18 USC Section 1350 as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002.
34
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VoIP, INC.
November 21, 2005 /s/ B. Michael Adler
---------------------------------
B. Michael Adler
President and CEO
/s/ David Sasnett
---------------------------------
David Sasnett
Chief Financial Officer
35
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Amendment No. 1)
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
OR
|X| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ____________to____________
Commission file number 000-28985
VOIP, INC.
(Name of small business issuer in its charter)
Texas 75-2785941
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12330 SW 53rd Street, Suite 712 33330
Ft. Lauderdale, Florida (Zip Code)
(Address of principal executive offices)
Issuer's telephone number, including area code: (954) 434-2000
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.001.
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 past 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.
YES |X| NO |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and none will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were: $2,619,393.
The aggregate market value of the voting common stock held by non-affiliates of
the issuer, based on the average bid and asked price of such stock, was
$98,248,877 at December 31, 2004.
At March 18, 2005, the registrant had outstanding 26,378,132 shares of par value
$.001 common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
TABLE OF CONTENTS
PART II........................................................................1
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...........1
ITEM 7. FINANCIAL STATEMENTS................................................4
ITEM 8A. CONTROLS AND PROCEDURES - EVALUATION OF DISCLOSURE CONTROLS........4
PART III.......................................................................4
ITEM 13. EXHIBITS...........................................................5
i
Explanatory Note
VoIP, Inc. (the "Company") is filing this Amendment No. 1 to its Annual Report
on Form 10-KSB for the year ended December 31, 2004 (the "2004 10-KSB"), which
was originally filed on March 30, 2005. This Amendment is being filed to restate
the Company's 2004 financial statements to include approximately $1.4 million in
compensation expense relating to warrants and options issued to employees during
2004. This Amendment No. 1 amends (i) Part II, Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations and Plan of
Operation to reflect the restated results of operations for 2004; (ii) Part II,
Item 8 - Financial Statements to provide the restated financial statements and
notes thereto for 2004; (iii) Part II Item 8A - Controls and Procedures -
Evaluation of Disclosure Controls and Procedures to report management's
assessment of the Company's disclosure controls as of the date of the filing of
this Amendment No. 1; and (iv) the certifications required under Rules 13a-15
and 15d-15(e) of the Securities Exchange Act, as amended, (the "Exchange Act")
so that they be dated as of a current date as required by Rule 12b-15 of the
Exchange Act.
This Amendment No. 1 does not reflect events occurring after the filing of the
2004 10-KSB, and does not update or modify the disclosures therein in any way
other than as required to reflect the amendments described above.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND PLAN OF OPERATION
-----------------------------------
The information presented in this section should be read in conjunction
with the information contained in the financial statements, including the notes
thereto, and the other financial statements appearing elsewhere in this
report.
General
-------
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the notes thereto and the other financial
information appearing elsewhere in this Prospectus. Certain statements contained
in this Prospectus and other written material and oral statements made from time
to time by us do not relate strictly to historical or current facts. As such,
they are considered "forward-looking statements" that provide current
expectations or forecasts of future events. Such statements are typically
characterized by terminology such as "believe," "anticipate," "should,"
"intend," "plan," "will," "expect," "estimate," "project," "strategy" and
similar expressions. Our forward-looking statements generally relate to the
prospects for future sales of our products, the success of our marketing
activities, and the success of our strategic corporate relationships. These
statements are based upon assumptions and assessments made by our management in
light of its experience and its perception of historical trends, current
conditions, expected future developments and other factors our management
believes to be appropriate. These forward-looking statements are subject to a
number of risks and uncertainties, including the following: our ability to
achieve profitable operations and to maintain sufficient cash to operate its
business and meet its liquidity requirements; our ability to obtain financing,
if required, on terms acceptable to it, if at all; the success of our research
and development activities; competitive developments affecting our current
products; our ability to successfully attract strategic partners and to market
both new and existing products; exposure to lawsuits and regulatory proceedings;
our ability to protect our intellectual property; governmental laws and
regulations affecting operations; our ability to identify and complete
diversification opportunities; and the impact of acquisitions, divestitures,
restructurings, product withdrawals and other unusual items. A further list and
description of these risks, uncertainties and other matters can be found
elsewhere in this Prospectus. Except as required by applicable law, we undertake
no obligation to update any forward-looking statements, whether as a result of
new information, future events or otherwise.
Restatement of 2004 Financial Statements
----------------------------------------
We account for options and warrants issued to employees in accordance
with Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." During the preparation of the financial statements
for the quarterly period ended September 30, 2005 we discovered that we did not
recognize in our 2004 financial statements the full amount of compensation
expense that should have been recognized on warrants issued to employees in 2004
or the compensation expense for the 4,000,000 stock options issued to employees
in 2004. The compensation expense that was not recognized relating to these
options and warrants was $ 1,384,763. We therefore decided it appropriate to
restate our 2004 financial statements to include this compensation expense. The
following table sets forth the impact of the restatements on certain amounts
previously reported in our 2004 financial statements.
Consolidated Balance Sheet As Previously As Restated
Reported
------------ ------------
Additional paid-in capital $ 12,722,565 $ 14,107,328
Accumulated deficit $ (4,639,386) $ (6,024,149)
Consolidated Statement of Operations for the nine months ended September 30,
2004:
Compensation and benefits $ 2,721,296 $ 4,106,059
Total operating expense $ 4,909,174 $ 6,293,937
Loss from operations $ (4,160,050) $ (5,544,813)
Net loss $ (4,014,739) $ (5,399,502)
Loss per share $ (0.27) $ (0.37)
Comparision of 2004 to 2003
Balance Sheet Data: December 31, 2004
-----------------
Total assets $10,215,552
Long-term liabilities, net $ 0
Total liabilities $ 2,108,114
Shareholders' equity $ 8,107,438
Year Ended
December 31,
--------------------------
Statements of Operations Data: 2004 2003
----------- -----------
Revenue $ 2,619,393 $ --
Operating (loss) $(5,544,813) $ (352,968)
Net loss $(5,399,502) $ (352,968)
Net loss per share $ (0.37) $ (0.20)
1
Net revenue totaled $3,028,006 ($2,619,393 from continuing operations),
for the year ended December 31, 2004 as compared to $8,678 for the year ended
December 31, 2003. The $3,019,328 increase in total net revenue was primarily
attributable entry into the new "VoIP" (Voice over IP) business segment and the
acquisition of Voipamericas, Inc. and DTNet Technologies, Inc. in 2004.
Revenue from the sale of tea in the segment business that we have
discontinued was $ 408,613, or 13.5%, of total net revenue for the year ended
December 31, 2004, versus $8,678, or 100%, of total net revenue for the prior
year.
As mentioned in Note A to the financial statements, the Company
acquired DTNet in June 2004 and Voipamericas in September 2004. DTNet provides
customer premises equipment to cable and DSL Internet providers throughout North
America. DTNet sales were approximately $4.7 million in 2003. Voipamericas
revenues for the first nine months of 2004 were $1.4 million. Management
believes that the acquisitions of DTNet and Voipamericas will provide proven
distribution channels and leadership in sales throughout the Americas. DTNet and
Voipamericas complement the Company's strategy to deliver Voice over Internet
Protocol over a wireless local loop and deliver service provider solutions to
cable operators.
Net losses for the respective years ended December 31, 2004 and 2003
were $5,399,502 and $352,968. Net loss per share was $0.37 and $0.20
respectively for each period.
Operating expenses consist of salaries and related personnel costs,
outside legal and professional fees, directors and officers insurance, bad debt
expenses and general corporate overhead costs. Operating expenses were $6.3
million for the year ended December 31, 2004. Operating expenses for 2003 have
been reclassified and included in the loss from discontinued operations for 2003
of $352,968. Compensation and related expenses for 2004 include approximately
$2.2 million in compensation costs for warrants issued to employees and
approximately $1.1 million in compensation costs for stock options issued to
employees and also reflect increases in headcount and related personnel
expenses. The general and administrative expenses for 2004 reflect the Company's
new line of business, VoIP telephony services.
The comparison of operations for the years ended December 31, 2004 and
2003 is not indicative of the Company's current business model. Whereas, during
2003 the Company was in the business of importing and selling a line of fine
teas. The Company has, since discontinued the tea business, to focus solely on
VoIP and emerging technologies.
2
(b) Liquidity and Capital Resources
As of December 31, 2004, we had cash and cash equivalents approximating
$1,141,000. We currently have two borrowing arrangements, one for $200,000 with
a local bank and one for $560,000 with a note payable to a shareholder. Cash
used in operating activities of $2.9 million in fiscal year 2004 was primarily
attributable to the net loss of $5.5 million, which included non cash items for
warrants and options issued to Company employees amounting to approxumately $3.3
million recorded as compensation in the Consolidated Statement of Operations.
Cash provided by financing activities in fiscal 2004 consisted primarily of $3.6
million of proceeds resulting from the sale of common stock to investors in
private placement transactions during the whole year and, as above-mentioned,
proceeds from issuance of note payable of $560,000.
Liquidity for the period from inception through December 31, 2004 has
been mainly provided by sales of common stocks through private placements and
borrowing from affiliates. Management has taken actions directly related to the
generation of product sales during calendar 2004 and anticipates that these
efforts will be sufficient to provide reasonable resources to sustain its
operations during 2005.
The Company anticipates that all working capital requirements for the
current annual period will be satisfied from the operation of the newly acquired
business and the sales of additional common shares through private placements.
(c) Payments Due by Period
The following table illustrates our outstanding debts and the terms of
that debt as of December 31, 2004:
Less than 1
Contractual Obligations Total Year
---------------------------------------------------------
Long-Term Debt $ 0.00 $ 0.00
Notes Payable to shareholders 560,000 $ 560,000
Operating Leases 35,572 $ 35,572
Purchase Obligations 0.00 $ 0.00
-------------------------
Total $ 595,572 $ 595,572
=========================
(d) Market Risk
We own market investment securities issued by various securities
issuers. The issuers of these products retain all interest rate and default
risk.
Available Information
We maintain a corporate Internet website with the address
www.voipincorporated.com. The contents of this website are not incorporated in
or otherwise to be regarded as part of this report. We file reports with the
Securities and Exchange Commission, or SEC, which are available on our website
free of charge. These reports include annual reports on Form 10-KSB, quarterly
reports on Form 10-QSB, current reports on Form 8-K and amendments to such
reports, each of which is provided on our website as soon as reasonably
practicable after we electronically file such materials with or furnish them to
the SEC. You can also read and copy any materials we file with the SEC at the
SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. In
addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the SEC, including us.
3
ITEM 7. FINANCIAL STATEMENTS
--------------------
The financial statements required by this item begin at Page F-1
hereof.
ITEM 8A. CONTROLS AND PROCEDURES
-----------------------
Evaluation of Disclosure Controls and Procedures
In connection with the filing of our 2004 10-KSB on March 31, 2005 the
Company's management, with the participation of our chief executive officer and
chief financial officer at that time, evaluated the effectiveness of our
Disclosure Controls and Procedures as of December 31, 2004.
We hired a new chief executive officer and new chief financial officer
in October 2005. The Company's management, with the participation of our new
chief executive officer and new chief financial officer, evaluated the
effectiveness of our controls and procedures in connection with the filing of
our quarterly report on Form 10-QSB for the quarterly period ended September 30,
2005. In connection with this evaluation and a review of the financial
information reported for current and prior periods, we noted the errors
resulting in the amended information and restated 2004 financial statements
reported in this Amendment No. 1 to our 2004 10-KSB. We have concluded these
errors occurred because we did not possess sufficient personnel experienced with
the implementation of Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" and with U. S. generally accepted
accounting principles. Based upon the control deficiency and restatement
discussed above, our present chief executive officer and chief financial officer
have concluded that our disclosure controls and procedures at September 30, 2005
were not effective in gathering, analyzing and disclosing information needed to
satisfy our Company's disclosure obligations under the Exchange Act. We expect
to begin to implement measures to improve our disclosure controls beginning with
the quarterly period ending December 31, 2005.
4
PART III
ITEM 13. EXHIBITS
---------
(a) The following documents are filed as part of this Annual Report on Form
10-KSB/A:
1. Financial Statements: The financial statements filed as part
of this report are listed in the "Index to Financial
Statements" on Page F-1 hereof.
2. Exhibits required to be filed by Item 601 of Regulation 10-KSB
Other Material Contracts
23.1 Consent of Tschopp, Whitcomb & Orr, P.A.
31.1 Certification of Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer under 18 U.S.C. ss. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer under 18 U.S.C. ss. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
5
VoIP INC.
TABLE OF CONTENTS
Financial Statements of VoIP, Inc.
Page
Reports of Independent Registered Public Accounting Firms F-2,3
Financial Statements:
Consolidated Balance Sheets - December 31, 2004 and 2003 F-4
Consolidated Statements of Operations - Years Ended F-5
December 31, 2004 and 2003
Consolidated Statements of Cash Flows - Years Ended
December 31, 2004 and 2003 F-6
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 2004 and 2003 F-7
Notes To Consolidated Financial Statements F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
Board of Directors
VoIP, Inc. and Subsidiaries
Fort Lauderdale, Florida
We have audited the accompanying consolidated balance sheet of VoIP, Inc. and
Subsidiaries ("the Company") as of December 31, 2004, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year ended December 31, 2004. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company has determined that it
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we do not express such an opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above presents
fairly, in all material respects, the consolidated financial position of VoIP,
Inc. and its subsidiaries, as of December 31, 2004, and the results of
operations and cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note B to the consolidated financial statements, the
accompanying consolidated balance sheet and related statements of operations,
shareholders' equity and cash flows have been restated to reflect the accounting
for certain stock warrants and options awarded to employees during 2004.
/s/ Berkovits, Lago & Company, LLP
Fort Lauderdale, Florida
March 16, 2005 except for Note B as to which the date is November 23, 2005
F-2
TSCHOPP, WHITCOMB & ORR, P.A.
2600 Maitland Center Parkway, Suite 330
Maitland, FL 32751
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors and Stockholder
Millennia Tea Masters, Inc.
We have audited the accompanying balance sheet of Millennia Tea Masters, Inc. as
of December 31, 2003 and the related statements of operations, changes in
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Millennia Tea Masters, Inc. as
of December 31, 2003, and the results of its operations and its cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has experienced limited
sales and incurred cumulative operating losses since its inception through
December 31, 2003. The Company has been dependent upon the proceeds from the
sales of common stock and advances from related parties to provide working
capital. This situation raises a substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Tschopp, Whitcomb & Orr, P.A.
January 30, 2004
Maitland, Florida
F-3
VoIP Inc.
Consolidated Balance Sheets
December 31, 2004 and 2003
Dec. 31, 2004 Dec. 31, 2003
------------- -------------
(As Restated)
ASSETS
Current Assets:
Cash and cash equivalents $ 1,141,205 $ --
Accounts receivable, net of allowance of $136,795 818,071 --
Due from related parties 245,402 --
Inventory 187,451 --
Assets from discontinued operations 412,419 259,459
Other current assets 43,702 --
------------- -------------
Total Current Assets 2,848,250 259,459
------------- -------------
Property and equipment, net 419,868 --
Intangibles 6,923,854 --
Other assets 23,580 --
------------- -------------
TOTAL ASSETS $ 10,215,552 $ 259,459
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,224,974 $ --
Bank loans and note payable 760,000 --
Liabilities from discontinued operations -- 151,167
Other current liabilities 123,140 --
------------- -------------
Total Liabilities 2,108,114 151,167
------------- -------------
Shareholders' equity:
Common stock - $0.001 par value
100,000,000 shares authorized
24,258,982 and 1,730,939 issued
and outstanding respectively 24,259 1,731
Additional paid-in capital 14,107,328 731,208
Accumulated deficit (6,024,149) (624,647)
------------- -------------
Total shareholders' equity 8,107,438 108,292
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,215,552 $ 259,459
============= =============
The accompanying notes are an integral part of these financial statements.
F-4
VoIP Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2004 and 2003
Year ended Year ended
December 31, 2004 December 31, 2003
----------------- -----------------
(As Restated)
Revenues $ 2,619,393 $ --
Cost of Sales 1,870,269 --
----------------- -----------------
Gross Profit 749,124 --
Operating expenses
Compensation and related expenses 4,106,059 --
General and administrative expenses 2,187,878 --
----------------- -----------------
Loss from continuing operations before income
taxes and discontinued operations (5,544,813) --
Provision for income taxes -- --
----------------- -----------------
Net loss before discontinued operations (5,544,813) --
Income (Loss) from discontinued operations,
net of income taxes 145,311 (352,968)
----------------- -----------------
Net Loss $ (5,399,502) $ (352,968)
================= =================
Basic and diluted loss per share:
Loss before discontinued operations $ (0.38) $ --
Income (loss) from discontinued operations,
net of income taxes $ 0.01 $ (0.20)
----------------- -----------------
Total $ (0.37) $ (0.20)
================= =================
Weighted average number of shares outstanding 14,597,312 1,730,939
================= =================
The accompanying notes are an integral part of these financial statements.
F-5
VoIP Inc.
Consolidated Statements of Cash Flows
Years ended December 31, 2004 and 2003
Year ended Year ended
December 31, December 31,
2004 2003
------------ ------------
(As Restated)
Cash flows from operating activities:
Continuing operations:
Net loss $ (5,544,813) $ --
Adjustments to reconcile net loss to net
cash used in operating activities -- --
Depreciation 82,832 --
Provision for bad debt 136,795 --
Common shares issued for services 494,166 --
Warrants issued to employees and stock option
compensation 3,320,763 --
Shares issued for intellectual property 105,000 --
Changes in operating assets and liabilities
net of assets and liabilities acquired:
Accounts receivable (555,007) --
Due from related parties (245,402) --
Inventory 144,913 --
Other current assets 8,531 --
Accounts payable (296,305) --
Other current liabilities (315,587) --
------------ ------------
Net cash used in continuing operating activities (2,664,114) --
------------ ------------
Discontinued operations:
Income (loss) from discontinued operations 145,311 (352,968)
Changes in assets, liabilities, and net results (408,000) 274,262
------------ ------------
Net cash used in discontinued operating activities (262,689) (78,706)
------------ ------------
Net used in operating activities (2,926,803) (78,706)
------------ ------------
Cash flows from investing activities - continuing operations:
Cash from acquisitions 104,872 --
Purchase of property and equipment (157,881) --
Cash for intellectual property (50,000) --
Purchase of other assets (21,100) --
------------ ------------
Net cash used in continuing investing activities (124,109) --
------------ ------------
Discontinued operations:
Cash from affiliates -- 82,196
------------ ------------
Net cash provided by discontinued investing activities -- 82,196
------------ ------------
Net cash provided by (used in) investing activities (124,109) 82,196
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable 560,000 --
Proceeds from sales of common stock 3,628,618 --
------------ ------------
Net cash provided by investing activities 4,188,618 --
Net increase in cash 1,137,706 3,490
Cash at beginning of year 3,499 9
------------ ------------
Cash at end of year $ 1,141,205 $ 3,499
============ ============
Non-cash investing and financing activities:
Common stock issued for services $ 494,166 $ --
============ ============
Warrants issued to employees $ 3,320,763 $ --
============ ============
Shares issued for intellectual property $ 105,000 $ --
============ ============
The accompanying notes are an integral part of these financial statements.
F-6
VoIP, Inc.
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 2004 and 2003
(As Restated for 2004)
Additional
Common Stock Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
Balance as of December 31, 2002 1,730,939 $ 1,731 $ 731,208 $ (271,679) $ 461,260
Loss for the for the year -- -- -- (352,968) (352,968)
------------ ------------ ------------ ------------ ------------
Balance as of December 31, 2003 1,730,939 1,731 731,208 (624,647) 108,292
------------ ------------ ------------ ------------ ------------
Common stock issued 12,500,000 12,500 -- -- 12,500
Common Stock issued for services received 568,235 568 342,432 -- 343,000
Common stock issued to investors for cash received 5,520,566 5,521 3,610,598 -- 3,616,119
Common stock issued for services 339,242 339 150,827 -- 151,166
Common Stock issued for acquisition of DTNet Tech 2,500,000 2,500 4,747,500 -- 4,750,000
Common Stock issued for acquisition of VoipAmericas 1,000,000 1,000 1,099,000 -- 1,100,000
Warrants issued to two company officers and stock
option compensation -- -- 3,320,763 -- 3,320,763
Stock issued for intellectual property 100,000 100 105,000 -- 105,100
Loss for the year -- -- -- (5,399,502) (5,399,502)
------------ ------------ ------------ ------------ ------------
Balance December 31, 2004 24,258,982 $ 24,259 $ 14,107,328 $ (6,024,149) $ 8,107,438
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-7
Note A - Organization and Description of Business
The Company was incorporated on August 3, 1998 under its original name of
Millennia Tea Masters, Inc. under the laws of the State of Texas.
The Company began operations in October 1998 with its initial order of imported
teas from Sri Lanka.
On February 27, 2004 the Company entered into a stock purchase agreement that
provided for the sale of 12,500,000 shares of its common stock in exchange for
$12,500 and a commitment by the purchaser to contribute the assets of two
start-up companies in the telecommunications business, eGlobalphone, Inc. and
VOIP Solutions, Inc. into the Company.
On April 13, 2004 the Company changed its name to VoIP, Inc. and began to
develop and manufacture innovative IP telephony customer premise equipment,
provide premium voice over the internet subscriber based telephony services and
state of the art long range WiFi technology solutions, for residential and
enterprise customers, including multimedia applications.
During December 2004 the Company decided to exit the tea import business in
order to focus its efforts and resources in the "Voice over Internet Protocol"
(VoIP) telecommunications industry. In connection with the decision, the Company
sold its imported tea inventory and began to wind down its tea import
operations. The assets, liabilities, and results of operations of the imported
tea business has been classified as discontinued operations on the accompanying
consolidated financial statements.
The Company offers quality Voice over IP (VoIP) based solutions offering
residential and business customers more user friendly and affordable ways to
communicate. VoIP, Inc. also manufactures products and provides services to
Internet Service Providers, Telecommunication Service Providers and Cable
Operators in strategic countries around the world. VoIP, Inc., through its
subsidiaries, provides a comprehensive portfolio of IP multimedia-based
solutions ranging from subscriber based voice services, to SIP based
infrastructure design and deployment, to broadband customer premise equipment
design and implementation services, as well as engineering design, manufacturing
and distribution of wireless broadband technology.
The Company's operations consist of one segment.
NOTE B - RESTATEMENT OF FINANCIAL STATEMENTS
The Company accounts for options and warrants issued to employees in accordance
with Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." During the preparation of the financial statements
for the quarterly period ended September 30, 2005 the Company discovered that it
did not recognize in its 2004 financial statements the full amount of
compensation expense that should have been recognized on warrants issued to
employees in 2004 or the compensation expense for the vested portion of
approximately 4,000,000 stock options issued to employees during the year ended
December 31, 2004. The compensation expense that was not recognized relating to
these options and warrants was $1,384,763 (see Notes I, L and O). The Company
therefore, decided that it would be appropriate to restate its financial
statements for the year ended December 31, 2004. The following table sets forth
the impact of the restatement on certain amounts previously reported in the
consolidated 2004 financial statements.
Consolidated Balance Sheet at December 31, 2004: As Previously As Restated
Reported
------------ ------------
Additional paid-in capital $ 12,722,565 $ 14,107,328
Accumulated deficit $ (4,639,386) $ (6,024,149)
Consolidated Statement of Operations for the year ended December 31, 2004:
Compensation and related expense $ 2,721,296 $ 4,106,059
Total operating expense $ 4,909,174 $ 6,293,937
Loss from operations $ (4,160,050) $ (5,544,813)
Net loss $ (4,014,739) $ (5,399,502)
Loss per share $ (0.27) $ (0.37)
Note C - Summary of Significant Accounting Policies
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, eGlobalphone, Inc. ("eGlobal") , VoIP Solutions,
Inc., VCG Technologies d/b/a DTNet Technologies ("DTNet"), Inc., and
VoxConsulting d/b/a/VoIP Americas, Inc. ("VoIP Americas") from their respective
dates of acquisition. All significant inter-company balances and transactions
have been eliminated in consolidation.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities; disclosure of contingent
assets and liabilities at the date of the financial statements; and the reported
amounts of revenues and expenses. Actual results could differ from those
estimates.
Cash and cash equivalents
-------------------------
For purposes of reporting cash flows, the Company considers all cash on hand, in
banks, including amounts in book overdraft positions, certificates of deposit
and other highly liquid debt instruments with a maturity of three months or less
at the date of purchase to be cash and cash equivalents. Cash overdraft
positions may occur from time to time due to the timing of making bank deposits
and releasing checks, in accordance with the Company's cash management policies.
F-8
Accounts Receivable
-------------------
Accounts receivable are stated at the amount management expects to collect from
outstanding balances. Management provides for probable uncollectible amounts
using the reserve method based on its assessment of the current status of the
individual receivables and after using reasonable collection efforts. As of
December 31, 2004 the balance of the allowance for uncollectible accounts
amounted to $136,795. There was no allowance as of December 31, 2003.
Inventory
---------
Inventory consists of finished goods and is valued at the lower of cost or
market using the first-in, first-out method.
Advertising expenses
--------------------
Advertising and marketing expenses are charged to operations as incurred.
Income Taxes
------------
Income taxes - The Company and its subsidiaries file consolidated federal and
state income tax returns. The Company has adopted Statement of Financial
Accounting Standards No. 109 in the accompanying consolidated financial
statements. The only temporary differences included therein are attributable to
differing methods of reflecting depreciation for financial statement and income
tax purposes.
Earnings (loss) per share
-------------------------
Basic earnings (loss) per share is computed by dividing the net income (loss)
for the year by the weighted-average number of shares of common stock
outstanding. The calculation of fully diluted earnings (loss) per share assumes
the dilutive effect of the exercise of outstanding options and warrants at
either the beginning of the respective period presented or the date of issuance,
whichever is later. Common stock equivalents represent the dilutive effect of
the assumed exercise of the outstanding stock options and warrants, using the
treasury stock method.
Fair Value of Financial Instruments
-----------------------------------
The carrying amount of cash, accounts receivable, accounts payable and notes
payable, as applicable, approximates fair value due to the short term nature of
these items and/or the current interest rates payable in relation to current
market conditions.
Revenue Recognition
-------------------
Revenue from product sales is recognized when persuasive evidence of an
arrangement exists, delivery to customer has occurred, the sales price is fixed
and determinable, and collectibility of the related receivable is probable.
The recognition of revenues from Internet telephony services are deferred for
new subscribers of eGlobalphone and Voipsolutions until it deems that the
customer has accepted the service. Subsequent revenues are recognized at the
beginning of each customer's month.
Property, plant, and equipment
------------------------------
Property, plant, and equipment are stated at cost. Depreciation is provided over
the estimated useful lives of the related assets using the straight line method.
The useful life of assets ranges from three to five years. The leasehold
improvements are amortized over the life of the related lease.
Business combinations
---------------------
The Company accounts for business combinations in accordance with Statement of
Financial Accounting Standard No. 141 Business Combinations ("SFAS No. 141").
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations. SFAS No. 141 requires that goodwill and intangible assets
F-9
with indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually by comparing carrying value to the respective fair
value in accordance with the provisions of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). This
pronouncement also requires that the intangible assets with estimated useful
lives be amortized over their respective estimated useful lives.
Impairment of long-lived assets
-------------------------------
VoIP, Inc. reviews the recoverability of its long-lived assets, such as plant,
equipment and intangibles when events or changes in circumstances occur that
indicate that the carrying value of the asset group may not be recoverable. The
assessment of possible impairment is based on the Company's ability to recover
the carrying value of the asset or asset group from the expected future pre-tax
cash flows (undiscounted and without interest charges) of the related
operations. If these cash flows are less than the carrying value of such asset,
an impairment loss is recognized for the difference between estimated fair value
and carrying value. The measurement of impairment requires management to
estimate future cash flows and the fair value of long-lived assets.
Recent accounting pronouncements
--------------------------------
In November 2004, FASB issued Statement No. 151, "Inventory Costs - an amendment
of ARB No. 43, Chapter 4." Statement No. 151 requires that abnormal amounts of
costs, including idle facility expense, freight, handling costs and spoilage,
should be recognized as current period charges. The provisions of this Statement
are effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. The Company does not expect the adoption of this Statement to
have a material impact on its financial statements.
In December 2004, FASB issued Statement No. 153, "Exchanges of Nonmonetary
Assets - an amendment of Accounting Principles Board ("APB") Opinion No. 29."
Statement No. 153 amends APB Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have a
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of this Statement are effective for nonmonetary
exchanges occurring in fiscal periods beginning after June 15, 2005. The Company
does not expect the adoption of this Statement to have a material impact on its
financial statements.
In December 2004, FASB issued Statement No. 123R, "Share-Based Payment."
Statement No. 123R revises Statement No. 123, supersedes APB Opinion No. 25 and
amends Statement No. 95. Statement No. 123R requires the cost of employee
services received in exchange for an award of equity instruments be recognized
over the period during which an employee is required to provide service in
exchange for the award. The provisions of this Statement are effective for
public entities that do not file as small business issuers as of the beginning
of the first interim period or annual reporting period that begins after
December 15, 2005. The Company does not expect the adoption of this Statement to
have a material impact on its financial statements.
Stock Based Compensation
------------------------
The Company applies the fair value method of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS
No. 123") in accounting for its stock options. This standard states that
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
The fair value for each option granted is estimated on the date of the grant
using the Black-Scholes option pricing model. The fair value of all vested
options granted has been charged to salaries, wages, and benefits in accordance
with SFAS No. 123.
F-10
Note D - Property and Equipment, net
As of December 31, 2004 property and equipment consists of the following:
Office Equipment $ 519,810
Furniture & Fixtures 56,748
Vehicles 4,769
Leasehold Improvements 4,562
---------
Total 585,889
Less accumulated depreciation (166,021)
---------
Total $ 419,868
=========
Depreciation expense for 2004 amounted to $82,832. There was no depreciation
expense for 2003.
Note E - Intangibles
As of December 31, 2004 intangibles consist of the following:
Goodwill-acquisition of DTNet Technologies, Inc. $5,210,553
Goodwill-acquisition of Voipamericas, Inc. 1,408,301
Intellectual property 305,000
----------
Total $6,923,854
==========
The goodwill on the acquisition of DTNet Technologies, Inc. ("DTNet") represents
the fair market value of DTNet liabilities as of the date of the acquisition
plus $4,750,000 which represents the market value of 2,500,000 shares of Company
stock issued pursuant to this acquisition.
The goodwill on the acquisition of VoIPAmericas, Inc. (VoIP Americas) represents
the fair market value of VoIPAmericas liabilities as of the date of the
acquisition plus $1,100,000 which represents the market value of 1,000,000
shares of the Company's stock issued pursuant to this acquisition.
Intellectual property is carried at cost which is comprised of $50,000 paid in
cash in 2004, $150,000 due in the first quarter of 2005, and the value assigned
to 100,000 Company common shares and 400,000 warrants issued pursuant to this
transaction. The valuation of the shares was $1.05 while the value was $105,000.
The value of the warrants was determined using the Black-Scholes model
calculated as of October 14, 2004. As these warrants were not "in the money"
these warrants have been assigned a value of zero. This model uses the
annualized deviation calculation and utilizes industry averages as a comparison
for adequate statistical results in the valuation. This is a standard financial
model that considers the statistical annual volatility of the market changes in
a stock price. (See Note H)
Intellectual property consists of the following:
a) all rights of the Company of Record in the telephone numbers
1(800)TALKTIME, 1(888)TALKTIME, and 1(877)TALKTIME.COM
b) all rights to the URL's (domain names) 800TALKTIME.COM, 1800TALKTIME.COM,
and 1-800-TALKTIME.COM
c) all rights to U.S. Trademark Registration No. 2,209,316 directed to the
mark 1-800-TALKTIME and the goodwill associated therewith.
F-11
Note F - Accounts Payables and Accrued Expenses
As of December 31, 2004 accounts payables and accrued expenses consist of the
following:
Account Payables Trade $ 988,815
Accrued Expenses 233,711
Other 2,448
----------
Total $1,224,974
==========
Note G - Bank Loans and Note Payable
As of December 31, 2004 bank loans and note payable consists of the following:
a) Bank Loan:
Revolving Line of Credit $ 187,000
Promissory Note 13,000
----------
200,000
b) Note Payable 560,000
----------
Total $ 760,000
==========
a) The revolving line of credit with the Bank of Tampa is interest only
payable at prime plus 1.0% monthly. The promissory note is payable in
monthly installments of approximately $6,200 including interest at a
rate of 7.5%. The loans are collateralized by receivables, inventory
and equipment. Both balances were fully paid in January 2005.
b) In December 2004 the Company issued a note payable to a shareholder in
the amount of $560,000 at an interest rate of 3.75% with a maturity
date of December 2005. As mentioned in Note K on January 6, 2005, the
Company issued another note payable amounting to $1,040,000 to the
same shareholder under the same terms and conditions as the previous
one.
Note H - Acquisitions
On May 25, 2004 (but effective for all purposes as of April 15, 2004), the
Company completed the acquisition of two Florida-based entities, (eGlobalphone,
Inc. and VoIP Solutions, Inc.). Contribution of these start-up companies was the
basis for the original decision to issue a controlling block of shares of common
stock to Mr. Ivester. eGlobalphone, Inc. and VoIP Solutions Inc. are both
Florida corporations.
In June 2004, the Company acquired DTNet Technologies, Inc. a Florida
Corporation. The acquisition was financed through the issuance of 2,500,000
shares of the Company's common stock with a value of $4,750,000 in exchange for
all issued and outstanding shares of DTNet common stock.
In September 2004, the Company closed the acquisition of VoIP Americas, a
Florida corporation. The acquisition was financed through the issuance of
1,000,000 shares of the Company's restricted common stock with the value of
$1,100,000 in exchange for all issues and outstanding shares of VoIP Americas.
Note I - Warrants
On August 4th, 2004, the Company issued 4,400,000 warrants to two executives to
acquire 2,200,000 Company common shares at $1.00 each. The compensation expense
of $2,217,600, is in the accompanying Consolidated Statement of Operations.
F-12
A summary of the Company's warrants as of December 31, 2004 is presented below:
2004
------------------------------
Weighted
average
Warrants exercise price
------------- --------------
Warrants outstanding at beginning of year --
Granted to two Company officers 4,400,000 $ 1.00
Granted to third parties 2,400,000 $ 2.58
Expired --
Exercised --
------------- --------------
Warrants outstanding at end of year 6,800,000 $ 1.59
============= ==============
Note J - Commitments
The Company is obligated under non-cancelable operating leases for its office
facilities and two apartments used by its employees. Future minimum lease
payments under the Company's non-cancelable operating lease as of December 31,
2004 are as follows:
Year ending Dec 31
------------------
2005 $ 52,772
2006 15,155
---------
$ 67,927
=========
Note K - Due From Related Parties
As of December 31, 2004 the due from related parties consists of the following:
DTNet, Inc. (*) $ 134,317
DTNet International (*) 119,974
Mozart Communication 21,794
Com Laser 5,850
Due to related parties (36,533)
----------
$ 245,402
==========
* The above entities are related to a shareholder of the Company. These advances
are unsecured, due upon demand and are non-interest bearing.
F-13
Note L - Income Taxes
The components of the Company's consolidated income tax provision are as
follows:
Year ended December 31,
2004 2003
----------- -----------
(As Restated)
Current Benefits $(1,836,000) (119,000)
Valuation allowance 1,836,000 119,000
----------- -----------
Total -- --
=========== ===========
2004 2003
----------- -----------
Long-term deferred tax assets arising from
net operatiing loss carry forward $(1,956,000) $ (119,000)
Valuation allowance 1,956,000 119,000
----------- -----------
Total -- --
=========== ===========
The reconciliation of income tax provision at statutory rate to the reported
income tax expense is as follows:
Year ended December 31
2004 2003
--------- ---------
Computed at statutory rate 34% 34%
State tax net of federal benefits -- --
Valuation allowance (34%) (34%)
--------- ---------
Total -- --
========= =========
At December 31, 2004 and December 31, 2003 deferred tax assets are related
solely to the Company's net operating loss carry forward of approximately
$4,486,000 and $303,000, respectively, which have been reduced by a valuation
allowance. If these carry forwards are not utilized, they will begin to expire
in 2018.
Note M - Stockholders' Equity
On February 27, 2004, the Company issued and sold 12,500,000 shares of common
stock to Steven Ivester in exchange for cash of $12,500 and his agreement to
contribute the intellectual property rights and related assets of two start-up
companies formed to engage in the telecommunications industry. The shares issued
represented approximately 88% of the shares outstanding after the exchange, as a
result of which Mr. Ivester became the controlling shareholder of the Company.
On April 1, 2004, the Company issued 142,902 shares to two accredited investors
in satisfaction of accounts payable totaling $71,421.
In May 2004, the Company issued 1,143,250 shares to twenty-two individual
accredited investors.
In May 2004, the Company issued 168,235 shares to one individual accredited
investor in exchange for services.
In May, 2004, the Company issued 67,300 shares to fourteen individual accredited
investors at a price of $3.00 per share.
On May 19, 2004, the Company issued 196,340 shares to two accredited investors
in satisfaction of accounts payable totaling $79,745.
On June 25, 2004, the Company closed the acquisition of DTNet Technologies, Inc.
("DTNet") a Florida corporation. The acquisition was effective through the
issuance of 2,500,000 shares of VoIP, Inc. restricted common stock in exchange
for all issued and outstanding shares of DTNet common stock.
In July 2004, the Company issued 668,688 shares to six individual existing
accredited investors. Also effective July 2004, registrant issued 41,688 shares
to four accredited individual investors.
On August 4, 2004, the Company issued 4,400,000 warrants to two executives to
acquire 4,400,000 shares at $1.00 per share. As explained in Note P, subsequent
events, in February 2005, 2,200,000 of warrants were exchanged for restricted
shares.
F-14
In August 2004, the Company issued 50,000 shares to one individual accredited
investor in satisfaction of accounts payable totaling $50,000.
In August 2004, the Company issued 653,319 shares to forty-six individual
accredited investors.
In September 2004, the Company issued 38,461 shares to one accredited investor.
On September 1st, 2004, the Company closed the acquisition of VoIP Americas, a
Florida corporation. The acquisition took the form of an exchange of 1,000,000
shares of VoIP restricted common stock in exchange the all issued and
outstanding shares of VoIP Americas common stock.
In October 2004, the Company issued 251,831 shares to twelve accredited
investors.
In October 2004, the Company issued 100,000 shares to one individual accredited
investors.
In November 2004, the Company issued of 2,249,500 to five accredited investors.
In November 2004, the Company issued 318,500 shares to twelve accredited
investors.
In December 2004, the Company issued 79,659 shares to five accredited investors.
In December 2004, the Company issued 400,000 shares to sixteen accredited
investors.
Note N - Discontinued Operations
In December 2004, the Company decided to exit the tea business and sold all its
tea inventory, Therefore, those transactions have been presented as discontinued
operations for the years ended December 31, 2004 and 2003.
Assets, liabilities, and results of the discontinued tea operations of the
Millennia Tea Master division are as follows:
Assets from discontinued operation:
2004 2003
--------- ---------
Cash $ 4,419 $ 3,499
Notes receivable from purchaser of tea
(non-interest bearing due in four equal 408,000 --
installments through December 31, 2005)
Tea inventory at net realizable value -- 251,534
Other assets -- 4,426
--------- ---------
Total $ 412,419 $ 259,459
========= =========
Liabilities from discontinued operations:
Due to related parties $ -- $ 151,167
--------- ---------
Total $ -- $ 151,167
========= =========
F-15
Results from discontinued operations:
Revenues $ 408,613 $ 8,678
Cost of sales 263,302 11,213
--------- ---------
Gross profit 145,311 (2,535)
Other expenses -- 350,433
--------- ---------
Income (loss) from discontinued operations: $ 145,311 $(352,968)
========= =========
NOTE O - Stock Options
A total of 4,000,000 shares of common stock has been reserved for issuance under
the Company's 2004 Employee Stock Option Plan. The Company accounts for the fair
value of its grants under its 2004 Stock Option Plan in accordance with SFAS No.
123. The compensation cost that has been charged against income for the 2004
Option Plan was approximately $1,117,000 in 2004.The activity in this 2004
Option Plan for the year ended December 31, 2004 is as follows:
Exercise Weighted Average
Number Price Range Exercise Price
Options outstanding at December 31, 2003 --
Options granted 4,000,000 $0.85 - $1.56 $1.14
Options returned to the plan
due to terminations (350,000) $1.10 $1.10
--------------- ------------------- -----------------
Options outstanding at December 31, 2004 3,650,000 $0.85 - $1.56 $1.14
=============== =================== =================
Options exercisable at year-end 903,750
=================
Weighted-average fair value of options
granted during the year $0.82
=================
Note P - Subsequent Events
On January 6, 2005, the Company issued a Note Payable to its controlling
shareholder in the amount of $1,040,000 at an interest rate of 3.75%, maturing
in December 2005.
On January 26, 2005, the Company filed a Form S-8 registration statement in
connection with the Company's 2004 Stock Option Plan. The plan provides for the
grant to eligible employees and directors of options for the purchase of Common
Stock. The Option Plan covers, in the aggregate, a maximum of 4,000,000 shares
of Common Stock and provides for the granting of both incentive stock options
(as defined in Section 422 of the Internal Revenue Code of 1986) and
nonqualified stock options (options which do not meet the requirements of
Section 422). Under the Option Plan, the exercise price may not be less than the
fair market value of the Common Stock on the date of the grant of the option.
On February 14, 2005, an officer exercised a Stock Purchase Warrant to purchase
2,200,000 shares of VoIP, Inc. common stock by surrendering such Warrant, and,
based upon an agreement with the Company, receiving in return 750,000 shares of
restricted common stock in a net exercise.
On February 23, 2005, VoIP, Inc. and its subsidiary eGlobalPhone, Inc. executed
an Asset Purchase Agreement for the purchase of certain intellectual property
rights associated with the trade names TALKTIME and TALKTIME.COM. In exchange
for the rights, the Registrant issued 100,000 shares of restricted common stock,
warrants to purchase 400,000 shares at $1.70 per share, and agreed to pay
$200,000 cash. Negotiations started during the last quarter of 2004, therefore
all the cash disbursements, liabilities, shares issued, and commitments were
recorded in that period.
F-16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed below by the following persons in the
capacities and on the dates indicated.
Name Office Date
/s/ B. Michael Adler Chairman, Chief Executive 11/23/05
------------------------ Officer and Director
B. Michael Adler (Principal Executive Officer)
/s/ David Sasnett Vice President and Chief 11/23/05
------------------------ Financial Officer
David Sasnett (Principal Financial and
Accounting Officer)