As
filed with the Securities and Exchange Commission on ___________________.
Registration
No. 333-___________
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
|
FORM
S-1
|
REGISTRATION
STATEMENT
|
UNDER
THE SECURITIES ACT OF
1933
|
|
VoIP,
Inc.
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(Name
of Small Business Issuer as Specified in
its Charter)
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Texas
|
|
3661
|
|
75-278/5941
|
|
|
|
|
|
(State
or Other Jurisdiction of Incorporation
or Organization)
|
|
(Primary
Standard Industrial Classification
Code Number)
|
|
(I.R.S.
Employer
Identification
Number)
|
12330
SW 53rd Street, Suite 712 Ft.
Lauderdale, FL 33330
(954)
434-2000
|
(Address
and Telephone Number of Principal
Executive Offices and Principal Place of
Business)
|
B.
Michael Adler Chairman and Chief
Executive Officer 12330 SW 53rd Street, Suite 712 Ft. Lauderdale, FL
33330 (954) 434-2000
|
(Name,
Address and Telephone Number of Agent for
Service)
|
Copies
to: Ronald L. Brown,
Esq. Andrews Kurth LLP 1717 Main Street, Suite 3700 Dallas, TX
75201 (214) 659-4400
|
|
Approximate
date of commencement of
proposed sale to the public: As soon as practicable after the effective
date of this Registration Statement.
|
|
If
any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. x
If
this Form is filed to register additional securities for an offering pursuant
to
Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If
this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. o
CALCULATION
OF REGISTRATION FEE
|
|
|
|
|
Title
of Each Class of Securities to be
Registered
|
Amount
to be Registered(1)
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Proposed
Maximum Offering Price Per Share(2)
|
Proposed
Maximum Aggregate Offering Price
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Amount
of Registration Fee
|
Common
Stock, $0.001
par
value
|
46,310,011
|
$ 1.66
|
76,874,618
|
$ 8,226
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(1)
|
In
addition, pursuant to Rule 416(c) under the Securities Act of 1933,
as
amended (the “Securities Act”), this Registration Statement also covers an
indeterminate number of additional shares that may be issuable in
connection with share splits, share dividends or similar
transactions.
|
(2)
|
Estimated
pursuant to Rule 457(c) under the Securities Act, solely for the
purpose
of calculating the registration fee, based on the average of the
bid and
asked prices for the Company’s common stock as reported within five
business days prior to the date of this
filing.
|
The
Registrant hereby amends this Registration Statement on such date or dates
as
may be necessary to delay its effective date until the Registrant shall file
a
further amendment that specifically states this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933, as amended, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a),
may
determine.
THE
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
SHARES
VoIP,
INC.
COMMON
STOCK
The
persons listed in this Prospectus under "Selling Shareholders" may offer and
sell from time to time up to an aggregate of 46,310,011
shares
of our common stock that they have acquired or will acquire from us, including
those shares that may be acquired upon exercise of warrants granted by us.
Information on the selling shareholders, and the times and manner in which
they
offer and sell shares of our common stock, is provided under "Selling
Shareholders" and "Plan of Distribution" in this Prospectus.
We
will not receive any proceeds for the sale of the common stock by the selling
shareholders. We will bear the costs and expenses of registering the common
stock offered by the selling shareholders. Selling commissions, brokerage fees,
and applicable transfer taxes are payable by the selling shareholders.
Our
common stock is listed on the Over-The-Counter Bulletin Board ("OTCBB") under
the symbol "VOII"). On February 9, 2006, the closing bid price for our common
stock on the OTCBB was $1.73 per share.
BEFORE
PURCHASING ANY OF THE SHARES COVERED BY THIS PROSPECTUS, CAREFULLY READ AND
CONSIDER THE RISK FACTORS INCLUDED IN THE SECTION ENTITLED "RISK FACTORS"
BEGINNING ON PAGE 5 YOU SHOULD BE PREPARED TO ACCEPT ANY AND ALL OF THE RISKS
ASSOCIATED WITH PURCHASING THE SHARES, INCLUDING A LOSS OF ALL OF YOUR
INVESTMENT.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The
date of this Prospectus is ________________.
You
should rely only on the information contained in this Prospectus. We have not
authorized any other person to provide you with information different from
that
contained in this Prospectus. The information contained in this Prospectus
is
complete and accurate only as of the date of the front cover page of this
Prospectus, regardless of the time of delivery of this Prospectus or the sale
of
any common stock. The Prospectus is not an offer to sell, nor is it an offer
to
buy, our common stock in any jurisdiction in which the offer or sale is not
permitted.
We
have not taken any action to permit a public offering of our shares of common
stock outside of the United States or to permit the possession or distribution
of this Prospectus outside of the United States. Persons outside of the United
States who came into possession of this Prospectus must inform themselves about
and observe any restrictions relating to the offering of the shares of common
stock and the distribution of this Prospectus outside of the United States.
PROSPECTUS
SUMMARY
The
following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements,
including the notes, appearing elsewhere in this Prospectus.
CERTAIN
RISKS
Detailed
information about the risks of investing in the offering is set forth in "Risk
Factors" beginning on page 5. Potential investors should specifically be aware
of the following:
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·
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We
have never achieved a profitable level of operations, and our operations
currently require significant amounts of cash. Our net loss for the
nine
months ended September 30, 2005 was $13,880,730 versus a net loss
of
$4,080,185 for the same period in 2004. Our cash flows from operations
for
the nine months ended September 30, 2005 were a negative $9,003,557.
For
the year ended December 31, 2004 our net loss was $5,399,502 and
our cash
flows from operations were a negative $2,926,803.
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|
·
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We
have a very limited base of customers at this time. We may not be
able to
expand our customer base or increase our revenues in the
future.
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|
·
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We
have relied upon sales of debt and equity securities, many to persons
related to management, to obtain enough funds to continue operating.
Such
sales provided net cash to us of $14,402,230 for the period from
January
1, 2004 through February 2, 2006. We will need to continue selling
debt or
equity securities to continue operations.
|
|
·
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As
of February 9, 2006, a total of 15,615,095 shares of common stock are
issuable upon exercise of warrants at prices from $1.00 to $2.60
per
share, and 4,000,000 shares of common stock are issuable under our
stock
option plan at exercise price ranges from $0.85 to $1.56. The
exercise of these warrants or options will result in additional
dilution to our common shareholders.
|
|
·
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Our
stock is traded on the Over-the-Counter Bulletin Board. Historically,
our
stock price has experienced significant fluctuations. The volume
of shares
to be sold in this offering represents a major increase in the number
of our tradable shares outstanding and could result in a decline in
our stock price.
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|
·
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The
businesses we have acquired have not been profitable. We have recorded
significant amounts of goodwill and intangible assets in connection
with
these acquisitions, and such assets are subject to possible future
impairment charges that could have a material adverse effect on our
results of operations and financial condition.
|
VoIP,
Inc., a Texas corporation, is a holding company of businesses centered on the
development and sale of technology, services and products for
Voice-over-Internet Protocol (VOIP), wireless and multimedia applications.
For
a
more detailed discussion of our history and our business, see "Business History"
beginning on page 20, and "Management’s Discussion and Analysis of Financial
Condition and Results of Operations," beginning on page 29.
Up
to
46,310,011
shares
of
our issued and outstanding common stock are being offered and sold by the
selling shareholders. We will not receive any of the proceeds from the sale
of
those shares. Such shares include 5,399,250 shares sold in private placements
and in acquisitions to accredited investors, 20,204,323 shares issuable
upon conversion of outstanding convertible notes sold, and 9,736,032 shares
issuable upon exercise at prices ranging from $1.00 to $2.60 of stock purchase
warrants granted in connection with the sales of such common stock and
convertible notes.
Sales
of
common stock may be made by or for the account of the selling shareholders
in
the over-the-counter market or on any exchange on which our common stock may
be
listed at the time of sale. Shares may also be sold in block transactions or
private transactions or otherwise, through brokers or dealers. Brokers or
dealers may be paid commissions or receive sales discounts in connection with
such sales. The selling shareholders must pay their own commission and absorb
the discounts. Brokers or dealers used by the selling shareholders will be
underwriters under the Securities act of 1933. In addition, any selling
shareholders that are a broker/dealer will be underwriters under the Securities
Act with respect to the common stock offered hereby. In lieu of making sales
through the use of this Prospectus, the selling shareholders may also make
sales
of the shares covered by this Prospectus pursuant to Rule 144 or Rule 144A
under
the Securities Act.
Balance
Sheet Data:
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(Unaudited)
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Goodwill
and other intangible assets
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$
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29,996,814
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$
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6,923,854
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|
$
|
—
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Total
assets
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|
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43,750,775
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|
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10,215,552
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|
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259,459
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Notes
payable, current
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7,240,444
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760,000
|
|
|
—
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Total
liabilities (all current)
|
|
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19,124,380
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|
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2,108,114
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|
|
151,167
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Shareholders’
equity
|
|
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23,849,830
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|
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8,107,438
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|
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108,292
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Statement
of Operations Data:
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|
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|
|
|
|
|
|
|
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Revenue
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$
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6,452,832
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$
|
1,015,065
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$
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2,619,393
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$
|
8,678
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|
$
|
1,018
|
|
Income
(loss) from continuing operations
|
|
|
(13,820,730 |
) |
|
(4,080,185 |
) |
|
(5,544,813 |
) |
|
(101,434 |
) |
|
|
|
Income
(loss) from discontinued operations
|
|
|
|
|
|
|
|
|
145,311 |
|
|
(251,534 |
) |
|
(61,926 |
) |
Net
loss
|
|
|
(13,880,730
|
)
|
|
(4,080,185
|
)
|
|
(5,399,502
|
)
|
|
(352,968
|
)
|
|
(61,926
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)
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Net
loss per common share
|
|
|
(0.39
|
)
|
|
(0.31
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)
|
|
(0.37
|
)
|
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(0.20
|
)
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(0.04
|
)
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(1)
Includes the results of DT Net Technologies, Inc. and VoIP Americas, Inc.
subsequent to their acquisition in June and September of 2004,
respectively.
(2)
Includes the results of Caerus, Inc. and subsidiaries subsequent to their
acquisition in May 2005.
See
“Financial
Statements”
beginning on Page F-1.
You
should carefully consider each of the following risk factors and all of the
other information in this Prospectus. 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.
This
Prospectus 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," “may”, “could” 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:
· our
ability to market our services successfully to new subscribers;
· our
ability to retain a high percentage of our customers;
· the
possibility of unforeseen capital expenditures and other upfront investments
required to deploy new technologies or to effect new business
initiatives;
· our
ability to access the capital markets;
· network
developments and operations;
· our
expansion, including consumer acceptance of new price plans and bundled
offerings;
· additions
or departures of key personnel;
· competition,
including the introduction of new products or services by our competitors;
· existing
and future laws or regulations affecting our business and our ability to comply
with these laws or regulations;
· our
reliance on the systems and provisioning processes of regional Bell operating
companies;
· technological
innovations;
· the
outcome of legal and regulatory proceedings;
· general
economic and business conditions, both nationally and in the regions in which
we
operate; and
· 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.
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 expect to report a net loss
and negative cash flows from operations for the year ended December 31, 2005.
We
reported net losses of approximately $13.9 million for the nine months ended
September 30, 2005 and approximately $5.4 million for the year ended December
31, 2004. 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 and $2.7 million for the
year ended December 31, 2004. 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, we may never be profitable. Even if our revenues increase,
if we are unable to generate sufficiently profitable margins on these revenues
we may never be profitable. 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 the
majority of our operations is comprised of businesses we acquired in 2005.
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 internet protocol (IP) communications services. These risks include
our ability:
·to
successfully integrate our recent acquisitions;
· to
increase acceptance of our VOIP communications services, thereby increasing
the
number of users of our IP telephony services;
· to
compete effectively, and;
· 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 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 by providing 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. Approximately 83% of our revenues for the quarter ended September
30, 2005 were derived from one customer. Currently, our revenues are
generated by providing termination services for other carriers and end users,
from the sales of retail VoIP services to consumers and from hardware product
sales. 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 from 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:
· acceptance
and use of IP telephony;
· growth
in
the number of our customers;
· expansion
of service offerings;
· traffic
levels on our network;
· the
effect of competition, regulatory environment, international long distance
rates
and access and transmission costs on our prices, and;
· continued
improvement of our global network quality.
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). Our lender has not declared a default under the loan agreement.
We
presently are current with the principal and interest payments on this loan
but
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:
· the
amount and timing of capital expenditures to expand our infrastructure;
· the
amount and timing of expenses to enhance marketing and promotion efforts; and
· the
timing of announcements or introductions of new or enhanced services by us.
The
factors outside our control include:
· the
timing of announcements or introductions of new or enhanced services by our
competitors;
· technical
difficulties or network interruptions in the Internet or our privately-managed
network;
· general
economic and competitive conditions specific to our industry.
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.
Our
operations currently require significant amounts of cash. 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, our pursuit of new customers and the introduction of new products
and/or services will require significant marketing and promotional expenses
that
we often incur before we begin to receive the related revenue. Our operations
have consumed, rather than generated, cash. Our working capital and capital
expenditure requirements have been met by sales of debt and equity securities.
We anticipate we will need to raise additional capital to continue our
operations. We may not be able to raise additional capital. If we are able
to
raise additional capital through the issuance of additional equity or debt,
our
current investors could experience dilution.
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 customers and revenues.
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 could be materially adversely affected.
We
face a risk of failure of 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 (also referred to as network access points)
in
facilities in Orlando, Atlanta, New York, Dallas, Los Angeles and we are
currently constructing a network access point in Chicago. Our systems and those
that connect to our network are subject to disruption from natural disasters
or
other sources such as 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.
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. Some of our products and 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.
International
operations may expose us to additional and unpredictable
risks.
We
may
enter international markets such as Eastern Europe, the Middle East, Latin
America, Africa and Asia and may expand our existing operations outside the
United States. International operations are subject to inherent risks,
including:
· potentially
weaker protection of intellectual property rights;
· political
and economic instability;
· unexpected
changes in regulations and tariffs;
· fluctuations
in exchange rates;
· varying
tax consequences, and;
· uncertain
market acceptance and difficulties in marketing efforts due to language and
cultural differences.
Our
entry into new lines of business, as well as potential future acquisitions,
joint ventures or strategic transactions entail 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:
|
·
|
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;
|
|
·
|
diversion
of management's attention and resources from our existing
businesses;
|
|
·
|
significant
write-offs if we determine that the business acquisition does not
fit or
perform up to expectations;
|
|
·
|
the
incurrence of debt and contingent liabilities or impairment charges
related to goodwill and other long-lived assets;
|
|
·
|
difficulties
in the assimilation of operations, personnel, technologies, products
and
information systems of the acquired
companies;
|
|
·
|
regulatory
and tax risks relating to the new or acquired business;
|
|
·
|
the
risks of entering geographic and business markets in which we have
limited
(or no) prior experience;
|
|
·
|
the
risk that the acquired business will not perform as expected; and
|
|
·
|
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, or 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.
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 we may incur higher costs to obtain such coverage. In addition,
it
may be 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.
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 and may
become subject to Section 404 one year sooner. 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 of operations, cash flows
and financial condition.
RISKS
RELATED TO OUR INDUSTRY
Our
future success depends on the growth in the use of Internet Protocol as a means
of communications.
If
the
market for IP communications, in general, and our services in particular, does
not grow or does not grow at the rate we anticipate, we will not be able to
increase our number of customers or generate the 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:
· inconsistent
quality or speed of service;
· traffic
congestion;
· potentially
inadequate development of the necessary infrastructure;
· lack
of
acceptable security technologies;
· lack
of
timely development and commercialization of performance improvements, and;
· unavailability
of cost-effective, high-speed access.
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 such competition 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 public 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
prepaid calling 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.
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.
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. 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.
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 reproduce 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 option 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.
Our
VOIP
services that are subject to the E911 Order do not presently account for a
material portion of our current VOIP revenues..
With
the
recent acquisition on WQN, Inc.'s VOIP assets we confirmed that
WQN filed and complied with the E911 order. We filed the required
acknowledgment letter relating to WQN RocketVOIP subscribers on October 25,
2005.
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.
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:
· the
addition or loss of any major customer;
· changes
in the financial condition or anticipated capital expenditure purchases of
any
existing or potential major customer;
· quarterly
variations in our operating results;
· changes
in financial estimates by securities analysts;
· speculation
in the press or investment community;
· announcements
by us or our competitors of significant contracts, new products or acquisitions,
distribution partnerships, joint ventures or
capital
commitments;
· sales
of
common stock or other securities by us or by our shareholders in the future;
· securities
and other litigation;
· announcement
of a stock split, reverse stock split, stock dividend or similar event;
· economic
conditions for the telecommunications, networking and related industries; and
· economic
instability.
In
addition, the volume of shares to be sold in this offering represents a major
increase in the number of our tradable shares outstanding and could result
in a
decline in our stock price.
We
expect to need 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:
· fund
ongoing operations and capital requirements;
· take
advantage of opportunities, including more rapid expansion or acquisition of
complementary products, technologies or businesses;
· develop
new products; or
· 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 continue 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.
We
do not have sufficient authorized shares.
Our
authorized shares of stock consist of 100,000,000 shares of common stock,
of
which there are currently 67,432,891 shares issued and outstanding and another
112,085,618 shares that may become outstanding upon the exercise or conversion
of outstanding stock options, warrants and convertible securities. A proxy
statement has been filed in connection with annual meeting of shareholders
at
which a proposal will be submitted to increase the authorized shares of capital
stock to 250,000,000 shares of common stock and 25,000,000 shares of “blank
check” preferred stock. If such proposal is not approved, we will be unable to
satisfy the contractual obligations we have undertaken to issue future shares
of
common stock.
WE
WILL NOT RECEIVE ANY PROCEEDS FROM THE SALE OF THE COMMON STOCK OFFERED
BY
THIS PROSPECTUS. THE SELLING SHAREHOLDERS WILL RECEIVE ALL OF THE PROCEEDS.
We,
however, will receive funds upon any exercise for cash of the warrants held
by
the selling shareholders. If any of such warrants are exercised for cash, we
will receive the exercise price for the warrants. Any funds received upon
exercise of the warrants will be applied to our working capital needs. There
can
be no assurance that any of the warrants will be exercised.
We
have
agreed to register 46,310,011 shares of our common stock, beneficially
owned by the selling shareholders. These shares were acquired or will be
acquired by the selling shareholders pursuant to private placement offerings
of
our securities (the "Placements") and the warrants issued under the Placements.
Included in the total number of shares, we are registering for resale up to
14,515,095 shares of common stock that may be issued upon the exercise of
warrants issued to certain of the selling shareholders. The shares of common
stock beneficially owned by each of the selling shareholders are being
registered to permit public secondary trading of these shares, and the selling
shareholders may offer these shares for resale from time to time. See "Plan
of
Distribution."
The
following table sets forth the names of the selling shareholders, the number
of
shares of common stock owned beneficially by each Selling Shareholder as of
February 9, 2006 and the number of shares that may be offered pursuant to
this Prospectus. Except as may be identified in the footnotes to the table,
none
of the selling shareholders has, or within the past three years has had, any
position, office or material relationship with us or any of our predecessors
or
affiliates. The table has been prepared based upon information furnished to
us
by or on behalf of the selling shareholders.
The
selling shareholders may decide to sell all, some, or none of the shares of
common stock listed below. We cannot provide you with any estimate of the number
of shares of common stock that any of the selling shareholders will hold in
the
future.
For
purposes of this table, beneficial ownership is determined in accordance with
the rules of the SEC, and includes voting power and investment power with
respect to such shares. All percentages are approximate.
As
explained below under "Plan of Distribution", we have agreed to bear certain
expenses (other than broker discounts and commissions, if any) in connection
with the list of shares under this Prospectus.
|
|
|
Maximum
Number of Shares of Common Stock
Beneficially Owned Prior the Offering
|
|
|
Maximum
Number of Shares Sold
|
|
|
Number
of Shares of Common Stock Owned Following the Offering Assuming
Sale of
All Shares Offered
|
|
Selling
Shareholder
|
|
|
Shares
|
|
|
Warrants
|
|
|
Hereby
|
|
|
Hereby
|
|
Akanji
Okuboye
|
|
|
72,490
|
|
|
|
|
|
7,249
|
|
|
65,241
|
|
Albert
& Delia Silva
|
|
|
25,766
|
|
|
|
|
|
2,577
|
|
|
23,189
|
|
Albert
Aletto
|
|
|
8,052
|
|
|
|
|
|
805
|
|
|
7,247
|
|
Alice
Barille
|
|
|
25,000
|
|
|
12,500
|
|
|
37,500
|
|
|
-
|
|
Alpha
Capital (1)
|
|
|
1,726,756
|
|
|
863,378
|
|
|
2,590,134
|
|
|
-
|
|
Amie
Selecman
|
|
|
8,052
|
|
|
|
|
|
805
|
|
|
7,247
|
|
Andreas
Pliakas
|
|
|
32,000
|
|
|
32,000
|
|
|
64,000
|
|
|
-
|
|
Andrew
J. and Diana K. Dietzler
|
|
|
27,500
|
|
|
12,500
|
|
|
27,500
|
|
|
12,500
|
|
Andrew
Preston
|
|
|
-
|
|
|
30,000
|
|
|
30,000
|
|
|
-
|
|
Conquest
Development
|
|
|
51,560
|
|
|
|
|
|
20,624
|
|
|
30,936
|
|
Anthony
Tallman
|
|
|
8,052
|
|
|
|
|
|
805
|
|
|
7,247
|
|
Anthony
W. Caen
|
|
|
12,500
|
|
|
3,125
|
|
|
9,375
|
|
|
6,250
|
|
Archie
Bell
|
|
|
15,000
|
|
|
12,500
|
|
|
27,500
|
|
|
-
|
|
Armando
& Linda Esteves
|
|
|
8,052
|
|
|
|
|
|
805
|
|
|
7,247
|
|
Arnold
Atkins, IRA
|
|
|
15,000
|
|
|
12,500
|
|
|
27,500
|
|
|
-
|
|
Arthur
Levesque
|
|
|
8,052
|
|
|
|
|
|
805
|
|
|
7,247
|
|
Arvid
Hinnen
|
|
|
32,000
|
|
|
32,000
|
|
|
64,000
|
|
|
-
|
|
B.
Jan Griffin
|
|
|
103,606
|
|
|
86,338
|
|
|
189,944
|
|
|
-
|
|
Barbara
Mittman
|
|
|
138,141
|
|
|
69,072
|
|
|
207,213
|
|
|
-
|
|
Bernard
Odoy Jr
|
|
|
61,875
|
|
|
|
|
|
24,750
|
|
|
37,125
|
|
Bobby
D. and Mona F. Williams
|
|
|
17,250
|
|
|
14,375
|
|
|
31,625
|
|
|
-
|
|
Bristol
Investment Fund, Ltd (2)
|
|
|
2,762,810
|
|
|
1,381,404
|
|
|
4,144,214
|
|
|
-
|
|
Bruce
Polity
|
|
|
75,000
|
|
|
62,500
|
|
|
137,500
|
|
|
-
|
|
Byron
P. and Lessie C. Butler
|
|
|
50,000
|
|
|
37,500
|
|
|
75,000
|
|
|
12,500
|
|
|
|
|
Maximum
Number of Shares of Common Stock
Beneficially Owned Prior the Offering
|
|
|
Maximum
Number of Shares Sold
|
|
|
Number
of Shares of Common Stock Owned Following the Offering Assuming
Sale of
All Shares Offered
|
|
Selling
Shareholder
|
|
|
Shares
|
|
|
Warrants
|
|
|
Hereby
|
|
|
Hereby
|
|
Carlton
S. Newton, Jr
|
|
|
12,500
|
|
|
6,250
|
|
|
18,750
|
|
|
-
|
|
Carrie
Caruso
|
|
|
18,885
|
|
|
|
|
|
2,095
|
|
|
16,790
|
|
Charlene
Stehling
|
|
|
13,691
|
|
|
|
|
|
1,369
|
|
|
12,322
|
|
Chestnut
Ridge Partners, L.P. (3)
|
|
|
431,689
|
|
|
215,844
|
|
|
647,533
|
|
|
-
|
|
Chris
Rhoades
|
|
|
625,000
|
|
|
125,000
|
|
|
750,000
|
|
|
-
|
|
Christopher
J. Catterton
|
|
|
15,000
|
|
|
12,500
|
|
|
27,500
|
|
|
-
|
|
Christopher
L. Weeks
|
|
|
150,000
|
|
|
125,000
|
|
|
275,000
|
|
|
-
|
|
Christopher
C. Lang
|
|
|
50,781
|
|
|
6,250
|
|
|
29,062
|
|
|
27,969
|
|
Clarence
J. Cahill and Clarence J. Cahill, Jr.
|
|
|
52,500
|
|
|
43,750
|
|
|
96,250
|
|
|
-
|
|
CMS
Capital (4)
|
|
|
259,014
|
|
|
129,508
|
|
|
388,522
|
|
|
-
|
|
Cross
Country Capital Partners, LP
|
|
|
3,600,000
|
|
|
2,225,000
|
|
|
3,600,000
|
|
|
2,225,000
|
|
Curtis
Frank
|
|
|
13,200
|
|
|
|
|
|
5,280
|
|
|
7,920
|
|
Cynthia
B. and James C. Coffey
|
|
|
62,500
|
|
|
62,500
|
|
|
125,000
|
|
|
-
|
|
Dale
Scales
|
|
|
62,500
|
|
|
62,500
|
|
|
125,000
|
|
|
-
|
|
Dale
Walter
|
|
|
27,000
|
|
|
15,000
|
|
|
42,000
|
|
|
-
|
|
Damian
Sousa
|
|
|
51,563
|
|
|
|
|
|
20,625
|
|
|
30,938
|
|
Dan
Hochman
|
|
|
51,563
|
|
|
|
|
|
20,625
|
|
|
30,938
|
|
Dave
Fletcher
|
|
|
37,500
|
|
|
37,500
|
|
|
75,000
|
|
|
-
|
|
David
D. Brown, Jr.
|
|
|
40,000
|
|
|
12,500
|
|
|
27,500
|
|
|
25,000
|
|
Denise
& Christian Carlstrom
|
|
|
8,382
|
|
|
|
|
|
838
|
|
|
7,544
|
|
DKR
Soundshore Oasis Holding Fund Ltd. (5)
|
|
|
1,726,755
|
|
|
863,376
|
|
|
2,590,131
|
|
|
-
|
|
Dominick
and Patricia Schiavone
|
|
|
110,000
|
|
|
50,000
|
|
|
110,000
|
|
|
50,000
|
|
E
Lance Vetter
|
|
|
25,781
|
|
|
|
|
|
10,312
|
|
|
15,469
|
|
Edward
F. and Marcella S. Orski
|
|
|
37,500
|
|
|
31,250
|
|
|
68,750
|
|
|
-
|
|
Eleanor
and William Gardner
|
|
|
12,500
|
|
|
12,500
|
|
|
25,000
|
|
|
-
|
|
Elizabeth
D. Landis
|
|
|
12,500
|
|
|
12,500
|
|
|
25,000
|
|
|
-
|
|
Ellis
International, Ltd (6)
|
|
|
2,849,145
|
|
|
1,424,574
|
|
|
4,273,719
|
|
|
-
|
|
Enable
Growth Partners, LP (7)
|
|
|
1,078,842
|
|
|
690,702
|
|
|
1,769,544
|
|
|
-
|
|
Enable
Opportunity Fund, LP (8)
|
|
|
207,211
|
|
|
172,676
|
|
|
379,887
|
|
|
-
|
|
Erich
Perrenoud
|
|
|
32,000
|
|
|
32,000
|
|
|
64,000
|
|
|
-
|
|
Ernst
Baer
|
|
|
32,000
|
|
|
32,000
|
|
|
64,000
|
|
|
-
|
|
Frank
Bianco
|
|
|
16,109
|
|
|
|
|
|
1,611
|
|
|
14,498
|
|
Gerhard
Johan Nel
|
|
|
25,000
|
|
|
12,500
|
|
|
37,500
|
|
|
-
|
|
Gil
Carroll
|
|
|
37,500
|
|
|
37,500
|
|
|
75,000
|
|
|
-
|
|
Gino
& Mary De Conti
|
|
|
8,052
|
|
|
|
|
|
805
|
|
|
7,247
|
|
GMN
Partnership, (Julius Grant & Co.)
|
|
|
150,875
|
|
|
|
|
|
15,088
|
|
|
135,787
|
|
Gregory
D. Dew
|
|
|
77,500
|
|
|
77,500
|
|
|
155,000
|
|
|
-
|
|
Grushko
& Mitmann, P.C.
|
|
|
103,448
|
|
|
|
|
|
103,448
|
|
|
-
|
|
Hal
Bibee, Sr
|
|
|
375,000
|
|
|
187,500
|
|
|
562,500
|
|
|
-
|
|
Harvey
Smades
|
|
|
794,190
|
|
|
375,000
|
|
|
1,025,000
|
|
|
144,190
|
|
Helen
M Stasky
|
|
|
32,692
|
|
|
25,000
|
|
|
50,000
|
|
|
7,692
|
|
Herbert
Cooper Family Trust, Herbert Cooper TTEE, Rita Cooper,
TTEE
|
|
|
42,000
|
|
|
25,000
|
|
|
55,000
|
|
|
12,000
|
|
James
W. Connor
|
|
|
12,500
|
|
|
12,500
|
|
|
25,000
|
|
|
-
|
|
Jason
& Susan Hollander
|
|
|
17,531
|
|
|
|
|
|
1,753
|
|
|
15,778
|
|
Jerry
O. and Bobby D. Williams
|
|
|
15,000
|
|
|
12,500
|
|
|
27,500
|
|
|
-
|
|
Jessica
Dillier
|
|
|
50,000
|
|
|
50,000
|
|
|
100,000
|
|
|
-
|
|
JFJ
Trust
|
|
|
103,606
|
|
|
86,338
|
|
|
189,944
|
|
|
-
|
|
Jimmy
D. Bell
|
|
|
15,000
|
|
|
12,500
|
|
|
27,500
|
|
|
-
|
|
John
A. Ross II and Linda B. Ross
|
|
|
12,500
|
|
|
12,500
|
|
|
25,000
|
|
|
-
|
|
John
C. Leeuwenburg
|
|
|
12,500
|
|
|
12,500
|
|
|
25,000
|
|
|
-
|
|
John
De Cecco III
|
|
|
8,052
|
|
|
|
|
|
805
|
|
|
7,247
|
|
John
M. and Ruby L. Campbell
|
|
|
12,500
|
|
|
12,500
|
|
|
25,000
|
|
|
-
|
|
John
Piotrowski
|
|
|
295,206
|
|
|
|
|
|
29,521
|
|
|
265,685
|
|
John
R. Olsen
|
|
|
87,500
|
|
|
21,875
|
|
|
65,625
|
|
|
43,750
|
|
John
Rebello III
|
|
|
16,109
|
|
|
|
|
|
1,611
|
|
|
14,498
|
|
John
Sutton
|
|
|
123,076
|
|
|
100,000
|
|
|
200,000
|
|
|
23,076
|
|
John
Thomas
|
|
|
62,500
|
|
|
62,500
|
|
|
125,000
|
|
|
-
|
|
Jose
L. and Mary G. Vazquez
|
|
|
12,500
|
|
|
12,500
|
|
|
25,000
|
|
|
-
|
|
|
|
|
Maximum
Number of Shares of Common Stock
Beneficially Owned Prior the Offering
|
|
|
Maximum
Number of Shares Sold
|
|
|
Number
of Shares of Common Stock Owned Following the Offering Assuming
Sale of
All Shares Offered
|
|
Selling
Shareholder
|
|
|
Shares
|
|
|
Warrants
|
|
|
Hereby
|
|
|
Hereby
|
|
Jose
Martinez
|
|
|
266,436
|
|
|
|
|
|
26,644
|
|
|
239,792
|
|
Joseph
& Judith Levis
|
|
|
206,250
|
|
|
|
|
|
82,500
|
|
|
123,750
|
|
Joseph
J. Kwietnewski Revocable Trust
|
|
|
15,000
|
|
|
12,500
|
|
|
27,500
|
|
|
-
|
|
Joseph
R. Levis
|
|
|
50,000
|
|
|
12,500
|
|
|
37,500
|
|
|
25,000
|
|
JRSQUARED,
LLC
|
|
|
75,000
|
|
|
62,500
|
|
|
137,500
|
|
|
-
|
|
Judith
Milner
|
|
|
83,820
|
|
|
|
|
|
8,382
|
|
|
75,438
|
|
Kareela
Business Ltd., BVI
|
|
|
93,000
|
|
|
93,000
|
|
|
186,000
|
|
|
-
|
|
Kathleen
Long
|
|
|
8,055
|
|
|
|
|
|
806
|
|
|
7,249
|
|
Kathleen
Masino
|
|
|
24,162
|
|
|
|
|
|
2,416
|
|
|
21,746
|
|
Ken
Hynes & Karen McSweeney
|
|
|
16,109
|
|
|
|
|
|
1,611
|
|
|
14,498
|
|
Kenneth
Dobriner )
|
|
|
87,500
|
|
|
|
|
|
65,625
|
|
|
21,875
|
|
Kevin
& Janet Miller
|
|
|
48,403
|
|
|
|
|
|
4,840
|
|
|
43,563
|
|
Kevin
B. Halter
|
|
|
1,400,000
|
|
|
-
|
|
|
300,000
|
|
|
1,100,000
|
|
Kevin
Grenz
|
|
|
98,350
|
|
|
50,000
|
|
|
110,000
|
|
|
38,350
|
|
Krishna
Reddy
|
|
|
8,055
|
|
|
|
|
|
806
|
|
|
7,250
|
|
Lakeshore
Growth Capital, LLC
|
|
|
|
|
|
302,400
|
|
|
302,400
|
|
|
-
|
|
Larry
D. Street and Nancy Street
|
|
|
37,500
|
|
|
31,250
|
|
|
68,750
|
|
|
-
|
|
Lauren
Spickler
|
|
|
84,317
|
|
|
|
|
|
8,432
|
|
|
75,885
|
|
Leah
Caputo
|
|
|
77,500
|
|
|
27,500
|
|
|
58,750
|
|
|
46,250
|
|
Lee
Yaffe
|
|
|
54,450
|
|
|
|
|
|
21,780
|
|
|
32,670
|
|
Linda
Yaffe
|
|
|
10,313
|
|
|
|
|
|
4,125
|
|
|
6,188
|
|
Lydia
Deppermann
|
|
|
37,500
|
|
|
9,375
|
|
|
28,125
|
|
|
18,750
|
|
M500,
Inc
|
|
|
200,000
|
|
|
|
|
|
200,000
|
|
|
-
|
|
Marc
& Karren Yaffe
|
|
|
10,313
|
|
|
|
|
|
4,125
|
|
|
6,188
|
|
Maria
Arancibia
|
|
|
105,000
|
|
|
|
|
|
105,000
|
|
|
-
|
|
Mark
De Stefano
|
|
|
8,052
|
|
|
|
|
|
805
|
|
|
7,247
|
|
Marker
Partners, LP (9)
|
|
|
2,172,107
|
|
|
1,726,756
|
|
|
3,898,863
|
|
|
-
|
|
Marshall
R. Davenport, Jr
|
|
|
68,750
|
|
|
12,500
|
|
|
25,000
|
|
|
56,250
|
|
Max
Plojing
|
|
|
4,192
|
|
|
|
|
|
419
|
|
|
3,773
|
|
|
|
|
Maximum
Number of Shares of Common Stock
Beneficially Owned Prior the Offering
|
|
|
Maximum
Number of Shares Sold
|
|
|
Number
of Shares of Common Stock Owned Following the Offering Assuming
Sale of
All Shares Offered
|
|
Selling
Shareholder
|
|
|
Shares
|
|
|
Warrants
|
|
|
Hereby
|
|
|
Hereby
|
|
Michael
Khalilian
|
|
|
48,126
|
|
|
|
|
|
48,126
|
|
|
-
|
|
Michael
Noonan
|
|
|
15,000
|
|
|
12,500
|
|
|
27,500
|
|
|
-
|
|
Michael
T. Macomson
|
|
|
45,000
|
|
|
20,000
|
|
|
40,000
|
|
|
25,000
|
|
Michael
Wineland
|
|
|
32,219
|
|
|
|
|
|
3,222
|
|
|
28,997
|
|
MZM
Capital Management, LLC
|
|
|
20,000
|
|
|
165,144
|
|
|
165,144
|
|
|
20,000
|
|
Nicholas
Bianco
|
|
|
65,232
|
|
|
|
|
|
6,523
|
|
|
58,709
|
|
Nick
Iannuzzi
|
|
|
67,056
|
|
|
|
|
|
13,411
|
|
|
53,645
|
|
Nicolas
Rogivue
|
|
|
100,000
|
|
|
100,000
|
|
|
200,000
|
|
|
-
|
|
Oli
Sjurdagardi
|
|
|
82,500
|
|
|
|
|
|
33,000
|
|
|
49,500
|
|
Osher
Capital, Inc.
|
|
|
129,507
|
|
|
64,754
|
|
|
194,261
|
|
|
-
|
|
Pasquale
J. and Margaret M. Velahos
|
|
|
15,000
|
|
|
12,500
|
|
|
27,500
|
|
|
-
|
|
Patrick
J. Bercik
|
|
|
15,000
|
|
|
15,000
|
|
|
30,000
|
|
|
-
|
|
Patrick
Shea
|
|
|
11,276
|
|
|
|
|
|
1,128
|
|
|
10,148
|
|
Pershing,
LLC FBO IRA George Yaffe
|
|
|
103,125
|
|
|
|
|
|
41,250
|
|
|
61,875
|
|
Pershing,
LLC FBO IRA Lee Yaffe
|
|
|
52,800
|
|
|
|
|
|
21,120
|
|
|
31,680
|
|
Peter
Currier
|
|
|
118,790
|
|
|
|
|
|
11,879
|
|
|
106,911
|
|
Peter
J. Condakes
|
|
|
62,500
|
|
|
15,625
|
|
|
46,875
|
|
|
31,250
|
|
Peter
L. Condakes
|
|
|
62,500
|
|
|
15,625
|
|
|
46,875
|
|
|
31,250
|
|
Platinum
Long Term Growth II, Inc. (10)
|
|
|
863,378
|
|
|
431,690
|
|
|
1,295,068
|
|
|
-
|
|
Primary
Wave Toll Free, LLC
|
|
|
175,000
|
|
|
125,000
|
|
|
300,000
|
|
|
-
|
|
Reed
Clevenger
|
|
|
62,500
|
|
|
62,500
|
|
|
125,000
|
|
|
-
|
|
Rene
Carrel
|
|
|
32,000
|
|
|
32,000
|
|
|
64,000
|
|
|
-
|
|
Renee
Story Jones
|
|
|
987,521
|
|
|
|
|
|
98,752
|
|
|
888,769
|
|
RFJM
Partners, LLC
|
|
|
250,000
|
|
|
250,000
|
|
|
375,000
|
|
|
125,000
|
|
Richard
Bianco
|
|
|
16,109
|
|
|
|
|
|
1,611
|
|
|
14,498
|
|
Richard
C. Gomrick
|
|
|
23,317
|
|
|
15,625
|
|
|
31,250
|
|
|
7,692
|
|
Richard
M Reiter, M.D.
|
|
|
30,000
|
|
|
7,500
|
|
|
22,500
|
|
|
15,000
|
|
Ricky
Birkes & Anne Fuery
|
|
|
9,661
|
|
|
|
|
|
966
|
|
|
8,695
|
|
Ricky
Lam
|
|
|
17,500
|
|
|
17,500
|
|
|
35,000
|
|
|
-
|
|
|
|
|
Maximum
Number of Shares of Common Stock
Beneficially Owned Prior the Offering
|
|
|
Maximum
Number of Shares Sold
|
|
|
Number
of Shares of Common Stock Owned Following the Offering Assuming
Sale of
All Shares Offered
|
|
Selling
Shareholder
|
|
|
Shares
|
|
|
Warrants
|
|
|
Hereby
|
|
|
Hereby
|
|
Robert
Spickler
|
|
|
52,697
|
|
|
|
|
|
5,270
|
|
|
47,427
|
|
Robert
Vela
|
|
|
75,000
|
|
|
37,500
|
|
|
112,500
|
|
|
-
|
|
Ron
Harden
|
|
|
106,323
|
|
|
|
|
|
15,714
|
|
|
90,609
|
|
Ronald
E. and Dorothy A. Stasky
|
|
|
27,500
|
|
|
12,500
|
|
|
27,500
|
|
|
12,500
|
|
Ronald
E. Clark
|
|
|
6,000
|
|
|
|
|
|
6,000
|
|
|
-
|
|
Ronald
J. Amadeo
|
|
|
12,500
|
|
|
6,250
|
|
|
18,750
|
|
|
-
|
|
Ronald
S. Arnstein
|
|
|
18,750
|
|
|
9,375
|
|
|
28,125
|
|
|
-
|
|
Ronna
Fisher
|
|
|
27,500
|
|
|
12,500
|
|
|
27,500
|
|
|
12,500
|
|
Russell
T. McAndrew
|
|
|
88,281
|
|
|
15,625
|
|
|
57,187
|
|
|
46,719
|
|
Shawn
Lewis
|
|
|
5,446,231
|
|
|
|
|
|
600,000
|
|
|
4,846,231
|
|
Stephan
Thurnherr
|
|
|
32,000
|
|
|
32,000
|
|
|
64,000
|
|
|
-
|
|
Stephen
Samuelson
|
|
|
8,052
|
|
|
|
|
|
805
|
|
|
7,247
|
|
Stephen
Smith
|
|
|
52,593
|
|
|
|
|
|
5,259
|
|
|
47,334
|
|
Steve
L. Postich
|
|
|
12,500
|
|
|
12,500
|
|
|
25,000
|
|
|
-
|
|
Ted
E. Bodenschatz
|
|
|
25,000
|
|
|
12,500
|
|
|
25,000
|
|
|
12,500
|
|
Terry
K. and Irene James
|
|
|
12,500
|
|
|
12,500
|
|
|
25,000
|
|
|
-
|
|
Thad
Bydlon
|
|
|
146,569
|
|
|
|
|
|
75,688
|
|
|
70,881
|
|
The
Divergence Fund LP
|
|
|
80,000
|
|
|
80,000
|
|
|
160,000
|
|
|
-
|
|
The
Divergence Fund LTD
|
|
|
40,000
|
|
|
40,000
|
|
|
80,000
|
|
|
-
|
|
Theodore
P. Bourneuf
|
|
|
37,701
|
|
|
12,500
|
|
|
25,000
|
|
|
25,201
|
|
Thomas
F. Reeves
|
|
|
276,748
|
|
|
|
|
|
51,750
|
|
|
224,998
|
|
Thomas
R. and Jayne A. Harkins
|
|
|
12,500
|
|
|
12,500
|
|
|
25,000
|
|
|
-
|
|
Thomas
R. Harkins
|
|
|
90,000
|
|
|
83,750
|
|
|
173,750
|
|
|
-
|
|
Tom
Babnick
|
|
|
60,000
|
|
|
50,000
|
|
|
110,000
|
|
|
-
|
|
Trans
Global Capital, LLC
|
|
|
312,500
|
|
|
156,250
|
|
|
468,750
|
|
|
-
|
|
T.R.
Winston & Company, LLC
|
|
|
|
|
|
136,200
|
|
|
136,200
|
|
|
-
|
|
Ulrich
Schuerch
|
|
|
32,000
|
|
|
32,000
|
|
|
64,000
|
|
|
-
|
|
Van
H. and Barbara A. Ernest
|
|
|
12,500
|
|
|
12,500
|
|
|
25,000
|
|
|
-
|
|
Wallace
T. Carter
|
|
|
12,500
|
|
|
12,500
|
|
|
25,000
|
|
|
-
|
|
|
|
|
Maximum
Number of Shares of Common Stock
Beneficially Owned Prior the Offering
|
|
|
Maximum
Number of Shares Sold
|
|
|
Number
of Shares of Common Stock Owned Following the Offering Assuming
Sale of
All Shares Offered
|
|
Selling
Shareholder
|
|
|
Shares
|
|
|
Warrants
|
|
|
Hereby
|
|
|
Hereby
|
|
Wayne
R. Vonderharr
|
|
|
15,000
|
|
|
12,500
|
|
|
27,500
|
|
|
-
|
|
Wesley
E. Thomas
|
|
|
62,500
|
|
|
62,500
|
|
|
125,000
|
|
|
-
|
|
Whalehaven
Capital Fund Limited (11)
|
|
|
1,876,756
|
|
|
863,378
|
|
|
2,740,134
|
|
|
-
|
|
William
D. Cherry
|
|
|
12,500
|
|
|
12,500
|
|
|
25,000
|
|
|
-
|
|
William
Jones
|
|
|
620,000
|
|
|
|
|
|
150,000
|
|
|
470,000
|
|
William
Scampoli
|
|
|
16,109
|
|
|
|
|
|
1,611
|
|
|
14,498
|
|
WQN,
Inc
|
|
|
6,746,429
|
|
|
|
|
|
2,250,000
|
|
|
4,496,429
|
|
Xavier
Burbano
|
|
|
100,000
|
|
|
25,000
|
|
|
75,000
|
|
|
50,000
|
|
YTMJ,
LLC
|
|
|
5,950,615
|
|
|
|
|
|
1,406,639
|
|
|
4,543,976
|
|
Yuzhen
Zhang
|
|
|
50,000
|
|
|
50,000
|
|
|
100,000
|
|
|
-
|
|
James
Magruder
|
|
|
100,000
|
|
|
|
|
|
5,000
|
|
|
95,000
|
|
Paul
Caputo
|
|
|
31,229
|
|
|
|
|
|
20,000
|
|
|
11,229
|
|
Bill
Glynn
|
|
|
8,021
|
|
|
|
|
|
1,604
|
|
|
6,417
|
|
Adi
Elfenbein
|
|
|
4,211
|
|
|
24,395
|
|
|
28,606
|
|
|
-
|
|
Steven
Bernstein
|
|
|
785
|
|
|
6,992
|
|
|
7,777
|
|
|
-
|
|
Gene
Cicero
|
|
|
5,283
|
|
|
18,613
|
|
|
23,896
|
|
|
-
|
|
Stephan
Stein
|
|
|
5,600
|
|
|
5,600
|
|
|
11,200
|
|
|
-
|
|
Joseph
Alagna
|
|
|
5,600
|
|
|
5,600
|
|
|
11,200
|
|
|
-
|
|
Newbridge
Securities
|
|
|
128,459
|
|
|
47,738
|
|
|
176,197
|
|
|
-
|
|
Alexis
Keller
|
|
|
10,000
|
|
|
|
|
|
10,000
|
|
|
-
|
|
Cornway
Corp. Ltd.
|
|
|
150,000
|
|
|
|
|
|
100,000
|
|
|
50,000
|
|
Ebony
Finance
|
|
|
260,000
|
|
|
800,000
|
|
|
500,000
|
|
|
560,000
|
|
Ivano
Angelastri
|
|
|
25,000
|
|
|
1,000,000
|
|
|
500,000
|
|
|
525,000
|
|
Jochen
Staiger
|
|
|
4,000
|
|
|
|
|
|
4,000
|
|
|
-
|
|
Marcello
Bagnolo
|
|
|
5,000
|
|
|
|
|
|
5,000
|
|
|
-
|
|
Marjolein
Imfeld
|
|
|
275,000
|
|
|
|
|
|
100,000
|
|
|
175,000
|
|
Marlies
Studer
|
|
|
2,000
|
|
|
|
|
|
2,000
|
|
|
-
|
|
Paul
Burkhard
|
|
|
10,000
|
|
|
|
|
|
10,000
|
|
|
-
|
|
Dave
Fletcher
|
|
|
37,500
|
|
|
|
|
|
37,500
|
|
|
-
|
|
Stephan
Gort
|
|
|
10,000
|
|
|
|
|
|
10,000
|
|
|
-
|
|
TOTAL
|
|
|
52,017,255
|
|
|
17,640,095
|
|
|
46,310,011
|
|
|
22,347,339
|
|
|
1.
|
Alpha
Capital AG is a Liechtenstein corporation. The shares beneficially
owned
consist of 1,726,756 shares of common stock, 431,689 warrants
exercisable
at $1.46 per share and 431,689 warrants exercisable at $1.59
per share.
Alpha Capital AG has informed the Company that Konrad Ackerman
has
dispositive and voting power for all of its shares in the
Company.
|
|
2.
|
Bristol
Investment Fund LTD is a Cayman Islands company. The shares
beneficially
owned consist of 2,762,810 shares of common stock, 690,702
warrants
exercisable at $1.46 per share and 690,702warrants exercisable
at $ 1.59
per share. Bristol Investment Fund LTD has informed the Company
that Paul
Kessler has dispositive and voting power for all of its shares
in the
Company.
|
|
3.
|
Chestnut
Ridge Partners, L.P. is a Delaware company. The shares beneficially
owned
consist of 431,689 shares of common stock, 107,922 warrants
exercisable at
$1.46 per share and 107,992 warrants exercisable at $1.59 per
share.
Chestnut Ridge Partners, L.P. has informed the Company that
Kenneth
Pasternak has dispositive and voting power for all of its shares
in the
Company.
|
|
4.
|
CMS
Capital is a California company. The shares beneficially owned
consist of
259,014 shares of common stock, 64,754 warrants exercisable
at $1.46 per
share and 64,754 warrants exercisable at $1.59 per share CMS
Capital has
informed the Company that Judah Zavdi has dispositive and voting
power for
all of its shares in the Company.
|
|
5.
|
The
shares beneficially owned by DKR Soundshore Oasis Holding Fund
Ltd.
consist of 1,726,755 shares of common stock, 431,688 warrants
exercisable
at $1.46 per share and 431,688 warrants exercisable at $1.59
per share DKR
Soundshore Oasis Holding Fund Ltd. has informed the Company
that Fred Leif
has dispositive and voting power for all of its shares in the
Company.
|
|
6.
|
Ellis
International LTD is a Republic of Panama company. The shares
beneficially
owned consist of 2,849,145 shares of common stock, 712,287
warrants
exercisable at $1.46 per share and 712,287 warrants exercisable
at $1.59
per share. Ellis International LTD has informed the Company
that Willhelm
Ungar has dispositive and voting power for all of its shares
in the
Company.
|
|
7.
|
The
shares beneficially owned by Enable Growth Partners, LP consist
of
1,078,842 shares of common stock, 345,351 warrants exercisable
at $1.46
per share and 345,351warrants exercisable at $1.59 per
share.
|
|
8.
|
The
shares beneficially owned by Enable Opportunity Fund, LP consist
of
207,211 shares of common stock, 86,338 warrants exercisable
at $1.46 per
share and 86,338 warrants exercisable at $1.59 per
share.
|
|
9.
|
The
shares beneficially owned by Marker Partners consist of 2,172,107
shares
of common stock, 863,378 warrants exercisable at $1.46 per
share and
863,378 warrants exercisable at $1.59 per share.
|
|
10.
|
Platinum
Long Term Growth II, Inc. Partners is a Delaware company. The
shares
beneficially owned consist of 863,378 shares of common stock,
215,845
warrants exercisable at $1.46 per share and 215,845 warrants
exercisable
at $1.59 per share.
|
|
11.
|
Whalehaven
Capital Fund LTD is a Bermuda company. The shares beneficially
owned
consist of 1,876,756 shares of common stock, 431,689 warrants
exercisable
at $1.46 per share and 431,689 warrants exercisable at $1.59
per share.
Whalehaven Capital Fund LTD has informed the Company that Michael
Finkelstein has dispositive and voting power for all of its
shares in the
Company.
|
|
12.
|
The
number of shares referred to in notes 1, 2, 3, 4, 5, 6, 10
and 11
represent 200% of the number of shares of Common Stock issuable
upon
conversion of certain convertible notes and warrants sold by
the Company
in January and February 2006.
|
|
13.
|
The
number of shares referred to in notes 7, 8 and 9 represent
120% of the
number of shares of Common Stock issuable upon conversion of
certain
convertible notes and warrants sold by the Company in January
2006.
|
The
shares may be sold from time to time by the selling shareholders or by pledges,
donees, transferees or other successors in interest. Such sales may be made
in
the over-the-counter market or on any stock exchange on which the common stock
of the Company may be listed at the time of sale or otherwise at prices and
terms then prevailing or at prices related to the then current market price,
or
in negotiated transactions. The shares may be sold by one or more of the
following:
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
privately-negotiated
transactions;
|
|
·
|
broker-dealers
may agree with the selling shareholders to sell a specified number
of such
shares at a stipulated price per share;
|
|
·
|
a
combination of any such methods of sale; and
|
|
·
|
any
other method permitted pursuant to applicable law.
|
The
selling shareholders may also sell shares under Rule 144 of the Securities
Act,
if available, rather than under this prospectus.
Broker-dealers
engaged by the selling shareholders may arrange for other broker-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling shareholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling shareholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.
We
have
agreed to pay for all costs and expenses incident to the issuance, offer, sale
and delivery of the shares of common stock offered by the selling shareholders,
including all expenses and fees of preparing, filing and printing the
registration statement and prospectus and related exhibits, amendments and
supplements thereto and mailing of such items. We will not pay sales or
brokerage commissions or discounts with respect to sales of the shares offered
by the selling shareholders.
Any
broker-dealers or agents that are involved in selling the shares are
"underwriters" within the meaning of the Securities Act in connection with
such
sales. In such event, any commissions received by such broker-dealers or agents
and any profit on the resale of the shares purchased by them may be deemed
to be
underwriting commissions or discounts under the Securities Act. One selling
shareholder (Newbridge Security Corp.) is a registered broker dealer.
We
are
required to pay all fees and expenses incident to the registration of the
shares, including fees and disbursements of counsel to the selling shareholders,
but excluding brokerage commissions or underwriter discounts. We have agreed
to
indemnify the selling shareholders against certain losses, claims, damages
and
liabilities under the Securities Act.
DIVIDEND
POLICY AND MARKET DATA
Dividends
We
have
no current plans to pay any future cash dividends on the common stock. Instead,
we intend to retain all earnings, other than those required to be paid to the
holders of any preferred stock we may issue in the future, to support our
operations and future growth. The payment of any future dividends on the common
stock will be determined by the Board of Directors based upon our earnings,
financial condition and cash requirements, possible restrictions in future
financing agreements, if any, business conditions and such other factors deemed
relevant.
Market
Information
The
common stock is traded on the Over-the-Counter Bulletin Board under the symbol
VOII. The quotations below reflect inter-dealer prices, without retail markup,
markdown or commissions and may not represent actual transactions. The following
table shows the bid price range of our common stock for the time periods
indicated:
From
|
|
|
|
|
|
|
|
|
|
|
01/01/02
|
|
|
12/31/03
|
|
|
*
|
|
|
*
|
|
01/01/04
|
|
|
03/31/04
|
|
$
|
0.85
|
|
$
|
0.80
|
|
04/01/04
|
|
|
06/30/04
|
|
|
6.75
|
|
|
1.35
|
|
07/01/04
|
|
|
09/30/04
|
|
|
3.20
|
|
|
1.10
|
|
10/01/04
|
|
|
12/31/04
|
|
|
4.75
|
|
|
1.05
|
|
10/01/05
|
|
|
03/31/05
|
|
|
4.08
|
|
|
1.61
|
|
04/01/05
|
|
|
06/30/05
|
|
|
1.65
|
|
|
1.03
|
|
07/01/05
|
|
|
09/30/05
|
|
|
2.30
|
|
|
0.95
|
|
10/01/05
|
|
|
12/31/05
|
|
|
1.27
|
|
|
2.07
|
|
*Trading
in the shares of our predecessor was sporadic and did not produce reported
quotations.
Holders
As
of February 1, 2006 there were approximately 489 shareholders of
record and an unknown number of beneficial holders holding through brokers.
SELECTED
FINANCIAL DATA
The
following table sets forth selected historical financial data as of and for
each
of the years ended December 31, 2000, 2001, 2002, 2003, and 2004 and the nine
months ended September 30, 2005 and 2004. The related financial data as of
December 31, 2004 and for the year then ended are derived from our consolidated
financial data as of December 31, 2004 and for the year ended are derived from
our consolidated financial statements which have been audited by Berkovits,
Logo
& Company, LLP, independent auditors, and their report is included elsewhere
in this Prospectus. The selected financial data as of December 31, 2003 and
2002
and for each of the years then ended are derived from our consolidated financial
statements have been audited by Tschopp, Whitcomb & Orr, P.A., independent
auditors, and their report is included elsewhere in this Prospectus. The
selected financial data as of and for the nine months ended September 30, 2004
and 2005 are derived from our unaudited financial consolidated statements.
The
following financial information should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
our consolidated financial statements and related notes appearing elsewhere
in
this Prospectus.
|
|
Years
Ended December 31,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
Revenues
|
|
$
|
629
|
|
$
|
356
|
|
$
|
1,018
|
|
$
|
8,678
|
|
$
|
2,619,313
|
|
$
|
1,015,065
|
|
$
|
6,452,832
|
|
Gross
Profit
|
|
|
522
|
|
|
295
|
|
|
849
|
|
|
(2,535
|
)
|
|
749,124
|
|
|
277,161
|
|
|
194,783
|
|
Operating
expenses
|
|
|
58,129
|
|
|
61,929
|
|
|
62,775
|
|
|
98,899
|
|
|
6,293,937
|
|
|
4,357,346
|
|
|
14,075,513
|
|
Loss
from continuing operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(101,434
|
)
|
|
(5,544,813
|
)
|
|
(4,080,185
|
)
|
|
(13,880,730
|
)
|
Net
loss
|
|
$
|
(57,607
|
)
|
$
|
(61,634
|
)
|
$
|
(61,926
|
)
|
$
|
(352,968
|
)
|
$
|
(5,399,502
|
)
|
$
|
(4,080,185
|
)
|
$
|
(13,880,730
|
)
|
Basic
and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
- |
|
|
-
|
|
|
-
|
|
|
(0.06
|
)
|
|
(0.38
|
)
|
|
(0.31
|
)
|
|
(0.39
|
)
|
Net
loss
|
|
|
(0.03
|
)
|
|
(0.04
|
)
|
|
(0.04
|
)
|
|
(0.20
|
)
|
|
(0.37
|
)
|
|
(0.31
|
)
|
|
(0.39
|
)
|
Summary
cash flow data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(59,898
|
)
|
|
(51,862
|
)
|
|
(75,496
|
)
|
|
(78,706
|
)
|
|
(2,664,114
|
) |
|
(784,832
|
) |
|
(9,003,557
|
) |
Net
cash provided by (used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investing
activities
|
|
|
60,000
|
|
|
52,902
|
|
|
73,849
|
|
|
82,196
|
|
|
(124,109
|
)
|
|
48,220
|
|
|
(176,875
|
)
|
Net
cash provided by
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financing
activities
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,188,618
|
|
|
970,637
|
|
|
11,278,168
|
|
Balance
Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
616
|
|
|
1,656
|
|
|
9
|
|
|
3,499
|
|
|
1,141,205
|
|
|
237,524
|
|
|
3,238,941
|
|
Property
and equipment
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
419,868
|
|
|
385,405
|
|
|
8,352,155
|
|
Goodwill
and other intangible assets
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,923,854
|
|
|
6,618,864
|
|
|
29,996,814
|
|
Total
assets
|
|
|
584,820
|
|
|
532,897
|
|
|
530,230
|
|
|
259,458
|
|
|
10,215,552
|
|
|
8,567,407
|
|
|
43,750,775
|
|
Long
term obligations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
776,565
|
|
Total
shareholders' equity
|
|
|
584,820
|
|
|
523,186
|
|
|
461,260
|
|
|
108,292
|
|
|
8,107,438
|
|
|
6,670,891
|
|
|
23,849,830
|
|
BUSINESS
History
We
were
incorporated on August 3, 1998 under our original name of Millennia Tea Masters
under the laws of the State of Texas. In February 2004 we exchanged 12,500,000
shares for the assets of two start-up telecommunication businesses,
eGlobalphone, Inc. and VoIP Solutions, Inc. We changed our name to VoIP, Inc.
in
April 2004. We consummated the acquisitions of DTNet Technologies, Inc., a
hardware supplier, and VoIP Americas, Inc., a VoIP related company, in June
and
September, respectively, of 2004. We decided to exit our former tea business
in
December 2004 and focus our efforts and resources in the Voice over Internet
Protocol telecommunications industry. In May 2005 we completed the acquisition
of Caerus, Inc., a VoIP carrier and service provider, and in October 2005 we
purchased substantially all of the VOIP related assets of WQN, Inc.
Overview
We
are 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 allow consumers
and businesses to communicate at reduced costs compared to legacy telephony
networks.
Since
2004, we have developed our business through strategic acquisitions. These
acquisitions have provided us with important technology, intellectual capital
and VOIP expertise, trade names, domain names; VOIP enhanced service
applications, key business relationships and revenues. We own our network,
technology and have the ability to provide complete product and service
solutions, including outsourced customer service and hardware fulfillment.
We
are a certified Competitive Local Exchange Carrier (CLEC) and Interexchange
Carrier (IXC) which allows us to receive more favorable rates from the Regional
Bell Operating Companies (RBOCs) and the traditional long-distance carriers
than
telephony resellers who are not CLECs or IXCs as well as provide regulatory
compliance in an industry that is moving quickly towards controls and
regulations. We expect to provide a comprehensive portfolio of advanced
telecommunications technologies, enhanced service solutions, and broadband
products to the VOIP industry. Our current and targeted customers include RBOCs,
CLECs, IXCs, wireless carriers, resellers, Internet Service Providers (ISPs),
cable system operators ("cable operators") and other providers of telephony
services in the United States and various countries around the world.
Our
goal
is to become the premier enabler for packet communication services for carriers,
service providers and cable operators seeking to offer value-added voice, data
and enhanced services products utilizing VOIP technology.
Our
Technology and Network
We
began
developing our proprietary hardware and software in 2002, establishing strategic
relationships with companies such as Intel, Brooktrout, Sonus, iCable and other
manufacturers of both hardware and software.
Our
proprietary softswitch features tools that we believe will relieve the
interoperability and cost issues that have affected the implementation of VOIP
softswitch technology by traditional carriers, enabling them to offer
cost-competitive, viable VOIP services. Our softswitch architecture is protocol
agnostic, allowing seamless integration with the legacy-based networks (referred
to in the industry as Time Division Multiplexing, or TDMs) employed by the
traditional telephony companies and with other packet technologies. Our network
will allow TDM-based networks to access the enhanced capabilities and
efficiencies of packet technology networks. The ability to control the
underlying technology in our network allows us to provide interoperable services
with multiple hardware solutions which may be pre-existing in customer networks.
Based on Microsoft .NET technology, we believe that integration to the
enterprise desktop will drive market acceptance and use of our advanced
services.
Our
network currently supports its own media gateways, softswitch controller,
unified messaging systems, voicemail, media trans-coding, billing and many
other
integral parts of a complete solution.
Our
network operations center located in Orlando, Florida, is a fully manned,
24x7x365 operation. From this center we monitor all aspects of the technical
environment of our network, from our nationwide optical backbone to network
routers, signaling gateways and numerous routing gateways, soft switches and
other aspects of our VOIP infrastructure. Fully redundant technologies are
deployed in a scalable network environment that we believe will enable us to
compete effectively and efficiently in the demanding Internet Protocol (IP)
telephony marketplace. Our network incorporates an advanced Multi-Protocol
Label
Switching (MPLS) architecture which provides services to carriers and other
service providers. Our network features direct interconnection facilities with
multiple RBOCs, CLECs, IXCs, service providers, cable operators, wireless
carriers and resellers.
We
are
currently implementing a nationwide expansion of our network through the
establishment of Network Access Points and multiple direct carrier
interconnections nationwide. This expansion will provide us with local access
to
substantially all of the major U.S. metropolitan areas while lowering our
transport costs and providing added redundancy and stability for our network.
We
anticipate completing this expansion by the end of 2006.
We
believe we operate the first seamless IP network that interfaces with Signal
System7 (SS7), Q.93 and Sigtran. Our primary network infrastructure will
continue to be integrated with the Sonus-based platform used in our network
today.
Customer,
Products and Services
Our
products and service offerings target VOIP wholesale customers, RBOCs, CLECs,
IXCs, wireless carriers, ISPs, cable operators and other providers of telephony
services in the United States and various countries around the world. Beginning
in October 2005 we also began selling retail VOIP products (EasyTalk, Rocket
VOIP, prepaid calling cards) as a result of our acquisition of WQN’s VOIP
assets and business.
Call
and Termination
We
charge
our wholesale customers termination fees to terminate calls on our network.
We
pay termination fees when it is necessary to route calls from our network to
other networks for termination. Our revenues and profit margins on those
revenues are a function of the number and duration of calls handled by our
network and what we charge and pay to handle this traffic.
U.S.
termination takes place either on our network or that of one of our network
partners to which we route traffic. Our international termination product
features direct routes and connections established to many international voice
carriers worldwide. Carriers use complex least-cost-routing algorithms that
direct traffic to the lowest cost carrier. We believe we are in the process
of
establishing a competitive cost structure through the efficiencies of our
network design, as well as through current and future partnerships with key
off-net and niche providers
VoiceOne
Carrier Direct
We
are in
the early stages of implementing our VoiceOne Carrier Direct program which
we
believe will enable us to develop a significant facilities based carriers
customer base. We are a certified CLEC in 28 states, and will continue to apply
for CLEC certification in other states as required.
We
believe that carriers that want to offer VOIP services have essentially three
options: create their own internal VOIP capabilities, acquire a VOIP carrier,
or
partner with a VOIP carrier. The first of these options requires a carrier
to
devote a significant amount of resources to (i) develop its VOIP network
capabilities and associated retail services; (ii) maintain its network and
develop new retail products, and; (iii) continuously upgrade its VOIP
capabilities to keep pace with technological changes. The acquisition of an
existing VOIP carrier could be relatively expensive and, once the acquisition
is
complete, the facilities based carrier would still face on-going maintenance/
upgrade issues and costs and additional capital expenditures.
With
respect to the third option, our VoiceOne Carrier Direct is a partner program
for carriers that provides them with our technology to IP-enable their TDM
networks. With this program the carriers receive our equipment and expertise,
enabling them to rapidly enter the VOIP services market without making
significant capital expenditures. Because our technology is protocol agnostic,
by implementing the VoiceOne Carrier Direct program we believe our customers
can
avoid modifications to their TDM networks and the operability issues that can
plague the interface of legacy systems with IP technology. We interface our
customers' TDM systems to our VOIP network. We do not charge the carriers for
equipment that includes softswitch technology, a media gateway, a service
creation environment, a multi-protocol label switching network and access to
our
products and services. In return for our equipment and expertise, the facilities
based carrier pays us fees to terminate calls on our network and for other
services such as Hosted IP Centrex and local inbound. We anticipate that this
strategy will be attractive to the carriers since it provides them with a new
group of customers and revenue sources without requiring them to modify their
legacy systems or expend capital. We can then obtain revenues from calls the
carriers terminate on our network, and can terminate calls on their
network.
Prepaid
Calling Cards
We
sell
prepaid calling cards we purchase from other carriers through a network of
private distributors located primarily in Southern California.
Fulfillment
Services
We
operate a fulfillment center for our broadband service provider partners and
are
an established supplier of broadband components and VOIP hardware to the cable
television industry.
EasyTalk
EasyTalk,
our automated number identification (ANI) retail product, marketed through
our
website, is a long distance service with "ease of use" features for
consumers. We believe that EasyTalk is a step beyond calling cards. Our
network is programmed to automatically recognize certain phone numbers and
to
provide callers from these numbers immediate access to long-distance services.
No calling card or PIN number calling card number is required. Consumer features
include PIN-less dialing, fast *1 recharge of the service, speed dial, and
quick
query of current balance.
RocketVoIP
Our
RocketVoIP retail product allows customers to use, through a media terminal
adapter we provide, their high speed internet connection to place local, long
distance and international calls.
Direct
Inward Dial Numbers
As
a
CLEC, we can provide our VoiceOne Carrier Direct and VSP customers with the
use
of a large selection of local, direct inward dial (DID) numbers
800
Origination
Our
800
Origination service is a flexible solution with IP or TDM delivery. Our 800
Origination product provides nationwide toll free numbers with full control
over
routing. Customers can re-route a number due to local area problems and can
log
into a web interface to manage their 800 numbers. Our 800 Origination service
supports geographic routing and vanity numbers.
Other
Products
We
sell
various PIN and ANI products to consumers via our website.
OUR
STRATEGY
Our
objective is to provide reliable, scalable, and competitively-priced worldwide
VOIP communication services with unmatched quality. We plan to achieve this
objective by delivering innovative technologies and services and balancing
the
needs of our customers with the needs of our business. We intend to bring high
quality voice products and services, at an affordable price, to other
communication providers, businesses and residential consumers to enhance the
ways in which these customers communicate with the rest of the world.
Specific
strategies to accomplish this objective include:
· building
our carrier/service provider customer base through aggressive marketing of
our
VoiceOne Carrier Direct program;
· completing
the expansion of our network (currently in process);
· capitalizing
on our technological expertise to introduce new products, services and
features;
· customizing
our service offerings for the purpose of pursuing strategic partnerships with
major customers and suppliers;
· offering
the best possible service and support to our customers with a world class
customer support organization;
· developing
additional distribution channels;
· expanding
our market share for our retail calling services;
· increasing
our customer base by introducing cost-effective solutions to interconnect with
our network; and
· controlling
operating expenses and capital expenditures.
Competition
We
compete primarily in the market for enhanced IP communications services. This
market is highly competitive and has numerous service providers. The market
for
enhanced Internet and IP communications services is new and rapidly evolving.
We
believe that the primary competitive factors determining success in the Internet
and IP communications market are:
· quality
of service;
· the
ability to meet and anticipate customer needs through multiple service offerings
and feature sets;
· responsive
customer care services, and;
· price.
Future
competition could come from a variety of companies both in the Internet and
telecommunications industries. These industries include major companies who
have
greater resources and larger customer bases than we have, and have been in
operation for many years. We also compete in the growing market of discount
telecommunications services including "pure play" VoIP service providers,
prepaid calling 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,
including instant messaging, PC-to-PC and PC-to-Phone services, and broadband
phone services.
Some
competitors may be able to bundle services and products that are not offered
by
us together with enhanced Internet and IP communications services, which could
place us at a significant competitive disadvantage. Many of our competitors
enjoy economies of scale that can result in lower cost structure for
transmission and related costs, which could cause significant pricing pressures
within the industry. At the same time, we see these potential competitors as
potential customers, and have organized our various reseller and service
provider products and services to meet the emergent needs of these companies.
Our
primary competitors include:
|
·
|
carriers
operating in the U.S. and abroad, which include the RBOCs, AT&T,
British Telecom, France Telecom, Deutsche Telecom, IDT, MCI, Sprint,
Level
3, Infonet, Qwest, Broadwing, Ibasis, and Teleglobe;
|
|
·
|
subscriber
based service provider competitors, which include Vonage, Packet8,
DeltaThree, SunRocket, Time Warner, Comcast and Net2phone.
|
Industry
Overview
The
advance of broadband delivery of the Internet into residential and small offices
has opened up a large market for high-speed services to be delivered in a manner
that is independent of the actual wires connected to each property. Nearly
three
out of four households with basic phone service have Internet access, and almost
half have of these households have broadband access. (Source:
Nielsen/NetRatings) The penetration of broadband is rising at around 2.5% per
month. These growth figures are even higher in other nations, which have only
recently been implementing systems after understanding and modeling their
platforms on what has become the standard in the United States. An additional
factor in the cost savings of VOIP is the relatively inexpensive nature of
IP
transit data at the core of the Internet. In the late 90's, a large amount
of
capital was invested in fiber connectivity between major metropolitan areas.
Due
to market forces, this fiber became available at incredibly inexpensive rates
and a "bandwidth glut" or "fiber glut" occurred at the core of the Internet,
driving costs down.
VOIP
is a
technology that enables voice communications over the Internet through the
compression of voice into data packets that can be transmitted over data
networks and then converted back into voice at the other side. Data networks,
such as the Internet or local area networks (LANs), have always utilized
packet-switched technology to transmit information between two communicating
terminals (for example, a PC downloading a page from a web server, or one
computer sending an e-mail message to another computer). The most common
protocol used for communicating on these packet switched networks is internet
protocol, (IP). VOIP allows for the transmission of voice along with other
data
over these same packet switched networks, and provides an alternative to
traditional telephone networks, which uses a fixed electrical connection to
carry voice signals through a series of switches to the final destination.
VOIP
has experienced significant growth in recent months. The telephone networks
maintained by many local and long distance telephone companies were designed
solely to carry low-fidelity audio signals with a high level of reliability.
Although these traditional telephone networks are very reliable for voice
communications, they are not well suited to service the explosive growth of
digital communication applications for the following reasons:
|
·
|
Until
recently, telephone companies have avoided the use of packet switched
networks for transmitting voice calls due to the potential for poor
sound
quality attributable to latency issues (delays) and lost packets
which can
prevent real-time transmission. Recent improvements in packet switch
technology, compression and broadband access technologies, as well
as
improved hardware and provisioning techniques, have significantly
improved
the quality and usability of packet-switched voice calls.
|
|
·
|
Packet-switched
networks have been built mainly for carrying non real-time data,
and the
advantages of such networks are their efficiency, flexibility, reliability
and scalability. Bandwidth is only consumed when needed, networks
can be
built in a variety of configurations to suit the number of users,
client/server application requirements and desired availability of
bandwidth and many terminals can share the same connection to the
network.
As a result, significantly more traffic can be transmitted over a
packet
switched network, such as a home network or the Internet, than a
circuit-switched telephony network. Packet switching technology allows
service providers to converge their traditionally separate voice
and data
networks and more efficiently utilize their networks by carrying
voice,
video, fax and data traffic over the same network. The improved efficiency
of packet switching technology creates network cost savings that
can be
passed on to the consumer in the form of lower telephony rates. The
exponential growth of the Internet in recent years has proven the
scalability and reliability of these underlying packet switched IP
based
networks. As broadband connectivity has become more available and
less
expensive, it is now possible for service providers like us to offer
voice
services that run over these IP networks to consumers and businesses
worldwide.
|
The
growth of the Internet in recent years has proven the scalability of these
underlying packet switched networks. As broadband connectivity, including cable
modem and digital subscriber line, or DSL, has become more available and less
expensive, it is now possible for service providers like us to offer voice
and
other services that run over these IP networks to businesses and residential
consumers. Providing such services has the potential to both substantially
lower
the cost of telephone service and equipment costs to these customers and to
increase the breadth of features available to our subscribers. Services like
full-motion, two-way video are now supported by the bandwidth spectrum commonly
available to broadband customers, whether business or residential.
As
the
wireless industry has shown, disruptive new technology with better product
and
service features has the effect of luring customers to regularly change
carriers. To minimize this risk of churn, carriers must continually expand
their
service offering in order to retain their existing customers. With the growing
acceptance of packet and VoIP telephony, the incumbent carriers are again faced
with a disruptive technology with a lower cost of service.
Human
Resource Team; VoIP Inc. Group
VoIP,
Inc. currently employs 80 persons in the following capacities: 7 officers,
18
general and administrative employees, and 55 technology personnel. We consider
our relations with our employees to be good. We have never had a work stoppage,
and none of our employees is represented by collective bargaining agreements.
We
believe that our future success will depend in part on our ability to attract,
integrate, retain and motivate highly qualified personnel, and upon the
continued service of our senior management and key technical personnel. None
of
our key personnel is bound by employment agreements that prohibit them from
ending their employment at any time. Competition for qualified personnel in
our
industry and geographical location is intense. We cannot assure you that we
will
be successful in attracting, integrating, retaining and motivating a sufficient
number of qualified employees to conduct our business in the future.
Legal
Proceedings
MCI
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. Discovery should commence shortly. The Company is currently
unable to determine what impact if any, this litigation will have on its
financial condition and results of operations.
Netrake
The
Company and its subsidiaries Caerus, Inc. and Volo Communications (“Volo”) are
involved in pending disputes with Netrake Communications (“Netrake”) arising
from an equipment purchase contract pursuant to which Volo agreed to purchase
approximately $2,000,000 worth in Netrake telephonic equipment and software.
The
Company has paid approximately $200,000 on the contract but has withheld
further
payments due to dissatisfaction with the performance of the equipment. In
arbitration pending in Dallas, Texas, Netrake has brought claim against the
Company and its subsidiaries for (1) breach of contract in the amount of
$1.8
million plus interest, (2) business disparagement, (3) misappropriation of
trade secrets, (4) tortuous interference with prospective business relations
and
(5) conversion. Netrake also seeks to recover its attorneys’ fees. Within this
same arbitration Volo and Caerus seek damages against Netrake for breach
of
contract and breach of warranty claiming that the Netrake product did not
perform in accordance with agreed upon specifications and
warranties.
Volo
and
Caerus have initiated litigation in Broward County, Florida claiming damages
and
recession against Netrake for alleged fraudulent misrepresentations, negligent
misrepresentations, violation of Florida’s Deceptive and Unfair Trade Practices
Act and seeking declaratory relief. Netrake claims all of these claims fall
within the arbitration clause of the equipment purchase contract.
The
Company is presently unable to determine what impact, if any, this arbitration
and litigation will have on its financial condition or results of operations.
Properties
Our
headquarters are in Fort Lauderdale, Florida. We have offices and facilities
in
a number of other locations. Following is a list of our offices and facilities,
all of which are leased, as of October 12, 2005.
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
|
Purpose
|
|
|
|
|
|
|
|
12330
SW 53rd Street, Suite 712 Ft.
Lauderdale, FL 33330
|
|
|
Principal
executive offices
|
|
|
3,200
|
|
$
|
39,648
|
|
|
|
|
|
|
|
|
|
|
|
|
151
S. Wymore Rd, Suite 3000
Altamonte
Springs, FL 32714
|
|
|
Network
operations center and offices
|
|
|
11,500
|
|
$
|
196,872
|
|
|
|
|
|
|
|
|
|
|
|
|
13101
56th Court N., Suite 813
Clearwater,
FL 33760
|
|
|
Fullfillment
center
|
|
|
4,500
|
|
$
|
35,304
|
|
|
|
|
|
|
|
|
|
|
|
|
14911
Quorum Dr., Suite 140
Dallas,
Texas 75254
|
|
|
Offices
|
|
|
6,250
|
|
$
|
54,000
|
|
|
|
|
|
|
|
|
|
|
|
|
17806
Pioneer Blvd, Suite 106
Artesia,
California 90701
|
|
|
Offices
|
|
|
1,000
|
|
$
|
41,000
|
|
Manufacturing
and Sources of Supply
Our
hardware products are manufactured by iCable System Co. Ltd. a South Korean
Company. iCableSystem provides offshore inventory and delivery services
worldwide and large scale orders are shipped directly from Korea to providers
at
any destination. iCableSystem has in-house PC board pressing, case design and
manufacturing, and board processing facilities, making them less susceptible
to
supply chain dropouts than other manufacturers.
The
primary chipset used in the CPE units is the Broadcom chipset, for which there
is an available supply path and rapid delivery periods. 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.
Equipment
for VoIP Solutions, Inc. which involve a "solution" delivery for a customer,
are
primarily software driven, and do not involve significant hardware resources
that are manufactured in-house.
Inventories
Our
hardware inventories are kept in a warehouse facility in Clearwater, Florida.
Our hardware inventory and supply methods provide adequate capacity for
most order volumes, but special orders or multi-thousand unit deliveries are
typically drop-shipped from Korea. All softswitch and "back office" solution
materials are also kept on-site for customer deployment, except in cases where
local purchase of equipment is less difficult or less costly than in-country
sourcing.
We
also maintain an inventory of prepaid calling cards
in a warehouse in Los Angeles, CA.
Intellectual
Property
We
have
developed several important intellectual property features. VoiceOne has
developed and the network provides a E911 solution to comply with the FCC's
recent order imposing E911 requirements on VoIP Service Providers. VoiceOne's
911 service is known as v-911. A key feature of the v-911 service is that it
can
route emergency calls for the customer whose location is constant as well as
the
customer who often moves the location of his VoIP device. Customers can update
their location information in real time, so that their v-911 call will be
delivered to the appropriate Public Safety Answering Point (PSAP) in the new
location. To further support the FCC 911 mandate, VoIP, Inc. has applied for
a
patent for its 911 compliant VoIP Multimedia Terminal Adaptor.
VoIP
Inc.
has developed Pathfinder as a "cascading provisioning server" feature for
deployment of zero-touch hardware deployment and is a new development that
is
exclusive to VoIP, Inc.'s platform. The system allows each device to
auto-provision without any customer interaction even in situations where there
are multiple levels of VAR or resellers to distribute the product to their
customers (to any number of resale levels.) This allows for installations
without any customer service or technical support time spent in configuration
issues.
Regulation
The
Company currently is a value added service provider. The hardware, integration
and softswitch portions of our business are expected to remain unthreatened
by
regulation in major nations in which the Company expects to do business. The
eGlobalphone service offering may potentially experience regulatory pressures
as
the United States makes changes in its telecommunications law to encompass
VoIP
services. The imposition of government regulation on our business could
adversely affect our operations by requiring additional expense to meet
compliance requirements.
|
1)
|
Regulation
is expected to be applied to the following areas of our service:
E911,
CALEA (law enforcement wiretap) and USF taxation.
|
|
a.
|
Our
existing E911 service addresses this concern already and we are working
with industry groups to also address E911 delivery via the network
when
that technology becomes mature and affordable. The combined delivery
methods should adequately protect the Company against negative regulatory
or economic pressure in the future.
|
|
b.
|
CALEA
data delivery is almost complete in the system for the basics of
call
status and PIN tapping. The additional steps of call monitoring and
call
splitting are yet to be even defined, though it is not anticipated
that
their deployment would require anything other than minor expense
for
adequate compliance with these laws, given current technology.
|
|
c.
|
USF
(Universal Service Fee) taxation has been explicitly not required
for data
services. The classification of VoIP as a value added data service
has
clearly indicated that it is outside of the USF charter.
|
|
2)
|
Comments
by the FCC staff have indicated that VoIP will be handled in a relatively
"hands-off" manner until the industry is more mature and capable
of
competing directly with RBOC and ILEC carriers. This is anticipated
to be
at least another two years.
|
|
3)
|
Even
with additional regulations and if they were to be applied, the costs
of
compliance would be significantly lower than those of traditional
telephony, as these regulatory structures are already being considered
and
compensated for in design aspects of the network.
|
|
4)
|
Our
primary focus on non-US customers should limit our exposure in
the United
States.
|
Federal
Regulation
The
Federal Communications Commission (FCC) regulates interstate and international
telecommunications services. The FCC imposes extensive regulations on common
carriers such as incumbent local exchange carriers ("ILECs") that have some
degree of market power. The FCC imposes less regulation on common carriers
without market power, such as Volo. The FCC permits these nondominant carriers
to provide domestic interstate services (including long-distance and access
services) without prior authorization; but it requires carriers to receive
an
authorization to construct and operate telecommunications facilities and to
provide or resell telecommunications services between the United States and
international points.. Under the Telecommunications Act of 1996 (the "1996
Act"), any entity, including cable television companies and electric and gas
utilities, may enter any telecommunications market, subject to reasonable state
regulation of safety, quality and consumer protection. Because implementation
of
the 1996 Act is subject to numerous federal and state policy rulemaking
proceedings and judicial review, there is still uncertainty as to what impact
it
will have on Volo. The 1996 Act is intended to increase competition. The 1996
Act opens the local services market by requiring ILECs to permit interconnection
to their networks and establishing ILEC obligations with respect to:
|
·
|
Reciprocal
Compensation. Requires all ILECs and CLECs to complete calls originated
by
competing carriers under reciprocal arrangements at prices based
on a
reasonable approximation of incremental cost or through mutual exchange
of
traffic without explicit payment.
|
|
·
|
Resale.
Requires all ILECs and CLECs to permit resale of their telecommunications
services without unreasonable restrictions or conditions. In addition,
ILECs are required to offer wholesale versions of all retail services
to
other telecommunications carriers for resale at discounted rates,
based on
the costs avoided by the ILEC in the wholesale offering.
|
|
·
|
Interconnection.
Requires all ILECs and CLECs to permit their competitors to interconnect
with their facilities. Requires all ILECs to permit interconnection
at any
technically feasible point within their networks, on nondiscriminatory
terms and at prices based on cost (which may include a reasonable
profit).
At the option of the carrier seeking interconnection, collocation
of the
requesting carrier's equipment in an ILEC's premises must be offered,
except where the ILEC can demonstrate space limitations or other
technical
impediments to collocation.
|
|
·
|
Unbundled
Access. Requires all ILECs to provide nondiscriminatory access to
specified unbundled network elements (including certain network
facilities, equipment, features, functions and capabilities) at any
technically feasible point within their networks, on nondiscriminatory
terms and at prices based on cost (which may include a reasonable
profit).
|
|
·
|
Number
Portability. Requires all ILECs and CLECs to permit, to the extent
technically feasible, users of telecommunications services to retain
existing telephone numbers without impairment of quality, reliability
or
convenience when switching from one telecommunications carrier to
another.
|
|
·
|
Dialing
Parity. Requires all ILECs and CLECs to provide "1+" equal access
to
competing providers of telephone exchange service and toll service,
and to
provide nondiscriminatory access to telephone numbers, operator services,
directory assistance, and directory listing, with no unreasonable
dialing
delays.
|
|
·
|
Access
to Rights-of-Way. Requires all ILECs and CLECs to permit competing
carriers access to poles, ducts, conduits and rights-of-way at regulated
prices.
|
The
FCC
has to date treated ISPs as "enhanced service providers," exempt from federal
and state regulations governing common carriers, including the obligation to
pay
access charges and contribute to the universal service fund. Nevertheless,
regulations governing disclosure of confidential communications, copyright,
excise tax, and other requirements may apply to the provision of Internet access
services.
The
FCC,
on March 10, 2004, adopted a Notice of Proposed Rulemaking, which will address
a
variety of issues concerning the regulatory treatment of VoIP telephony. At
the
same time, the FCC ruled on a petition which dealt with a VoIP service that
never used the PSTN, was offered free to members of the service, and did not
involve the transport of the calls. The FCC determined the service was not
a
telecommunications service under the Act. We cannot predict the outcome of
these
proceedings or other FCC or state proceedings that may affect our operations
or
impose additional requirements, regulations or charges upon our provision of
Internet access and related Internet Protocol-based telephony services.
The
FCC
and many state public utilities commissions have implemented rules to prevent
unauthorized changes in a customer's pre-subscribed local and long distance
carrier services (a practice commonly known as "slamming.") Pursuant to the
FCC's slamming rules, a carrier found to have slammed a customer is subject
to
substantial fines. In addition, the FCC's slamming rules allow state public
utilities commissions to elect to administer and enforce the FCC's slamming
rules. These slamming liability rules substantially increase a carrier's
possible liability for unauthorized carrier changes, and may substantially
increase a carrier's administrative costs in connection with alleged
unauthorized carrier changes. The Communications Assistance for Law Enforcement
Act (CALEA) provides rules to ensure that law enforcement agencies would be
able
to properly conduct authorized electronic surveillance of digital and wireless
telecommunication services.
CALEA
requires telecommunications carriers to modify their equipment, facilities,
and
services used to provide telecommunications services to ensure that they are
able to comply with authorized surveillance requirements. Our switches are
CALEA
compliant. The FCC is currently looking at whether VoIP and other Internet
enabled communications services should continue to be unregulated Internet
services. We cannot predict the outcome of such proceedings or that any
increased level of regulation resulting there from will not have a material
adverse affect on our business or operations.
State
Regulation
The
1996
Act is intended to increase competition in the telecommunications industry,
especially in the local exchange market. With respect to local services, ILECs
are required to allow interconnection to their networks and to provide unbundled
access to network facilities, as well as a number of other pro-competitive
measures. Because the implementation of the 1996 Act is subject to numerous
state rulemaking proceedings on these issues, it is currently difficult to
predict how quickly full competition for local se
Local
Regulation
Our
network is subject to numerous local regulations such as building codes and
licensing. Such regulations vary on a city-by-city, county- by-county and
state-by-state basis.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 Prospectus.
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.
Balance
Sheet Data:
|
|
September
30, 2005
|
|
December
31, 2004
|
|
December
31, 2003
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Goodwill
and other intangible assets
|
|
$
|
29,996,814
|
|
$
|
6,923,854
|
|
$
|
—
|
|
Total
assets
|
|
|
43,750,775
|
|
|
10,215,552
|
|
|
259,458
|
|
Notes
payable, current
|
|
|
7,240,444
|
|
|
760,000
|
|
|
151,166
|
|
Total
liabilities (all current)
|
|
|
19,124,380
|
|
|
2,108,114
|
|
|
151,166
|
|
Shareholders'
equity
|
|
|
23,849,830
|
|
|
8,107,438
|
|
|
108,292
|
|
Statement
of Operations Data:
|
|
Nine
Months Ended
|
|
Year
Ended
|
|
|
|
September
30,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
6,452,832
|
|
$
|
1,015,065
|
|
$
|
2,619,393
|
|
$
|
8,678
|
|
$
|
1,018
|
|
Loss
from continuing operations
|
|
|
(13,880,730
|
)
|
|
(4,080,185
|
)
|
|
(5,544,813
|
)
|
|
(101,434
|
)
|
|
—
|
|
Net
loss
|
|
|
(13,880,730
|
)
|
|
(4,080,185
|
)
|
|
(5,399,502
|
)
|
|
(352,968
|
)
|
|
(61,926
|
)
|
Net
loss per common share
|
|
|
(0.39
|
)
|
|
(0.31
|
)
|
|
(0.37
|
)
|
|
(0.20
|
)
|
|
(0.04
|
)
|
Financial Condition
and Results of Operations
Comparison
of Years Ended December 31, 2003 And 2002
The
Company commenced operations during the fourth quarter of 1998 and focused
significant resources through December 2003 in procuring and importing inventory
and developing sales and distribution channels. Accordingly, the Company
generated only minimal revenues and experienced cumulative losses of
approximately $624,647, which includes an inventory reserve of $251,534.
During
this start-up phase, the Company was dependent upon cash advances from
affiliates to provide working capital.
Comparison
of Years Ended December 31, 2004 And 2003
Operations
for the years ended December 31, 2004 and 2003 are not necessarily comparable,
as 2003 operations are not indicative of our current business model. During
2003
our business was the importing and selling of a line of fine teas. We have
since
discontinued the tea business to focus solely on VOIP and emerging technologies.
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
to
entry into the VOIP business and the acquisition of Voipamericas, Inc. and
DTNet
Technologies, Inc. in 2004.
Revenue
from the sale of tea in the 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.
We
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.
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.
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 nine months ended September 30, 2005 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
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, Broadwing
Communications, LLC, 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. Our combined
operating and third-party termination costs exceeded the revenues we
generated from the 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 approximately $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 financing
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 acquisition of the VOIP assets of WQN, Inc. which
was
completed on October 6, 2005.
Under
Statement of Financial Accounting Standards No. 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 financial condition.
Outlook
for Remainder of 2005
We
acquired the assets of WQN, Inc.'s VOIP business in October 2005. WQN reported
revenues, gross profit, and an operating loss of approximately $24.2 million,
$1.1 million, and $3.5 million, respectively, for the nine months ended
September 30, 2005. We
anticipate revenue growth during the fourth quarter of 2005 due to the addition
of WQN's VOIP business and customers. However, we also expect to report a net
loss and negative cash flows from operations for the year ended 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 business in 2004 we have never been profitable. We have experienced
negative cash flows from operations, and have been dependent on the issuances
of
debt and common stock in private transactions to support our operations and
continue our business.
At
September 30, 2005 our contractual obligations, including capital expenditures,
totaled approximately $11.5 million. Included in this amount was 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.
To
date our lender has not declared a default under this loan agreement.
In
January, 2006, we issued and sold $11.2 million principal amount of
convertible notes to accredited investors (at a 12.121% original issue discount)
in a private placement and received approximately $9.7 million in net proceeds.
The investors also received five-year warrants to purchase a total of 4,254,297
shares at a price of $1.46 per share, and one-year warrants to purchase
4,254,297 shares at a price of $1.59 per share.
Of
the
convertible notes approximately $7.6 million is secured by a subordinated lien
on our assets, and all of these notes bear interest at 8%, are payable over
two
years beginning 90 to 180 days after closing in cash or, at our option, in
our
registered common stock at the lesser of $1.40 per share or 85% of the weighted
average price of the stock on the OTCBB for the 15 day period prior to the
payment due date. The holders may at their election convert all or part of
the notes into shares of common stock at the conversion rate of $1.32 per share.
We have agreed to file a registration statement covering the resale of all
shares of common stock that may be issuable upon payment or conversion of these
notes, or exercise of the accompanying warrants.
We
anticipate that we will continue to report net losses and 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
had
outstanding commitments to purchase capital equipment of approximately $2.0
million at September 30, 2005.
Payments
Due by Period
The
following table illustrates our outstanding debt and the terms of that debt
as
of September 30, 2005:
|
|
|
|
|
|
|
|
|
|
Contractual
Obligations
|
|
Total
|
|
|
|
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
|
|
$
|
—
|
|
Critical
Accounting Policies and Estimates
We
have
identified the policies and significant estimation processes below as critical
to our business operations and the understanding of our results of operations.
This listing is not intended to be a comprehensive list. In many cases, the
accounting treatment of a particular transaction is specifically dictated
by
accounting principles generally accepted in the United States, with no need
for
management’s judgment in their application. In other cases, management is
required to exercise judgment in the application of accounting principles
with
respect to particular transactions. The impact and any associated risks related
to these policies on our business operations is discussed throughout
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” where such policies affect reported and expected financial results.
For a detailed discussion on the application of these and other accounting
policies, see Note B in the Notes to Consolidated Financial Statements for
the
year ended December 31, 2004, included in this Form S-1. Our preparation
of our
consolidated financial statements requires us to make estimates and assumptions
that affect the reported amount of assets and liabilities, disclosure of
contingent assets and liabilities at the date of our consolidated financial
statements, and the reported amounts of revenue and expenses during the
reporting periods. Management bases its estimates on historical experience
and
on various other assumptions that are believed to be reasonable under the
circumstances. There can be no assurance that actual results will not differ
from those estimates and such differences could be significant.
Revenue
recognition
- Our
revenue is primarily derived from fees charged to terminate voice services
over
our network, and from monthly recurring charges associated with Internet
and
from sales of hardware product.
Variable
revenue is earned based on the number of minutes during a call and is recognized
upon completion of a call. Revenue for each customer is calculated from
information received through the Company’s network switches. The Company tracks
the information received from the switch and analyzes the call detail records
and applies the respective revenue rate for each call.
Fixed
revenue is earned from monthly recurring services provided to customers that
are
fixed and recurring in nature, and are connected for a specified period of
time.
Revenue recognition commences after the provisioning, testing, and acceptance
of
the service by the customer. Revenues are recognized as the services are
provided and continue until the expiration of the contract or until cancellation
of the service by the customer.
Revenue
from hardware product sales is recognized when persuasive evidence of an
arrangement exists, delivery to the customer has occurred, the sales price
is
fixed and determinable, and collectibility of the related receivable is
considered probable.
Accounts
Receivable
-
Accounts receivable are stated at the amount management expects to collect
from
outstanding balances. Management provides for probable uncollectible amounts
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.
Goodwill
- In
accordance with Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets," the Company tests its goodwill and
intangible assets for impairment at least annually by comparing the fair
values
of these assets to their carrying values, and the Company 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 the consolidated statement of operations
as an operating expense.
Recently
Issued Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123 (revised 2004) (“123R”), “Share-Based Payment”. Statement 123(R) will
provide investors and other users of financial statements with more complete
and
neutral financial information by requiring that the compensation cost relating
to share based payment transactions be recognized in financial statements.
That
cost will be measured based on the fair value of the equity or liability
instruments issued. SFAS No. 123(R) covers a wide range of share-based
compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights and employee share purchase
plans. SFAS No. 123(R) replaces SFAS No. 123, “Accounting for Stock Based
Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued
to Employees”. SFAS No. 123, as originally issued in 1995, established as
preferable a fair-value-based method of accounting for share-based payment
transactions with employees. However, that Statement permitted entities the
option of continuing to apply the guidance in APB Opinion No. 25, as long
as the
footnotes to financial statements disclosed what net income would have been
had
the preferable fair-value based method been used. Public entities (other
than
those filing as small business issuers) will be required to apply SFAS No.
123(R) as of the first interim or annual reporting period that begins after
June
15, 2005. We are in the process of evaluating whether the adoption of SFAS
No.
123(R) will have a significant impact on our overall results of operations
or
financial position.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an Amendment of
ARB No. 43,” Chapter 4 (“SFAS No. 151”). The amendments made by SFAS No. 151
clarify that abnormal amounts of idle facility expense, freight, handling
costs,
and wasted materials (spoilage) should be recognized as current-period charges
and require the allocation of fixed production overheads to inventory based
on
the normal capacity of the production facilities. SFAS No. 151 will become
effective beginning in fiscal 2006. The adoption of this Statement will not
have
a significant impact on our financial condition or results of
operations.
In
December 2004, the FASB issued SFAS No. 152, Accounting for Real Estate
Time-Sharing Transactions - an amendment to SFAS No. 66 and 67”. This Statement
amends SFAS No. 66, “Accou8nting for Sales of Real Estate” to reference the
financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in the Statement of Position (“SOP”) No. 04-02.
This Statement also amends SFAS No. 67, “Accounting for Costs and Initial Rental
Operations of Real Estate Projects” to state that the guidance for (a)
incidental operations and (b) costs incurred to sell real estate projects
does
not apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance of SOP No. 04-02. This Statement
is effective for financial statement s for fiscal years beginning after June
15,
2005 with earlier application encouraged. The adoption of SFAS No. 152 will
not
have a material impact on our overall results of operations or financial
position.
In
December 2004, the FASB issued SFAS No. 153, “Exchange of Nonmonetary Assets” an
amendment of APB Opinion No. 29, “Accounting for Nonmonetary Transactions”. The
amendments made by SFAS No. 153 are based on the principle that exchanges
on
monetary assets should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with a
broker
exception for exchanges of nonmonetary assets that do not have commercial
substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. Earlier application is
permitted for nonmonetary asset exchanges occurring in fiscal periods after
the
date of issuance. The provisions of SFAS No. 153 shall be applied prospectively.
We are in the process of evaluating whether the adoption of SFAS No. 153
will
have significant impact on our overall results of operations or financial
position.
In
January 2003, the FASB issued FSAB Interpretation No. (“FIN”) 46, “Consolidation
of Variable Interest Entities” (“FIN 46”). In December 2003, FIN 46 was replaced
by FASB interpretation No. 46(R) “Consolidation of Variable Interest Entities”.
FIN 46(R) clarifies the application of Accounting Research Bulletin No. 51,
“Consolidated Financial Statements,” to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN
46(R)
requires an enterprise to consolidate a variable interest entity if that
enterprise will absorb a majority of the entity’s expected losses, is entitled
to receive a majority of the entity’s expected residual returns, or both. FIN
46(R) is effective for entities being evaluated under FIN 46(R) for
consolidation no later than the end of the first reporting period that ends
after March 15, 2004. We do not believe the adoption of FIN 46(R) will have
a
material impact on our financial position or results of operations, as we
do
consolidate our joint ventures as required by this FIN.
Inflation
We
do not
believe inflation has a significant effect on our operations at this
time.
Quantitative
and Qualitative Disclosures about Market Risk
We
are
exposed to certain market risks that are inherent in our financial instruments.
These instruments arise from transactions in the normal course of
business.
At
September 30, 2005, our cash balances were held primarily in the form of
checking accounts and overnight deposits in a major financial institution.
Due
to the short-term nature of these accounts we believe that we are not subject
to
any material interest or market risks on these balances.
Our
debt
is at fixed interest rates. Consequently we currently believe that our interest
rate risk is low.
We
do not
conduct business in currencies other than the United States dollar.
MANAGEMENT
Directors,
Prospective Directors, Executive Officers and Control Persons
The
following table sets forth information concerning our executive officers and
directors as of the periods set forth below:
Name
|
|
Age
|
|
Position
with Company
|
|
Dates
|
B.
Michael Adler
|
|
58
|
|
Chief
Executive Officer and Chairman;
|
|
October
2005 to present
|
|
|
|
|
Prospective
Director
|
|
|
Hal
H. Bibee, Sr.
|
|
53
|
|
President
|
|
November
2005 to present
|
Shawn
M. Lewis
|
|
38
|
|
Chief
Technology Officer
|
|
May
2005 to present
|
David
W. Sasnett
|
|
49
|
|
Chief
Financial Officer
|
|
October
2005 to present
|
Osvaldo
Pitters
|
|
47
|
|
Senior
Vice President -Finance;
|
|
May
2004 to present
|
|
|
|
|
Former
Chief Financial Officer
|
|
|
George
Firestone
|
|
73
|
|
Director
|
|
November
2005 to present
|
Stuart
Kosh
|
|
49
|
|
Director
|
|
February
2006 to present
|
Steven
Ivester
|
|
41
|
|
Former
Chairman and Director; Former Chief
|
|
March
2004 to present
|
|
|
|
|
Executive
Officer; Consultant
|
|
|
Nicholas
A. Iannuzzi, Jr.
|
|
40
|
|
Prospective
Director
|
|
|
Thomas
Reeves
|
|
58
|
|
Prospective
Director
|
|
|
Chris
Rhoades
|
|
40
|
|
Prospective
Director
|
|
|
John
N. Spencer, Jr.
|
|
65
|
|
Prospective
Director
|
|
|
B.
Michael Adler
became
our Chief Executive Officer in October 2005. Mr. Adler is the founder of WQN,
Inc., has been a member of its board of directors since its inception in 1996,
and served as its Chief Executive Officer from 1996 to 2001. Mr. Adler is the
Chief Executive Officer of Eagle Venture Capital, LLC, a Delaware limited
liability company, formerly known as WorldQuest Networks, LLC, and a former
Director of Intellicall, Inc., a publicly-traded manufacturer of pay phones
and
call processing equipment (New York Stock Exchange symbol “ICL”). Mr. Adler
founded Intellicall in 1984 and served as Chairman or Vice Chairman of the
Board
from its inception until November 1993. From 1994 to July 1999, Mr. Adler was
the Chairman of the Board of The Payphone Company Limited, a company that owns
a
wireless pay telephone network in Sri Lanka. Mr. Adler is a nominee for election
to our Board at our upcoming shareholders meeting scheduled for March
2006.
Hal
H. Bibee, Sr.
is an entrepreneur and corporate financial consultant. He is a Certified Public
Accountant (inactive), formerly with Ernst & Ernst. In 1984 he co-founded
MetroTel, which at that time was the largest private pay telephone company
in
New York City, and served as its Chief Executive Officer through 1985. Mr.
Bibee
was a founding shareholder of the First Bank of East Tennessee and served on
its
Board of Directors from 1988 to 1997. As an entrepreneur in the
telecommunications industry, Mr. Bibee has engineered, constructed and operated
cable television systems throughout the Southeast. As a Board member,
stockholder and consultant for Mega Force Staffing Services, Inc. from
1995-1997, Mr. Bibee was in charge of all mergers & acquisitions and
investment banking activities. In 1998, he founded FiberLink, LLC, and in 2000,
INTELLICAD, LLC. These firms provide consulting, engineering and construction
services to the telecommunications industry. He is a General Partner in ASETZ,
a
diversified real estate investment and development company, and a General
Partner in Parkway Properties, a self storage development and operating company.
From 2004 to the present, he has served on the Board of Directors, and as the
Audit Committee Chairman, of WQN, Inc., a publicly-held telecom company that
offered voice over internet protocol services to domestic and international
markets until it sold the assets for that business to our Company in October
2005.
Shawn
M. Lewis
oversees all of our technological and engineering activities. Mr. Lewis
founded and was the President and CEO of Caerus, Inc. and its three
subsidiaries, Volo Communications, Caerus Networks, Inc., and Caerus Billing
& Mediation, Inc. from 2001 to 2005. We acquired Caerus, Inc. in May 2005 at
which time Mr. Lewis became our Chief Technology Officer. Prior to Caerus Mr.
Lewis co-founded XCOM Technologies, a competitive local exchange carrier, where
he served in an executive capacity and led the development of patents for the
first softswitch and SS7 Media Gateway. XCOM Technologies was sold to Level
3 in
1998. His next venture, set-top box vendor River Delta, was sold to Motorola.
His most recent venture, Caerus, Inc. empowers carriers and service providers
to
begin selling advanced voice over internet protocol related services. In 2004,
Mr. Lewis plead guilty to a felony drug possession offense and received
probation. Mr. Lewis is presently engaged in a Chapter 11 bankruptcy in
Orlando, Florida.
David
W. Sasnett
has more than 25 years of experience in providing management, accounting and
advisory services to a wide variety of companies, both public and private.
Immediately prior to joining our company Mr. Sasnett was a consultant with
Corevision Strategies, LLC, a financial and management services consulting
firm.
During 2004 Mr. Sasnett held the positions of Vice President of Finance and
Controller of Mastec, Inc., a publicly-traded specialty contractor engaged
in
the design, construction, installation, maintenance and upgrade of
infrastructures for companies and government entities operating in the
telecommunication, broadband, energy services, traffic control and homeland
security services industries. In 2003 Mr. Sasnett founded, and continues to
be
the President of, Secure Enterprises, LLC, a successful consumer product
manufacturer and distributor and in 2002 he was an Executive Vice President
with
Platinum Products, Inc., a privately-held importer and distributor of consumer
products. Mr. Sasnett was employed from 1994 to 2002 by Catalina
Lighting, Inc., a global, publicly-traded manufacturer and distributor of
residential lighting and other consumer products. From 1996 to 2002 he served
as
Catalina’s Chief Financial Officer. Mr. Sasnett’s prior experience also includes
more than 12 years with the audit department of the international accounting
and
consulting firm of Deloitte & Touche, LLP.
Osvaldo
Pitters
has a successful track record and progressive working experience managing
finance, administration, accounting and auditing functions in the US, England,
UK and Latin America. Mr. Pitters worked 10 years with
PriceWaterhouseCoopers in the Audit Department in Latin America and in England,
UK. Mr. Pitters also worked 7 years with Pepsi Cola International in the
Finance Area in several countries within the Latin American region. He also
worked for two years as Deputy General Manager of Banco Republica in Lima,
Peru.
Before joining us, from January 2003 to April 2004, Mr. Pitters was the
Controller of the Cima Telecom Group in Miami, Florida. He is a 1983 graduate
of
the Santiago University, Chile and a 1985 post graduate of the Cambridge
University, UK. Mr. Pitters was our Chief Financial Officer until October 2005
and since that time has been our Senior Vice President of Finance.
George
Firestone
was elected Florida’s 20th
Secretary of State in 1978 and was re-elected for two additional terms.
Previously, he served as a member of the House of Representatives and as a
member of the Florida Senate. During this legislative tenure, he was responsible
for the passage of laws permitting international banking and foreign trade
zones. Senator Firestone currently serves as the State of Florida’s “Special
Envoy” to the Foreign Consular Corp of Florida. He has a long history of valued
legislative service, including serving as a member of the Florida Cabinet,
the
State’s Chief Elections Officer, and Chief Cultural Officer.
For
the
past five years Senator Firestone has been the Chairman and CEO of Tecton
International, Inc., a financial and operations management company specializing
in the management and workout of non-performing businesses and distressed real
estate. Senator Firestone is a vice president, general manager and stockholder
of Gray Security Service, which provides security investigations of commercial
and industrial matters. He serves on the board of Eastern National Bank of
Miami. His long public service support includes serving as chairman of the
City
of Miami Economic Advisory Board; member of the Dade County Personnel Advisory
Board; and receiver and trustee of the U.S. Bankruptcy Court. Senator Firestone
is a licensed real estate broker and developer, and insurance broker
specializing in the field of estate planning and business insurance for
individuals and corporations.
Stuart
Kosh
moved to Florida in 1978 to join his father and brother at Kosh Ophthalmic,
Inc., a wholesale optical laboratory with annual sales of $15 million, where
he
managed 100 employees. In 1998, the company was sold to Essilor of America,
and
Mr. Kosh maintains his position as General Manager. His leadership roles
have included involvement with the Big Brothers Big Sisters Program of Broward
County as a mentor to needy youth. For the past 15 years, Mr. Kosh has been
involved with the National Multiple Sclerosis Society. He has served on their
board and chairs their annual golf tournament which raises over $50,000.
Presently he is serving on the Temple Dor Dorim Board of Directors. Mr. Kosh
was
appointed a Director of our company in February 2006.
Steven
Ivester
has been a successful technology inventor and entrepreneur since 1982. In 1985
he established a chain of automotive service centers, All State Auto Centers
(Founder & President) and sold the business in 1991. He subsequently
established, expanded and sold a chain of computer stores known as 21st Century
Computers. In 1997, Mr. Ivester became President and Chief Executive
Officer of Navigator, PC, which invented a series of rugged waterproof military
grade navigational computer and display systems. From 2001 to 2004, he consulted
for Voice over IP companies and was responsible for the specification and
development of IP desktop telephone devices, Multimedia Terminal Adaptors,
and
portable WiFi phones in addition to sourcing, negotiation and quality assurance.
In early 2004, Mr. Ivester founded VoIP, Inc. Mr. Ivester resigned as
our Chief Executive Officer in October 2005 and resigned from his position
on
our board in December 2005. He presently serves as a consultant to the Company
pursuant to a three year consulting agreement that began in October 2005.
The
following individuals are nominees for election as a Director at our
shareholders meeting to be held in March 2006:
Nicholas
A. Iannuzzi,
Jr.,
age
40, is a partner in the law firm of Rothenberg, Estner, Orsi, Arone and
Grumbach, LLP of Wellesley, Massachusetts, where he has worked since 2002.
From
1997-2002 Mr. Iannuzzi maintained his own law practice in Boston, Massachusetts.
Mr. Iannuzzi specializes in the areas of corporate and contract law, civil
litigation and real estate. He serves as general counsel to numerous
corporations and has advised his clients on various business matters and
transactions, including major acquisitions and sales of businesses. Mr. Iannuzzi
is a graduate of Boston College and received his J.D. from the Suffolk
University Law School.
Thomas
Reeves,
age 58, has a broad professional career that began with Shaklee Corporation,
initially as Contract Manufacturing Manager and later as Director of Purchasing.
In 1980 he accepted a Vice President position with Nutrition Pak Corporation.
From 1984 to 1992 Mr. Reeves was President of Torick Inc. an electrical
wire harness manufacturer. In 1992 he started Transportation Safety Technologies
where he was President and Chief Executive Officer. From 2000 to present he
has
been President of TRJB Inc. a holding company for various companies in the
hospitality industry. Mr. Reeves has been actively involved in supporting
the American Cancer Society and is a committee member of the Cystic Fibrosis
Foundation. He holds a BS in Business Administration from California State
University.
Chris
Rhoades,
age
40, has three years management consulting experience and was employed for 11
years (from 1992 to 2003) by the investment banking firm of Merrill Lynch.
Since
2004 he has been the Chief Executive Officer and owner of Rhoades Building
Products, Inc. Over the last three years Mr. Rhoades has also focused on capital
allocation and has invested in several companies in the voice over internet
protocol marketplace and in commercial real estate developments.
Mr.
Rhoades was involved in hundreds of debt and equity financings for both
U.S. and European companies while working at Merrill Lynch’s New York and San
Francisco offices. He served in a crucial advisory capacity to mutual and hedge
funds, evaluating on their behalf the strategy, fundamentals, valuation, and
capital structure of numerous companies. Mr. Rhoades analyzed research
specific to the telecom industry, and wrote research analysis in the mid-90's
specific to the growth of the mobile telephone industry. In 2005 Mr. Rhoades
was appointed by the Governor of Maine to a task force established to
research economic stimulus ideas for the state. Mr. Rhoades is a graduate
of the University of California at Berkeley and went on to receive his MBA
from
Northwestern University's Kellogg Graduate School of Management.
John
N. Spencer,
Jr., age
65, served a broad range of clients for more than 38 years while at Ernst &
Young. He began his Ernst & Young career in Boston in 1962 and worked in the
Firm’s National office in New York assisting with the development of
professional policies and in resolving client matters nationwide in the audit,
accounting and SEC areas. Mr. Spencer served as the Managing Partner of
E&Y’s Providence, Rhode Island office before transferring to Atlanta in
1981. Most recently he was the Market Segment Team Leader for Ernst &
Young’s Life Sciences industry practice in the Southeast. He retired from Ernst
& Young in 2000.
Mr.
Spencer has significant expertise in coordinating services to publicly held
companies, including involvement in more than 200 registration statements and
over 25 initial public offerings. He provided audit and financial related
services for over 100 merger and acquisition transactions and has significant
experience with numerous Boards and Audit Committees. Active in Georgia’s
technology community, he served as president and a director of the Business
and
Technology Alliance. He was a cofounder and is treasurer of the Atlanta Venture
Forum, an association of venture capital investors in the Southeast, and he
recently completed two years as the President of the Georgia Biomedical
Partnership. Mr. Spencer is a member of the National Association of Corporate
Directors, and he serves as a member of the Board of Directors of: A C
Therapeutics, Inc.; GeneEx, Inc.; and OrthoHelix Surgical Designs, Inc. He
also
serves on the Board of Directors of Firstwave Technologies, Inc. (NASDAQ -
FSTW)
and is the Chair of its Audit Committee. In addition, Mr. Spencer is a Director
of BioFlorida and of the Georgia Biomedical Partnership.
Board
of Directors and Committee Meetings; Committees of the
Board
During
the fiscal year ended December 31, 2004 and through October 2005 Mr. Steven
Ivester was the sole director of our Company, consequently, formal board
and
committee meetings were not held during that time. One formal meeting of
the
board of directors was held in December 2005. Senator George Firestone was
appointed as a director of our Company in November 2005. Mr. Ivester resigned
his position as a Director in December 2005 and Mr. Stuart Kosh was appointed
to
our Board in February 2006.
Because
Mr. Ivester had been the only director of the Company, he performed the
functions of the audit committee, Mr. Ivester was not an “audit committee
financial expert,” as defined by the SEC. Upon elections of the nominees for
director at our upcoming shareholders’ meeting in March 2006, the Company plans
to establish an audit committee of independent directors. The audit committee
will operate pursuant to a written charter.
During
the fiscal years ended December 31, 2004 and 2005, the Company did not have
a
standing compensation or nominating committee. Upon election of the nominees
for
director, the Company plans to establish a compensation committee consisting
of
two or more independent directors. The compensation committee will operate
pursuant to a written charter.
Executive
Compensation
The
following table sets forth information with respect to the compensation, for
the
last three fiscal years, of our Chief Executive Officer and each person who
served as an executive officer of our Company for the last three fiscal years
and whose total annual salary and bonus exceeded $100,000. In accordance with
the rules of the SEC, the compensation set forth in the table below does not,
unless otherwise noted, include medical, group life or other benefits that
are
available to all of our salaried employees, and perquisites and other personal
benefits, securities or property that do not exceed the lesser of $50,000 or
10%
of the total annual salary and bonuses for each of the individuals shown in
the
table.
Summary
Compensation Table
|
|
|
|
|
|
|
|
|
|
|
Annual
Compensation
|
|
|
|
|
Name/Principal
Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven
Ivester (1)
|
|
|
2005
|
|
$ |
231,722
|
|
$ |
250,000
|
|
|
0
|
|
$ |
33,563
|
|
Former
Chief Executive Officer
|
|
|
2004
|
|
|
125,000
|
|
|
—
|
|
|
0
|
|
|
2,475
|
|
|
|
|
2003
|
|
|
—
|
|
|
—
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill
Burbank (2)
|
|
|
2005
|
|
|
146,156
|
|
|
1,923
|
|
|
0
|
|
|
0
|
|
Former
Chief Operating Officer
|
|
|
2004
|
|
|
2,116
|
|
|
—
|
|
|
0
|
|
|
0
|
|
|
|
|
2003
|
|
|
|
|
|
—
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Osvaldo
Pitters
|
|
|
2005
|
|
|
100,000
|
|
|
1,923
|
|
|
0
|
|
|
0
|
|
Former
Chief Financial Officer;
|
|
|
2004
|
|
|
50,000
|
|
|
—
|
|
|
0
|
|
|
0
|
|
Senior
Vice President of Finance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
—
|
|
|
—
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B.
Michael Adler
|
|
|
2005
|
|
|
48,739
|
|
|
2,769
|
|
|
0
|
|
|
0
|
|
Chairman;
Chief Executive Officer
|
|
|
2004
|
|
|
—
|
|
|
—
|
|
|
0
|
|
|
0
|
|
|
|
|
2003
|
|
|
—
|
|
|
—
|
|
|
0
|
|
|
0
|
|
|
(1)
|
Mr. Ivester
resigned his position as CEO in October 2005 and his position as
Director
in December 2005. His 2005 salary as reflected above includes $88,462
that
is accrued but unpaid as of February 10,
2006
|
|
(2) |
Mr.
Burbank resigned his position in January
2006.
|
Stock
Options
|
|
|
Stock
Options
|
|
Number
of Securities
Underlaying
Unexercised
Options
at December 31, 2005
|
|
|
Value
of Unexercised In-the-
Money
Options at
December
31, 2005
|
|
Name
|
|
|
|
|
Realized
Value
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
B.
Michael Adler
|
|
|
|
|
|
|
125,000
|
|
|
375,000
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill
Burbank
|
|
|
|
|
|
|
250,000
|
|
|
250,000
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Osvaldo
Pitters
|
|
|
|
|
|
|
250,000
|
|
|
250,000
|
|
$
|
52,500
|
|
$
|
52,500
|
|
Long-Term
Incentive Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Future Payment under Non- Stock Price-Based Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares, Under
or Other
|
|
Performance
or Other
PeriodUntilMaturation
or
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Name
|
|
Rights
|
|
Payout
|
|
($
or #)
|
|
($
or #)
|
|
($
or #)
|
|
(None)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Option Plans
The
Company's current Stock Option Plan (the "2004 Option Plan") provides for
the
grant to eligible employees and directors of options for the purchase of
common
stock. The 2004 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 2004 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.
The
Board
of Directors administers and interprets the2004 Option Plan and is authorized
to
grant options there under to all eligible employees of the Company, including
officers. The Board of Directors designates the optionees, the number of
shares
subject to the options and the terms and conditions of each option. Each
option
granted under the 2004 Option Plan must be exercised, if at all, during a
period
established in the grant which may not exceed 10 years from the later of
the
date of grant or the date first exercisable. An optionee may not transfer
or
assign any option granted and may not exercise any options after a specified
period subsequent to the termination of the optionee's employment with the
Company.
On
December 7, 2005, our Board of Directors approved, subject to shareholder
approval, the Company’s 2006 Equity Incentive Plan (the “2006 Plan”). The 2006
Plan provides that key employees, consultants and non-employee directors
of the
Company or an affiliate may be granted: (1) options to acquire shares of
the
Company’s common stock, (2) shares of restricted common stock, (3) stock
appreciation rights, (4) performance-based awards, (5) “Dividend Equivalents”,
and (6) other stock-based awards. We are seeking shareholder approval at
our
March 2006 shareholders’ meeting for the future issuance of options under the
2006 Plan to allow its participants to acquire up to 10,000,000 shares of
our
common stock.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Our
Company was organized by Kevin Halter and members of his family in 1998,
when
they purchased 1,000,000 shares at its par value. Then in March 2004, the
Company sold 12,500,000 shares of stock to Steven Ivester for par value
($12,500), plus his agreement to contribute two operating companies. Such
companies were contributed in May 2004, effective April 15, 2004.
In
October 2005, we purchased all of the assets of WQN, Inc. Mr. Adler was the
Chief Executive Officer of WQN, Inc. and owns approximately 39% of WQN’s
outstanding common stock. In connection with the transaction, our Company,
through an acquisition subsidiary, purchased the assets for a purchase price
consisting of (1) a convertible promissory note, in the principal amount
of
$3,700,000 (the “Note”), (2) 1,250,000 shares of restricted common stock and (3)
a warrant to purchase 5,000,000 shares of common stock. The aggregate
outstanding principal amount of the Note, together with interest, is convertible
into either shares of preferred stock or shares of common stock. The Note,
in
the principal amount of $3,700,000, will accrue interest at the rate of 6%
per
annum. In addition, we issued WQN, Inc. an additional 500,000 shares of
restricted common stock relating to the difference between the amount of
accounts receivable and the accounts payable transferred in the transaction.
At
December 31, 2004 we owed a shareholder $560,000 under a note payable bearing
interest at 3.75% and maturing December 31, 2005. The Company owed Steven
Ivester $1,000,000 as of December 31, 2005 under a note payable bearing interest
at 3.75% and maturing December 31, 2005. The loan to Mr. Ivester was repaid
by
the Company in January 2006.
We
entered into a consulting agreement with Mr. Ivester on October 18, 2005.
Pursuant to the consulting agreement, Mr. Ivester will provide general
business strategy, financing and product development advice. Mr. Ivester
will receive $200,000 per year for his services under the consulting agreement,
as well as a $2,500 per month vehicle allowance. Mr. Ivester will be
eligible to receive bonuses, as determined by the Board of Directors.
Mr. Ivester will be eligible for participation in the Company’s 2006 Stock
Option Plan, as determined by the Board of Directors. Mr. Ivester is
entitled to severance payments under the consulting agreement if the consulting
agreement is terminated under certain circumstances.
Promoters
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
May 25, 2004 (but effective for all purposes as of April 15, 2004),
the Company completed the acquisition of two Florida-based subsidiaries,
eGlobalphone, Inc. and VoIP Solutions, Inc., both Florida Corporations.
On
August 4, 2004, the Company issued warrants to purchase 2,200,000 shares of
common stock for an exercise price of $1.00 per share to each of John Todd
and
Clive Raines. Mr. Todd's warrants were exchanged for 750,000 shares in a
net cashless exercise in February 2005.
Messrs.
Ivester, Todd and Raines may be considered to be “promoters” of the Company.
General
The
following summary is qualified in its entirety by reference to the Company's
Articles of Incorporation and its By-Laws. The Company's authorized capital
stock consists of 100,000,000 shares of common stock, $.001 par value per
share.
As discussed below, we are proposing to amend and restate our Articles of
Incorporation at our upcoming March 2006 shareholders’ meeting to increase the
number of authorized shares of common stock and to authorize the issuance
of
preferred stock.
Common
Stock
As
of
February 3, 2006, 67,432,891common shares of the Company's common stock are
held
of record by approximately 489 persons. Each share of common stock entitles
the holder of record thereof to cast one vote on all matters acted upon at
the
Company's shareholder meetings. Directors are elected by a plurality vote.
Because holders of common stock do not have the cumulative voting rights,
holders or a single holder of more than 50% of the outstanding shares of
common
stock present and voting at an annual meeting at which a quorum is present
can
elect all of the Company's directors. Holders of common stock have no preemptive
rights and have no right to convert their common stock into any other
securities. All of the outstanding shares of common stock are fully paid
and
non-assessable.
Holders
of common stock are entitled to receive ratably such dividends, if any as
may be
declared from time to time by the Board of Directors in its sole discretion
from
funds legally available therefore. In the event the Company is liquidated,
dissolved or wound up, holders of common stock are entitled to share ratably
in
the assets remaining after liabilities and all accrued and unpaid cash dividends
are paid.
On
December 7, 2005, our board of directors unanimously approved and recommended
for adoption by the shareholders at our upcoming shareholders’ meeting in March,
2006 the Amended and Restated Articles of Incorporation (the “Amended and
Restated Articles”). The Amended and Restated Articles would provide for the
issuance of 250,000,000 shares of common stock and would authorize 25,000,000
shares of preferred stock. The board of directors would have the authority
to
issue classes or series of preferred stock in the future having such
designations, rights, preferences and relative participating, option or other
special rights of the shares of each such class or series, including such
things
as voting rights, dividend rights, conversion rights, redemption rights,
and
other restrictions and features.
The
Company's transfer agent is Securities Transfer Corporation, Frisco, Texas.
The
following table sets forth information as of February 3, 2006, except as
otherwise noted, with respect to the beneficial ownership of our common
stock:
· each
person known by the Company to own beneficially more than five percent of
our
outstanding common stock;
· each
director and prospective director of the Company;
· the
Company’s Chief Executive Officer and each person who serves as an executive
officer of the Company; and
· all
executive officers and directors of the Company as a group.
The
number of shares beneficially owned by each stockholder is determined under
rules promulgated by the SEC. The information is not necessarily indicative
of
beneficial ownership for any other purpose. Under these rules, beneficial
ownership includes any shares as to which the individual has sole or shared
voting power or investment power and any shares as to which the individual
has
the right to acquire beneficial ownership within 60 days, except as otherwise
noted, through the exercise or conversion of any stock option, warrant,
preferred stock or other right. The inclusion in the following table of those
shares, however, does not constitute an admission that the named stockholder
is
a direct or indirect beneficial owner of those shares. Unless otherwise
indicated, to our knowledge based upon information produced by the persons
and
entities named in the table, each person or entity named in the table has
sole
voting power and investment power, or shares voting and/or investment power
with
his or her spouse, with respect to all shares of capital stock listed as
owned
by that person or entity.
Name
of Beneficial Owner
|
|
Shares
of Common Stock Beneficially Owned
|
|
Ownership
of Common Stock (11)
|
|
|
|
|
|
|
|
YTMJ,
LLC
5600
PGA Boulevard, Suite 204
Palm
Beach Gardens, FL 33412
|
|
|
5,950,615
|
|
|
8.8
|
%
|
WQN,
Inc. (1)
14911
Quorum Drive, Suite 140
Dallas,
Texas 75240
|
|
|
10,236,995
|
|
|
14.4
|
%
|
Steven
Ivester
|
|
|
6,025,000
|
|
|
8.9
|
%
|
Shawn
M. Lewis
|
|
|
5,446,231
|
|
|
8.1
|
%
|
B.
Michael Adler (2)
|
|
|
1,125,000
|
|
|
1.7
|
%
|
Hal
Bibee, Sr (3)
|
|
|
1,687,500
|
|
|
2.5
|
%
|
David
W. Sasnett (4)
|
|
|
450,000
|
|
|
*
|
|
Osvaldo
Pitters (5)
|
|
|
350,000
|
|
|
*
|
|
George
Firestone (6)
|
|
|
16,666
|
|
|
*
|
|
Nicholas
A. Iannuzzi, Jr.
|
|
|
75,000
|
|
|
*
|
|
Stuart
Kosh (7)
|
|
|
1,284,477
|
|
|
1.9
|
%
|
Chris
Rhoades (8)
|
|
|
1,042,500
|
|
|
1.6
|
%
|
Thomas
Reeves (9)
|
|
|
585,000
|
|
|
0.9
|
%
|
John
N. Spencer, Jr.
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
All
directors and executive officers as a group (7 persons)
(10)
|
|
|
10,359,874
|
|
|
14.8
|
%
|
* Less
than
one percent.
(1) |
Consists
of 6,746,429 shares of Common Stock and 3,490,566 shares issuable
upon
conversion of a Convertible Promissory
Note.
|
(2) |
Consists
of (a) 500,000 shares of common stock; (b) currently exercisable
options
to purchase 125,000 shares of common stock; and (c) warrants
to purchase
500,000 shares of common stock.
|
(3) |
Consists
of (a) 375,000 shares of common stock; (b) currently exercisable
options
to purchase 125,000 shares of common stock; and (c) warrants
to purchase
1,187,500 shares of common stock.
|
(4) |
Consists
of currently exercisable options to purchase 75,000 shares of
common
stock, and warrants to purchase 375,000 shares of common
stock.
|
(5) |
Consists
of currently exercisable options to purchase 250,000 shares of
common
stock and 100,000 shares owned by Mr. Pitters’
spouse.
|
(6) |
Consists
of 8,333 shares of common stock and currently exercisable options
to
purchase 8,333 shares of common
stock..
|
(7) |
Consists
of 778,227 shares of common stock and warrants to purchase 506,250
shares
of common stock.
|
(8) |
Consists
of 730,000 shares of common stock and warrants to purchase 312,500
shares
of common stock.
|
(9) |
Consists
of 438,500 shares of common stock and warrants to purchase 146,500
shares
of common stock
|
(10) |
Represents
the combined beneficial ownership of the executives and the Company’s two
directors as of February 2, 2006 which consist of Messrs. Adler,
Bibee,
Lewis, Sasnett, Pitters, Firestone and
Kosh.
|
(11) |
Based
upon 67,432,891 shares of common stock issued and outstanding
as of
February 2, 2006.
|
Legal
matters in connection with the common stock being offered hereby will be
passed
upon for the Company and selling shareholders by Andrews Kurth LLP, Dallas,
Texas.
Our
financial statements as of December 31, 2004, in this Prospectus, have been
audited by the firm of Berkovits, Lago & Company, LLP , independent
registered certified public accountants, as set forth in their report herein
included, and have been so included in reliance upon such report being given
upon their authority as experts in accounting and auditing. Our financial
statements and the financial statements for our subsidiary, Caerus, Inc.
as of
December 31, 2003 and 2002, in this Prospectus have been audited by the firm
of
Tschopp, Whitcomb & Orr, P.A. and Moore Stephens Lovace, P.A., respectively,
independent registered certified public accountants, as set forth in their
report herein included, and have been so included in reliance upon such report
being given upon their authority as experts in accounting and auditing.
We
have
filed with the Securities and Exchange Commission (the "Commission") a
Registration Statement on Form S-1, together with all amendments, schedules
and
exhibits thereto, pursuant to the Securities Act with respect to the securities
offered by this prospectus. This prospectus does not contain all information
set
forth in the registration statement and the exhibits. The statements contained
in this prospectus as to the contents of any contract or other document
identified as exhibits in this prospectus are materially complete, but in
each
instance, reference is made to a copy of such contract or document filed
as an
exhibit to the Registration Statement. For further information with respect
to
the Company and the securities offered hereby, reference is made to the
Registration Statement and exhibits which may be inspected without charge
at the
Commission's principal office 100 F Street, NE, Washington, D. C. 20549.
We
are
subject to the reporting requirements of the Securities Exchange Act of 1934,
as
amended (the "Exchange Act"), and in accordance therewith will file reports,
proxy statements and other information with the Commission Such reports,
proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission at 100 First Street, NE, Washington,
D.
C. 20549. Copies of such material may also be obtained from the Public Reference
Section of the Commission at prescribed rates. Our Registration Statement
on
Form S-1, as well as any reports to be filed under the Exchange Act can also
be
obtained electronically after we have filed such documents with the Commission
through a variety of databases, including among others, the Commission's
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") program,
Knight-Ridder Information, Inc., Federal Filings/Dow Jones and Lexis/Nexis.
Additionally, the Commission maintains a Website (http://www sec.gov) that
contains such information regarding the Company.
We
intend
to furnish our shareholders with annual reports containing audited financial
statements and such other reports as we deem appropriate or as may be required
by law.
Requests
for information may be directed to Osvaldo Pitters, Senior Vice President
of
Finance, c/o the Company at 12330 S.W. 53rd Street, Suite 712, Fort Lauderdale,
Florida 33330, telephone (954) 434-2000.
INDEX
TO FINANCIAL STATEMENTS
|
|
|
VoIP,
Inc. Financial Statements
|
|
Page
|
|
|
|
Reports
of Independent Certified Public Accountants
|
|
F-1-2
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2004 and 2003
|
|
F-3
|
|
|
|
Consolidated
Statements of Operations for Years Ended December 31, 2004, 2003 and
2002
|
|
F-4
|
|
|
|
Consolidated
Statement of Changes in Shareholders Equity for Years Ended
December
31, 2004, 2003 and 2002
|
|
F-5
|
|
|
|
Consolidated
Statements of Cash Flows for Years Ended December 31, 2004, 2003 and
2002
|
|
F-6
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-7
|
|
|
|
Consolidated
Balance Sheets as of September 30, 2005 and 2004
|
|
F-14
|
|
|
|
Consolidated
Statements of Operations for Nine Months Ended September 30,
2005 and
2004
|
|
F-15
|
|
|
|
Consolidated
Statements of Cash Flows for Nine Months Ended September 30,
2005 and 2004
|
|
F-16
|
|
|
|
Notes
to Financial Statements for Nine Months Ended September 30, 2005
and
2004
|
|
F-17
|
|
|
|
Proforma
Condensed Combined Financial Statements
|
|
Page
|
|
|
|
Proforma
Condensed Combined Statement of Operations for Nine Months Ended
September
30, 2005 - Unaudited
|
|
F-23
|
|
|
|
Proforma
Condensed Combined Statement of Operations for Year Ended December
31, 2004 - Unaudited
|
|
F-24
|
|
|
|
Proforma
Condensed Combined Statement of Operations for Nine Months Ended
September
30, 2004 - Unaudited
|
|
F-25
|
|
|
|
Notes
to Unaudited Pro Forma Condensed Combined Financial
Statements
|
|
F-26
|
|
|
|
Caerus,
Inc. Financial Statements
|
|
Page
|
|
|
|
Report
of Independent Certified Public Accountants
|
|
F-27
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2004 and 2003
|
|
F-28
|
|
|
|
Consolidated
Statements of Operations for Year Ended December 31, 2004 and Period
May 15, 2002 (Date of Inception) through December 31, 2003
|
|
F-29
|
|
|
|
Consolidated
Statements fo Changes in Stockholders' Equity (Deficit) for Year
Ended
December 31, 2004 and Period May 15, 2002 (Date of Inception) through
December 31, 2003
|
|
F-30
|
|
|
|
Consolidated
Statements of Cash Flows for Year Ended December 31, 2004 and Period
May
15, 2002 (Date of Inception) through December 31, 2003
|
|
F-31
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-32
|
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.
|
|
|
|
|
|
|
/s/
Berkovits,
Lago & Company, LLP |
|
|
|
|
|
|
|
Fort
Lauderdale, Florida March 16, 2005, except for Notes H, K and N
as
to which the date is November 23,
2005
|
TSCHOPP,
WHITCOMB & ORR, P.A.
2600
Maitland Center Parkway, Suite 330
Maitland,
Florida 32751
Board
of
Directors and Stockholder
Millennia
Tea Masters, Inc.
We
have
audited the accompanying balance sheet of Millenia Tea Masters, Inc. as of
December 31, 2003 and 2002 and the related statements of operations, changes
in
shareholders' 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 |
VoIP
Inc.
Consolidated
Balance Sheets
December
31, 2004 and 2003
|
|
|
|
|
|
|
|
Dec.
31, 2004
|
|
Dec.
31, 2003
|
|
|
|
|
|
|
|
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.
VoIP
Inc.
Consolidated
Statements of Operations
Years
Ended December 31, 2004, 2003, and
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
Revenues
|
|
$
|
2,619,393
|
|
$
|
8,678
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
1,870,269
|
|
|
11,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
749,124
|
|
|
(2,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
Compensation
and related expenses
|
|
|
4,106,059
|
|
|
—
|
|
|
—
|
|
General
and administrative expenses
|
|
|
2,187,878
|
|
|
98,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income
taxes
and discontinued operations
|
|
|
(5,544,813
|
)
|
|
(101,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss before discontinued operations
|
|
|
(5,544,813
|
)
|
|
(101,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) from discontinued operations,
net
of income taxes
|
|
|
145,311
|
|
|
(251,534
|
)
|
|
(61,926
|
) |
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(5,399,502
|
)
|
$
|
(352,968
|
)
|
$
|
(61,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before discontinued operations
|
|
$
|
(0.38
|
)
|
$
|
(0.06
|
)
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations, net
of income taxes
|
|
$
|
0.01
|
|
$
|
(0.15
|
)
|
$
|
|
) |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(0.37
|
)
|
$
|
(0.20
|
)
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
14,597,312
|
|
|
1,730,939
|
|
|
1,730,939
|
|
The
accompanying notes are an integral part of these financial
statements.
Consolidated
Statements of Changes in Shareholders' Equity
Years
Ended December 31, 2004 and 2003 and 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
Amount
|
|
|
Additional
Paid- in
Capital
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2001
|
|
|
1,730,939
|
|
$
|
1,731
|
|
$
|
731,208
|
|
$
|
(209,753
|
)
|
$
|
523,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
for the for the year
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(61,926
|
)
|
|
(61,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
and options issued to employees
|
|
|
—
|
|
|
—
|
|
|
3,320,763
|
|
|
—
|
|
|
3,320,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued for intellectual property
|
|
|
100,000
|
|
|
100
|
|
|
105,000
|
|
|
—
|
|
|
105,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
for the year
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,399,502
|
)
|
|
(5,399,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2004
|
|
|
24,258,982
|
|
$
|
24,259
|
|
$
|
14,107,328
|
|
$
|
(6,024,149
|
)
|
$
|
8,107,438
|
|
VoIP
Inc.
Consolidated
Statements of Cash Flows
Years
ended December 31, 2004, 2003 and
2002
|
|
|
|
|
|
|
|
|
|
Year
ended December
31, 2004
|
|
Year
ended December
31,2003
|
|
Year
ended December
31,2002
|
|
|
|
|
|
|
|
|
|
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
|
|
|
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
|
)
|
|
(61,926
|
)
|
Changes
in assets, liabilities, and net results
|
|
|
(408,000
|
)
|
|
274,262
|
|
|
(13,570
|
)
|
Net
cash used in discontinued operating activities
|
|
|
(262,689
|
)
|
|
(78,706
|
)
|
|
(75,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
used in operating activities
|
|
|
(2,926,803
|
)
|
|
(78,706
|
)
|
|
(75,496
|
)
|
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
|
|
|
73,849
|
|
Net
cash provided by discontinued investing activities
|
|
|
—
|
|
|
82,196
|
|
|
73,849
|
|
Net
cash provided by (used in) investing activities
|
|
|
(124,109
|
)
|
|
82,196
|
|
|
73,849
|
|
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
|
|
|
(1,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at beginning of year
|
|
|
3,499
|
|
|
9
|
|
|
1,656
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at end of year
|
|
$
|
1,141,205
|
|
$
|
3,499
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Notes
to Financial Statements
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 internet protocol telephony customer premise equipment, provide
voice over the internet subscriber based telephony services and 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
have
been classified as discontinued operations on the accompanying consolidated
financial statements.
The
Company offers 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 infrastructure design and deployment, and broadband customer
premise equipment design and implementation services.
The
Company's operations consist of one segment.
NOTE
B - 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., VoIP Solutions, Inc., DTNet
Technologies, Inc., and VoIP Americas, Inc. 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.
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
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
Revenues
are derived from fees charged to terminate calls on the Company’s network, from
monthly recurring charges associated with internet services, and from sales
of
hardware product.
Variable
revenue is earned based on the number of minutes during a call and is recognized
upon completion of a call. Revenue for each customer is calculated from
information received through the Company’s network switches. The Company tracks
the information received from the switch and analyzes the call detail records
and applies the respective revenue rate for each call.
Fixed
revenue is earned from monthly recurring services provided to customers that
are
fixed and recurring in nature, and are connected for a specified period of
time.
Revenue recognition commences after the provisioning, testing, and acceptance
of
the service by the customer. Revenues are recognized as the services are
provided and continue until the expiration of the contract or until cancellation
of the service by the customer.
Revenue
from hardware product sales is recognized when persuasive evidence of an
arrangement exists, delivery to the customer has occurred, the sales price
is
fixed and determinable, and collectibility of the related receivable is
considered probable.
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
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 June 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.
As
of
December 31, 2004 property and equipment consists of the following:
Office
Equipment
|
|
$
|
519,810
|
|
Furniture
& Fixtures
|
|
|
56748
|
|
Vehicles
|
|
|
4769
|
|
Leasehold
Improvements
|
|
|
4562
|
|
Total
|
|
$
|
585,889
|
|
Less
accumulated depreciation
|
|
|
(166,021
|
)
|
Total
|
|
$
|
419,868
|
|
NOTE
D - 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 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 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.
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
F - BANK LOANS AND NOTE PAYABLE
As
of
December 31, 2004 bank loans and note payable consists of the following:
Bank
Loan:
|
|
|
|
Revolving
Line of Credit
|
|
$
|
187,000
|
|
Promissory
Note
|
|
|
13,000
|
|
Sub-total
|
|
$
|
200,000
|
|
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
G - 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, VoIP Inc. 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.
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 expenses
of
$2,217,600, is in the accompanying Consolidated Statement of Operations.
A
summary
of the Company's warrants as of December, 31 2004 is presented below:
|
|
|
Warrants
|
|
|
Weighted
average
exercise
price
|
|
|
|
|
|
|
|
|
|
Warrants
outstanding at beginning or year
|
|
|
—
|
|
$
|
—
|
|
Granted
to two company officers
|
|
|
4,400,000
|
|
$
|
1.00
|
|
Granted
to a third party
|
|
|
2,400,000
|
|
$
|
2.58
|
|
Expired
|
|
|
—
|
|
$
|
—
|
|
Exercised
|
|
|
—
|
|
$
|
—
|
|
Warrants
outstanding at end of year
|
|
|
6,800,000
|
|
$
|
1.59
|
|
The
value
of warrants issued to the Company officers and the value of the 400,000 warrants
granted to the third party was estimated using the Black-Scholes option pricing
model with the following assumptions; risk free rate 3.35%, no dividend yield,
expected life of five years and volatility of 175% and 152%, respectively.
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 leases as of December
31,
2004 are as follows:
Year
ending Dec 31
|
|
|
|
2005
|
|
$
|
52,772
|
|
2006
|
|
|
15,155
|
|
Total
|
|
$
|
67,927
|
|
NOTE
J - RELATED PARTY TRANSACTIONS
As
of
December 31, 2004 the due from related party consists in the
following:
DTNet,
Inc. (*)
|
|
$
|
134,317
|
|
DTNet
International (*)
|
|
|
119,974
|
|
Mozart
Communication
|
|
|
21,794
|
|
Com
Laser
|
|
|
5,850
|
|
Due
to related parties
|
|
|
(36,533
|
)
|
Total
|
|
$
|
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.
The
components of the Company's consolidated income tax provision are as
follows:
|
|
|
Year
ended December 31,
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
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
operating 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
|
|
|
0
|
%
|
|
0
|
%
|
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
L - 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.
On
May
10, 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 N, subsequent
events,
in February 2005, 2,200,000 warrants were exchanged for restricted shares.
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, VoIP Inc. 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 for all the 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
investor.
In
November 2004, the Company issued 2,249,500 shares 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
M - DISCONTINUED OPERATIONS
In
December 2004, the Company decided to exit the tea business and sold
its entire
tea inventory, therefore, those transactions have been presented as discontinued
operations for the year 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 operations:
|
|
2004
|
|
2003
|
|
Cash
|
|
$
|
4,419
|
|
$
|
3,499
|
|
Notes
receivable from purchaser of tea
(non-interest
bearing due in four equal
installments
through
|
|
|
|
|
|
|
|
December
31, 2005)
|
|
|
408,000
|
|
|
—
|
|
Tea
inventory at net realizable value
|
|
|
—
|
|
|
251,534
|
|
Other
assets
|
|
|
—
|
|
|
4,426
|
|
Total
|
|
$
|
412,419
|
|
$
|
259,459
|
|
Liabilities
from discontinued operations:
|
|
2004
|
|
2003
|
|
Due
to related parties
|
|
$
|
—
|
|
$
|
151,167
|
|
Total
|
|
$
|
—
|
|
$
|
151,167
|
|
Results
from discontinued operations:
|
|
2004
|
|
2003
|
|
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 N
- 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:
|
|
Number
|
|
Exercise
Price
Range
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2003
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
4,000,000
|
|
|
|
|
|
$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 O
- 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 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.
VoIP,
Inc.
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,238,941
|
|
$
|
237,524
|
|
Accounts
receivable, net of allowance of
$113,817
and $136,795 respectively
|
|
|
704,451
|
|
|
806,686
|
|
Due
from related parties
|
|
|
259,806
|
|
|
—
|
|
Inventory
|
|
|
561,245
|
|
|
369,944
|
|
Other
current assets
|
|
|
364,929
|
|
|
133,412
|
|
Total
current assets
|
|
|
5,129,372
|
|
|
1,547,566
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
8,352,155
|
|
|
385,405
|
|
Goodwill
and other intangible assets
|
|
|
29,996,814
|
|
|
6,618,864
|
|
Other
assets
|
|
|
272,434
|
|
|
15,572
|
|
TOTAL
ASSETS
|
|
$
|
43,750,775
|
|
$
|
8,567,407
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
9,009,315
|
|
$
|
1,169,840
|
|
Loans
payable
|
|
|
7,240,444
|
|
|
—
|
|
Convertible
notes payable
|
|
|
815,991
|
|
|
—
|
|
Other
current liabilities
|
|
|
2,058,630
|
|
|
726,676
|
|
Total
current liabilities
|
|
|
19,124,380
|
|
|
1,896,516
|
|
Convertible
notes payable - long term
|
|
|
611,934
|
|
|
—
|
|
Other
debt
|
|
|
164,631
|
|
|
—
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
19,900,945
|
|
|
1,896,516
|
|
|
|
|
|
|
|
|
|
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
|
|
|
20,859
|
|
Additional
paid-in capital
|
|
|
43,698,121
|
|
|
11,885,049
|
|
Accumulated
deficit
|
|
|
(19,904,879
|
)
|
|
(5,235,017
|
)
|
Total
shareholders' equity
|
|
|
23,849,830
|
|
|
6,670,891
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$
|
43,750,775
|
|
$
|
8,567,407
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
VoIP,
Inc.
Consolidated
Statements of Operations
(Unaudited)
|
|
|
|
|
|
|
|
Nine
Months Ended September,
30
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,452,832
|
|
$
|
1,015,065
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
6,258,049
|
|
|
737,904
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
194,783
|
|
|
277,161
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
4,419,207
|
|
|
3,404,151
|
|
Commissions
and fees to third parties
|
|
|
2,456,588
|
|
|
57,416
|
|
Advertising
and marketing
|
|
|
482,050
|
|
|
115,180
|
|
Professional
and legal
|
|
|
1,178,639
|
|
|
238,527
|
|
Depreciation
and amortization
|
|
|
1,821,214
|
|
|
38,315
|
|
Other
|
|
|
3,717,815
|
|
|
503,757
|
|
Total
operating expenses
|
|
|
14,075,513
|
|
|
4,357,346
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(13,880,730
|
)
|
|
(4,080,185
|
)
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(13,880,730
|
)
|
$
|
(4,080,185
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
$
|
(0.39
|
)
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
35,918,087
|
|
|
13,037,347
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
VoIP,
Inc.
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
Nine
Months Ended September 30
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
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
|
|
|
2,964
|
|
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
|
)
|
|
87,949
|
|
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.
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 - 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.
The
Company will need to continue 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.
NOTE
C - 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
|
|
Ingangibles
with indefinite 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
D - 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").
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
E - 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.
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 J).
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,
and,
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
F - 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
G - 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.
NOTE
H - 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
I - 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
Price
|
|
Wtd.
Avg.
|
|
|
|
Number
|
|
Range
|
|
Exercise
Price
|
|
Options
outstanding at December 31, 2004
|
|
|
3,650,000
|
|
$
|
0.85
- 1.56
|
|
$
|
1.14
|
|
Options
returned to the plan due
|
|
|
(600,000
|
)
|
$
|
0.85
- 1.10
|
|
$
|
0.95
|
|
to
employee terminations
|
|
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
325,000
|
|
$
|
1.01
- 1.17
|
|
$
|
1.12
|
|
Options
outstanding as oat September 30, 2005
|
|
|
3,375,000
|
|
$
|
0.85
- 1.56
|
|
$
|
1.17
|
|
The
Company recorded compensation expense of $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 nine 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 nine months ended September 30, 2004. During the nine months
ended September
30, 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 nine
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.
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.
VOIP,
INC. AND SUBSIDIARIES
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The
following unaudited pro forma condensed combined financial statements
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 June 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 combined statements of operation
for the nine
month periods ended September 30, 2005 and 2004, and the year ended
December 31,
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 period.
The
unaudited pro forma condensed combined financial statements 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.
VoIP,
Inc
Proforma
Condensed Combined Statement of Operations
(Unaudited)
Nine
Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VoIP,
Inc
|
|
|
Caerus,
Inc
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 pro forma consolidated
statement
of operations.
Proforma
Condensed Combined Statement of Operations (Unaudited)
Year
Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VoIP,
Inc
|
|
|
Caerus,
Inc
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,619,393
|
|
$
|
14,379,365
|
|
$
|
—
|
|
$
|
16,998,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,870,269
|
|
|
15,765,201
|
|
|
|
|
|
17,635,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
749,124
|
|
|
(1,385,836
|
)
|
|
—
|
|
|
(636,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
6,293,937
|
|
|
7,225,759
|
|
|
3,111,108
|
|
|
16,630,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(5,544,813
|
)
|
|
(8,611,595
|
)
|
|
(3,111,108
|
)
|
|
(17,267,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from continuing operations
|
|
|
($5,544,813
|
)
|
|
($8,611,595
|
)
|
|
($3,111,108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
|
145,311
|
|
|
—
|
|
|
—
|
|
|
145,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(5,399,502
|
)
|
|
(8,611,595
|
)
|
|
(3,111,108
|
)
|
|
(17,122,205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
31,031,782
|
|
The
accompanying notes are an integral part of this pro forma consolidated statement
of operations.
VoIP,
Inc
Proforma
Condensed Combined Statement of Operations (Unaudited)
Nine
Months Ended September 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VoIP,
Inc
|
|
|
Caerus,
Inc
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 pro forma consolidated
statement
of operations.
VOIP,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL
STATEMENTS
(1)
VOIP,
INC. Basis of Presentation
Historical
financial information for VOIP, INC. as of September 30, 2005 and for the
nine
months ended September 30, 2005 and 2004 and the year ended December 31,
2004
has been derived from VOIP, INC.'s historical statements.
(2)
CAERUS, INC. Basis of Presentation
Historical
financial information for CAERUS, INC. as of June 30, 2005 and for the six
months ended June 30, 2005 and 2004 and the year ended December 31, 2004
has
been derived from CAERUS, INC.'s historical statements.
(3)
VOIP,
INC. and CAERUS, INC. Merger
On
June
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.
(4)
Pro
Forma Statements of Operations Adjustments
Adjustments
to the pro forma Statements of Operations represent amortization of certain
intangible assets recorded in connection with the acquisition.
REPORT
OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board
of
Directors
Caerus,
Inc.
Altamonte
Springs, Florida
We
have
audited the accompanying consolidated balance sheets of Caerus, Inc. as of
December 31, 2004 and 2003, and the related consolidated statements of
operations, changes in stockholders' equity (deficit), and cash flows for
the
year ended December 31, 2004 and for period May 15, 2002 (date of inception)
through December 31, 2003. 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 audits.
We
conducted our audits in accordance with auditing standards generally accepted
in
the United States of America. Those standards require that we plan and perform
the audits 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 audits provide a reasonable basis
for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the consolidated financial position of Caerus,
Inc. as
of December 31, 2004 and 2003, and the results of its operations and cash
flows
for the year ended December 31, 2004 and for the period May 15, 2002 (date
of
inception) through December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming the Company
will
continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company has incurred significant losses and negative
cash flows from operations, has a working capital deficit, and has significant
unresolved litigation as discussed in Note 8 to the financial statements.
These
matters, among other things, raise substantial doubt about the Company's
ability
to continue as a going concern. Management's plans related to these matters
are
also discussed in Note 1. These financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
|
|
|
|
|
|
|
|
|
|
|
/s/
Moore
Stephens Lovelace, P.A. |
|
|
|
Certified
Public Accountants |
|
|
|
|
|
|
|
Orlando, Florida July 25,
2005 |
|
|
|
|
CAERUS,
INC.
CONSOLIDATED
BALANCE SHEETS
December
31, 2004 and 2003
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
19,414
|
|
$
|
25,078
|
|
Restricted
cash
|
|
|
60,224
|
|
|
196
|
|
Accounts
receivable
|
|
|
2,098,598
|
|
|
358,522
|
|
Note
receivable - related party
|
|
|
—
|
|
|
179,974
|
|
Supplies,
deposits and prepaid expenses
|
|
|
70,999
|
|
|
350,199
|
|
TOTAL
CURRENT ASSETS
|
|
|
2,249,235
|
|
|
913,969
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT
|
|
|
|
|
|
|
|
Telecommunications
equipment and computers
|
|
|
6,390,973
|
|
|
732,205
|
|
Furniture
and fixtures
|
|
|
61,960
|
|
|
21,624
|
|
Leasehold
improvements
|
|
|
163,808
|
|
|
146,358
|
|
Purchased
and developed software
|
|
|
473,228
|
|
|
598,243
|
|
|
|
|
7,089,969
|
|
|
1,498,430
|
|
Less
accumulated depreciation and amortization
|
|
|
(824,580
|
)
|
|
(183,408
|
)
|
NET
PROPERTY AND EQUIPMENT
|
|
|
6,265,389
|
|
|
1,315,022
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Deferred
loan origination costs, net
|
|
|
285,075
|
|
|
—
|
|
Lease
deposit and other
|
|
|
28,959
|
|
|
65,000
|
|
TOTAL
ASSETS
|
|
$
|
8,828,658
|
|
$
|
2,293,991
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
7,137,293
|
|
$
|
452,094
|
|
Note
payable
|
|
|
6,006,899
|
|
|
—
|
|
Convertible
notes payable - related party
|
|
|
1,830,000
|
|
|
1,050,000
|
|
Deferred
revenue and customer deposits
|
|
|
38,750
|
|
|
60,576
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
15,012,942
|
|
|
1,562,670
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
Common
stock - $.01 par value; 50,000,000 shares authorized;
|
|
|
|
|
|
|
|
14,940,508
and 11,948,367 shares issued and outstanding, respectively
|
|
|
149,405
|
|
|
119,484
|
|
Preferred
stock - $.01 par value; 25,000,000 shares authorized;
|
|
|
|
|
|
|
|
-0-
shares issued and outstanding
|
|
|
—
|
|
|
—
|
|
Additional
paid-in capital
|
|
|
4,618,253
|
|
|
2,952,184
|
|
Accumulated
deficit
|
|
|
(10,951,942
|
)
|
|
(2,340,347
|
)
|
TOTAL
SHAREHOLDERS' EQUITY (DEFICIT)
|
|
|
(6,184,284
|
)
|
|
731,321
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
|
|
$
|
8,828,658
|
|
$
|
2,293,991
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
The
Year Ended December 31, 2004, and
The
Period May 15, 2002 (Date of Inception) Through December 31, 2003
|
|
|
|
|
|
|
|
2004
|
|
2002-2003
|
|
|
|
|
|
(Development Stage)
|
|
|
|
|
|
|
|
SALES
|
|
$
|
14,379,365
|
|
$
|
1,191,287
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
|
|
|
|
|
Network
and termination costs
|
|
|
15,103,149
|
|
|
900,681
|
|
Testing
and sales concessions
|
|
|
662,052
|
|
|
—
|
|
|
|
|
|
|
|
|
|
TOTAL
COST OF SALES
|
|
|
15,765,201
|
|
|
900,681
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT (LOSS)
|
|
|
(1,385,836
|
)
|
|
290,606
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
Equipment
and computer expenses
|
|
|
603,189
|
|
|
97,068
|
|
Office
expenses
|
|
|
228,108
|
|
|
206,215
|
|
Labor-related
expenses
|
|
|
2,973,070
|
|
|
1,214,240
|
|
Professional
fees
|
|
|
814,243
|
|
|
400,872
|
|
Marketing
|
|
|
217,835
|
|
|
16,689
|
|
Litigation
settlement
|
|
|
326,205
|
|
|
—
|
|
Rent,
utilities and security
|
|
|
246,545
|
|
|
355,481
|
|
Taxes
and licenses
|
|
|
55,527
|
|
|
25,390
|
|
Travel,
lodging and entertainment
|
|
|
163,555
|
|
|
90,928
|
|
Depreciation
and amortization
|
|
|
641,172
|
|
|
183,409
|
|
Asset
impairment charge
|
|
|
299,122
|
|
|
—
|
|
|
|
|
|
|
|
|
|
TOTAL
EXPENSES
|
|
|
6,568,571
|
|
|
2,590,292
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(7,954,407
|
)
|
|
(2,299,686
|
)
|
|
|
|
|
|
|
|
|
OTHER
EXPENSES
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(657,238
|
)
|
|
(19,654
|
)
|
Other
expense, net
|
|
|
50
|
|
|
(21,007
|
)
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(8,611,595
|
)
|
$
|
(2,340,347
|
)
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For
The
Year Ended December 31, 2004, and The Period May 15, 2002 (Date of Inception)
Through December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock $.01
Par Value
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
- MAY 15, 2002
|
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ISSUANCE
OF FOUNDER STOCK
|
|
|
5,400,000
|
|
|
54,000
|
|
|
—
|
|
|
—
|
|
|
54,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALE
OF COMMON STOCK
|
|
|
6,186,592
|
|
|
61,866
|
|
|
2,721,909
|
|
|
—
|
|
|
2,783,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ISSUANCE
OF COMMON STOCK
FOR
SERVICES
|
|
|
150,000
|
|
|
1,500
|
|
|
81,750
|
|
|
—
|
|
|
83,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ISSUANCE
OF COMMON STOCK
FOR
PROPERTY AND EQUIPMENT
|
|
|
211,775
|
|
|
2,118
|
|
|
148,525
|
|
|
—
|
|
|
150,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,340,347
|
)
|
|
(2,340,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
- DECEMBER 31, 2003
|
|
|
11,948,367
|
|
|
119,484
|
|
|
2,952,184
|
|
|
(2,340,347
|
)
|
|
731,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ISSUANCE
OF COMMON STOCK
|
|
|
712,071
|
|
|
7,121
|
|
|
273,139
|
|
|
—
|
|
|
280,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ISSUANCE
OF COMMON STOCK FOR
DEBT
|
|
|
2,280,070
|
|
|
22,800
|
|
|
1,097,200
|
|
|
—
|
|
|
1,120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ISSUANCE
OF STOCK WARRANTS IN CONNECTION
WITH
SECURED NOTE PAYABLE
|
|
|
—
|
|
|
—
|
|
|
218,813
|
|
|
—
|
|
|
218,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMPLOYEE
STOCK OPTIONS - COMPENSATION
EXPENSE
RECOGNIZED
|
|
|
—
|
|
|
—
|
|
|
76,917
|
|
|
—
|
|
|
76,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,611,595
|
)
|
|
(8,611,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
- DECEMBER 31, 2004
|
|
|
14,940,508
|
|
$
|
149,405
|
|
$
|
4,618,253
|
|
$
|
(10,951,942
|
)
|
$
|
(6,184,284
|
)
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
The
Year Ended December 31, 2004, and
The
Period May 15, 2002 (Date of Inception) Through December 31, 2003
|
|
|
|
|
|
|
|
2004
|
|
2002-2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
loss
|
|
$
|
(8,611,595
|
)
|
$
|
(2,340,347
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Litigation
settlement
|
|
|
326,205
|
|
|
—
|
|
Depreciation
and amortization
|
|
|
641,172
|
|
|
183,408
|
|
Asset
impairment charge
|
|
|
299,122
|
|
|
—
|
|
Amortization
of deferred loan fees
|
|
|
56,613
|
|
|
—
|
|
Stock
issued to Founder
|
|
|
—
|
|
|
54,000
|
|
Stock
issued for services
|
|
|
—
|
|
|
83,250
|
|
Expense
related to employee stock options
|
|
|
76,917
|
|
|
—
|
|
Forgiveness
of related-party loan
|
|
|
415,323
|
|
|
—
|
|
Changes
in:
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
(60,028
|
)
|
|
(196
|
)
|
Accounts
receivable
|
|
|
(2,066,281
|
)
|
|
(358,522
|
)
|
Supplies,
deposits and prepaid expenses
|
|
|
279,200
|
|
|
(415,199
|
)
|
Other
assets
|
|
|
36,041
|
|
|
—
|
|
Accounts
payable and accrued expenses
|
|
|
6,685,199
|
|
|
452,094
|
|
Deferred
revenue
|
|
|
(21,826
|
)
|
|
60,576
|
|
|
|
|
|
|
|
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(1,943,938
|
)
|
|
(2,280,936
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Additions
to property and equipment
|
|
|
(5,890,661
|
)
|
|
(1,347,787
|
)
|
Additions
to related-party loan
|
|
|
(235,349
|
)
|
|
(179,974
|
)
|
|
|
|
|
|
|
|
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(6,126,010
|
)
|
|
(1,527,761
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Proceeds
from borrowings
|
|
|
8,900,000
|
|
|
1,050,000
|
|
Repayment
of note payable
|
|
|
(993,101
|
)
|
|
—
|
|
Proceeds
from issuance of common stock
|
|
|
280,260
|
|
|
2,783,775
|
|
Payments
for loan origination costs
|
|
|
(122,875
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
8,064,284
|
|
|
3,833,775
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH
|
|
|
(5,664
|
)
|
|
25,078
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - BEGINNING OF PERIOD
|
|
|
25,078
|
|
|
—
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - END OF PERIOD
|
|
$
|
19,414
|
|
$
|
25,078
|
|
Caerus,
Inc.
NOTES
TO CONSOLIDATED
FINANCIAL
STATEMENTS
For
The
Year Ended December 31, 2004 and For The Period May 15, 2002 (Date of Inception)
Through December 31, 2003
NOTE
1 - DESCRIPTION OF BUSINESS
Caerus,
Inc. and subsidiaries (collectively referred to as the "Company") were
incorporated on May 15, 2002 and are wholesale providers of advanced
telecommunications technologies and services to carriers and service providers,
including Inter Exchange Carriers ("IXCs"), Competitive Local Exchange Carriers
("CLECs"), Internet Service Providers, Cable Operators and Enhanced Voice
and
Data Service Providers. Through its wholesale-only model, the Company has
positioned itself as a "carrier's carrier" and offers protocol-agnostic packet
switched technologies to address the gap between traditional communications
and
"next generation" platforms.
During
the period May 15, 2002 (date of inception) to December 31, 2003, the Company
was in the process of developing its resources, enhancing its proprietary
technology, building a nationwide network with five physical interconnection
points (cities), working with potential customers on testing its network,
and
attracting key engineering professionals; accordingly, the Company was
considered to be a development stage enterprise. In January 2004, the Company
became fully operational and management determined that the Company was no
longer in a development stage.
The
Company offers a comprehensive suite of Internet Protocol ("IP")-based broadband
packet voice services, IP and Time Division Multiplexing ("TDM")
origination/termination services, IP PBX-hosted services, and unified messaging
services that include enhanced voice and data solutions. The suite of services
is complemented by a Service Creation Environment that enables the Company
to
develop custom applications and features "on the fly" for its customers.
The
consolidated financial statements include the accounts of the Company and
its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
The
Company has incurred significant losses and negative cash flows from operations
since its inception. Additionally, the Company has a working capital deficit
of
$12,763,707 and an accumulated deficit of $10,951,942 at December 31, 2004.
Management continues to undertake steps as part of a plan to attempt to improve
liquidity and operating results with the goal of sustaining Company operations.
These steps include seeking (a) to increase high-margin sales; and
(b)
to
control overhead costs and operating expenses. Management plans, in this
regard,
to continue the implementation of a stabilized and fully operational network,
adding recurring-revenue customers, attracting an experienced management
team
capable of building a profitable company, and securing funding to meet current
obligations.
There
can
be no assurance that the Company can successfully accomplish these steps.
Accordingly, the Company's ability to continue as a going concern is uncertain
and dependent upon continuing to achieve improved operating results and cash
flows or obtaining additional financing. These consolidated financial statements
do not include any adjustments to the amounts and classification of assets
and
liabilities that might be necessary should the Company be unable to continue
in
business.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash
and Cash Equivalents
For
financial presentation purposes, the Company considers short-term, highly
liquid
investments with original maturities of three months or less to be cash
equivalents.
Restricted
Cash and Letters of Credit
Certain
cash is restricted to support standby letters of credit which, in turn, support
operating license bonds required by several states' regulatory agencies.
These
standby letters of credit are generally in force for one year with automatic
one-year extensions. Maximum draws available to the beneficiary as of December
31, 2004 were $60,000. If the Company was required to obtain replacement
standby
letters of credit as of December 31, 2004 for those currently outstanding,
it is
the Company's opinion that the replacement costs would not significantly
vary
from the present fee structure.
Accounts
Receivable
Accounts
receivable result from the sale of the Company's services, net of estimated
allowances. The Company estimates an allowance for doubtful accounts based
on a
specific-identification basis. The Company had no allowance for doubtful
accounts as of December 31, 2004 and 2003.
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation and amortization are calculated
on a straight-line basis over the assets' useful lives, which range from
three
to ten years. Leasehold improvements are amortized over the estimated useful
lives of the improvements, or the term of the lease, if shorter. Maintenance
and
repairs are expensed as incurred, while renewals and betterments are
capitalized. Upon the sale or other disposition of property, the cost and
related accumulated depreciation are removed from the accounts, and any gain
or
loss is recognized in operations.
Under
the
Statement of Position ("SOP") 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use," the Company expenses computer
software costs related to internal-use software that is incurred in the
preliminary project stage. When the capitalization criteria of SOP 98-1 have
been met, costs of developing or obtaining internal-use computer software
are
capitalized. The Company capitalized approximately $772,350 of costs incurred
for internally developed software during the period from inception through
December 31, 2004. Amortization of internal-use software over a 5-year estimated
useful life commenced upon the software being placed in service beginning
January 1, 2004. Amortization of internal-use software for the periods ended
December 31, 2004 and 2003 was approximately $77,000 and $-0-, respectively.
During 2004, the Company suspended a number of software development projects
and, accordingly, recognized a related asset impairment charge of $299,122
in
2004.
Deposits
Deposits
consist primarily of an equipment deposit, a refundable office lease deposit
and
various other deposits outstanding with service providers.
Deferred
Revenue
Deferred
revenue represents fees for services that have not yet met the criteria to
be
recognized as revenue.
Revenue
Recognition
Revenue
is recognized when earned. Revenue related to long distance, carrier access
service and certain other usage-driven charges are billed monthly in arrears,
and the associated revenues are recognized during the month of service.
Income
Taxes
The
Company utilizes the asset and liability method of accounting for income
taxes.
Under this method, deferred income taxes are recorded to reflect the tax
consequences in future years of differences between the tax basis of assets
and
liabilities and their financially reported amounts at each year-end, based
on
enacted laws and statutory rates applicable to the periods in which differences
are expected to affect taxable income. As of December 31, 2004, the Company
had
a deferred tax asset of approximately $3,000,000, the components of which
consisted primarily of the Company's net losses, fixed asset depreciation
and
stock-based compensation. Also at December 31, 2004, the Company had a net
operating loss carryforward of approximately $11,000,000 for federal income
tax
purposes that will begin to expire in 2022, and that is subject to significant
limitations based upon the occurrence of certain changes in ownership of
the
Company.
A
valuation allowance is provided against the future benefits of deferred tax
assets if it is determined that it is more likely than not that the future
tax
benefits associated with the deferred tax asset will not be realized. Due
to
recurring losses since inception and the resultant uncertainty of the
realization of the tax loss carryforward, the Company has established a 100%
valuation allowance against the carryforward benefit. Accordingly, no
provision/benefit for income taxes has been included in these consolidated
financial statements.
Concentration
of Credit Risk
Financial
instruments that may subject the Company to concentrations of credit risk
consist principally of cash and cash equivalents and accounts receivable.
The
Company has investment policies and procedures that are reviewed periodically
to
minimize credit risk.
One
customer represented approximately 98% and 90% of the Company's accounts
receivable as of December 31, 2004 and 2003, respectively, and approximately
91%
and 95% of the Company's revenues for the year ended December 31, 2004 and
for
the period May 15, 2002 (date of inception) through December 31, 2003,
respectively. The loss of this customer would have a significant adverse
affect
on the Company's operations.
Concentration
of Supplier Risk
One
supplier represented approximately 86% of the Company's accounts payable
as of
December 31, 2004, and approximately 94% of the Company's cost of sales for
the
year ended December 31, 2004 (see Note 8).
Stock-based
Compensation
The
Company uses the fair value method of Statement of Financial Accounting
Standards No. 123R, "Accounting for Stock Based Compensation" 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 minimum value
method.
Estimates
The
preparation of these consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Estimates also affect
the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Significant management estimates
affect the carrying value of, among other things, internal-use software,
cost of
goods sold (see Note 7), the estimating of the fair value of the Company's
common stock (see Note 3), and the evaluation of existing disputes and claims
(see Notes 7 and 8).
Reclassifications
Certain
reclassifications have been made to the 2003 financial statements to conform
to
the 2004 presentation.
NOTE
3 - CONVERTIBLE NOTES PAYABLE - RELATED PARTY
During
2003, the Company issued two one-year convertible notes to a stockholder
of the
Company, $1,050,000 and $70,000 of which were funded in the periods ended
December 31, 2003 and 2004, respectively. These notes accrued interest at
12%
per annum, with all interest and principal due in September and December
2004.
These notes, which had certain anti-dilution provisions and which were
collateralized by substantially all of the assets of the Company, were converted
into common stock in May 2004 (see Note 6) and the convertible notes were
cancelled and the principal amount was satisfied in full.
The
Company determined the conversion rates based upon its evaluation of the
Company's common stock on the issuance dates. The Company's evaluations were
based upon, among other things, peer company valuations, industry and market
conditions, the Company's current financial position, terms and conditions
of
funding available to the Company at the time of issuance, etc.
During
2004, the Company issued two one-year convertible notes to a stockholder
of the
Company, totaling $1,830,000. These notes accrue interest at 12% per annum,
with
monthly principal and interest payments originally scheduled through August
and
November 2004. Restrictive covenants pertaining to the note payable discussed
in
Note 4 to these financial statements precluded payment of scheduled principal
and interest on these notes; therefore, these notes are currently due. However,
the same covenants preclude payment until the note described in Note 4 to
these
financial statements is paid in full. These one-year notes are collateralized
by
substantially all of the assets of the Company (see Note 8).
Interest
expense incurred with respect to these notes during the year ended December
31,
2004 and the period May 15, 2002 (date of inception) through December 31,
2003,
was $122,223 and $19,653, respectively.
Interest
payments made with respect to these notes during the year ended December
31,
2004 and the period May 15, 2002 (date of inception) through December 31,
2003,
were $42,560 and $-0-, respectively.
NOTE
4 - NOTE PAYABLE
In
June
2004, the Company secured a $15,000,000 debt facility and drew down the first
$7,000,000 traunch primarily for the purpose of funding network equipment
purchases. 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 the Company's assets, as well as rights to preferred
stock warrants (see Notes 6 and 8).
Interest
paid under this debt facility during the year ended December 31, 2004, was
$484,867.
The
Company is currently in violation of several of the restrictive covenants
in
this debt facility. Under its provisions, the lender has the right to call
the
related note payable due. Accordingly, the full amount of the note at December
31, 2004 has been classified as current.
NOTE
5 - NOTE RECEIVABLE - RELATED PARTY
During
the period May 15, 2002 (date of inception) through December 31, 2004, the
Company advanced $415,323 to an officer of the Company. In 2005, these advances
were characterized as compensation and were forgiven; accordingly, their
carrying value was reduced to zero at December 31, 2004. In addition, the
Company agreed to pay the related federal income tax withholding of
approximately $104,000 on behalf of the related party, which was accrued
at
December 31, 2004.
NOTE
6 - STOCKHOLDERS' EQUITY
In
June
2002, the Company increased its authorized shares to 100,000 shares of $0.01
par
value common stock. In July 2002, the Company increased its authorized shares
to
3,000,000 shares of $0.01 par value common stock and approved a 2-for-1 common
stock split. In October 2002, the Company increased its authorized shares
to
6,000,000 shares of $0.01 par value common stock. In July 2003, the Company
approved an additional 3-for-1 common stock split and an increase in the
authorized shares of common stock to 18,000,000. The Articles of Amendment
for
this amendment were not filed with the state of Delaware until 2004. The
accompanying consolidated financial statements and related notes present
all of
these amendments as if they were affected for all periods presented.
In
2002,
5,400,000 shares of common stock were issued to the founder of the Company.
These shares were recorded at their par value.
In
2002,
the Company issued 150,000 shares of its common stock for legal services
provided to the Company, which were recorded at their estimated fair value
of
$83,250.
During
the period May 15, 2002 (date of inception) through December 31, 2003, the
Company issued 5,965,957 shares of its common stock and received net proceeds
of
$2,783,775. Offering costs related to these sales consisted of the issuance
of
an additional 220,635 shares of the Company's common stock.
During
the period May 15, 2002 (date of inception) through December 31, 2003, the
Company issued 211,775 shares of its common stock in consideration for leasehold
improvements and equipment, of which 190,211 of the shares were issued to
the
founder of the Company. These shares were recorded at their estimated fair
value
of $150,643.
In
May
2004, $1,120,000 of convertible notes payable to a shareholder were converted
into 2,280,070 shares of common stock.
In
May
and August 2004, the Company issued 500,000 and 212,071 shares of its common
stock for cash of $100,000 and $180,260, respectively.
In
May
2004, the Company authorized the issuance of up to 25,000,000 shares of $.01
par
value preferred stock, the terms of which will be decided upon by the Company's
Board of Directors.
In
August
2004, the Company approved increasing the authorized common stock to 50,000,000
shares. However, the related state filing has yet to be effected.
Rights
to Convert to Preferred Stock
At
December 31, 2004, related parties held 12,989,445 shares of common stock
that
had the right to be converted into preferred shares; however, as of December
31,
2004, no shares of preferred stock had been issued by the Company (see Note
8).
Stock
Options
During
October 2004, the Board approved the Company's 2004 Stock Option Plan (the
"Plan"), whereby 4,000,000 shares of the Company's common stock were reserved
for issuance under the Plan to selected directors, officers, employees and
consultants of the Company. As of December 31, 2004, options to purchase
2,164,969 shares of common stock for $0.85 per share were issued and outstanding
under the Plan. These options expire ten years from the date of issuance.
They
vest from 36 to 48 months of employment following the date of option issuance.
These options had an estimated fair value of $330,599 at the date of grant,
using the minimum-value method with the following assumptions:
Expected
life (in years)
|
|
|
10.0
|
|
Risk-free
interest rate
|
|
|
2.0
|
%
|
Dividend
yield
|
|
|
0.0
|
%
|
Related
2004 compensation expense was $76,917, determined by amortizing the options'
estimated fair value at grant date over their vesting period. The weighted
average remaining contractual life of the options outstanding at December
31,
2004 was 9.8 years (see Note 8). The Company had no stock options outstanding
at
December 31, 2003.
Stock
Warrants
In
2004,
the Company granted a series of warrants to purchase shares of preferred
stock,
the specific terms of which had yet to be determined, at an exercise price
of
$0.85 per share, in conjunction with the long-term note payable issuance
(see
Note 4). These warrants expire at the earlier of ten years from their issuance
date, or five years after a potential initial public securities offering.
At the
warrant holder's election, these warrants may be exercised on a non-cash
basis
whereby the warrant holder uses the surplus of the preferred stock's then-fair
market value per share over the $0.85 exercise price as payment for the
preferred stock purchased under these warrants.
These
warrants had estimated fair values totaling $218,813 at their grant dates,
recognized as additional paid-in capital and deferred loan origination costs.
Additional information pertaining to these warrants issued and outstanding
at
December 31, 2004 is as follows:
Date
Granted
|
|
Shares
|
|
June,
2004
|
|
|
1,235,294
|
|
August,
2004
|
|
|
766,020
|
|
October,
2004
|
|
|
383,010
|
|
Total
Issued and Outstanding
|
|
|
2,384,324
|
|
Also
in
conjunction with the long-term note payable issuance (see Note 4), the Company
granted warrants to purchase up to $1.0 million of common or preferred stock
that may be issued in conjunction with any future securities offering of
at
least $5.0 million, upon the same price and conditions as afforded to
third-party investors in said potential securities offering.
In
August
2004, the Company issued warrants to purchase 150,000 shares of common stock
to
a former employee whose employment was terminated in June 2004. Such warrants
are exercisable at $0.85 per share, and expire on June 26, 2006. The Company
had
no stock warrants outstanding at December 31, 2003.
Operating
Leases
In
August
2002, the Company entered into an operating lease for office space, which
expires in February 2008. Approximate minimum future lease payments due under
this operating lease, are as follows:
Year
Ending
|
|
|
|
December
31,
|
|
Amount
|
|
2005
|
|
$
|
196,000
|
|
2006
|
|
$
|
202,000
|
|
2007
|
|
$
|
208,000
|
|
2008
|
|
$
|
35,000
|
|
During
the year ended December 31, 2004 and the period May 15, 2002 (date of inception)
through December 31, 2003, $172,700 and $234,000, respectively, were charged
to
operations for rent expense related to this operating lease.
Legal
and Regulatory Proceedings
The
Company's 100%-owned subsidiary, Volo Communications, Inc., settled its breach
of contract dispute related to a 2003 "take or pay" sales contract with the
Company. In connection with this settlement, the Company wrote off its
previously recorded account receivable of $326,205 in 2004.
Vendor
Dispute
Certain
transport and termination costs incurred by the Company are recorded at vendor
invoice amount less any amounts that have been formally disputed, for which
the
Company expects to receive a credit. Disputed amounts are based upon
management's detailed review of vendor call records and contract provisions;
accordingly, the recorded transport and termination costs represent management's
estimates of what is ultimately due and payable. During the year ended December
31, 2004, and the period May 15, 2002 (date of inception) through December
31,
2003, $4,500,000 and $2,500,000, respectively, of one vendor's charges were
formally disputed. As of December 31, 2004, approximately $4,759,000 remained
in
dispute and are, therefore, not included in the accompanying financial
statements (see Note 8). Differences between the disputed amounts and final
settlements, if any, are reported in operations in the year of settlement.
Other
Telecommunications
industry revenues are subject to statutory and regulatory changes,
interpretations of contracts, etc., all of which could materially affect
our
revenues. Generally, our customers have sixty days from the invoice date
to
dispute any billed charges. Management reviews all billings for compliance
with
applicable rules, regulations and contract terms and believes that it is
in
compliance therewith; accordingly, no allowance has been recorded in the
accompanying financial statements for potential disputed charges.
NOTE
8 - SUBSEQUENT EVENTS
Capital
Stock Transactions
In
February 2005, the Company issued 511,750 shares of Series B preferred stock
for
$818,800 cash. In May 2005, 7,289,445 shares of common stock were converted
into
5,944,669 shares of Series A preferred stock. Both Series A and Series B
preferred stock are convertible into common stock, and they carry voting
rights
equal to the equivalent number of common shares into which they are convertible.
Also, both Series A and Series B preferred stock contain equal and ratable
dividend and liquidation preferences over common stock.
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 alleged 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 through March, 2005, and threatening to terminate
all
services to Volo within 5 days. On April 12, 2005, MCI terminated all services
to Volo. By these actions, 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 damages in an amount to be determined at trial. MCI has
filed
a motion to strike certain of Caerus' affirmative defenses and a motion to
dismiss Caerus' counterclaims. Discovery should commence shortly. While
management is optimistic about the outcome of this litigation, it is currently
unable to assess the ultimate likelihood of a favorable or unfavorable outcome;
accordingly, no related provision or liability has been made in the accompanying
financial statements.
Merger
On
May
31, 2005, the Company consummated an Agreement and Plan of Merger ("Merger
Agreement") with VoIP, Inc. ("VoIP") (OTCBB:VOII.OB), whereby 100% of Caerus,
Inc.'s common and preferred stock, stock options and warrants were exchanged
for
the common stock of a wholly-owned subsidiary of VoIP. The VoIP subsidiary's
name was then changed to Caerus, Inc. Also in conjunction with this merger,
the
holder of the $1,830,000 notes payable at December 31, 2004 referred to in
Note
3 agreed to exchange those notes plus accrued interest for an equivalent
number
of shares of VoIP common stock valued at $1.23 per share.
You
may
rely on the information contained in this prospectus. We have not authorized
anyone to provide information different from that contained in this prospectus.
Neither the delivery of this prospectus nor the sale of common shares means
that
information contained in this prospectus is correct after the date of this
prospectus. This prospectus is not an offer to sell or solicitation of an
offer
to buy our common shares in any circumstances under which the offer or
solicitation is unlawful.
|
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Heading
|
|
Page
|
|
|
|
Prospectus
Summary
|
|
3
|
|
|
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Risk
Factors
|
|
5
|
|
|
|
Use
of Proceeds
|
|
14
|
|
|
|
Dividend
Policy and Market Data
|
|
19
|
|
|
|
Business
and Properties
|
|
21
|
|
|
|
Management's
Discussion and Analysis of Financial Condition and Results
of
Operations
|
|
29
|
|
|
|
Management
|
|
32
|
|
|
|
Principal
Shareholders
|
|
37
|
|
|
|
Description
of Securities
|
|
37
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|
|
|
Plan
of Distribution
|
|
|
|
|
|
Investor
Suitability Requirement
|
|
|
|
|
|
Legal
Matters
|
|
38
|
|
|
|
Experts
|
|
|
|
|
|
Available
Information
|
|
39
|
|
|
|
Index
to Financial Statements
|
|
44
|
Until
__________, 2005 (90 days from the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus
when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
UP
TO 46,310,011 SHARES
COMMON
STOCK
VoIP,
Inc.
P
R O S P E C T U S
______________,
2006
INFORMATION
NOT REQUIRED TO BE IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
The
estimated expenses of the registration, all of which will be paid by the
Company, are as follows:
SEC
Filing Fee
|
|
$
|
8,226
|
|
Accounting
Fees and Expenses
|
|
|
25,000
|
|
Legal
Fees and Expenses
|
|
|
30,000
|
|
Total
|
|
$
|
63,225
|
|
Item
14. Indemnification of Directors and Officers
The
Registrant's Articles of Incorporation provide that no director of the
Registrant will be personally liable to the Registrant or any of its
shareholders for monetary damages arising from the director's breach of
fiduciary duty as a director, with certain limited exceptions.
Pursuant
to the Texas Business Corporation Act (the "Act"), every Texas corporation
has
the power to indemnify any person who was or is a party or is threatened
to be
made a party to any threatened, pending or completed action, suit or proceeding
(other than an action by or in the right of the corporation) by reason of
the
fact that such person is or was a director, officer, employee or agent of
the
corporation or is or was serving in such a capacity at the request of the
corporation for another corporation, partnership, joint venture, trust or
other
enterprise, against any and all expenses, judgments, fines and amounts paid
in
settlement and reasonably incurred in connection with such action, suit or
proceeding. The power to indemnify applies only if such person acted in good
faith and in a manner such person reasonably believed to be in the best
interests, or not opposed to the best interests, of the corporation and,
with
respect to any criminal action or proceeding, had no reasonable cause to
believe
his or her conduct was unlawful.
The
power
to indemnify applies to actions brought by or in the right of the corporation
as
well, but only to the extent of defense and settlement expenses and not to
any
satisfaction of a judgment or settlement of the claim itself, and with the
further limitation that in such actions no indemnification shall be made
in the
event of any adjudication of negligence or misconduct unless the court, in
its
discretion, believes that in light of all the circumstances indemnification
should apply. The Registrant's Articles of Incorporation contain provisions
authorizing it to indemnify its officers and directors to the fullest extent
permitted by the Act.
Effective
September 2005, registrant issued 4,888,250 shares of common stock for cash
of
$3,910,600.
Effective
September 2005, registrant issued 30,500 shares of common stock for cash
of
$25,925 in connection with the exercise of employee stock options.
Effective
September 2005, registrant issued 1,501,001 shares of common stock for the
conversion of 2,200,000 warrants.
Effective
September 2005, registrant issued 222,278 shares of common stock for services
provided to the company.
All
such
shares were issued pursuant to exemptions provided by Section 4(2) of the
Securities Act of 1933 and Regulation D.
(b)
Exhibits
(3)
|
|
2.1
|
|
Stock
Contribution Agreement dated May 25, 2004, between Registrant
and Steven
Ivester
|
|
|
|
|
|
(11)
|
|
2.2
|
|
Agreement
and Plan of Merger with Caerus, Inc. dated as of May 31,
2005
|
|
|
|
|
|
(12)
|
|
2.3
|
|
Asset
Purchase Agreement dated as of August 3, 2005, by and between
VoIP, Inc. Acquisition Company and WQN, Inc.
|
|
|
|
|
|
(1)
|
|
3.1.1
|
|
Articles
of Incorporation
|
|
|
|
|
|
(3)
|
|
3.1.2
|
|
Amendment
of Articles of Incorporation
|
|
|
|
|
|
(1)
|
|
3.2
|
|
Bylaws
|
|
|
|
|
|
(3)
|
|
4.1
|
|
Specimen
Stock Certificate
|
|
|
|
|
|
(16)
|
|
5.1
|
|
Opinion
of Andrews Kurth LLP
|
|
|
|
|
|
(3)
|
|
10.1
|
|
2004
Stock Option Plan
|
|
|
|
|
|
(2)
|
|
10.2
|
|
Stock
Purchase Agreement dated February 27, 2004 between Registrant
and Steven
Ivester
|
|
|
|
|
|
(4)
|
|
10.3
|
|
Stock
Purchase Agreement dated June 25, 2004 among Registrant, DTNet
Technologies and Marc Moore
|
|
|
|
|
|
(5)
|
|
10.4
|
|
Stock
Purchase Agreement among Carlos Rivas, Albert Rodriguz, Registrant
and Vox
Consulting Group Inc.
|
|
|
|
|
|
(6)
|
|
10.5.1
|
|
Subscription
Agreement
|
|
|
|
|
|
(6)
|
|
10.5.2
|
|
Form
of Class A Warrant
|
|
|
|
|
|
(6)
|
|
10.5.3
|
|
Form
of Class B Warrant
|
|
|
|
|
|
(7)
|
|
10.6.1
|
|
Stock
Purchase Warrant issued to Ivano Angelaftri
|
|
|
|
|
|
(7)
|
|
10.6.2
|
|
Stock
Purchase Warrant issued to Ebony Finance
|
|
|
|
|
|
(8)
|
|
10.7
|
|
Net
Exercise Agreement with John Todd
|
|
|
|
|
|
(9)
|
|
10.8
|
|
Asset
Purchase Agreement dated February 23, 2005
|
|
|
|
|
|
(10)
|
|
10.9.1
|
|
Subscription
Agreement
|
|
|
|
|
|
(10)
|
|
10.9.2
|
|
Form
of Class C Warrant
|
|
|
|
|
|
(10)
|
|
10.9.3
|
|
Form
of Class D Warrant
|
|
|
|
|
|
(10)
|
|
10.9.4
|
|
Form
of Convertible Note
|
|
|
|
|
|
(10)
|
|
10.9.5
|
|
Security
Agreement
|
|
|
|
|
|
(10)
|
|
10.9.6
|
|
Security
and Pledge Agreement
|
|
|
|
|
|
(10)
|
|
10.9.7
|
|
Guaranty
|
|
|
10.10
|
|
Caerus,
Inc. Merger Documents dated May 31, 2005:
|
|
|
|
|
|
(11)
|
|
10.10.1
|
|
Option
Exchange Agreement
|
|
|
|
|
|
(11)
|
|
10.10.2
|
|
Registration
Rights Agreement
|
|
|
|
|
|
(11)
|
|
10.10.3
|
|
Exchange
Agreement
|
|
|
|
|
|
(11)
|
|
10.10.4
|
|
Registration
Rights Agreement
|
|
|
|
|
|
(11)
|
|
10.10.5
|
|
Consent
and Waiver Agreement
|
|
|
|
|
|
(11)
|
|
10.10.6
|
|
Guaranty
|
|
|
|
|
|
(11)
|
|
10.10.7
|
|
Security
Agreement
|
|
|
|
|
|
(11)
|
|
10.10.8
|
|
Employment
Agreement
|
|
|
|
|
|
|
|
10.11
|
|
WQN,
Inc. Documents dated August 3, 2005:
|
|
|
|
|
|
(12)
|
|
10.11.1
|
|
Warrant
|
|
|
|
|
|
(12)
|
|
10.11.2
|
|
Security
Agreement between VoIP, Inc. and WQN, Inc.
|
|
|
|
|
|
(12)
|
|
10.11.3
|
|
Consent,
Waiver and Acknowledgement by and among Cedar Boulevard Lease
Funding,
Inc., VoIP,
Inc. and
certain
Subsidiaries
of VoIP, Inc.
|
|
|
|
|
|
(12)
|
|
10.11.4
|
|
Third
Amendment to Subordinated Loan and Security Agreement
by and among Cedar Boulevard Lease Funding, Inc., VoIP,
Inc. and certain subsidiaries of VoIP, Inc.
|
|
|
|
|
|
(12)
|
|
10.11.5
|
|
Security
Agreement between Cedar Boulevard Lease Funding, Inc. and VoIP
Acquisition
Company
|
|
|
|
|
|
(12)
|
|
10.11.6
|
|
Guaranty
between Cedar Boulevard Lease Funding, Inc. And VoIP Acquisition
Company
Promissory Note
|
|
|
|
|
|
(13)
|
|
10.12.1
|
|
Subscription
Agreement for Secured Note dated January 6, 2006 |
|
|
|
|
|
(13)
|
|
10.12.2
|
|
Subscription
Agreement for Unsecured Note dated January 6, 2006 |
|
|
|
|
|
(14)
|
|
10.12.3
|
|
Subscription
Agreement dated February 3, 2006 |
|
|
|
|
|
(16)
|
|
21.1
|
|
Subsidiaries
of the Registrant
|
|
|
|
|
|
(16)
|
|
23.1
|
|
Consent
of Tschopp, Whitcomb & Orr, P.A.
|
|
|
|
|
|
|
|
23.2
|
|
Consent
of Berkovits, Lago & Company, LLP
|
|
|
|
|
|
|
|
23.3
|
|
Consent
of Andrews Kurth LLP -- included in Exhibit 5.1
|
|
|
|
|
|
(15)
|
|
23.4
|
|
Consent
from Moore Stephens Lovelace, P.A.
|
|
|
|
|
|
(1)
|
|
|
|
Filed
as exhibits to Registrant's Form 10SB filed January 19,
2000
|
|
|
|
|
|
(2)
|
|
|
|
Filed
as exhibit to Form 8-K filed March 3, 2004
|
|
|
|
|
|
(3)
|
|
|
|
Filed
as exhibit to Form 8-K filed June 9, 2004
|
|
|
|
|
|
(4)
|
|
|
|
Filed
as exhibit to Form 8-K filed July 7, 2001
|
|
|
|
|
|
(5)
|
|
|
|
Filed
as exhibit to Form 8-K filed September 16,
2004
|
(6)
|
|
|
|
Filed
as exhibit to form 8-K filed November 17, 2004
|
|
|
|
|
|
(7)
|
|
|
|
Filed
as exhibit to form 8-K filed December 15, 2004
|
|
|
|
|
|
(8)
|
|
|
|
Filed
as exhibit to form 8-K filed February 16, 2005
|
|
|
|
|
|
(9)
|
|
|
|
Filed
as exhibit to form 8-K filed March 1, 2005
|
|
|
|
|
|
(10)
|
|
|
|
Filed
as exhibit to form 8-K filed June 6, 2005
|
|
|
|
|
|
(11)
|
|
|
|
Filed
as exhibit to form 8-K filed July 11, 2005
|
|
|
|
|
|
(12)
|
|
|
|
Filed
as exhibit to form 8-K filed August 9, 2005
|
|
|
|
|
|
(13)
|
|
|
|
Filed
as exhibit to Form 8-K filed January 12, 2006 |
|
|
|
|
|
(14)
|
|
|
|
Filed
as exhibit to Form 8-K filed February 8, 2006 |
|
|
|
|
|
(15)
|
|
|
|
Filed
herewith
|
|
|
|
|
|
(16)
|
|
|
|
To
be filed by Amendment |
The
undersigned Registrant hereby undertakes as follows:
(a)
(1)
To file, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i)
Include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii)
Reflect in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume
of
securities offered (if the total dollar value of securities offered would
not
exceed that which was registered) and any deviation from the low or high
end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective Registration Statement; and
(iii)
Include any additional or changed material information on the plan of
distribution.
(2)
For
determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered and the
offering of the securities at that time to be the initial bona fide offering.
(3)
File
a post-effective amendment to remove from registration any of the securities
being registered that remain unsold at the end of the offering.
In
accordance with the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of
the
requirements of filing on Form S-1 and authorized this registration statement
to
be signed on its behalf by the undersigned, in the City of Fort Lauderdale,
State of Florida, on February 13, 2006.
VoIP,
INC.
|
|
|
|
|
|
|
|
|
By: |
/s/
B. Michael Adler |
|
B.
Michael Adler, Chairman and Chief Executive
Officer |
|
|
In
accordance with requirements of the Securities Act of 1933, this registration
statement was signed by the following persons in the capacities and on the
dates
stated:
SIGNATURE |
|
TITLE |
|
DATE |
|
|
|
|
|
/s/
B. Michael Adler |
|
Chairman
and Chief Executive Officer, |
|
February
10, 2006 |
B. Michael Adler |
|
|
|
|
|
|
|
|
|
/s/
David Sasnett |
|
Chief
Financial Officer |
|
February
10, 2006 |
David Sasnett |
|
Principal
Accounting Officer |
|
|
|
|
|
|
|
/s/
George Firestone |
|
Director |
|
February
10, 2006 |
George Firestone |
|
|
|
|
|
|
|
|
|
/s/
Stuart Kosh |
|
Director |
|
February
13, 2006 |
Stuart
Kosh |
|
|
|
|