UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB/A
(Amendment
No. 2)
(Mark
One)
x
ANNUAL
REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the
fiscal year ended December 31, 2004
o
TRANSITION
REPORT PURSUANT TO SECTION 13
OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the
transition period ____________to____________
Commission
file number 000-28985
VOIP,
INC.
(Name
of
small business issuer in its charter)
Texas
|
75-2785941
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
12330
SW 53rd
Street, Suite 712
|
|
Fort
Lauderdale, Florida
|
33330
|
(Address
of principal executive offices)
|
(ZIP
Code)
|
Issuer's
telephone number, including area code: (954) 434-2000
Securities
registered pursuant to Section 12(b) of the Act: None.
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, par value
$0.001.
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. o
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for
such shorter period that the issuer was required to file such reports), and
(2)
has been subject to such filing requirements for the past 90 days. YES x NO o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and none will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to
this Form 10-KSB. x
Indicate
by a check mark whether the registrant is a shell company (as defined by
Rule12b-2 of the Exchange Act). YES o
NO x
The
issuer's revenues for its most recent fiscal year were: $1,828,193.
The
aggregate market value of the voting common stock held by non-affiliates of
the
issuer, based on the average bid and asked price of such stock, was $98,248,877
at December 31, 2004.
At
March
18, 2005, the registrant had outstanding 26,378,132 shares of par value $.001
common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
Transitional
Small Business Disclosure Format (Check one): Yes o; No x
VOIP,
INC.
FORM
10-KSB/A FOR THE YEAR ENDED DECEMBER 31, 2004
TABLE
OF CONTENTS
PART
II
|
4
|
|
|
ITEM
6. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND PLAN OF OPERATION
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4
|
|
|
ITEM
7. FINANCIAL STATEMENTS
|
6
|
|
|
ITEM
8A. CONTROLS AND PROCEDURES - EVALUATION OF DISCLOSURE
CONTROLS
|
6
|
|
|
PART
III
|
9
|
|
|
ITEM
13. EXHIBITS
|
9
|
Explanatory
Note
VoIP,
Inc. (the "Company") is filing this Amendment No. 2 to its Annual Report on
Form
10-KSB for the year ended December 31, 2004 (the "2004 10-KSB"), which was
originally filed on March 30, 2005, and amended on November 23, 2005. This
Amendment No. 2 is being filed to restate the Company's financial statements
for
the year ended December 31, 2004, which were misstated, resulting in overstated
revenues, expenses, receivables and payables, and understated net loss. This
misstatement was discovered by the senior financial management personnel that
commenced their employment with the Company in the fourth quarter of 2005,
during their review and analysis in connection with the preparation of the
Company’s 2005 annual financial statements. This misstatement occurred in the
financial statements of the Company's consolidated subsidiary VCG Technologies,
Inc., doing business as DTNet Technologies (“DTNet”), which was acquired in June
2004. The Company has therefore decided to restate its 2004 consolidated
financial statements to correct these misstatements. Adjustments are made to
reduce: (a) the overstatements of revenues and receivables; (b) the
overstatement of cost of goods sold; and (c) the understatement of net loss,
which aggregated $791,200, $498,123, and $462,618, respectively, for the year
ended December 31, 2004.
The
Company’s amended Annual Report on Form 10-KSB/A filed on November 23, 2005
previously restated the Company's 2004 consolidated financial statements
to
include approximately $1.4 million in compensation expense relating to warrants
and options issued to employees during 2004. In addition, certain
reclassifications have been made to the 2004 financial statements presented
herein to conform to the presentation as filed in the Company’s Annual Report on
Form 10-KSB for the year ended December 31, 2005 which was filed on April
17,
2006.
This
Amendment No. 2 amends (i) Part II, Item 6 - Management's Discussion and
Analysis of Financial Condition and Results of Operations and Plan of Operation
to reflect the restated results of operations for 2004; (ii) Part II, Item
8 -
Financial Statements to provide the restated financial statements and notes
thereto for 2004; (iii) Part II Item 8A - Controls and Procedures - Evaluation
of Disclosure Controls and Procedures to report management's assessment of
the
Company's disclosure controls as of the date of the filing of this Amendment
No.
2; and (iv) the certifications required under Rules 13a-15 and 15d-15(e)
of the
Securities Exchange Act of 1934, as amended, (the "Exchange Act") so that
they
can be dated as of a current date as required by Rule 12b-15 of the Exchange
Act.
This
Amendment does not reflect events occurring after the filing of the 2004 10-KSB,
and does not update or modify the disclosures therein in any way other than
as
required to reflect the amendments described above.
PART
II
ITEM
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS AND PLAN OF OPERATION
The
information presented in this section should be read in conjunction with the
information contained in the financial statements, including the notes thereto,
and the other financial statements appearing elsewhere in this
report.
General
The
following discussion should be read in conjunction with the Consolidated
Financial Statements and the notes thereto and the other financial information
appearing elsewhere in this Annual Report on Form 10-KSB/A. Certain statements
contained in this Annual Report on Form 10-KSB/A 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 forecast 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 or 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. Except as required
by applicable law, we undertake no obligation to update any forward-looking
statements, whether as a result of new information, future events or
otherwise.
Restatement
of 2004 Financial Statements
On
March
22, 2006, we concluded that our consolidated financial statements for the
year
ended December 31, 2004 were misstated, resulting in overstated revenues,
expenses, receivables and payables, and understated net loss. These
misstatements were discovered by the senior financial management personnel
that
commenced their employment with the Company in the fourth quarter of 2005,
during their review and analysis in connection with the preparation of the
2005
annual financial statements. The misstatements occurred in the financial
statements of our consolidated subsidiary, DTNet, which was acquired in June
2004. We have therefore decided to restate our 2004 consolidated financial
statements to correct these misstatements. Adjustments to reduce: (a) the
overstatements of revenues and receivables; (b) the overstatement of cost
of
goods sold; and (c) the understatement of net loss, aggregated $791,200,
$498,123, and $462,618, respectively, for the year ended December 31,
2004.
Our
amended Annual Report on Form 10-KSB/A filed on November 23, 2005 previously
restated our 2004 consolidated financial statements to include approximately
$1.4 million in compensation expense relating to warrants and options issued
to
employees during 2004.
In
addition, certain reclassifications have been made to the 2004 financial
statements contained herein, to conform to the 2004 presentation as filed
in our
Annual Report on Form 10-KSB for the year ended December 31, 2005, which
was
filed on April 17, 2006.
The
following table sets forth the impact of these restatements on certain amounts
previously reported in our consolidated financial statements for the year
ended
December 31, 2004:
Balance
Sheet Data
|
|
As
of December 31, 2004
|
|
|
|
As
Originally
Reported
|
|
As
Previously Restated in Amendment No.1
|
|
As
Restated Herein
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
818,071
|
|
$
|
818,071
|
|
$
|
166,239
|
|
Inventory
|
|
|
187,451
|
|
|
187,451
|
|
|
324,185
|
|
Accounts
payable
|
|
|
1,224,974
|
|
|
1,224,974
|
|
|
1,148,833
|
|
Additional
paid-in capital
|
|
|
12,722,565
|
|
|
14,107,328
|
|
|
14,107,328
|
|
Accumulated
deficit
|
|
|
(4,639,386
|
)
|
|
(6,024,149
|
)
|
|
(6,486,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data
|
|
|
Year
Ended December 31, 2004
|
|
|
|
|
As
Originally
Reported
|
|
|
As
Previously Restated in Amendment No.1
|
|
|
As
Restated Herein
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,619,393
|
|
$
|
2,619,393
|
|
$
|
1,828,193
|
|
Cost
of goods sold
|
|
|
1,870,269
|
|
|
1,870,269
|
|
|
1,372,146
|
|
Compensation
and related expenses
|
|
|
2,721,296
|
|
|
4,106,059
|
|
|
4,106,059
|
|
General
and administrative expenses
|
|
|
2,187,878
|
|
|
2,187,878
|
|
|
2,357,419
|
|
Loss
from continuing operations before income
|
|
|
|
|
|
|
|
|
|
|
taxes
and discontinued operations
|
|
|
(4,160,050
|
)
|
|
(5,544,813
|
)
|
|
(6,007,431
|
)
|
Net
loss
|
|
|
(4,014,739
|
)
|
|
(5,399,502
|
)
|
|
(5,862,120
|
)
|
Net
loss per share
|
|
|
(0.27
|
)
|
|
(0.37
|
)
|
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
For
discussion of the impact of these restatements on current management’s
evaluation of disclosure controls and procedures, the separate Board of
Directors investigation of these misstatements and the steps we are taking
to
address the issues associated with these misstatements, see Item 8A. “Controls
and Procedures.”
Results
of Operations
Net
revenue totaled $2,236,806 ($1,828,193 from continuing operations) for the
year
ended December 31, 2004 as compared to $8,678 for the year ended December
31,
2003. The $2,228,128 increase in total net revenue was primarily attributable
to
our entry into the new voice over internet protocol ("VoIP") business segment
and the acquisition of Vox Consulting Group, Inc., doing business as
VoipAmericas, and DTNet in 2004.
Revenue
from the sale of tea in the segment business that we have discontinued was
$408,613, or 18.3%, 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’
revenue for the first nine months of 2004 were $1.4 million. Management believes
that the acquisitions of DTNet and VoipAmericas will provide proven distribution
channels and leadership in sales throughout the Americas. DTNet and VoipAmericas
complement our strategy to deliver VoIP services over a wireless local loop
and
deliver service provider solutions to cable operators.
Net
losses for the respective years ended December 31, 2004 and 2003 were $5,862,120
and $352,968, respectively. Net loss per share was $0.40 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 approximately $6.5
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 employee and
approximately $1.1 million in compensation costs for stock options issued
to
employees and also reflect increases in headcount and related personnel
expenses. The general and administrative expenses for 2004 reflect the Company's
new line of business, VoIP telephony services.
The
comparison of operations for the years ended December 31, 2004 and 2003 is
not
indicative of our current business model, since during 2003, we were in the
business of importing and selling a line of fine teas. We have since
discontinued the tea business, to focus solely on VoIP and emerging
technologies.
Liquidity
and Capital Resources
As
of
December 31, 2004, we had cash and cash equivalents approximating $1,141,000.
We
had two borrowing arrangements, one for $200,000 with a local bank and one
for
$560,000 with a note payable to a shareholder. Cash used in operating activities
of $2.9 million in fiscal year 2004 was primarily attributable to the net loss
of $5.9 million, which included non cash items for warrants and options issued
to Company employees amounting to approximately $3.3 million recorded as
compensation in the Consolidated Statement of Operations. Cash provided by
financing activities in fiscal 2004 consisted primarily of $3.6 million of
proceeds resulting from the sale of common stock to investors in private
placement transactions during the whole year and, as above-mentioned, proceeds
from issuance of note payable of $560,000.
Liquidity
for the period from inception through December 31, 2004 has been mainly provided
by sales of common stock through private placements and borrowing from
affiliates. Management has taken actions directly related to the generation
of
product sales during calendar 2004 and anticipates that these efforts will
be
sufficient to provide reasonable resources to sustain its operations during
2005.
We
anticipate that all working capital requirements for the current annual period
will be satisfied from the operation of the newly acquired business and the
sales of additional common shares through private placements.
Payments
Due by Period
The
following table illustrates our outstanding debts and the terms of that debt
as
of December 31, 2004:
Contractual
Obligations
|
|
Total
|
|
Less
than 1 Year
|
|
Loans
payable
|
|
$
|
200,000
|
|
$
|
200,000
|
|
Due
to related parties
|
|
|
560,000
|
|
|
560,000
|
|
Operating
leases
|
|
|
35,572
|
|
|
35,572
|
|
Purchase
obligations
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
795,572
|
|
$
|
795,572
|
|
|
|
|
|
|
|
|
|
We
own
market investment securities issued by various securities issuers. The issuers
of these products retain all interest rate and default risk.
Available
Information
We
maintain a corporate Internet website with the address www.voipincorporated.com.
The contents of this website are not incorporated in or otherwise to be regarded
as part of this report. We file reports with the Securities and Exchange
Commission, or SEC, which are available on our website free of charge. These
reports include Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB,
current reports on Form 8-K and amendments to such reports, each of which is
provided on our website as soon as reasonably practicable after we
electronically file such materials with or furnish them to the SEC. You can
also
read and copy any materials we file with the SEC at the SEC's Public Reference
Room at 100 F Street, NE, Washington, DC 20549. In addition, the SEC maintains
a
website (www.sec.gov) that contains reports, proxy and information statements,
and other information regarding issuers that file electronically with the SEC,
including us.
ITEM
7. FINANCIAL STATEMENTS
The
financial statements required by this item begin at Page F-1
hereof.
ITEM
8A.CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As
required by Rule 13a-15(b) under the Exchange Act, as of the end of the
period covered by this Annual Report, our management conducted an evaluation
with the participation of our Chief Executive Officer and Chief Financial
Officer (collectively, the “Certifying Officers”) regarding the effectiveness of
the design and operation of the Company’s disclosure controls and procedures (as
defined in Rules13a-15(e) and 15d-15(e) under the Exchange Act). Our management,
with the participation of the Certifying Officers, also conducted an evaluation
of our Company’s internal control over financial reporting and identified three
control deficiencies, which in combination resulted in a material weakness.
A
significant deficiency is a control deficiency, or combination of control
deficiencies, that adversely affects the Company’s ability to initiate,
authorize, record, process or report external financial data reliably in
accordance with generally accepted accounting principles such that there
is more
than a remote likelihood that a misstatement of the Company’s annual or interim
financial statements that is more than inconsequential will not be prevented
or
detected. A material weakness is a significant deficiency, or combination
of
significant deficiencies, that results in more than a remote likelihood that
a
material misstatement of a company’s annual or interim financial statements will
not be prevented or detected. The control deficiencies identified by our
management and the Certifying Officers that existed at December 31, 2004,
which
in combination resulted in a material weakness were: (a) misstatements in
amounts reported for a consolidated subsidiary, and (b) insufficient
personnel resources with appropriate accounting expertise.
Based
on this evaluation and in accordance with the requirements of Auditing Standard
No. 2 of the Public Company Accounting Oversight Board, our Certifying
Officers conclude that the Company’s disclosure controls and procedures were
ineffective as of December 31, 2004.
Our
management, including the Certifying Officers, does not expect that our
disclosure controls and procedures will prevent all errors and all improper
conduct. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute assurance that the objectives of the
control system are met. Further, a design of a control system must reflect
the
fact that there are resource constraints, and the benefits of controls must
be
considered relative to their costs. Because of the inherent limitations in
all
control systems, no evaluation of controls can provide absolute assurance
that
all control issues and instances of improper conduct, if any, have been
detected. These inherent limitations include the realities that judgments
and
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more persons, or by management
override of the control. Further, the design of any system of controls is
also
based in part upon assumptions about the likelihood of future events, and
there
can be no assurance that any design will succeed in achieving its stated
goals
under all potential future conditions. Over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations and a
cost-effective control system, misstatements due to error or fraud may occur
and
may not be detected.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f)
under the Exchange Act. The Company’s internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, and
includes those policies and procedures that:
· |
pertain
to the maintenance of records that, in reasonable detail accurately
and
fairly reflect the transactions and dispositions of the assets of
the
Company;
|
· |
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles and, that receipts and expenditures of the
Company
are being made only in accordance with authorization of management
and
directors of the Company; and
|
· |
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial
statements.
|
Our
management, including the Certifying Officers, assessed the effectiveness of
the
Company’s internal control over financial reporting as of December 31, 2004, and
have concluded that the Company had the following control deficiencies that,
when combined, resulted in a material weakness:
(a) |
In
March 2006, during their review and analysis of 2005 results and
financial
condition in connection with the preparation of the 2005 financial
statements and the 2005 Form 10-KSB, our senior financial management
discovered certain overstatements of the revenues, expenses and
receivables reported, and understatement of net loss, for our consolidated
subsidiary DTNet. Based upon an assessment of the impact of the
adjustments to our financial results arising from this matter, we
have
restated the financial information presented in this Form 10-KSB/A
for the
period ended December 31, 2004. Adjustments to reduce: (a) the
overstatements of revenues and receivables; (b) the overstatement
of cost
of goods sold; and (c) the understatement of net loss, aggregated
$791,200, $498,123, and $462,618, respectively, for the year ended
December 31, 2004.
|
(b) |
During
the preparation of the financial statements for the period ended
September
30, 2005, the Company discovered that it did not recognize in its
2004
financial statements the full amount of compensation expense that
should
have been recognized on warrants issued to employees, or the compensation
expense for the vested portion of approximately 4,000,000 stock options
issued to employees, during the three months ended September 30,
2004, in
accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation." The compensation expense
that
was not recognized relating to these options and warrants was $1,384,763.
The Company therefore restated its related 2004 financial information,
as
filed in its Quarterly Report on Form 10-QSB/A filed May 11, 2006
for the
period ended September 30, 2004, and in its amendment to its Annual
Report
on Form 10-KSB/A filed November 23, 2005 for year ended December
31, 2004,
to correct this misstatement.
|
(c) |
The
Company does not have sufficient personnel resources at corporate
headquarters with appropriate accounting expertise or experience
in
financial reporting for public companies. Management, with the
participation of the Certifying Officers, determined that the potential
magnitude of a misstatement arising from this deficiency is more
than
inconsequential to the annual and/or interim financial statements.
|
Management
has concluded that the above deficiencies when combined together have resulted
in a material weakness in its internal control over financial reporting because
the quantitative effect of any errors resulting from these deficiencies when
taken together could result in a material misstatement of the Company’s interim
and annual financial reports. Based on this evaluation and in accordance
with
the requirements of Auditing Standard No. 2 of the Public Company
Accounting Oversight Board, the Chief Executive Officer and Chief Financial
Officer concluded that the Company did not maintain effective internal control
over financial reporting as of December 31, 2004.
Remediation
Steps to Address Control Deficiencies
The
Company is in the process of addressing the identified material weakness
by
remediating the control deficiencies in the Company’s internal control over
financial reporting which comprise this material weakness as follows:
(a) |
In
March 2006 the Company’s Board of Directors retained counsel to conduct a
thorough investigation of the accounting misstatements of the Company’s
DTNet subsidiary. Such counsel, in turn, retained an independent
forensic
accounting firm to assist its investigation. Based on this investigation,
the Company’s Board of Directors and management have concluded that these
intentional overstatements of revenues, expenses and receivables
were
limited to the unauthorized actions of two individuals. One of these
individuals was employed at corporate headquarters and the other
was
employed at DTNet’s headquarters. The individual employed at corporate
headquarters resigned shortly after the initiation of the investigation
and the Company terminated the employment of the other individual
immediately following the receipt of the preliminary findings of
the
investigation in early April 2006. On April 19, 2006 the Company
sold
DTNet to a former officer of the Company.
|
(b) |
The
Company continues to seek to improve its in-house accounting resources.
During the fourth quarter of 2005 the Company hired a new CFO with
significant accounting and public company experience. During the
first
quarter of 2006, the Company did not hire any new accounting personnel,
However, the Company significantly supplemented its internal accounting
resources during these three months by using independent accounting
and
financial consulting firms. Management expects to continue to use
such
third parties until such time as the Company is able to hire sufficient
in-house accounting expertise. In April 2006 the Company promoted
the
former Finance Director of one of its recently acquired subsidiaries
to
the position of Corporate Controller. This individual has significant
financial experience (including five years with the audit department
of
the accounting firm of KPMG Peat Marwick), has served as the CFO
and/or
controller of various companies (including a public registrant),
and is a
Certified Public Accountant.
|
Changes
in Control Over Financial Reporting
There
were no changes in the Company’s internal control over financial reporting
identified in connection with the evaluation of such internal control that
occurred during the Company’s last fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
PART
III
ITEM
13. EXHIBITS
(a)
The
following documents are filed as part of this Annual Report on Form
10-KSB/A:
|
1. |
Financial
Statements: The financial statements filed as part of this report
are
listed in the "Index to Financial Statements" on Page F-1
hereof.
|
|
2. |
Exhibits
required to be filed by Item 601 of Regulation
10-KSB
|
31.1 |
Certification
of Chief Executive Officer under Section 302 of the Sarbanes-Oxley
Act of
2002
|
31.2 |
Certification
of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley
Act
of 2002
|
32.1 |
Certification
of Chief Executive Officer under 18 U.S.C. ss. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002
|
32.2 |
Certification
of Chief Financial Officer under 18 U.S.C. ss. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002
|
VOIP,
INC.
|
|
|
TABLE
OF CONTENTS
|
|
|
|
|
|
Page
|
|
|
Reports
of Independent Certified Public Accountants
|
F-2,
3
|
|
|
Consolidated
Balance Sheets December 31, 2004 (As Restated) and 2003
|
F-4
|
|
|
Consolidated
Statements of Operations for Years Ended December 31, 2004 (As
Restated)
and 2003
|
F-5
|
|
|
Consolidated
Statements of Cash Flow for Years Ended December 31, 2004 (As Restated)
and 2003
|
F-6
|
|
|
Consolidated
Statement of Changes in Shareholders Equity for years Ended December
31,
2004 (As Restated) and 2003
|
F-7
|
|
|
Notes
to Consolidated Financial Statements for Year Ended December 31,
2004
|
F-8
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors
VoIP,
Inc. and Subsidiaries
Fort
Lauderdale, Florida
We
have
audited the accompanying consolidated balance sheet of VoIP, Inc. and
Subsidiaries (“the Company”) as of December 31, 2004, and the related
consolidated statements of operations, shareholders’ equity, and cash flows for
the year ended December 31, 2004. These consolidated financial statements
are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company has determined
that it
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we do not express such an opinion.
An
audit includes examining, on a test basis, evidence supporting the amounts
and
disclosures in the financial statements. An audit also includes, assessing
the
accounting principles used and significant estimates made by management,
as well
as evaluating the overall financial statement presentation. We believe that
our
audit provides a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above presents
fairly, in all material respects, the consolidated financial position of
VoIP,
Inc. and its Subsidiaries, as of December 31, 2004, and the results of
operations and cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
As
discussed in Note B to the consolidated financial statements, the accompanying
consolidated balance sheet and related consolidated statements of operations,
shareholders’ equity and cash flows have been restated to reflect the accounting
for certain stock warrants and options awarded to employees during 2004,
as well
as misstatements which occurred in the financial statements of the Company’s
consolidated subsidiary doing business as DTNet Technologies.
/s/
Berkovits, Lago & Company, LLP
Fort
Lauderdale, Florida
March
16,
2005 except for
Note
B as
to which the date
is
May 8,
2006
TSCHOPP,
WHITCOMB & ORR, P.A.
2600
Maitland Center Parkway, Suite 330
Maitland,
FL 32751
Board
of
Directors and Stockholder
Millennia
Tea Masters, Inc.
We
have
audited the accompanying balance sheet of Millennia Tea Masters, Inc. as of
December 31, 2003 and the related statements of operations, changes in
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on
our audit.
We
conducted our audit in accordance with auditing standards generally accepted
in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In
our
opinion, the financial statements referred to above, present fairly, in all
material respects, the financial position of Millennia Tea Masters, Inc. as
of
December 31, 2003, and the results of its operations and its cash flows for
the
year then ended in conformity with accounting principles generally accepted
in
the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has experienced limited sales
and
incurred cumulative operating losses since its inception through December 31,
2003. The Company has been dependent upon the proceeds from the sales of common
stock and advances from related parties to provide working capital. This
situation raises a substantial doubt about the Company's ability to continue
as
a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/
Tschopp, Whitcomb & Orr, P.A.
January
30, 2004
Maitland,
Florida
|
VoIP
Inc.
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
December
31, 2004
|
|
December
31, 2003
|
|
|
|
(As
Restated)
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,141,137
|
|
$
|
—
|
|
Accounts
receivable, net of allowance of $136,795
|
|
|
166,239
|
|
|
—
|
|
Due
from related parties
|
|
|
245,402
|
|
|
—
|
|
Inventory
|
|
|
324,185
|
|
|
—
|
|
Assets
from discontinued operations
|
|
|
412,419
|
|
|
259,459
|
|
Total
current assets
|
|
|
2,289,382
|
|
|
259,459
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
419,868
|
|
|
—
|
|
Goowill
and other intangibles
|
|
|
6,923,854
|
|
|
—
|
|
Other
assets
|
|
|
23,580
|
|
|
—
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
9,656,684
|
|
$
|
259,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
1,148,833
|
|
$
|
—
|
|
Loans
payable
|
|
|
200,000
|
|
|
—
|
|
Due
to related parties
|
|
|
560,000
|
|
|
|
|
Liabilities
from discontinued operations
|
|
|
—
|
|
|
151,167
|
|
Other
current liabilities
|
|
|
103,031
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
2,011,864
|
|
|
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
|
|
|
(6,486,767
|
)
|
|
(624,647
|
)
|
Total
shareholders' equity
|
|
|
7,644,820
|
|
|
108,292
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$
|
9,656,684
|
|
$
|
259,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
VoIP
Inc.
|
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
Year
Ended December 31
|
|
|
|
2004
|
|
2003
|
|
|
|
(As
Restated)
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,828,193
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,372,146
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
456,047
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
Compensation
and related expenses
|
|
|
4,106,059
|
|
|
—
|
|
General
and administrative expenses
|
|
|
2,357,419
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income
|
|
|
|
|
|
|
|
taxes
and discontinued operations
|
|
|
(6,007,431
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Net
loss before discontinued operations
|
|
|
(6,007,431
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations,
|
|
|
|
|
|
|
|
net
of income taxes
|
|
|
145,311
|
|
|
(352,968
|
)
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(5,862,120
|
)
|
$
|
(352,968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before discontinued operations
|
|
$
|
(0.41
|
)
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations,
|
|
|
|
|
|
|
|
net
of income taxes
|
|
|
0.01
|
|
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
Net
loss per share
|
|
$
|
(0.40
|
)
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
14,597,312
|
|
|
1,730,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated
financial
statements.
|
|
|
|
|
|
|
|
VoIP,
Inc.
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
2004
|
|
2003
|
|
Cash
flows from operating activities:
|
|
|
(As
Restated
|
)
|
|
|
|
Continuing
operations:
|
|
|
|
|
|
|
|
Net
loss from continuing operations
|
|
$
|
(6,007,431
|
)
|
$
|
—
|
|
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
|
|
|
—
|
|
Options
and warrants issued for services and compensation
|
|
|
3,320,763
|
|
|
—
|
|
Shares
issued for intellectual property
|
|
|
105,100
|
|
|
|
|
Changes
in operating assets and liabilities, net of assets & liabilities
acquired:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
96,825
|
|
|
—
|
|
Due
from related parties
|
|
|
(245,402
|
)
|
|
—
|
|
Inventory
|
|
|
8,179
|
|
|
—
|
|
Other
current assets
|
|
|
52,233
|
|
|
—
|
|
Accounts
payable
|
|
|
(372,446
|
)
|
|
—
|
|
Other
current liabilities
|
|
|
(335,696
|
)
|
|
—
|
|
Net
cash used in continuing operating activities
|
|
|
(2,664,082
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations
|
|
|
145,311
|
|
|
(352,968
|
)
|
Changes
in assets, liabilities, and net results
|
|
|
(408,000
|
)
|
|
274,262
|
|
Net
cash used in discontinued operating activities
|
|
|
(262,689
|
)
|
|
(78,706
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(2,926,771
|
)
|
|
(78,706
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities - continuing operatons:
|
|
|
|
|
|
|
|
Cash
from acquisitions
|
|
|
104,872
|
|
|
—
|
|
Purchase
of property and equipment
|
|
|
(157,881
|
)
|
|
—
|
|
Cash
for intellectual property
|
|
|
(50,000
|
)
|
|
—
|
|
Purchase
of other assets
|
|
|
(21,200
|
)
|
|
—
|
|
Net
cash used in continuing investing activities
|
|
|
(124,209
|
)
|
|
—
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
Cash
from affiliates
|
|
|
—
|
|
|
82,196
|
|
Net
cash provided by discontinued investing activities
|
|
|
—
|
|
|
82,196
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
(124,209
|
)
|
|
82,196
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from issuance of notes payable
|
|
|
560,000
|
|
|
—
|
|
Proceeds
from sales of common stock
|
|
|
3,628,618
|
|
|
—
|
|
Net
cash provided by financing activities
|
|
|
4,188,618
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
|
1,137,638
|
|
|
3,490
|
|
Cash
and cash equivalents at beginning of year
|
|
|
3,499
|
|
|
9
|
|
Cash
and cash equivalents at end of year
|
|
$
|
1,141,137
|
|
$
|
3,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated
financial
statements.
|
|
|
|
|
|
|
|
VoIP,
Inc.
|
Consolidated
Statements of Changes in Shareholders' Equity
|
Years
Ended December 31, 2004 and 2003
|
(As
Restated for 2004)
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Common
Stock
|
|
Paid-In
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2002
|
|
|
1,730,939
|
|
$
|
1,731
|
|
$
|
731,208
|
|
$
|
(271,679
|
)
|
$
|
461,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
for the year ended December 31, 2003
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(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
Technologies
|
|
|
2,500,000
|
|
|
2,500
|
|
|
4,747,500
|
|
|
-
|
|
|
4,750,000
|
|
Common
stock issued for acquisition of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VoIPAmericas
|
|
|
1,000,000
|
|
|
1,000
|
|
|
1,099,000
|
|
|
-
|
|
|
1,100,000
|
|
Warrants
issued to two company officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
stock option compensation
|
|
|
-
|
|
|
-
|
|
|
3,320,763
|
|
|
-
|
|
|
3,320,763
|
|
Stock
issued for intellectual property
|
|
|
100,000
|
|
|
100
|
|
|
105,000
|
|
|
-
|
|
|
105,100
|
|
Loss
for the year ended December 31, 2004
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5,862,120
|
)
|
|
(5,862,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2004
|
|
|
24,258,982
|
|
$
|
24,259
|
|
$
|
14,107,328
|
|
$
|
(6,486,767
|
)
|
$
|
7,644,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NOTE
A - ORGANIZATION AND DESCRIPTION OF BUSINESSS
The
Company was incorporated on August 3, 1998 under its original name of Millennia
Tea Masters, Inc. under the laws of the State of Texas.
The
Company began operations in October 1998 with its initial order of imported
teas
from Sri Lanka.
On
February 27, 2004 the Company entered into a stock purchase agreement that
provided for the sale of 12,500,000 shares of its common stock in exchange
for
$12,500 and a commitment by the purchaser to contribute the assets of two
start-up companies in the telecommunications business, eGlobalphone, Inc. and
VOIP Solutions, Inc. into the Company.
On
April
13, 2004 the Company changed its name to VoIP, Inc. and began to develop and
manufacture innovative IP telephony customer premise equipment, provide premium
voice over the internet subscriber based telephony services and state of the
art
long range WiFi technology solutions, for residential and enterprise customers,
including multimedia applications.
During
December 2004 the Company decided to exit the tea import business in order
to
focus its efforts and resources in the "Voice over Internet Protocol" (VoIP)
telecommunications industry. In connection with the decision, the Company sold
its imported tea inventory and began to wind down its tea import operations.
The
assets, liabilities, and results of operations of the imported tea business
has
been classified as discontinued operations on the accompanying consolidated
financial statements.
The
Company offers quality Voice over IP (VoIP) based solutions offering residential
and business customers more user friendly and affordable ways to communicate.
VoIP, Inc. also manufactures products and provides services to Internet Service
Providers, Telecommunication Service Providers and Cable Operators in strategic
countries around the world. VoIP, Inc., through its subsidiaries, provides
a
comprehensive portfolio of IP multimedia-based solutions ranging from subscriber
based voice services, to SIP based infrastructure design and deployment, to
broadband customer premise equipment design and implementation services, as
well
as engineering design, manufacturing and distribution of wireless broadband
technology.
The
Company's operations consist of one segment.
NOTE
B - RESTATEMENT OF FINANCIAL STATEMENTS
The
Company accounts for options and warrants issued to employees in accordance
with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." During the preparation of the financial statements for the
quarterly period ended September 30, 2005 the Company discovered that it did
not
recognize in its 2004 financial statements the full amount of compensation
expense that should have been recognized on warrants issued to employees in
2004
or the compensation expense for the vested portion of approximately 4,000,000
stock options issued to employees during the year ended December 31, 2004.
The
compensation expense that was not recognized relating to these options and
warrants was $1,384,763 (see Notes I, L and O). The Company therefore decided
that it would be appropriate to restate its financial statements for the year
ended December 31, 2004.
On
March
22, 2006, the Company concluded that its consolidated financial statements
for
the year ended December 31, 2004 were further misstated, resulting in overstated
revenues, expenses, receivables and payables, and understated net loss. These
misstatements were discovered by the senior financial management personnel
that
commenced their employment with the Company in the fourth quarter of 2005 during
their review and analysis in connection with the preparation of the 2005 annual
financial statements. The misstatements occurred in the financial statements
of
the Company's consolidated subsidiary doing business as DTNet Technologies,
which was acquired in June 2004. The Company therefore restated its 2004
consolidated financial statements to correct these misstatements. Adjustments
to
reduce: (a) the overstatements of revenues and receivables; (b) the
overstatement of cost of goods sold; and (c) the understatement of net loss,
aggregated $791,200, $498,123, and $462,618, respectively, for the year ended
December 31, 2004.
The
following table sets forth the impact of these restatements on certain amounts
previously reported in our consolidated financial statements for the three
and
nine months ended September 30, 2004:
Balance
Sheet Data
|
|
As
of December 31, 2004
|
|
|
|
As
Originally
Reported
|
|
As
Restated
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
818,071
|
|
$
|
166,239
|
|
Inventory
|
|
|
187,451
|
|
|
324,185
|
|
Accounts
payable
|
|
|
1,224,974
|
|
|
1,148,833
|
|
Additional
paid-in capital
|
|
|
12,722,565
|
|
|
14,107,328
|
|
Accumulated
deficit
|
|
|
(4,639,386
|
)
|
|
(6,486,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data
|
|
|
Year
Ended December 31, 2004
|
|
|
|
|
As
Originally
Reported
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,619,393
|
|
$
|
1,828,193
|
|
Cost
of goods sold
|
|
|
1,870,269
|
|
|
1,372,146
|
|
Compensation
and related expenses
|
|
|
2,721,296
|
|
|
4,106,059
|
|
General
and administrative expenses
|
|
|
2,187,878
|
|
|
2,357,419
|
|
Loss
from continuing operations before income
|
|
|
|
|
|
|
|
taxes
and discontinued operations
|
|
|
(4,160,050
|
)
|
|
(6,007,431
|
)
|
Net
loss
|
|
|
(4,014,739
|
)
|
|
(5,862,120
|
)
|
Net
loss per share
|
|
|
(0.27
|
)
|
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, eGlobalphone, Inc. ("eGlobal") , VoIP Solutions,
Inc., VCG Technologies d/b/a DTNet Technologies ("DTNet"), Inc., and Vox
Consulting d/b/a/VoIP Americas, Inc. ("VoIP Americas") from their respective
dates of acquisition. All significant intercompany 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
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 diluted
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 diluted effect of the assumed
exercise of the outstanding stock options and warrants, using the treasury
stock
method.
Fair
Value of Financial Instruments
The
carrying amount of cash, accounts receivable, accounts payable and notes
payable, as applicable, approximates fair value due to the short term nature
of
these items and/or the current interest rates payable in relation to current
market conditions.
Revenue
Recognition
Revenue
from product sales is recognized when persuasive evidence of an arrangement
exists, delivery to customer has occurred, the sales price is fixed and
determinable, and collectibility of the related receivable is probable.
The
recognition of revenues from Internet telephony services are deferred for new
subscribers of eGlobalphone and Voipsolutions until it deems that the customer
has accepted the service. Subsequent revenues are recognized at the beginning
of
each customer's month.
Property,
plant, and equipment
Property,
plant, and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the related assets using the straight line method.
The
useful life of assets ranges from three to five years. The leasehold
improvements are amortized over the life of the related lease.
Business
combinations
The
Company accounts for business combinations in accordance with Statement of
Financial Accounting Standard No. 141 Business Combinations ("SFAS No. 141").
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations. SFAS No. 141 requires that goodwill and intangible assets
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
The
Company 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:
|
|
2004
|
|
Equipment
|
|
$
|
519,810
|
|
Furniture
& Fixtures
|
|
|
56,748
|
|
Vehicles
|
|
|
4,769
|
|
Leasehold
improvements
|
|
|
4,562
|
|
Total
|
|
|
585,889
|
|
Less
accumulated depreciation
|
|
|
(166,021
|
)
|
Total
|
|
$
|
419,868
|
|
Depreciation
expense for 2004 amounted to $82,832. There was no depreciation
expense
for 2003.
|
As
of
December 31, 2004 intangible assets consist of the following:
Goodwill-acquisition
of DTNet Technologies, Inc.
|
|
$
|
5,210,553
|
|
Goodwill-acquisition
of Voipamericas, Inc.
|
|
|
1,408,301
|
|
Intellectual
property
|
|
|
305,000
|
|
Total
|
|
$
|
6,923,854
|
|
The
goodwill on the acquisition of DTNet Technologies, Inc. ("DTNet") represents
the
fair market value of DTNet liabilities as of the date of the acquisition plus
$4,750,000 which represents the market value of 2,500,000 shares of Company
stock issued pursuant to this acquisition.
The
goodwill on the acquisition of VoipAmericas, Inc. (VoIP Americas) represents
the
fair market value of VoipAmericas liabilities as of the date of the acquisition
plus $1,100,000 which represents the market value of 1,000,000 shares of
the
Company's stock issued pursuant to this acquisition.
Intellectual
property is carried at cost which is comprised of $50,000 paid in cash in 2004,
$150,000 due in the first quarter of 2005, and the value assigned to 100,000
Company common shares and 400,000 warrants issued pursuant to this transaction.
The valuation of the shares was $1.05 while the value was $105,000. The value
of
the warrants was determined using the Black-Scholes model calculated as of
October 14, 2004. As these warrants were not "in the money", these warrants
have
been assigned a value of zero. This model uses the annualized deviation
calculation and utilizes industry averages as a comparison for adequate
statistical results in the valuation. This is a standard financial model that
considers the statistical annual volatility of the market changes in a stock
price. (See Note H)
Intellectual
property consists of the following:
a)
all
rights of the Company of Record in the telephone numbers 1(800)TALKTIME,
1(888)TALKTIME, and 1(877)TALKTIME.COM
b)
all
rights to the URL's (domain names) 800TALKTIME.COM, 1800TALKTIME.COM, and
1-800-TALKTIME.COM
c)
all
rights to U.S. Trademark Registration No. 2,209,316 directed to the mark
1-800-TALKTIME and the goodwill associated therewith.
As
of
December 31, 2004 accounts payables and accrued expenses consist of the
following:
|
|
2004
|
|
|
|
(As
Restatetd)
|
|
Accounts
payable-trade
|
|
$
|
912,674
|
|
Accrued
expenses
|
|
|
233,711
|
|
Other
|
|
|
2,448
|
|
Total
|
|
$
|
1,148,833
|
|
As
of
December 31, 2004 loans payable consist of: (i) a $187,000 balance of a
revolving line of credit with the Bank of Tampa, with interest only payable
at
prime plus 1.0% monthly; and (ii) a $13,000 promissory note, payable in monthly
installments of approximately $6,200 including interest at a rate of 7.5%.
These
loans are collateralized by receivables, inventory and equipment. Both balances
were fully paid in January 2005.
NOTE
H - ACQUISITIONS
On
May
25, 2004 (but effective for all purposes as of April 15, 2004), the Company
completed the acquisition of two Florida-based entities, (eGlobalphone, Inc.
and
VoIP Solutions, Inc.). Contribution of these start-up companies was the basis
for the original decision to issue a controlling block of shares of common
stock
to Mr. Ivester. eGlobalphone, Inc. and VoIP Solutions Inc. are both Florida
corporations.
In
June
2004, the Company acquired DTNet Technologies, Inc. a Florida Corporation.
The
acquisition was financed through the issuance of 2,500,000 shares of the
Company's common stock with a value of $4,750,000 in exchange for all issued
and
outstanding shares of DTNet common stock.
In
September 2004, the Company closed the acquisition of VoIP Americas, a Florida
corporation. The acquisition was financed through the issuance of 1,000,000
shares of the Company's restricted common stock with the value of $1,100,000
in
exchange for all issues and outstanding shares of VoIP Americas.
NOTE
I - WARRANTS
On
August
4th, 2004, the Company issued 4,400,000 warrants to two executives to acquire
2,200,000 Company common shares at $1.00 each. The compensation 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 company officers
|
|
|
4,400,000
|
|
$
|
1.00
|
|
Granted
to third parties
|
|
|
2,400,000
|
|
|
2.58
|
|
Expired
|
|
|
—
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
Warrants
outstanding at end of year
|
|
|
6,800,000
|
|
$
|
1.59
|
|
NOTE
J - COMMITMENTS
The
Company is obligated under non-cancelable operating leases for its office
facilities and two apartments used by its employees. Future minimum lease
payments under the Company's non-cancelable operating lease as of December
31,
2004 are as follows:
Year
ending December 31:
|
|
|
|
|
|
|
|
2005
|
|
$
|
52,772
|
|
2006
|
|
|
15,155
|
|
|
|
|
|
|
Total
|
|
$
|
67,927
|
|
NOTE
K - DUE FROM RELATED PARTIES
As
of
December 31, 2004 the amount due from related parties consists of the following:
|
|
2004
|
|
DTNet,
Inc.
|
|
$
|
134,317
|
|
DTNet
International
|
|
|
119,974
|
|
Mozart
Communication
|
|
|
21,794
|
|
Com
Laser
|
|
|
5,850
|
|
Other
|
|
|
(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
|
|
|
|
(As
Restated)
|
|
|
|
|
|
|
|
|
|
Current
benefit
|
|
$
|
(1,993,121
|
)
|
$
|
(119,000
|
)
|
Valuation
allowance
|
|
|
1,993,121
|
|
|
119,000
|
|
Total
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Long-term
deferred tax assets arising from
|
|
|
|
|
|
|
|
net
operating loss carryforward
|
|
$
|
(2,113,121
|
)
|
$
|
(119,000
|
)
|
Valuation
allowance
|
|
|
2,113,121
|
|
|
119,000
|
|
Total
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
The
reconciliation of income tax provision at statutory rate to the reported income
tax expense is as follows:
|
|
Year
ended December 31,
|
|
|
|
2004
|
|
2003
|
|
Computed
at statutory rate
|
|
|
34
|
%
|
|
34
|
%
|
State
tax net of federal benefits
|
|
|
—
|
|
|
—
|
|
Valuation
allowance
|
|
|
(34
|
%)
|
|
(34
|
%)
|
Total
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
At
December 31, 2004 and December 31, 2003 deferred tax assets are related solely
to the Company's net operating loss carry forward of approximately $4,172,029
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.
In
December 2004, the Company decided to exit the tea business and sold all of
its
tea inventory. Therefore, those transactions have been presented as discontinued
operations for the years ended December 31, 2004 and 2003.
Assets,
liabilities, and results of the discontinued tea operations of the Millennia
Tea
Master division are as follows:
|
|
|
|
|
|
|
|
2004
|
|
2003
|
|
|
|
(As
Restated)
|
|
|
|
Assets
from discontinued operations:
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
Due
to related parties
|
|
$
|
—
|
|
$
|
151,167
|
|
Total
|
|
$
|
—
|
|
$
|
151,167
|
|
|
|
|
|
|
|
|
|
Results
from discontinued operations:
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
408,613
|
|
$
|
8,678
|
|
Cost
of sales
|
|
|
263,302
|
|
|
11,213
|
|
Gross
Profit
|
|
|
145,311
|
|
|
(2,535
|
)
|
Other
expenses
|
|
|
—
|
|
|
350,433
|
|
Income
(loss) from discontinued operations
|
|
$
|
145,311
|
|
$
|
(352,968
|
)
|
|
|
|
|
|
|
|
|
NOTE
N - STOCK OPTIONS
A
total
of 4,000,000 shares of common stock have 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
|
|
$
|
0.85 -
$1.56
|
|
$
|
1.14
|
|
Options
returned to the plan due
|
|
|
|
|
|
|
|
|
|
|
to
employee 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 - 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 issue 1,143,250 shares to twenty-two individual accredited
investors.
In
May
2004, the Company issued 168,235 shares to one individual accredited investor
in
exchange for services.
In
May,
2004, the Company issued 67,300 shares to fourteen individual accredited
investors at a price of $3.00 per share.
On
May
19, 2004, the Company issued 196,340 shares to two accredited investors in
satisfaction of accounts payable totaling $79,745.
On
June
25, 2004, the Company closed the acquisition of DTNet Technologies, Inc.
("DTNet") a Florida corporation. The acquisition was effective through the
issuance of 2,500,000 shares of VoIP, Inc. restricted common stock in exchange
for all issued and outstanding shares of DTNet common stock.
In
July
2004, the Company issued 668,688 shares to six individual existing accredited
investors. Also effective July 2004, registrant issued 41,688 shares to four
accredited individual investors.
On
August
4, 2004, the Company issued 4,400,000 warrants to two executives to acquire
4,400,000 shares at $1.00 per share. As explained in Note J, subsequent events,
in February 2005, 2,200,000 of 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, the Company closed the acquisition of VoIP Americas,
a
Florida corporation. The acquisition took the form of an exchange of 1,000,000
shares of VoIP restricted common stock in exchange the all issued and
outstanding shares of VoIP Americas common stock.
In
October 2004, the Company issued 251,831 shares to twelve accredited investors.
In
October 2004, the Company issued 100,000 shares to one individual accredited
investor.
In
November 2004, the Company issued of 2,249,500 to five accredited investors.
In
November 2004, the Company issued 318,500 shares to twelve accredited investors.
In
December 2004, the Company issued 79,659 shares to five accredited investors.
In
December 2004, the Company issued 400,000 shares to sixteen accredited
investors.
NOTE
P - SUBSEQUENT EVENTS
On
January 6, 2005, the Company issued a Note Payable to its controlling
shareholder in the amount of $1,040,000 at an interest rate of 3.75%, maturing
in December 2005.
On
January 26, 2005, the Company filed a Form S-8 registration statement in
connection with the Company's 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.
Pursuant
to the requirements of the Securities Act, the Company has duly caused this
Annual Report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fort Lauderdale, State of Florida, on May 11, 2006.
|
|
|
|
VOIP,
INC. |
|
|
|
|
By: |
/s/
B.
Michael Adler |
|
B.
Michael Adler |
|
Chief
Executive Officer |