Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
(Mark
one)
x QUARTERLY
REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the
quarterly period ended March 31, 2006
or
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
OF
1934
For
the
transition period from _________ to ________
Commission
File Number: 000-28985
(Exact
name of small business issuer as specified in its charter)
Texas
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75-2785941
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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12330
SW 53rd Street, Suite 712, Fort Lauderdale, FL 33330
(Address
of principal executive offices)
(954)
434-2000
(Issuer's
telephone number)
Indicate
by check whether the registrant (1) filed all reports required to be filed
by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past
90 days. YES x
NO o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
126-2 of the Exchange Act). YES o NO x
State
the
number of shares outstanding of each of the issuer's classes of common equity
as
of the latest practicable date: May 2, 2006: 68,878,266.
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Form
10-Q for the Quarter Ended March 31, 2006
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Table
of Contents
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Page
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Part
I - Financial Information
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Item
1
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Financial
Statements
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3
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Item
2
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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18
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Item
3
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Qualitative
and Quantitative Disclosures About Market Risk
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22
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Item
4
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Controls
and Procedures
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22
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Part
II - Other Information
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Item
1
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Legal
Proceedings
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25
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Item
1A
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Risk
Factors
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25
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Item
2
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Unregistered
Sales of Equity Securities and Use of Proceeds
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Item
3
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Defaults
upon Senior Securities
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Item
4
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Submission
of Matters to a Vote of Security Holders
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Item
5
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Other
Information
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Item
6
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Exhibits
and Reports on Form 8-K
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Signatures
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26
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PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
Consolidated
Balance Sheets
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March
31, 2006
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December
31, 2005
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(Unaudited)
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$
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3,534,084
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$
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3,228,745
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Accounts
receivable, net of allowance of
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$185,817
and $177,489, respectively
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1,154,379
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1,320,062
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Due
from related parties
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44,938
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161,530
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Inventory
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718,795
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797,074
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Other
current assets
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987,041
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936,520
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Total
current assets
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6,439,237
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6,443,931
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Property
and equipment, net |
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9,594,638
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10,155,507
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Goodwill
and other intangibles
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37,743,373
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39,441,372
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Other
assets
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214,315
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349,205
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TOTAL
ASSETS
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$
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53,991,563
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$
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56,390,015
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LIABILITIES
AND SHAREHOLDERS' EQUITY
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Current
liabilities:
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Accounts
payable and accrued expenses
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$
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12,868,330
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$
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13,304,915
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Loan
payable
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3,980,200
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4,685,236
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Convertible
notes payable
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6,711,502
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3,399,798
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Fair
value liability for warrants
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4,807,355
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-
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Advances
from investors
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286,675
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3,000,000
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Due
to related party
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349,637
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1,572,894
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Other
current liabilities
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594,327
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956,004
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Total
current liabilities
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29,598,026
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26,918,847
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Other
liabilities
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269,106
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245,248
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Shareholders'
equity:
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Common
stock - $0.001 par value
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100,000,000
shares authorized;
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68,878,266
and 61,523,397 shares issued
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and
outstanding, respectively
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68,878
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61,523
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Additional
paid in capital
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72,662,687
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63,964,497
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Accumulated
deficit
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(48,607,134
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)
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(34,800,100
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)
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Total
shareholders' equity
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24,124,431
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29,225,920
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TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
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$
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53,991,563
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$
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56,390,015
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The
accompanying notes are an integral part of these consolidated financial
statements.
VoIP,
Inc.
Consolidated
Statements of Operations (Unaudited)
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Three
Months Ended March 31
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2006
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2005
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Revenues
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$
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10,361,546
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$
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1,402,469
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Cost
of sales
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10,896,317
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1,301,095
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Gross
profit (loss)
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(534,771
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)
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101,374
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Operating
expenses:
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Compensation
and related expenses
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3,047,498
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864,021
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Commissions
and fees paid to third parties
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1,072,225
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53,325
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Professional,
legal and consulting expenses
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2,386,066
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309,296
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Depreciation
and amortization
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1,530,088
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47,980
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Goodwill
impairment
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839,101
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-
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General
and administrative expenses
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1,268,950
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367,872
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Loss
from operations
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(10,678,699
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(1,541,120
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Other (income)
expenses: |
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Interest
expense
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1,504,448
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14,278
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Financing
expenses
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342,609
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-
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Change
in fair value liability for warrants
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1,281,278
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-
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Loss
before income taxes
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(13,807,034
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)
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(1,555,398
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)
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Provision
for income taxes
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-
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-
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Net
loss
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$
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(13,807,034
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)
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$
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(1,555,398
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)
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Basic
and diluted loss per share
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$
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(0.20
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)
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$
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(0.06
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)
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Weighted
average number of shares outstanding
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67,587,424
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25,705,857
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VoIP,
Inc.
Consolidated
Statements of Cash Flows (Unaudited)
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Three
Months Ended March 31
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2006
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2005
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Cash
flows from operating activities:
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Net
loss
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$
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(13,807,034
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)
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$
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(1,555,398
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)
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Adjustments
to reconcile net loss to net cash used in operating activities:
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Depreciation
and amortization
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1,530,088
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47,980
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Goodwill
impairment
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839,101
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-
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Provision
for bad debt
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16,684
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-
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Common
shares issued for services
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1,844,234
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28,325
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Amortization
of debt discounts
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1,177,051
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-
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Options
and warrants issued for services and compensation
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1,819,056
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360,531
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Provision
for warrants liability
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1,281,278
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-
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Changes
in operating assets and liabilities:
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Accounts
receivable
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148,999
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(495,391
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)
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Due
from related parties
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116,592
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201,864
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Inventory
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78,279
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(520,089
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)
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Assets
from discontinued operations
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-
|
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20,419
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Other
current assets
|
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(50,521
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)
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|
(232,168
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)
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Accounts
payable and accrued expenses
|
|
|
(436,585
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)
|
|
(9,938
|
)
|
Other
current liabilities
|
|
|
(361,677
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)
|
|
(74,368
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)
|
Net
cash used in operating activities
|
|
|
(5,804,455
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)
|
|
(2,228,233
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)
|
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|
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|
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Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(110,321
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)
|
|
(49,352
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)
|
Sale
of other assets
|
|
|
134,890
|
|
|
(65,477
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)
|
Net
cash provided by (used in) investing activities
|
|
|
24,569
|
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|
(114,829
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)
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|
|
|
|
|
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|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from issuance of notes payable
|
|
|
7,249,482
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|
1,040,000
|
|
Repayment
of notes payable
|
|
|
(681,178
|
)
|
|
(590,666
|
)
|
Repayment
of amounts due to related parties
|
|
|
(1,223,257
|
)
|
|
-
|
|
Proceeds
from sales of common stock
|
|
|
740,178
|
|
|
1,678,125
|
|
Net
cash provided by financing activities
|
|
|
6,085,225
|
|
|
2,127,459
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|
|
|
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|
Net
increase (decrease) in cash and cash equivalents
|
|
|
305,339
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(215,603
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)
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Cash
and cash equivalents, beginning of period
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|
|
3,228,745
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|
1,141,137
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Cash
and cash equivalents, end of period
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$
|
3,534,084
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$
|
925,534
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The
accompanying notes are an integral part of these consolidated financial
statements.
Notes
to Consolidated Financial Statements
NOTE
A - ORGANIZATION AND DESCRIPTION OF BUSINESS
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 common stock 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 VCG
Technologies, Inc. d/b/a DT Net Technologies (“DTNet”), a hardware supplier, and
VoIP Americas, Inc. (“VoIP Americas”), 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 (“VoIP”)
telecommunications industry. In May 2005 the Company acquired Caerus, Inc.
(“Caerus”), a VoIP carrier and service provider. In October 2005 the Company
purchased substantially all of the VoIP assets of WQN Inc.'s (“WQN”) business.
The
Company is an emerging global provider of advanced communications services
utilizing VoIP technology. VoIP 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 offers a portfolio of
advanced telecommunications technologies, enhanced service solutions, and
broadband products. Current and targeted customers include regional bell
operating companies (“RBOCs”), CLECs, IXCs, wireless carriers, resellers,
internet service providers, cable multiple system operators and other providers
of telephony services.
The
Company's operations consist of three segments: Telecommunication Services,
Hardware Sales and Calling Card Sales.
The
financial information presented herein should be read in conjunction with the
consolidated financial statements for the year ended December 31, 2005. The
accompanying consolidated financial statements for the three months ended March
31, 2006 and 2005 are unaudited but, in the opinion of 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
months ended March 31, 2006 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, 2005.
All
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the 2005 financial statements to
conform to the 2006 presentation.
NOTE
B - BUSINESS SEGMENT INFORMATION
The
Company has three reportable segments: telecommunication services, hardware
sales, and calling card sales. The telecommunications services segment
terminates wholesale and retail, local and long distance calls. Such termination
is either on the Company’s network or through other telecommunication service
providers. This segment is also in the early stages of implementing wholesale
VoIP services. The hardware sales segment supplies broadband components and
VoIP
hardware to broadband service providers. The calling card segment sells prepaid
telephone calling cards purchased from other carriers through a network of
private distributors located primarily in southern California.
The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies as detailed in the Company's annual
report on Form 10-KSB for the year ended December 31, 2005. Information about
operations by business segment, as of and for the three months ended March
31,
2006 and 2005 (except listed 2005 balance sheet amounts, which are as of
December 31, 2005), is as follows:
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Corporate
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Telecommunication
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Hardware
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Calling
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and
|
|
|
|
|
|
Services
|
|
Sales
|
|
Cards
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,632,547
|
|
$
|
434,851
|
|
$
|
5,294,148
|
|
$
|
-
|
|
$
|
10,361,546
|
|
Interest
and expense
|
|
|
325,360
|
|
|
-
|
|
|
-
|
|
|
1,179,088
|
|
|
1,504,448
|
|
Depreciation
and amortization
|
|
|
1,498,965
|
|
|
5,436
|
|
|
-
|
|
|
25,687
|
|
|
1,530,088
|
|
Net
loss
|
|
|
(4,446,688
|
)
|
|
(1,145,043
|
)
|
|
(26,593
|
)
|
|
(8,188,710
|
)
|
|
(13,807,034
|
)
|
Capital
expenditures
|
|
|
110,321
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
110,321
|
|
Identifiable
assets
|
|
|
11,421,916
|
|
|
446,919
|
|
|
1,566,541
|
|
|
2,812,814
|
|
|
16,248,190
|
|
Goodwill
|
|
|
23,351,473
|
|
|
198,000
|
|
|
-
|
|
|
-
|
|
|
23,549,473
|
|
Other
intangible assets, net
|
|
|
13,888,900
|
|
|
-
|
|
|
-
|
|
|
305,000
|
|
|
14,193,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
843,935
|
|
$
|
558,534
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,402,469
|
|
Interest
expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
14,278
|
|
|
14,278
|
|
Depreciation
and amortization
|
|
|
30,000
|
|
|
1,312
|
|
|
-
|
|
|
16,668
|
|
|
47,980
|
|
Net
income (loss)
|
|
|
(632,721
|
)
|
|
2,531
|
|
|
-
|
|
|
(925,208
|
)
|
|
(1,555,398
|
)
|
Capital
expenditures
|
|
|
9,693
|
|
|
917
|
|
|
-
|
|
|
38,742
|
|
|
49,352
|
|
Identifiable
assets
|
|
|
11,979,115
|
|
|
562,576
|
|
|
1,448,236
|
|
|
2,958,716
|
|
|
16,948,643
|
|
Goodwill
|
|
|
23,306,341
|
|
|
1,037,101
|
|
|
-
|
|
|
-
|
|
|
24,343,442
|
|
Other
intangible assets, net
|
|
|
14,792,930
|
|
|
-
|
|
|
-
|
|
|
305,000
|
|
|
15,097,930
|
|
NOTE
C - LIQUIDITY AND CAPITAL RESOURCES
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. The
Company’s independent auditors have added an explanatory paragraph to their
opinion on the Company’s consolidated financial statements for the year ended
December 31, 2005, based on substantial doubt about the Company’s ability to
continue as a going concern.
At
March
31, 2006, the Company's contractual obligations for debt, leases and capital
expenditures totaled approximately $16.3 million. Included in this amount
is
approximately $4.0 million due on a loan from a lending institution. The
Company
was not in compliance with certain covenants under the loan agreement for
this
debt. However, the lender has not declared a default.
See
Note
H for a description of the Company’s convertible notes issued in January and
February 2006. As explained below, the subscription agreements for these
notes
contain provisions that could impact the Company’s future capital raising
efforts and its capital structure:
· |
As
required by the subscription agreements, in February 2006, the Company
filed a registration statement (the “Notes Registration Statement”) to
register 200% of the shares issuable upon conversion of these notes
and
all of the shares issuable upon exercise of the warrants issued in
connection with the notes. Until the Notes Registration Statement
is
declared effective by the Securities and Exchange Commission the
Company is liable, beginning in late April 2006, for liquidated
damages each month at a rate of 1.5% of the outstanding principal
of the
notes until the Notes Registration Statement is declared effective.
|
· |
Unless
consent is obtained from the note holders, the Company may not file
any
new registration statements or amend any existing registrations until
the
sooner of (i) 60 days following the effective date of the Notes
Registration Statement or (ii) all the notes have been converted
into
shares of the Company’s common stock and such shares of common stock and
the shares of common stock issuable upon exercise of the warrants
have
been sold by the note holders.
|
· |
Until
the Notes Registration Statement has been effective for 365 days,
the note
holders must be given the right of first refusal with respect to
any
proposed sale of the Company’s common stock or debt
obligations.
|
· |
Unless
consent is obtained from the note holders, for so long as 20% or
more of
the principal amount of the notes, the warrants or the common stock
issued
or issuable for the notes remains outstanding, the Company may not
issue
any new shares of common stock, convertible securities or warrants
at a
price per share, conversion price per share or exercise price per
share
that is lower than those prices in effect for the notes and warrants
without issuing the note holders sufficient additional shares or
warrants
at prices such that their warrant exercise price or per share price
on
average is equal to that for the proposed securities to be
issued.
|
· |
In
April 2006, the Company was in violation of certain requirements
of these
debt facilities. However, the note holders have not declared the
notes in
default. As such, the full amount of the notes at March 31, 2006
has been
classified as current.
|
The
Company will need to continue to raise additional debt or equity capital
to
provide the funds necessary to restructure or repay its $4.0 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.
The
Company’s authorized shares of stock consist of 100,000,000 shares of common
stock. As of March 31, 2006, 68,878,266 common shares were issued and
outstanding, approximately 41,000,000 million additional shares are contingently
issuable upon the exercise of stock options and warrants, or conversion of
convertible securities. A proxy statement will be filed in connection with
the
Company’s 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 preferred stock. If such proposal is
not
approved, the Company may be unable to satisfy the contractual obligations
it
has undertaken to issue future shares of common stock.
NOTE
D - PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following:
|
|
March
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Equipment
|
|
$
|
10,526,740
|
|
$
|
9,381,372
|
|
Furniture
& Fixtures
|
|
|
178,082
|
|
|
216,402
|
|
Software
|
|
|
723,122
|
|
|
1,667,864
|
|
Vehicles
|
|
|
15,269
|
|
|
15,269
|
|
Leasehold
improvements
|
|
|
151,835
|
|
|
248,952
|
|
Total
|
|
|
11,595,048
|
|
|
11,529,859
|
|
Less
accumulated depreciation
|
|
|
(2,000,410
|
)
|
|
(1,374,352
|
)
|
Total
|
|
$
|
9,594,638
|
|
$
|
10,155,507
|
|
Depreciation
expense was $626,058 and $47,980 for the three months ended March 31, 2006
and
2005, respectively.
NOTE
E - GOODWILL AND OTHER INTANGIBLE ASSETS
As
of
March 31, 2006 and December 31, 2005, goodwill and other intangible assets
consisted of the following:
|
|
|
|
|
2006
|
|
2005
|
|
Goodwill,
by business segment:
|
|
|
|
|
|
|
|
|
Telecommunication
services
|
|
|
|
|
|
|
$
|
23,351,473
|
|
$
|
23,306,341
|
|
Hardware
sales
|
|
|
|
|
|
|
|
198,000
|
|
|
1,037,101
|
|
Calling
cards
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
Corporate
and other
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
Subtotal
|
|
|
|
|
|
|
|
23,549,473
|
|
|
24,343,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
Life (Years)
|
|
|
|
|
|
|
|
Technology
|
4.0
|
|
$
|
6,000,000
|
|
$
|
6,000,000
|
|
Customer
relationships
|
5.0
- 6.0
|
|
|
8,325,000
|
|
|
8,325,000
|
|
Trade
names
|
9.0
|
|
|
1,300,000
|
|
|
1,300,000
|
|
Non-compete
agreement
|
1.0
|
|
|
500,000
|
|
|
500,000
|
|
Other
intangible assets
|
Indefinite
|
|
|
600,000
|
|
|
600,000
|
|
Subtotal
|
|
|
|
|
|
|
|
16,725,000
|
|
|
16,725,000
|
|
Accumulated
amortization
|
|
|
|
|
|
|
|
(2,531,100
|
)
|
|
(1,627,070
|
)
|
Other
intangible assets, net
|
|
|
|
|
|
|
|
14,193,900
|
|
|
15,097,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
goodwill and other intangible assets
|
|
|
|
|
|
|
$
|
37,743,373
|
|
$
|
39,441,372
|
|
Amortization
expense for the three months ended March 31, 2006 and 2005 amounted to $904,030
and $0, respectively.
NOTE
F - ACCOUNTS PAYABLES AND ACCRUED EXPENSES
As
of
March 31, 2006 and December 31, 2005, accounts payables and accrued expenses
consisted of the following:
|
|
2006
|
|
2005
|
|
Accounts
payable-trade
|
|
$
|
10,324,437
|
|
$
|
11,155,401
|
|
Accrued
expenses
|
|
|
2,543,893
|
|
|
2,149,514
|
|
Total
|
|
$
|
12,868,330
|
|
$
|
13,304,915
|
|
NOTE
G - LOAN PAYABLE
The
loan
payable at March 31, 2006 and December 31, 2005 is owed to a lending
institution. This loan bears interest at 12.5%, and is repayable through
June
2007 if the loan’s repayment schedule is not accelerated or modified. Additional
borrowings under this facility are contingent upon, among other things, the
Company raising certain levels of additional equity financing. Interest expensed
and paid under this debt facility during the three months ended March 31,
2006,
and 2005 was approximately $128,000 and $0, respectively.
This
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. The Company was
in violation of certain requirements of this debt facility at March 31,
2006. As a result, the full amount of the note at March 31, 2006 has been
classified as current. To date, the lender has not declared this loan in
default.
NOTE
H - CONVERTIBLE NOTES AND WARRANTS PAYABLE
At
March
31, 2006 and December 31, 2005, convertible notes payable consisted of the
following:
|
|
2006
|
|
2005
|
|
Payable
to WQN, Inc.
|
|
$
|
3,700,000
|
|
$
|
3,700,000
|
|
Payable
to accredited investors
|
|
|
12,138,023
|
|
|
1,496,804
|
|
Subtotal
|
|
|
15,838,023
|
|
|
5,196,804
|
|
|
|
|
|
|
|
|
|
Less
discounts
|
|
|
(9,126,521
|
)
|
|
(1,797,006
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,711,502
|
|
$
|
3,399,798
|
|
In
July
and October 2005, the Company issued and sold $3,085,832 in principal amount
of
convertible notes to accredited investors at a discount, receiving net proceeds
of $2,520,320. These notes are immediately convertible at the option of the
note
holders into 3,857,290 shares of the Company’s common stock. These note holders
also received five-year warrants to purchase 3,857,290 shares of the Company’s
common stock for prices ranging from $1.38 to $1.65 per share. These notes
are
secured by a subordinated lien on the Company’s assets, and the notes bear
interest at an effective rate of approximately 20%. The principal balance
of
these notes was $923,702 and $1,496,804 at March 31, 2006 and December 31,
2005,
respectively. Half of these notes are repayable beginning in October 2005,
and
the other half beginning in January 2006 (3 months following their respective
issuances), over two years in cash or, at the option of the Company, in
registered common stock at the lesser of $1.40 per share or 85% of the weighted
average price of the stock on the OTC Bulletin Board (the “OTCBB”).
In
January and February 2006, the Company issued and sold $11,959,666 principal
amount of convertible notes to accredited investors at a discount, receiving
net
proceeds of $9,879,400. These notes are immediately convertible at the option
of
the note holders into 8,010,229 shares of the Company’s common stock. These note
holders also received five-year warrants to purchase 4,537,053 shares of
the
Company’s common stock for $1.46 per share, and one-year warrants to purchase
4,537,053 shares for $1.59 per share. Approximately $7.6 million of these
notes
are secured by a subordinated lien on the Company’s assets. The principal
balance of these notes was $11,214,321 at March 31, 2006. All these notes
bear
interest at an effective rate of approximately 20%, and are payable over
two
years beginning 90 to 180 days after closing in cash or, at the option of
the
Company, in registered common stock at the lesser of $1.40 per share or 85%
of
the weighted average price of the stock on the OTCBB. In April 2006, the
Company
was in violation of certain requirements of these notes, and did not make
the
scheduled payments of $389,481 for these notes. While the note holders have
not declared the notes in default, the full amount of the notes at March
31,
2006 has been classified as current.
In
October 2005, the Company acquired substantially all of the operating assets
and
liabilities of WQN, for a total purchase price of $9.8 million. The acquisition
was financed in part with the issuance of a convertible note in the principal
amount of $3.7 million. This note is convertible at the option of WQN into
shares of the Company’s common stock at a price of $1.06 per share. This note is
payable over twelve months beginning February 2006, and bears nominal interest
at 6%. However, the scheduled payments have not been made, and WQN has agreed
to
subordinate its repayment claim to the convertible note holders described
in the
two preceding paragraphs above. A debt discount was established to reflect
an
effective interest rate of 20%, bringing the original net note payable value
to
$3,216,000.
No
interest was paid under any these convertible notes during the three months
ended March 31, 2006.
The
Company determined that it had insufficient authorized common shares to satisfy
the warrant obligations associated with the convertible notes issued in January
and February 2006 on the dates the warrants were issued. Therefore, in
accordance with Emerging Issues Task Force Issues 00-27 and 00-19, the
$3,526,077 value of these warrants at their issuance dates was recorded as
a
debt discount and a liability on the Company’s consolidated balance sheet. The
liability was marked-to-market at March 31, 2006, resulting in a $1,281,278
increase in the liability and a corresponding charge to earnings for the
three
months ended March 31, 2006.
NOTE
I - ADVANCES FROM INVESTORS
The
unsecured advances from investors of $286,675 at March 31, 2006 represent
funds
deposited with the Company in anticipation of the issuance of future notes
payable. The unsecured advances from investors of $3,000,000 at December
31,
2005 represents funds deposited with the Company in anticipation of the issuance
of convertible notes payable, which were issued in January 2006 (see NOTE
H).
These
advances are not interest bearing, and are unsecured.
NOTE
J - ACQUISITIONS
On
May
31, 2005 the Company acquired 100% of Caerus, and its wholly owned subsidiaries
Volo Communications, Inc. (“Volo”), Caerus Networks, Inc., and Caerus Billing,
Inc. in exchange for approximately 16,900,000 of the Company's common shares
(plus 2,000,000 million escrowed shares).
The
goodwill, intangible assets and property recorded for the acquisition of
Caerus
represent the fair market value of liabilities as of the date of acquisition,
plus approximately $18.3 million, which represents the value of the Company's
common stock and options issued pursuant to the acquisition.
On
October 5, 2005, the Company acquired substantially all of the operating
assets
and liabilities of WQN, for a total purchase price of $9.8 million. The
acquisition was financed with the issuance of $3.2 million of convertible
debt,
1,300,000 shares of the Company’s common stock, and 5,000,000 warrants to
purchase the Company’s common stock at $0.001 per share.
Condensed
balance sheets of the Caerus and WQN acquisitions, reflecting the net fair
value
amounts assigned to each major asset and liability, as of their respective
acquisition dates are as follows:
|
|
Caerus,
Inc.
|
|
WQN,
Inc.
|
|
Current
assets
|
|
$
|
617,000
|
|
$
|
3,775,000
|
|
Property
and equipment, net
|
|
|
7,869,000
|
|
|
508,000
|
|
Other
assets
|
|
|
131,000
|
|
|
463,000
|
|
Accounts
payable and other current liabilities
|
|
|
(14,674,000
|
)
|
|
(2,031,000
|
) |
Note
payable
|
|
|
(4,832,000
|
)
|
|
-
|
|
Net
liabilities assumed
|
|
|
(10,889,000
|
)
|
|
2,715,000
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
17,778,000
|
|
|
4,120,000
|
|
Intangible
assets - other
|
|
|
13,800,000
|
|
|
2,925,000
|
|
Intangible
assets
|
|
|
31,578,000
|
|
|
7,045,000
|
|
Net
fair value assets acquired
|
|
$
|
20,689,000
|
|
$
|
9,760,000
|
|
NOTE
K - LITIGATION
MCI
On
April
8, 2005, The Company’s subsidiary Volo filed suit against MCI WorldCom Network
Services, Inc. d/b/a UUNET ("MCI WorldCom"). Volo alleges that MCI WorldCom
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 WorldCom refused to negotiate such overcharges
in good
faith. Volo also seeks damages arising out of MCI WorldCom'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 WorldCom 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 five 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 WorldCom is in breach of the Services
Agreement; (2) $8,365,980 billed by MCI WorldCom is not "due and payable"
under
that agreement; and (3) MCI WorldCom'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 WorldCom filed an Answer, Affirmative Defenses, Counterclaim
and
Third-Party Complaint naming Caerus as a third-party defendant. MCI WorldCom
asserts a breach of contract claim against Volo, a breach of guarantee
claim
against Caerus, and a claim for unjust enrichment against both parties,
seeking
an amount to be determined at trial. On July 11, 2005, Volo and Caerus
answered
the counterclaim and third-party complaint, and filed a third-party counterclaim
against MCI WorldCom for declaratory judgment, fraud in the inducement,
and
breach of implied duty of good faith and fair dealing. Volo and Caerus
seek
direct, indirect and punitive damages in an amount to be determined at
trial.
On
August
1, 2005, MCI WorldCom 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.
Discovery
is in progress. MCI WorldCom has served requests for documents and for
admissions and interrogatories on Volo and Caerus, to which Volo and Caerus
have
responded. Volo has served document requests and interrogatories on MCI
WorldCom. Volo has also initiated third party discovery. The Court on March
9,
2006 granted in part and denied in part motions to compel disclosures brought
by
Volo and MCI WorldCom and directed the appointment of an independent expert
to
review and report to the Court on certain matters relevant to the parties'
claims and defenses. The Court on April 12, 2006 granted in part and denied
in
part motions brought by Volo for a protective order and by MCI WorldCom to
compel disclosures, and MCI WorldCom's motion for clarification of the March
9,
2006 Order. On
May 4,
2006, the Court entered an order directing the appointment of an independent
expert to review and report to the Court and the parties upon the routing
and
termination of calls received by MCI WorldCom from Volo. Volo has contended
that
such routing and termination is relevant, inter
alia,
to its
allegations that MCI WorldCom engaged in a fraudulent and systematic re-routing
of traffic through local trunks in order to avoid paying access fees to
terminate such calls. On
May 4,
2006, the Court issued a Case Management and Scheduling Order directing the
parties to mediate by February 1, 2007 and setting a target trial date of
February/March 2007.
The
Company is currently unable to assess the outcome of this litigation or its
impact on the Company’s financial condition and results of
operations.
Netrake
The
Company and its subsidiaries Caerus and Volo are involved in pending disputes
with Netrake Communications ("Netrake") arising from an equipment purchase
contract under which Volo agreed to purchase approximately $2.0 million of
Netrake’s 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)
tortious 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
rescission 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, and has
procured an order from the lower court in Florida compelling arbitration of
these claims in Dallas, Texas. That order is currently on appeal.
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.
NOTE
L - STOCK BASED COMPENSATION
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 activity in this 2004 Option
Plan
for the three months ended March 31, 2006 is as follows:
|
|
Number
|
|
Exercise
Price
Range
|
|
Wtd.
Avg.
Exercise
Price
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2005
|
|
|
3,746,562
|
|
$
|
0.85
- $1.56
|
|
$
|
1.21
|
|
Options
returned to the plan due to employee terminations
|
|
|
(1,025,500
|
)
|
$
|
0.85
- $1.56
|
|
$
|
1.04
|
|
Options
exercised
|
|
|
(314,000
|
)
|
$
|
0.85
- $1.56
|
|
$
|
1.04
|
|
Options
granted
|
|
|
-
|
|
|
|
|
|
|
|
Options
outstanding at March 31, 2006
|
|
|
2,407,062
|
|
$
|
0.85
- $1.56
|
|
$
|
1.31
|
|
In
addition to options issued under the 2004 option plan, the Company granted
1,000,000 options during 2005 to three executive officers at an exercise
price
of $1.56, all of which remain outstanding at March 31, 2006
The
Company recorded compensation expense of $1,819,056 and $360,531 for the
three
months ended March 31, 2006 and 2005, respectively, in connection with
options,
warrants and stock granted to employees. As of March 31, 2006, approximately
$1,219,000 in total compensation cost related to nonvested options remains
to be
expensed in future periods.
The
value
of options and warrants was estimated using the Black-Scholes pricing
model. The
Black-Scholes pricing calculations were made using volatilities at either
one-year or three-year, monthly or weekly, trailing measures, as appropriate,
and risk-free rates as determined by the nearest maturity Treasury yield
as of
respective valuation dates.
On
December 7, 2005, the Company’s 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. The Company is seeking
shareholder approval at its 2006 annual meeting of shareholders for the future
issuance of options under the 2006 Plan to allow its participants to acquire
up
to 10,000,000 shares of the Company’s common stock.
NOTE
M - WARRANTS
Through
March 31, 2006 the Company has issued to employees and financial services
firms
warrants to purchase the Company’s common stock. During the three months ended
March 31, 2006 and 2005, the Company issued 206,250 and 750,000 shares,
respectively, of common stock in exchange for these warrants. As of March
31,
2006 and December 31, 2005, the Company had outstanding approximately 11,000,000
warrants, excluding warrants issued in conjunction with convertible debt
issuances referred to in NOTE H, to purchase its common stock at a weighted
average exercise price of $1.72 per share.
NOTE
N - 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 leases as of March
31,
2006 are as follows:
Year
ending December 31
|
|
|
|
2006
(nine months)
|
|
$
|
295,578
|
|
2007
|
|
|
208,160
|
|
Total
|
|
$
|
503,738
|
|
Rent
expense for these leases for the three months ended December 31, 2006 and
2005
was $68,189 and $17,628, respectively.
NOTE
O - RELATED PARTY TRANSACTIONS
As
of
March 31, 2006 and 2005 the amount due from related parties consisted of
an
account receivable from WQN, a shareholder of the Company.
In
December 2004 the Company issued a $560,000 note payable to a shareholder,
bearing interest at 3.75%, with an original maturity date of December 2005.
In
January 2005 the Company issued another note payable for $1,040,000 to the
same
shareholder under similar terms. At March 31, 2006 and December 31, 2005,
the
outstanding balance of these notes was $349,637 and $1,572,894, respectively.
The notes are currently due on demand.
Interest
paid under these notes was $6,279 and $0 during the three months ended March
31,
2006 and 2005, respectively.
NOTE
P - INCOME TAXES
The
components of the Company's consolidated income tax provision are as follows:
|
|
Three
Months ended March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Current
benefit
|
|
$
|
3,260,372
|
|
$
|
525,192
|
|
Deferred
benefit (expense)
|
|
|
336,294
|
|
|
(37,507
|
)
|
Subtotal
|
|
$
|
3,596,666
|
|
$
|
487,685
|
|
Less
valuation allowances
|
|
|
(3,596,666
|
)
|
|
(487,685
|
)
|
Net
|
|
$
|
-
|
|
$
|
-
|
|
The
reconciliation of the income tax provision at the statutory rate to the reported
income tax expense is as follows:
|
|
Three
Months ended March 31,
|
|
|
|
2006
|
|
2005
|
|
Computed
at statutory rate
|
|
|
34%
|
|
|
34%
|
|
Options
and warrants expense
|
|
|
(8%
|
)
|
|
(3%
|
)
|
Valuation
allowance
|
|
|
(26%
|
)
|
|
(31%
|
)
|
Total
|
|
|
-
|
|
|
-
|
|
At
March
31, 2006 the Company’s net deferred tax assets consisted of the
following:
Net
operating loss carryforwards
|
|
$
|
12,158,070
|
|
Excess
of goodwill impairment charge over tax basis
amortization
|
|
|
896,290
|
|
Excess
book over tax amortization of intangible assets
|
|
|
490,399
|
|
Subtotal
|
|
|
13,544,759
|
|
Less
valuation allowances
|
|
|
(13,544,759
|
)
|
Total
|
|
$
|
-
|
|
The
Company’s net operating loss carryforwards for
federal income tax purposes were approximately $35,600,000 as
of
March 31, 2006. These carryforwards expire in 2018 ($4,200,000), 2019
($22,000,000), and 2020 ($9,400,000), respectively.
NOTE
Q - SUBSEQUENT EVENTS
On
April
19, 2006, the Company completed the sale of its wholly-owned subsidiary,
DTNet,
to the Company’s former Chief Operating Officer (the “Purchaser”), pursuant to a
stock purchase agreement. The consideration for the sale consisted primarily
of
(1) the return for cancellation of warrants to purchase 200,000 shares of
the
Company’s common stock held by the Purchaser; and (2) the return for
cancellation of 200,000 shares of the Company’s common stock held by the
Purchaser. The value of the proceeds approximated the Company’s net book value
of its investment in DTNet. However, because DTNet’s operations were the primary
component of the Company’s hardware sales business segment, the Company recorded
an impairment charge of $839,101 in its statement of operations for the three
months ended March 31, 2006. The remaining $198,000 balance of goodwill for
this
segment at March 31, 2006 approximates the excess of the sales proceeds received
over DTNet’s carrying value (excluding goodwill) at the date of
sale.
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 the Company, Caerus, and WQN.
On
June
1, 2005, the Company, and Caerus announced the closing of the merger of Volo,
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.
On
October 6, 2005, the Company purchased substantially all of the assets of
WQN’s
VoIP business. Such assets consist of WQN’s properties and infrastructure for
its services platform for both retail and wholesale voice over internet
business.
The
unaudited pro forma condensed combined statements of operation for the three
months ended March 31, 2005 assumes that the mergers of Caerus, WQN and the
Company were consummated at January 1, 2005.
The
unaudited pro forma condensed combined statements of operations have been
prepared based on currently available information and assumptions that are
deemed appropriate by the Company's management. The pro forma information
is for
informational purposes only and is not intended to be indicative of the actual
consolidated results that would have been reported had the transactions occurred
on the dates indicated, nor does the information represent a forecast of
the
consolidated financial position at any future date or the combined financial
results of the Company, Caerus and WQN for any future period.
VoIP,
Inc
Proforma
Condensed Combined Statements of Operations (Unaudited)
Three
Months Ended March 31, 2005
|
|
VoIP,
Inc
|
|
Caerus,
Inc
|
|
WQN,
Inc
|
|
Adjustments
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,402,469
|
|
$
|
4,994,845
|
|
$
|
7,607,738
|
|
$
|
-
|
|
$
|
14,005,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,301,095
|
|
|
6,357,717
|
|
|
7,325,411
|
|
|
-
|
|
|
14,984,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
101,374
|
|
|
(1,362,872
|
)
|
|
282,327
|
|
|
-
|
|
|
(979,171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
1,642,494
|
|
|
1,615,123
|
|
|
1,226,401
|
|
|
992,109
|
|
|
5,476,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1,541,120
|
)
|
|
(2,977,995
|
)
|
|
(944,074
|
)
|
|
(992,109
|
)
|
|
(6,455,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
14,278
|
|
|
240,082
|
|
|
-
|
|
|
160,800
|
|
|
415,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(1,555,398
|
)
|
|
(3,218,077
|
)
|
|
(944,074
|
)
|
|
(1,152,909
|
)
|
|
(6,870,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(1,555,398
|
)
|
$
|
(3,218,077
|
)
|
$
|
(944,074
|
)
|
$
|
(1,152,909
|
)
|
$
|
(6,870,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
25,705,857
|
|
VOIP,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL
STATEMENTS
(1)
Basis
of Presentation
The
historical financial information for the Company, Caerus and WQN, Inc. for
the
three months ended March 31, 2005 has been derived from each company’s
respective historical consolidated financial statements.
(2)
VoIP,
Inc. and Caerus, Inc. Merger
On
June
1, 2005, the Company and Caerus, Inc. announced the closing of the Merger
of
Volo Corp., a wholly-owned subsidiary of the Company, with and into Caerus,
with
Caerus as the surviving
corporation. The Merger was completed pursuant to the Merger Agreement through
the conversion of all of Caerus’ outstanding capital stock into 16,434,470
shares of common stock, par value $0.001, of the Company.
(3)
On
October 6, 2005, the Company purchased substantially all of the assets of
WQN’s
VoIP business. Such assets consist of WQN’s properties and infrastructure for
its services platform for both retail and wholesale voice over internet
business.
(4)
Pro
Forma Statements of Operations Adjustments
Adjustments
to the pro forma Statements of Operations represent amortization of intangible
assets and interest expense related to convertible debt recorded in connection
with the acquisitions.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
General
The
following discussion should be read in conjunction with the unaudited
consolidated financial statements and the notes thereto and the other financial
information appearing elsewhere in this Form 10-Q. Certain statements contained
in this Form 10-Q 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," “may,” 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 our business and meet our 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 our Form 10-KSB for the year ended December 31, 2005.
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.
Financial
Summary
Balance
Sheet Data:
|
|
March
31, 2006
|
|
December
31, 2005
|
|
|
|
|
|
|
|
Goodwill
and other intangible assets
|
|
$
|
37,743,373
|
|
$
|
39,441,372
|
|
Total
assets
|
|
|
53,991,563
|
|
|
56,390,015
|
|
Notes
and loans payable, current
|
|
|
10,978,377
|
|
|
11,085,034
|
|
Total
liabilities
|
|
|
29,867,132
|
|
|
27,164,095
|
|
Shareholders’
equity
|
|
|
24,124,431
|
|
|
29,225,920
|
|
|
|
For
the Three Months Ended March 31
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
10,361,546
|
|
$
|
1,402,469
|
|
Loss
from operations
|
|
|
(10,678,699
|
)
|
|
(1,541,120
|
)
|
Net
loss
|
|
|
(13,807,034
|
)
|
|
(1,555,398
|
)
|
Net
loss per share
|
|
|
(0.20
|
)
|
|
(0.06
|
)
|
Comparison
of Three Months Ended March 31, 2006 And 2005
The
comparability of our 2006 results to those for 2005 is greatly impacted
by the
acquisition in May 2005 of Caerus and by the purchase in October 2005 of
substantially all of the VOIP-related assets and business of WQN. The following
table presents our pro forma results of operations for the three months
ended
March 31, 2005, assuming these business combinations had occurred at the
beginning of 2005:
|
|
Proforma
|
|
|
|
Combined
|
|
|
|
|
|
Revenues
|
|
$
|
14,005,052
|
|
Net
loss
|
|
$
|
(6,870,458
|
)
|
Net
loss per share
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
Consolidated
Results
Our
consolidated revenues for the three months ended March 31, 2006 and 2005
were
$10.4 million and $1.4 million, respectively. Our consolidated net loss was
$13,807,034 ($0.20 per share) for the three months ended March 31, 2006 as
compared to a net loss of $1,555,398 ($0.06 per share) for the three months
ended March 31, 2005. The increases in our revenues and net loss from the
2005
to 2006 period reflects the inclusion of the results of Caerus and the VOIP
business of WQN from the dates of their acquisitions. Revenues for the three
months ended March 31, 2006 include approximately $2.1 million and $7.8 million
in revenues generated by the acquired Caerus and WQN businesses, respectively.
Substantially all of the Caerus revenues for the three months ended March
31,
2006 (which represents 20% of our consolidated revenues for this period)
were
generated by one customer. Our 2006 results include operating losses of $3.9
million generated by Caerus’ operations and $133,000 attributable to the
business formerly owned by WQN.
We
incurred significantly greater operating expenses in the first three months
of
2006 ($10.7 million) than in the corresponding 2005 ($1.5 million). Our overhead
expense (excluding the goodwill impairment charge of $839,101) grew by
approximately $8.3 million, reflecting the increased size and complexity
of our
operations. Included in operating expenses for the three months ended March
31,
2006 are $3.0 million in compensation and benefits, $1.1 million in commissions
and fees paid to third parties primarily in connection with our capital raising
efforts, professional, legal and consulting expenses of $2.4 million, and
$1.5
million of depreciation and amortization.
In
accordance with SFAS No. 142, we are required to periodically evaluate the
carrying value of our goodwill and intangible assets. During the three months
ended March 31, 2006, we recognized impairment expense of $839,101 related
to
goodwill recorded for our hardware sales business segment. If in the future
the
remaining carrying value of our goodwill exceeds its fair market value, we
may
be required to record an additional 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.
We
did
not have sufficient authorized and unissued common shares to satisfy the
related
warrant obligations associated with the convertible notes issued in January
and
February 2006 on the dates the warrants were issued. Therefore, in accordance
with Emerging Issues Task Force Issues 00-27 and 00-19, the $3,526,077 the
value
of these warrants at their issuance dates was recorded as a debt discount
and a
liability on the Company’s consolidated balance sheet. The liability was
marked-to-market at March 31, 2006, resulting in a $1,281,278 increase in
the
liability and a corresponding charge to earnings for the three months ended
March 31, 2006. Future changes in the market value of these warrants may
have a
material effect on our operating results.
Total
assets at March 31, 2006 were $54.0 million, down from $56.4 million at December
31, 2005. This decrease in assets is due primarily to increased depreciation,
amortization, and impairment related to the tangible and intangible
assets. Goodwill and other intangible assets comprised 70% of our
consolidated total assets at March 31, 2006, attributable primarily to these
acquisitions.
Results
by Segment
Our
results by business segment for the three months ended March 31, 2006 and
2005
are as follows:
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telecommunications
|
|
Hardware
Sales
|
|
Calling
Cards
|
|
Corporate
|
|
Consolidated
|
|
Revenues
|
|
$
|
4,632,547
|
|
$
|
434,851
|
|
$
|
5,294,148
|
|
$
|
-
|
|
$
|
10,361,546
|
|
Gross
profit (loss)
|
|
|
(728,188
|
)
|
|
93,420
|
|
|
99,997
|
|
|
-
|
|
|
(534,771
|
)
|
Operating
expenses
|
|
|
3,393,140
|
|
|
1,040,463
|
|
|
126,590
|
|
|
5,583,735
|
|
|
10,143,928
|
|
Loss
from operations
|
|
|
(4,121,328
|
)
|
|
(947,043
|
)
|
|
(26,593
|
)
|
|
(5,583,735
|
)
|
|
(10,678,699
|
)
|
Other
expense
|
|
|
325,360
|
|
|
-
|
|
|
-
|
|
|
2,802,975
|
|
|
3,128,335
|
|
Net
income (loss)
|
|
$
|
(4,446,688
|
)
|
$
|
(947,043
|
)
|
$
|
(26,593
|
)
|
$
|
(8,386,710
|
)
|
$
|
(13,807,034
|
)
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telecommunications
|
|
Hardware
Sales
|
|
Calling
Cards
|
|
Corporate
|
|
Consolidated
|
|
Revenues
|
|
$
|
843,935
|
|
$
|
558,534
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,402,469
|
|
Gross
profit (loss)
|
|
|
(22,544
|
)
|
|
123,918
|
|
|
-
|
|
|
-
|
|
|
101,374
|
|
Operating
expenses
|
|
|
610,177
|
|
|
121,387
|
|
|
-
|
|
|
910,930
|
|
|
1,642,494
|
|
Profit
(loss) from operations
|
|
|
(632,721
|
)
|
|
2,531
|
|
|
-
|
|
|
(910,930
|
)
|
|
(1,541,120
|
)
|
Other
expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
14,278
|
|
|
14,278
|
|
Net
income (loss)
|
|
$
|
(632,721
|
)
|
$
|
2,531
|
|
$
|
-
|
|
$
|
(925,208
|
)
|
$
|
(1,555,398
|
)
|
Telecommunication
Services Segment:
The
net
loss from our telecommunication services segment grew from $632,721 in the
first
three months of 2005 to $4,446,688 in the corresponding 2006 period. Revenue
for
this segment grew by $3.8 million in the first three months of 2006 to $4.6
million. These increases are attributable almost entirely to the Caerus and
WQN
acquisitions.
The
negative gross profit for this segment of $728,188 in the first three months
of
2006 reflects variable costs paid to third party vendors that exceeded the
revenues we charged to terminate the calls of our customers. We do not expect
to
generate positive margins on our network traffic until such time as we are
able
to increase the overall volume of traffic handled by our network by growing
our customer base and lower the average cost per minute we pay for call
termination through: (a) negotiating more favorable pricing; (b) expanding
our
selection of third party vendors; and (c) improving our routing process and
technology to ensure we are using the lowest cost route available to us to
terminate each call.
Operating
expenses in the first three months of 2006 for this segment rose to $3.4
million, and include compensation and benefits expenses of $834,585 and
depreciation and amortization aggregating $1.5 million.
Hardware
Sales Segment:
Hardware
sales were relatively flat during the first three months of 2006 ($434,851)
as
compared to the corresponding 2005 period. However, the net loss for this
segment went from essentially nil in the first three months of 2005, as compared
to $947,043 in 2006, mainly due to the goodwill impairment charge discussed
previously.
On
April
19, 2006, the Company completed the sale of its wholly-owned subsidiary,
DTNet.
However, because DTNet’s operations were the primary component of the Company’s
hardware sales business segment, the Company recorded an impairment charge
of
$839,101 in its statement of operations for the three months ended March
31,
2006. The remaining $198,000 goodwill for this segment approximates the excess
of the sales proceeds received over DTNet’s carrying value (excluding goodwill)
at the date of sale.
Calling
Card Sales Segment:
Calling
card sales were $5.3 million in the first three months of 2006, reflecting
the
acquisition of this segment in October 2005, as a part of the WQN acquisition.
The loss from operations in the 2006 period was $26,593.
Liquidity
and Capital Resources
Cash
and
cash equivalents increased by $305,339 for the three months ended March 31,
2006, to $3.5 million. Our consolidated net cash used in operating activities
for the three months ended March 31, 2006 was $5.8 million, due primarily
to the
net loss described above. We funded our operating activities principally
through
financing activities that generated net proceeds of $6.1
million.
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
March
31, 2006 our current liabilities totaled approximately $29.6 million. Included
in this amount was an outstanding balance of approximately $4.0 million on
a
loan from a lending institution. We are not in compliance with certain related
loan covenants. To date our lender has not declared a default under this
loan
agreement.
At
March
31, 2006 our negative working capital was $23.2 million.
In
January and February 2006, we issued and sold $12.0 million principal amount
of
convertible notes to accredited investors at a discount, receiving net proceeds
of $9.9 million (including advance funds received in December 2005). These
notes
are immediately convertible at the option of the note holders into 8,010,229
shares of the Company’s common stock. These note holders also received five-year
warrants to purchase 4,537,053 shares of the Company’s common stock for $1.46
per share, and one-year warrants to purchase 4,537,053 shares for $1.59 per
share. Approximately $7.6 million of these notes are secured by a subordinated
lien on our assets. All these notes bear interest at an effective rate of
approximately 20%, and are payable over two years beginning 90 to 180 days
after
closing in cash or, at the option of the Company, in registered common stock
at
the lesser of $1.40 per share or 85% of the weighted average price of the
stock
on the OTCBB. In April 2006, the Company was in violation of certain
requirements of these notes, and did not make scheduled payments of $389,481.
While the note holders have not declared the notes in default, the full amount
of the notes at March 31, 2006 has been classified as current.
As
explained below, the subscription agreements related to these convertible
notes
contain provisions that could impact our future capital raising efforts and
our
capital structure:
· |
As
required by the subscription agreements, in February 2006, we filed
a
registration statement (the “Notes Registration Statement”) to register
200% of the shares issuable upon conversion of these notes and all
of the
shares issuable upon exercise of the warrants that were issued in
connection with the notes. Until the Notes Registration Statement
is
declared effective by the Securities and Exchange Commission, we
are
liable, beginning in late April 2006, for liquidated damages each
month at
a rate of 1.5% of the outstanding principal of the notes (currently
$168,215 per month) until the Notes Registration Statement is declared
effective.
|
· |
Unless
consent is obtained from the note holders, we may not file any new
registration statements or amend any existing registrations until
the
sooner of (i) 60 days following the effective date of the Notes
Registration Statement or (ii) all the notes have been converted
into
shares of the Company’s common stock and such shares of common stock and
the shares of common stock issuable upon exercise of the warrants
have
been sold by the note holders.
|
· |
Until
the Notes Registration Statement has been effective for 365 days,
the note
holders must be given the right of first refusal with respect to
any
proposed sale of the Company’s common stock or debt
obligations.
|
· |
Unless
consent is obtained from the note holders, for so long as 20% or
more of
the principal amount of the notes, the warrants or the common stock
issued
or issuable for the notes remains outstanding, we may not issue any
new shares of common stock, convertible securities or warrants at
a price
per share, conversion price per share or exercise price per share
that is
lower than those prices in effect for the notes and warrants, without
issuing the note holders sufficient additional shares or warrants
at
prices such that their warrant exercise price or per share price
on
average is equal to that for the proposed securities to be
issued.
|
Our
acquisition of WQN’s VoIP assets was funded in part with the issuance of a
convertible note with a principal amount of $3.7 million. This note is
convertible at the option of WQN into shares of the Company’s common stock at
$1.06 per share. It is also convertible by the Company into shares of preferred
stock once its Articles of Incorporation are amended to authorize preferred
stock issuances. This note is payable over 12 months beginning February 2006,
and bears nominal interest at 6%. However, scheduled payments have not been
made, and WQN has agreed to subordinate its repayment claim to the convertible
note holders described above.
We
anticipate that we will continue to report net losses and experience negative
cash flows from operations. We will need to raise additional debt or equity
capital to provide the funds necessary to repay or restructure our $4.0 million
loan, meet our other current contractual obligations and continue our
operations. We are actively seeking to raise this additional capital. However,
we may not be successful in obtaining further equity or debt financing for
our
business.
Our
authorized shares of stock consist of 100,000,000 shares of common stock,
of
which there are currently 68,878,266 shares issued and outstanding.
Approximately another 41,000,000 additional shares are contingently issuable
upon the exercise or conversion of outstanding stock options, warrants and
convertible securities. A proxy statement will be 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 may be unable to satisfy the contractual obligations
we have
undertaken to issue future shares of common stock.
Capital
Expenditure Commitments
We
have
outstanding commitments to purchase capital equipment of approximately $348,000
at March 31, 2006. We anticipate financing these purchases with leasing
facilities.
Payments
Due by Period
The
following table illustrates our outstanding debt, purchase obligations, and
related payment projections as of March 31, 2006:
|
|
|
|
Less
than
|
|
|
|
|
|
Contractual
Obligations
|
|
Total
|
|
1
Year
|
|
1-3
Years
|
|
3-5
Years
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
notes (principal)
|
|
$
|
16,945,378
|
|
$
|
16,945,378
|
|
$
|
-
|
|
$
|
-
|
|
Loan
payable
|
|
|
3,980,200
|
|
|
3,980,200
|
|
|
-
|
|
|
-
|
|
Unsecured
advances
|
|
|
286,675
|
|
|
286,675
|
|
|
-
|
|
|
|
|
Due
to related parties
|
|
|
349,637
|
|
|
349,637
|
|
|
-
|
|
|
-
|
|
Other
liabilities
|
|
|
269,106
|
|
|
74,323
|
|
|
129,037
|
|
|
65,746
|
|
Subtotal
|
|
|
21,830,996
|
|
|
21,636,213
|
|
|
129,037
|
|
|
65,746
|
|
Purchase
obligations
|
|
|
426,750
|
|
|
426,750
|
|
|
-
|
|
|
-
|
|
Operating
leases
|
|
|
538,602
|
|
|
295,578
|
|
|
243,024
|
|
|
-
|
|
Total
|
|
$
|
22,796,348
|
|
$
|
22,358,541
|
|
$
|
372,061
|
|
$
|
65,746
|
|
ITEM
3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK
In
conjunction with the January and February, 2006 convertible note issuances
discussed in NOTE H to our consolidated financial statements, we determined
that
we had insufficient authorized common shares to satisfy the related warrants
to
purchase 8,508,594 million shares of the Company’s common stock. Therefore,
under Emerging Issues Task Force Issue 00-19, the $3,526,077 value of these
warrants at their issuance dates was classified as a liability on our
consolidated balance sheet, and their value was marked-to-market at March
31,
2006, resulting in a $1,281,278 increase in the liability, and a corresponding
charge to earnings for the three months ended March 31, 2006. Until we have
sufficient authorized common shares to satisfy these warrant obligations,
we
will be subject to future noncash mark-to-market exposure to the extent that
the
estimated market value of these warrants changes in the future, which are
in
turn primarily dependent on the Company’s common stock market price per share.
As a hypothetical example, a $0.50 per share increase or decrease in the
market
price of the Company’s common stock at March 31, 2006 would have increased or
decreased the estimated average market value of these warrants by $0.38 or
$.30
per warrant, respectively, resulting in hypothetical mark-to-market adjustments
that would have further increased the Company’s consolidated net loss for the
three months ended March 31 2006 by $3,190,723, or decreased that loss by
$2,552,579, respectively.
We
are
not exposed to significant interest rate or foreign currency exchange rate
risk.
ITEM
4. 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 Quarterly 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 our 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 our 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, as
of
March 31, 2006. The control deficiencies identified by our management and the
Certifying Officers, which in combination resulted in a material weakness,
were
(a) misstatements in amounts reported for a consolidated
subsidiary, (b) insufficient personnel resources with appropriate
accounting expertise, and (c) a lack of independent verification of amounts
billed to certain customers.
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 our disclosure controls and procedures were ineffective
as of March 31, 2006.
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. Our 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 our assets that could
have
a material effect on the financial statements. |
Our
management, including the Certifying Officers, assessed the effectiveness of
our
internal control over financial reporting as of March 31, 2006, and have
concluded that we had the following control deficiencies as of March 31, 2006
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 Annual Report on Form 10-KSB, our senior
financial
management discovered certain overstatements of the revenues and
expenses
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 restated the financial
information presented in our Form 10-KSB/A for the year ended December
31,
2004. Adjustments to reduce (i) the overstatements of revenues; (ii)
the
overstatement of cost of goods sold; and (iii) the understatement
of net
loss, aggregated $791,200, $498,123, and $462,618, respectively,
for the
year ended December 31, 2004, and $604,678, $499,840, and $48,101,
for the
year ended December 31, 2005, respectively.
|
|
(b)
|
The
amounts invoiced to our wholesale telecommunications customers are
calculated by our engineering department. This billing process is
overseen solely by the head of that department, our Chief Technology
Officer. We do not presently employ a separate revenue assurance
process whereby these bills would be recalculated and independently
verified by a department other than engineering. Our management with
the participation of the Certifying Officers determined that the
potential
magnitude of a misstatement arising due to this deficiency is more
than
inconsequential to the annual and/or interim financial
statements.
|
|
(c)
|
We
do not have sufficient personnel resources at corporate headquarters
with
appropriate accounting expertise or experience in financial reporting
for
public companies. Our 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 of financial reporting because
the quantitative effect of any errors resulting from these deficiencies when
taken together could result in a material misstatement of our 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 Certifying Officers concluded that we did not maintain
effective internal control over financial reporting as of March 31, 2006
based
on the criteria in the Internal Control - Integrated Framework.
Remediation
Steps to Address Control Deficiencies
We
are in
the process of addressing the identified material weakness by remediating the
control deficiencies in our internal control over financial reporting which
comprise this material weakness as follows:
|
(a)
|
In
March 2006, our Board of Directors (the “Board”) retained counsel to
conduct a thorough investigation of the accounting misstatements
of our
DTNet subsidiary. Such counsel, in turn, retained an independent
forensic
accounting firm to assist its investigation. Based on this investigation
our Board 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 we terminated
the
employment of the other individual immediately following the receipt
of
the preliminary findings of the investigation in early April 2006.
We
changed the individual responsible for the day-to-day management
of DTNet,
relocated its accounting to our corporate offices and increased our
analysis of this subsidiary’s transactions. In April 2006, we sold this
subsidiary to our former Chief Operating
Officer.
|
|
(b)
|
We
continue to seek to improve our in-house accounting resources. During
the
fourth quarter of 2005 we hired a new CFO with significant accounting
and
public company experience. During the first quarter of 2006 we did
not
hire any new accounting personnel. However, we significantly supplemented
our internal accounting resources during these three months by using
independent accounting and financial consulting firms. We expect
to
continue to use such third parties until such time as we are able
to hire
sufficient in-house accounting expertise. In April 2006 we promoted
the
former Finance Director of one of our 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.
|
|
(c)
|
We
are in the process of designing a revenue assurance process for
the
billing of our wholesale telecommunications customers to provide
independent recalculation and verification of amounts billed. We
anticipate implementing this methodology by the end of the third
quarter
of 2006.
|
Changes
in Control Over Financial Reporting
There
were no changes in our internal control over financial reporting identified
in
connection with the evaluation of such internal control that occurred during
our
last fiscal quarter that have materially affected, or are reasonably likely
to
materially affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
ITEM
1.A RISK
FACTORS
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS
UPON SENIOR SECURITIES
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
The
Company has held no regularly scheduled, called or special meetings of
shareholders during the reporting period.
ITEM
5. OTHER
INFORMATION
None
(a)
Exhibits
No.
Description
31.1
Certification by CEO under SEC Rule 13a-14, as adopted pursuant to Section
302
of the Sarbanes-Oxley Act of 2002.
31.2
Certification by CFO under SEC Rule 13a-14, as adopted pursuant to Section
302
of the Sarbanes-Oxley Act of 2002.
32.1
Certification by CEO pursuant to 18 USC Section 1350 as adopted by
Section
906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification by CFO pursuant to 18 USC Section 1350 as adopted by
Section
906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
Quarterly Report on Form 10-Q for the period ended March 31, 2006 to be signed
on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
VoIP,
INC. |
|
|
|
Date: May 18,
2006 |
|
/s/ David
Sasnett |
|
David
Sasnett |
|
Chief Financial
Officer |