As filed with the Securities and Exchange Commission on October 14, 2005
Registration No. 333-127522
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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VoIP, Inc.
(Name of Small Business Issuer as Specified in its Charter)
Texas 3661 75-2785941
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification Number)
Incorporation or
Organization)
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12330 SW 53rd Street, Suite 712
Ft. Lauderdale, FL 33330
(954) 434-2000
(Address and Telephone Number of Principal Executive
Offices and Principal Place of Business)
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Steven Ivester
President and Chief Executive Officer
VoIP, Inc.
12330 SW 53rd Street, Suite 712
Ft. Lauderdale, FL 33330
(954) 434-2000
(Name, Address and Telephone Number of Agent for Service)
-------------------------------
Copies to:
Ronald L. Brown, Esq.
Andrews Kurth LLP
1717 Main Street, Suite 3700
Dallas, TX 75201
(214) 659-4400
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|_______
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|_______
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|_______
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. |_|
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment that specifically states this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933, as amended, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
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SUBJECT TO COMPLETION DATED OCTOBER 14, 2005
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PROSPECTUS
15,372,245
SHARES
VoIP, INC.
COMMON STOCK
-------------------------------------------
The persons listed in this Prospectus under "Selling Shareholders" may
offer and sell from time to time up to an aggregate of 15,372,245 shares of our
common stock that they have acquired or will acquire from us, including those
shares that may be acquired upon exercise of warrants granted by us. Information
on the selling shareholders, and the times and manner in which they offer and
sell shares of our common stock, is provided under "Selling Shareholders" and
"Plan of Distribution" in this Prospectus.
We will not receive any proceeds for the sale of the common stock by the
selling shareholders. We will bear the costs and expenses of registering the
common stock offered by the selling shareholders. Selling commissions, brokerage
fees, and applicable transfer taxes are payable by the selling shareholders.
Our common stock is listed on the Over-The-Counter Bulletin Board
("OTCBB") under the symbol "VOII"). On October 13, 2005, the closing bid price
for our common stock on the OTCBB was $1.75 per share.
BEFORE PURCHASING ANY OF THE SHARES COVERED BY THIS PROSPECTUS, CAREFULLY
READ AND CONSIDER THE RISK FACTORS INCLUDED IN THE SECTION ENTITLED "RISK
FACTORS" BEGINNING ON PAGE 5 YOU SHOULD BE PREPARED TO ACCEPT ANY AND ALL OF THE
RISKS ASSOCIATED WITH PURCHASING THE SHARES, INCLUDING A LOSS OF ALL OF YOUR
INVESTMENT.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is ________________.
You should rely only on the information contained in this Prospectus. We
have not authorized any other person to provide you with information different
from that contained in this Prospectus. The information contained in this
Prospectus is complete and accurate only as of the date of the front cover page
of this Prospectus, regardless of the time of delivery of this Prospectus or the
sale of any common stock. The Prospectus is not an offer to sell, nor is it an
offer to buy, our common stock in any jurisdiction in which the offer or sale is
not permitted.
We have not taken any action to permit a public offering of our shares of
common stock outside of the United States or to permit the possession or
distribution of this Prospectus outside of the United States. Persons outside of
the United States who came into possession of this Prospectus must inform
themselves about and observe any restrictions relating to the offering of the
shares of common stock and the distribution of this Prospectus outside of the
United States.
2
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes, appearing elsewhere in this Prospectus.
CERTAIN RISKS
Detailed information about the risks of investing in the offering are set
forth in "Risk Factors" beginning on page 5. Potential investors should
specifically be aware of the following:
o We have never achieved a profitable level of operations.
o For the year ended December 31, 2004 our net loss was $4,014,739 and
our cash flows from operations were a negative $2,664,114.
o Our net loss for the six months ended June 30, 2005 was $5,033,437
versus a loss of $430,981 for the same period in 2004. Our cash
flows from operations for the six months ended June 30, 2005 were a
negative $4,583,648.
o We have relied upon sales of debt and equity securities, many to
persons related to management, to obtain enough funds to continue
operating. Such sales amounted to $6,261,399 through June 30, 2005.
We will need to continue selling debt and equity securities to
continue operations.
o As of September 30, 2005, a total of 22,756,253 shares of common
stock are issuable upon exercise of warrants at prices from $1.00 to
$1.70 per share, and 4,000,000 shares of common stock are issuable
under our stock option plan at exercise price ranges from $0.85 to
$1.56 which will result in additional dilution to our common
shareholders.
o There is an inactive trading market in our common stock, and the
market for our stock is illiquid and volatile.
o The companies we have acquired have losses and operate at negative
margins. We have recorded significant amounts of goodwill and
intangible assets in connection with these acquisitions, and such
assets are subject to possible future impairment charges that could
have a material adverse effect on our results of operations and
financial condition.
VoIP, Inc., a Texas corporation, is a holding company of businesses
centered on the development and sale of technology, services and products for
Voice-over-Internet Protocol (VOIP), wireless and multimedia applications.
For a more detailed discussion of our history and our business, see
"Business History" beginning on page 20, and "Management Discussion and Analysis
of Financial Condition and Results of Operations and Plan of Operation,"
beginning on page 32.
THE OFFERING
Up to 15,372,245 shares of our issued and outstanding common stock are
being offered and sold by the selling shareholders. We will not receive any of
the proceeds from the sale of those shares. Such shares include 6,123,286 shares
sold in private placements and in acquisition to accredited investors from
December 2004 until July 28, 2005 and 3,038,520 shares issuable upon exercise of
stock purchase warrants granted in connection with the sale of the common stock,
at exercise prices ranging from $1.38 to $1.60.
PLAN OF DISTRIBUTION
Sales of common stock may be made by or for the account of the selling
shareholders in the over-the-counter market or on any exchange on which our
common stock may be listed at the time of sale. Shares may also be sold in block
transactions or private transactions or otherwise, through brokers or dealers.
Brokers or dealers may be paid commissions or receive sales discounts in
connection with such sales. The selling shareholders must pay their own
commission and absorb the discounts. Brokers or dealers used by the selling
shareholders will be underwriters under the Securities act of 1933. In addition,
any selling shareholders that are a broker/dealer will be underwriters under the
Securities Act with respect to the common stock offered hereby. In lieu of
making sales through the use of this Prospectus, the selling shareholders may
also make sales of the shares covered by this Prospectus pursuant to Rule 144 or
Rule 144A under the Securities Act.
3
SELECTED FINANCIAL INFORMATION
Balance Sheet Data:
June 30, 2005
(unaudited) December 31, 2004
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Goodwill and other intangible assets $ 30,765,594 $ 6,923,854
Total assets 43,250,279 10,215,552
Notes payable, current 7,736,929 760,000
Total liabilities (all current) 20,542,992 2,108,114
Shareholders' equity 22,707,287 8,107,438
Six Months Ended Year Ended
June 30, December 31,
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Statement of Operations Data: 2005 2004 2004 2003
----------- --------- ----------- ---------
(Unaudited)
Revenue $ 3,916,920 $ 85,298 $ 2,619,393 $ 0
Operating (loss)(1) (5,033,437) (430,981) (4,160,050) 0
Net (loss) (1) (5,033,437) (430,981) (4,014,739) (352,968)
Net (loss) per common share (0.19) (0.05) (0.27) (0.20)
(1) The operating loss for the year ended December 31, 2004 includes
$3,520,000 in non-cash compensation expenses resulting from the
issuance to executive officers of warrants to purchase 4,400,000
shares of common stock for $1.00 per share in August, 2004.
See "Financial Statements" beginning on Page F-1.
4
RISK FACTORS
You should carefully consider each of the following risk factors and all
of the other information in this Prospectus. If any of the following risks and
uncertainties develops into actual events, our business, financial condition or
results of operations could be materially and adversely affected. If that
happens, the trading price of our Shares could decline significantly. The risk
factors below contain forward-looking statements regarding our company. Actual
results could differ materially from those set forth in the forward-looking
statements.
Cautionary Statement Regarding Forward-Looking Statements
This Prospectus contains forward-looking statements relating to events
anticipated to happen in the future. These forward-looking statements are based
on the beliefs of our management, as well as assumptions made by and information
currently available to our management. Forward-looking statements also may be
included in other written and oral statements made or released by us. You can
identify forward-looking statements by the fact that they do not relate strictly
to historical or current facts. The words "believe," "anticipate," "intend,"
"expect," "estimate," "project" and similar expressions are intended to identify
forward-looking statements. Forward-looking statements describe our expectations
today of what we believe is most likely to occur or may be reasonably achievable
in the future, but they do not predict or assure any future occurrence and may
turn out to be wrong. Forward-looking statements are subject to both known and
unknown risks and uncertainties and can be affected by inaccurate assumptions we
might make. Consequently, no forward-looking statement can be guaranteed. Actual
future results may vary materially. We do not undertake any obligation to
publicly update any forward-looking statements to reflect new information or
future events or occurrences. These statements reflect our current views with
respect to future events and are subject to risks and uncertainties about us,
including, among other things:
o our ability to market our services successfully to new subscribers;
o our ability to retain a high percentage of our customers;
o the possibility of unforeseen capital expenditures and other upfront
investments required to deploy new technologies or to effect new
business initiatives;
o our ability to access markets and finance network developments and
operations;
o our expansion, including consumer acceptance of new price plans and
bundled offerings;
o additions or departures of key personnel;
o competition, including the introduction of new products or services
by our competitors;
o existing and future laws or regulations affecting our business and
our ability to comply with these laws or regulations;
o our reliance on the systems and provisioning processes of regional
Bell operating companies;
o technological innovations;
o the outcome of legal and regulatory proceedings;
o general economic and business conditions, both nationally and in the
regions in which we operate; and
o other factors described in this document, including those described
in more detail below.
We caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this document.
RISKS RELATED TO OUR COMPANY
We have a history of losses and negative cash flows from operations and we
anticipate such losses and negative cash flows may continue.
We have incurred significant losses since inception, and we may continue
to incur significant losses for the foreseeable future. We reported net losses
of approximately $5.0 million for the six months ended June 30, 2005 and
approximately $4.0 million for the year ended December 31, 2004. As of June 30,
2005, our accumulated deficit was approximately $9.7 million. We had negative
cash flows from operations of approximately $4.6 million for the six months
ended June 30, 2005 and $2.7 million for the year ended December 31, 2004. Our
revenues may not grow or even continue at their current level. We will need to
increase our revenues to become profitable. In order to increase our revenues,
we need to attract and maintain customers to increase the fees we collect for
our services. If our revenues do not increase as much as we expect or if our
expenses increase at a greater pace than revenues, we may never be profitable
or, if we become profitable, we may not be able to sustain or increase
profitability on a quarterly or annual basis.
5
We have a limited operating history upon which you can evaluate us.
We have only a limited operating history upon which you can evaluate our
business and prospects. We commenced operations of our current business in 2004.
You should consider our prospects in light of the risks, expenses and
difficulties we may encounter as an early stage company in the new and rapidly
evolving market for IP communications services. These risks include our ability:
o to increase acceptance of our enhanced VoIP communications services,
thereby increasing the number of users of our IP telephony services;
o to compete effectively, and;
o to develop new products and keep pace with developing technology.
In addition, because we expect an increasing percentage of our revenues to
be derived from our enhanced IP communications services, our past operating
results may not be indicative of our future results.
We may not be able to expand our revenue base and achieve profitability.
Our business strategy is to expand our revenue sources to include the IP
communications services to several different customer groups. We can neither
assure you that we will be able to accomplish this nor that this strategy will
be profitable. Currently, our revenues are generated by providing routing and
termination services to other carriers and through hardware sales. These
services have not been profitable to date and may not be profitable in the
future.
In the future, we intend to generate increased revenues from enhanced IP
communications services, from multiple sources, many of which are unproven. We
expect that our revenues for the foreseeable future will be dependent on, among
other factors:
o acceptance and use of IP telephony;
o expansion of service offerings;
o traffic levels on our network;
o the effect of competition, regulatory environment, international
long distance rates and access and transmission costs on our prices,
and;
o continued improvement of our global network quality.
We cannot assure you that a market for our services will develop. Our
market is new and rapidly evolving. Our ability to sell our services may be
inhibited by, among other factors, the reluctance of some end-users to switch
from traditional communications carriers to IP communications carriers and by
concerns with the quality of IP telephony and the adequacy of security in the
exchange of information over the Internet, and the reluctance of our resellers
and service providers to utilize outsourced solutions providers. End-users in
markets serviced by recently deregulated telecommunications providers are not
familiar with obtaining services from competitors of these providers and may be
reluctant to use new providers, such as us. We will need to devote substantial
resources to educate customers and end-users about the benefits of IP
communications solutions in general and our services in particular. If
enterprises and their customers do not accept our enhanced IP communications
services as a means of sending and receiving communications, we will not be able
to increase our number of paid users or successfully generate revenues in the
future.
We may incur goodwill and intangible asset impairment charges.
Our balance sheet at June 30, 2005 includes approximately $16.9 million in
goodwill and approximately $13.9 million in intangible assets recorded in
connection with our acquisitions. We expect to record significant additional
amounts of goodwill and intangible assets as a result of our acquisition in
October 2005 of substantially all of the assets relating to the VoIP business of
WQN, Inc.
In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," we test our goodwill and our intangible
assets for impairment at least annually by comparing the fair values of these
assets to their carrying values, and we may be required to record impairment
charges for these assets if in the future their carrying values exceed their
fair values. Such accounting charges related to impairment would be reflected in
our consolidated statement of operations as an operating expense, and could have
a material adverse impact on our results of operations and financial condition.
6
Potential fluctuations in our quarterly financial results may make it difficult
for investors to predict our future performance.
Our quarterly operating results may fluctuate significantly in the future
as a result of a variety of factors, many of which are outside our control.
The factors generally within our control include:
o the amount and timing of capital expenditures to expand our
infrastructure;
o the amount and timing of expenses to enhance marketing and promotion
efforts; and
o the timing of announcements or introductions of new or enhanced
services by us.
The factors outside our control include:
o the timing of announcements or introductions of new or enhanced
services by our competitors;
o technical difficulties or network interruptions in the Internet or
our privately-managed network;
o general economic and competitive conditions specific to our
industry.
The foregoing factors also may create other risks affecting our long-term
success, as discussed in the other risk factors. We believe that
quarter-to-quarter comparisons of our historical operating results may not be a
good indication of our future performance, nor would our operating results for
any particular quarter be indicative of our future operating results.
We expect to need additional capital to continue our operations.
We intend to continue to enhance and expand our network in order to
maintain our competitive position and meet the increasing demands for service
quality, capacity and competitive pricing. Also, the introduction of new
products and/or service will require significant marketing and promotional
expenses that we often incur before we begin to receive the related revenue. Our
cash flow from operations has not been sufficient to meet our capital
expenditure and working capital requirements. We anticipate we will need to
raise additional capital to continue our operations. We may not be able to raise
additional capital, and if we are able to raise additional capital through the
issuance of additional equity, our current investors could experience dilution.
If we are unable to obtain additional capital, we may be required to reduce the
scope of our business or our anticipated growth, which would reduce our
revenues.
7
Our network may not be able to accommodate our capacity needs.
We expect the volume of traffic we carry over our network to increase
significantly as we expand our operations and service offerings. Our network may
not be able to accommodate this additional volume. In order to ensure that we
are able to handle additional traffic, we may have to enter into long-term
agreements for leased capacity. To the extent that we overestimate our capacity
needs, we may be obligated to pay for more transmission capacity than we
actually use, resulting in costs without corresponding revenues. Conversely, if
we underestimate our capacity needs, we may be required to obtain additional
transmission capacity from more expensive sources. If we are unable to maintain
sufficient capacity to meet the needs of our users, our reputation could be
damaged and we could lose users.
Additionally, our success depends on our ability to handle a large number
of simultaneous calls. We expect that the volume of simultaneous calls will
increase significantly as we expand our operations. If this occurs, additional
stress will be placed upon the network hardware and software that manages our
traffic. We cannot assure stockholders of our ability to efficiently manage a
large number of simultaneous calls. If we are not able to maintain an
appropriate level of operating performance, or if our service is disrupted, then
we may develop a negative reputation and our business, results of operations and
financial condition would be materially adversely affected.
We face a risk of failure of computer and communications systems used in our
business.
Our business depends on the efficient and uninterrupted operation of our
computer and communications systems as well as those that connect to our
network. We maintain communications systems (i.e. Network Access Points) in
facilities in Orlando, Atlanta, New York, Dallas, Los Angeles and we are
currently constructing a NAP in Chicago. Our systems and those that connect to
our network are subject to disruption from natural disasters or other sources of
power loss, communications failure, hardware or software malfunction, network
failures and other events both within and beyond our control. Any system
interruptions that cause our services to be unavailable, including significant
or lengthy telephone network failures or difficulties for users in communicating
through our network or portal, could damage our reputation and result in a loss
of users.
8
Our computer systems and operations may be vulnerable to security breaches.
Our computer infrastructure is potentially vulnerable to physical or
electronic computer viruses, break-ins and similar disruptive problems and
security breaches that could cause interruptions, delays or loss of services to
our users. We believe that the secure transmission of confidential information
over the Internet, such as credit card numbers, is essential in maintaining user
confidence in our services. We rely on licensed encryption and authentication
technology to effect secure transmission of confidential information, including
credit card numbers. It is possible that advances in computer capabilities, new
technologies or other developments could result in a compromise or breach of the
technology we use to protect user transaction data. A party that is able to
circumvent our security systems could misappropriate proprietary information or
cause interruptions in our operations. Security breaches also could damage our
reputation and expose us to a risk of loss or litigation and possible liability.
Although we have experienced no security breaches to date of which we are aware,
we cannot guarantee you that our security measures will prevent security
breaches.
Online credit card fraud can harm our business.
The sale of our products and services over the Internet exposes us to
credit card fraud risks. Many of our products and services, including our VoIP
services, can be ordered or established (in the case of new accounts) over the
Internet using a major credit card for payment. As is prevalent in retail
telecommunications and Internet services industries, we are exposed to the risk
that some of these credit card accounts are stolen or otherwise fraudulently
obtained. In general, we are not able to recover fraudulent credit card charges
from such accounts. In addition to the loss of revenue from such fraudulent
credit card use, we also remain liable to third parties whose products or
services are engaged by us (such as termination fees due telecommunications
providers) in connection with the services which we provide. In addition,
depending upon the level of credit card fraud we experience, we may become
ineligible to accept the credit cards of certain issuers. We are currently
authorized to accept American Express, Visa, MasterCard, and Discover. The loss
of eligibility for acceptance of credit cards could significantly and adversely
affect our business. We will attempt to manage fraud risks through our internal
controls and our monitoring and blocking systems. If those efforts are not
successful, fraud could cause our revenue to decline significantly and our
business, financial condition and results of operations to be materially and
adversely affected.
We depend on highly qualified technical and managerial personnel.
Our future success also depends on our continuing ability to attract,
retain and motivate highly qualified technical expertise and managerial
personnel necessary to operate our businesses. We may need to give retention
bonuses and stock incentives to certain employees to keep them, which can be
costly to us. The loss of the services of members of our management team or
other key personnel could harm our business. Our future success depends to a
significant extent on the continued service of key management, client service,
product development, sales and technical personnel. We do not maintain key
person life insurance on any of our executive officers and do not intend to
purchase any in the future. Although we generally enter into non-competition
agreements with our key employees, our business could be harmed if one or more
of our officers or key employees decided to join a competitor or otherwise
compete with us.
9
We may be unable to attract, assimilate or retain highly qualified
technical and managerial personnel in the future. Wages for managerial and
technical employees are increasing and are expected to continue to increase in
the future. We may have difficulty in hiring and retaining highly skilled
employees with appropriate qualifications. If we were unable to attract and
retain the technical and managerial personnel necessary to support and grow our
businesses, our businesses would likely be materially and adversely affected.
Operating internationally exposes us to additional and unpredictable risks.
We intend to continue to enter additional markets in Eastern Europe, the
Middle East, Latin America, Africa and Asia and to expand our existing
operations outside the United States. International operations are subject to
inherent risks, including:
o potentially weaker protection of intellectual property rights;
o political and economic instability;
o unexpected changes in regulations and tariffs;
o fluctuations in exchange rates;
o varying tax consequences, and;
o uncertain market acceptance and difficulties in marketing efforts
due to language and cultural differences.
Our entry into new lines of business, as well as potential future acquisitions,
joint ventures or strategic transactions entails numerous risks and
uncertainties that could have an adverse effect on our business.
We may enter into new or different lines of business, as determined by
management and our Board of Directors. Our acquisitions, as well as any future
acquisitions or joint ventures could result, and in some instances have resulted
in numerous risks and uncertainties, including:
o potentially dilutive issuances of equity securities, which may be
issued at the time of the transaction or in the future if certain
performance or other criteria are met or not met, as the case may
be. These securities may be freely tradable in the public market or
subject to registration rights which could require us to publicly
register a large amount of our Common Stock, which could have a
material adverse effect on our stock price;
o diversion of management's attention and resources from our existing
businesses;
o significant write-offs if we determine that the business acquisition
does not fit or perform up to expectations;
o the incurrence of debt and contingent liabilities or impairment
charges related to goodwill and other long-lived assets;
o difficulties in the assimilation of operations, personnel,
technologies, products and information systems of the acquired
companies;
o regulatory and tax risks relating to the new or acquired business;
o the risks of entering geographic and business markets in which we
have no or limited prior experience;
o the risk that the acquired business will not perform as expected;
and
o material decreases in short-term or long-term liquidity.
We depend upon a contract manufacturer for our hardware products and any
disruption in its business may cause us to fail to meet the demands of our
customers and damage our customer relationships.
We rely on iCable System Co. Ltd., a South Korean company, to manufacture
certain of our hardware products. iCable provides comprehensive manufacturing
services, including assembly of our products and procurement of materials.
iCable directly ships finished products from Korea to our customers around the
world. We do not have a long-term supply contract with iCable and they are not
required to manufacture products for any specified period. Qualifying a new
contract manufacturer and commencing commercial-scale production is expensive
and time consuming and could result in a significant interruption in the supply
of our products. If a change in contract manufacturers results in delays of our
fulfillment of customer orders or if a contract manufacturer fails to make
timely delivery of orders, we may lose revenues and suffer damage to our
customer relationships.
Additionally, iCable currently purchases the primary chipset used in our
customer premise equipment, or CPE, from Broadcom. Currently, there is an
available supply path and rapid delivery for these chipsets. It is not
anticipated that there will be any significant shortfalls in the ability to
produce equipment or deliver equipment, given past experience and current
operating procedures, even under heavy volume sales. Our customers rely upon our
ability to meet committed delivery dates, and any disruption in the supply of
key components would seriously impact our ability to meet these dates and could
result in legal action by our customers, loss of customers or harm to our
ability to attract new customers.
10
RISKS RELATED TO OUR INDUSTRY
Our future success depends on the growth in the use of the Internet as a means
of communications.
If the market for IP communications, in general, and our services in
particular, does not grow at the rate we anticipate or at all, we will not be
able to increase our number of users or generate revenues we anticipate. To be
successful, IP communications requires validation as an effective, quality means
of communication and as a viable alternative to traditional telephone service.
Demand and market acceptance for recently introduced services are subject to a
high level of uncertainty. The Internet may not prove to be a viable alternative
to traditional telephone service for reasons including:
o inconsistent quality or speed of service;
o traffic congestion on the Internet;
o potentially inadequate development of the necessary infrastructure;
o lack of acceptable security technologies;
o lack of timely development and commercialization of performance
improvements, and;
o unavailability of cost-effective, high-speed access to the Internet.
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by such growth, or its performance or
reliability may decline. In addition, Web sites may from time to time experience
interruptions in their service as a result of outages and other delays occurring
throughout the Internet network infrastructure. If these outages or delays
frequently occur in the future, Internet usage, as well as usage of our
communications portal and our services, could be adversely affected.
Intense competition could reduce our market share and harm our financial
performance.
Competition in the market for IP communications services is becoming
increasingly intense and is expected to increase significantly in the future.
The market for Internet and IP communications is new and rapidly evolving. We
expect that competition from companies both in the Internet and
telecommunications industries will increase in the future. Our competitors
include both start-up IP telephony service providers and established traditional
communications providers. Many of our existing competitors and potential
competitors have broader portfolios of services, greater financial, management
and operational resources, greater brand-name recognition, larger subscriber
bases and more experience than we have. In addition, many of our IP telephony
competitors use the Internet instead of a private network to transmit traffic.
Operating and capital costs of these providers may be less than ours,
potentially giving them a competitive advantage over us in terms of pricing. We
also compete against the growing market of discount telecommunications services
including calling cards, prepaid cards, call-back services, dial-around or 10-10
calling and collect calling services. In addition, some Internet service
providers have begun to aggressively enhance their real time interactive
communications, focusing on instant messaging, PC-to-PC and PC-to-phone, and/or
broadband phone services.
In addition, traditional carriers, cable companies and satellite
television providers are bundling services and products not offered by us with
internet telephony services. While this provides us with the opportunity to
offer these companies our products and services as a way for them to offer
internet telephony services, it also introduces the risk that they will
introduce these services on their own utilizing other options while at the same
time making it more difficult for us to compete against them with direct to
consumer offerings of our own. If we are unable to provide competitive service
offerings, we may lose existing users and be unable to attract additional users.
In addition, many of our competitors, especially traditional carriers, enjoy
economies of scale that result in a lower cost structure for transmission and
related costs, which cause significant pricing pressures within the industry. In
order to remain competitive we intend to increase our efforts to promote our
services, and we cannot be sure that we will be successful in doing this.
In addition to these competitive factors, recent and pending deregulation
in some of our markets may encourage new entrants. We cannot assure you that
additional competitors will not enter markets that we plan to serve or that we
will be able to compete effectively.
Decreasing telecommunications rates may diminish our revenues and profitability.
International and domestic telecommunications rates have decreased
significantly over the last few years in most of the markets in which we
operate, and we anticipate that rates will continue to be reduced in all of the
markets in which we do business or expect to do business. Users who select our
services to take advantage of the current pricing differential between
traditional telecommunications rates and our rates may switch to traditional
telecommunications carriers as such pricing differentials diminish or disappear,
and we will be unable to use such pricing differentials to attract new customers
in the future. In addition, our ability to market our carrier transmission
services to telecommunications carriers depends upon the existence of spreads
between the rates offered by us and the rates offered by traditional
telecommunications carriers, as well as a spread between the retail and
wholesale rates charged by the carriers from which we obtain wholesale service.
Continued rate decreases will require us to lower our rates to remain
competitive could reduce our revenues and reduce or possibly eliminate our gross
profit from our carrier transmission services. If telecommunications rates
continue to decline, we may lose users for our services.
We may not be able to keep pace with rapid technological changes in the
communications industry.
Our industry is subject to rapid technological change. We cannot predict
the effect of technological changes on our business. In addition, widely
accepted standards have not yet developed for the technologies we use. We expect
that new services and technologies will emerge in the market in which we
compete. These new services and technologies may be superior to the services and
technologies that we use, or these new services may render our services and
technologies obsolete. To be successful, we must adapt to our rapidly changing
market by continually improving and expanding the scope of services we offer and
by developing new services and technologies to meet customer needs. Our success
will depend, in part, on our ability to license leading technologies and respond
to technological advances and emerging industry standards on a cost-effective
and timely basis. We may need to spend significant amounts of capital to enhance
and expand our services to keep pace with changing technologies.
Third parties might infringe upon our proprietary technology.
We cannot assure you that the steps we have taken to protect our
intellectual property rights will prevent misappropriation of our proprietary
technology. To protect our rights to our intellectual property, we rely on a
combination of trademark and trade secret protection, confidentiality agreements
and other contractual arrangements with our employees, affiliates, strategic
partners and others. We may be unable to detect the unauthorized use of, or take
appropriate steps to enforce, our intellectual property rights. Effective
copyright and trade secret protection may not be available in every country in
which we offer or intend to offer our services. Failure to adequately protect
our intellectual property could harm our brand, devalue our proprietary content
and affect our ability to compete effectively. Further, defending our
intellectual property rights could result in the expenditure of significant
financial and managerial resources.
If we are not able to obtain necessary licenses of third-party technology at
acceptable prices, or at all, some of our products may become obsolete.
From time to time, we may be required to license technology from third
parties to develop new products or product enhancements. Third-party licenses
may not be available or continue to be available to us on commercially
reasonable terms. The inability to maintain or re-license any third-party
licenses required in our current products, or to obtain any new third-party
licenses to develop new products and product enhancements could require us to
obtain substitute technology of lower quality or performance standards or at
greater cost, and delay or prevent us from making these products or
enhancements, any of which could seriously harm the competitiveness of our
products. We currently license third party technology for products acquired
through the WQN acquisition. We anticipate migrating these products to our
internal technology over the next six to 12 months at which point we will have
no current reliance on third party technology.
Government regulation and legal uncertainties relating to IP telephony could
harm our business.
Historically, voice communications services have been provided by
regulated telecommunications common carriers. We offer voice communications to
the public for international and domestic calls using IP telephony, and we do
not operate as a licensed telecommunications common carrier in any jurisdiction.
Based on specific regulatory classifications and recent regulatory decisions, we
believe we qualify for certain exemptions from telecommunications common carrier
regulation in many of our markets. However, the growth of IP telephony has led
to close examination of its regulatory treatment in many jurisdictions making
the legal status of our services uncertain and subject to change as a result of
future regulatory action, judicial decisions or legislation in any of the
jurisdictions in which we operate. Established regulated telecommunications
carriers have sought and may continue to seek regulatory actions to restrict the
ability of companies such as ours to provide services or to increase the cost of
providing such services. In addition, our services may be subject to regulation
if regulators distinguish phone-to-phone telephony service using IP technologies
over privately-managed networks such as our services from integrated PC-to-PC
and PC-originated voice services over the Internet. Some regulators may decide
to treat the former as regulated common carrier services and the latter as
unregulated enhanced or information services. Application of new regulatory
restrictions or requirements to us could increase our costs of doing business
and prevent us from delivering our services through our current arrangements. In
such event, we would consider a variety of alternative arrangements for
providing our services, including obtaining appropriate regulatory
authorizations for our local network partners or ourselves, changing our service
arrangements for a particular country or limiting our service offerings. Such
regulations could limit our service offerings, raise our costs and restrict our
pricing flexibility, and potentially limit our ability to compete effectively.
Further, regulations and laws which affect the growth of the Internet could
hinder our ability to provide our services over the Internet.
Recent regulatory enactments by the FCC will require us to provide
enhanced Emergency 911 dialing capabilities to our subscribers as part of our
standard VoIP services and to comply with certain notification requirements with
respect to such capabilities, these requirements will result in increased costs
and risks associated with the delivery of our VoIP services.
On June 3, 2005, the FCC released the "IP-Enabled Services and E911
Requirements for IP-Enabled Service Providers, First Report and Order and Notice
of Proposed Rulemaking" (the "E911 Order"). The E911 Order requires, among other
things, that VoIP service providers that interconnect to the public switched
telephone network ("Interconnected VoIP Providers") supply enhanced emergency
911 dialing capabilities ("E911") to their subscribers no later than 120 days
from the effective date of the E911 Order. The effective date of the E911 Order
is July 29, 2005. As part of such E911 capabilities, Interconnected VoIP
Providers are required to mimic the 911 emergency calling capabilities offered
by traditional landline phone companies. Specifically, all Interconnected VoIP
Providers must deliver 911 calls to the appropriate local public safety
answering point ("PSAP"), along with call back number and location, where the
PSAP is able to receive that information. Such E911 capabilities must be
included in the basic service offering of the Interconnected VoIP Providers; it
cannot be an optional or extra feature. The PSAP delivery obligation, along with
call back number and location information must be provided regardless of whether
the service is "fixed" or "nomadic." User registration of location is
permissible initially, although the FCC is committed to an advanced form of E911
that will determine user location without user intervention, one of the topics
of the further Notice of Proposed Rulemaking to be released.
11
Additionally, the E911 Order required that, by July 29, 2005 (the
effective date of the E911 Order), each Interconnected VoIP Provider must have:
(1) specifically advised every new and existing subscriber, prominently and in
plain language, of the circumstances under which the E911 capabilities service
may not be available through its VoIP services or may in some way be limited by
comparison to traditional landline E911 services; (2) obtained and kept a record
of affirmative acknowledgement from all subscribers, both new and existing, of
having received and understood the advisory described in the preceding item (1);
and (3) distributed to its existing subscribers warning stickers or other
appropriate labels warning subscribers if E911 service may be limited or not
available and instructing the subscriber to place them on or near the equipment
used in conjunction with the provider's VoIP services. We have complied with the
requirements set forth in the preceding items (1) and (3). However, despite
engaging in significant efforts, as of October 12, 2005, we had received the
affirmative acknowledgements required by the preceding item (2) from less than
15% of our VoIP subscribers.
On July 26, 2005, noting the efforts made by Interconnected VoIP Providers
to comply with the E911 Order's affirmative acknowledgement requirement, the
Enforcement Bureau of the FCC (the "EB") released a Public Notice communicating
that, until August 30, 2005, it would not initiate enforcement action against
any Interconnected VoIP Provider with respect to such affirmative
acknowledgement requirement on the condition that the provider file a detailed
report with the FCC by August 10, 2005. The report must set forth certain
specific information relating to the provider's efforts to comply with the
requirements of the E911 Order. Furthermore, the EB stated its expectation that
that if an Interconnected VoIP Provider has not received such affirmative
acknowledgements from 100% of its existing subscribers by August 29, 2005, then
the Interconnected VoIP Provider would disconnect, no later than August 30,
2005, all subscribers from whom it has not received such acknowledgements. On
August 26, 2005, the EB released another Public Notice communicating that it
would not, until September 28, 2005, initiate enforcement action regarding the
affirmative acknowledgement requirement against those providers that: (1)
previously filed reports on or before August 10, 2005 in accordance with the
July 26 Public Notice; and (2) file two separate updated reports with the FCC by
September 1, 2005 and September 22, 2005 containing certain additional required
information relating to such provider's compliance efforts with respect to the
E911 Order's requirements. The EB further stated in the second Public Notice its
expectation that, during the additional period of time afforded by the
extension, all Interconnected VoIP Providers that qualified for such extension
would continue to use all means available to them to obtain affirmative
acknowledgements from all of their subscribers.
Our VoIP services that are subject to the E911 Order account for a
material portion of our current VoIP revenues. However, our VoIP retail net
revenues were not substantial for the six months ending June 30, 2005 as they
were approximately $26,362.00. Since the E911 Order, we have fully complied with
the mandated FCC reporting requirements and the FCC has acknowledged that
enforcement will not be pursued.
With the recent acquisition on WQN, Inc.'s VoIP Assets we have confirmed
that WQN has filed and complied with the E911 order. We will be filing the
required acknowledgment letter relating to WQN RocketVoIP Subscribers on October
25, 2005. The most recent E911 compliance deadline is November 29, 2005.
On October 9, 2005 we announced a new service called v911 to support E911
not only for our customers but as a service to be resold to Service Providers
that need E911 compliance. Additional information on this service is referenced
within this document.
Although the EB has thus far granted three extensions to its deadline for
obtaining affirmative acknowledgements from 100% of Interconnected VoIP
Providers' subscribers, the EB may or may not provide additional extensions to
such deadline and the Company may or may not qualify for such extensions. If we
are required by the EB to suspend VoIP service to a material portion of our VoIP
subscribers for a material period of time due to our non-compliance with the
E911 Order, our revenues and operating results from our current VoIP operations
will deteriorate.
Even assuming our full compliance with the E911 Order, such compliance and
our efforts to achieve such compliance, will increase our cost of doing business
in the VoIP arena and may adversely affect our ability to deliver our VoIP
telephony services to new and existing customers in all geographic regions.
Our products must comply with industry standards, FCC regulations, state,
country-specific and international regulations, and changes may require us to
modify existing products.
In addition to reliability and quality standards, the market acceptance of
telephony over broadband IP networks is dependent upon the adoption of industry
standards so that products from multiple manufacturers are able to communicate
with each other. There is currently a lack of agreement among industry leaders
about which standard should be used for a particular application, and about the
definition of the standards themselves. These standards, as well as audio and
video compression standards, continue to evolve. We also must comply with
certain rules and regulations of the Federal Communications Commission (FCC)
regarding electromagnetic radiation and safety standards established by
Underwriters Laboratories, as well as similar regulations and standards
applicable in other countries. Standards are continuously being modified and
replaced. As standards evolve, we may be required to modify our existing
products or develop and support new versions of our products. The failure of our
products to comply, or delays in compliance, with various existing and evolving
industry standards could delay or interrupt volume production of our IP
telephony products, which would have a material adverse effect on our business,
financial condition and operating results.
12
Increased costs associated with corporate governance compliance may
significantly affect our results of operations.
The Sarbanes-Oxley Act of 2002 will require changes in some of our
corporate governance and securities disclosure and compliance practices, and
will require a thorough documentation and evaluation of our internal control
procedures. We expect this to increase our legal compliance and financial
reporting costs. This could also make it more difficult and more expensive for
us to obtain director and officer liability insurance, and we may be required to
accept reduced coverage or incur higher costs to obtain coverage. In addition,
they could make it more difficult for us to attract and retain qualified members
of our board of directors, or qualified executive officers. We are presently
evaluating and monitoring regulatory developments and cannot estimate the timing
or magnitude of additional costs we may incur in this regard.
Our internal controls over financial reporting may not be adequate and our
independent auditors may not be able to certify as to their adequacy, which
could have a significant and adverse effect on our business and reputation.
Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and
regulations of the Securities Exchange Commission associated with this Act,
which we refer to as Section 404, require a reporting company to, among other
things, annually review and disclose its internal controls over financial
reporting, and evaluate and disclose changes in its internal controls over
financial reporting quarterly. Under Section 404 a reporting company is required
to document and evaluate such internal controls in order to allow its management
to report on, and its independent auditors attest to, these controls. We will be
required to comply with Section 404 not later than our fiscal year ending
December 2007. We are currently evaluating our strategy to begin performing the
system and process documentation, evaluation and testing required (and any
necessary remediation) in an effort to comply with management certification and
auditor attestation requirements of Section 404. In the course of our ongoing
evaluation, we may identify areas of our internal controls requiring
improvement, and plan to design enhanced processes and controls to address
issues that might be identified through this review. As a result, we expect to
incur additional expenses and diversion of management's time. We cannot be
certain as to the timing of completion of our documentation, evaluation, testing
and remediation actions or the impact of the same on our operations and may not
be able to ensure that the process is effective or that the internal controls
are or will be effective in a timely manner. If we are not able to implement the
requirements of Section 404 in a timely manner or with adequate compliance, our
independent auditors may not be able to certify as to the effectiveness of our
internal control over financial reporting and we may be subject to sanctions or
investigation by regulatory authorities, such as the Securities and Exchange
Commission. As a result, there could be an adverse reaction in the financial
markets due to a loss of confidence in the reliability of our financial
statements. In addition, we may be required to incur costs in improving our
internal control system and the hiring of additional personnel. Any such actions
could adversely affect our results.
We expect to seek to raise additional capital in the future, which may not be
available to us, and if it is available, may dilute the ownership of our common
stock.
In the future, we expect to seek to raise additional funds through public
or private debt or equity financings in order to:
o fund ongoing operations and capital requirements;
o take advantage of opportunities, including more rapid expansion or
acquisition of complementary products, technologies or businesses;
o develop new products; or
o respond to competitive pressures.
Any additional capital raised through the sale of convertible debt or
equity may further dilute an investor's percentage ownership of our common
stock. Furthermore, additional financings may not be available on terms
favorable to us, or at all. A failure to obtain additional funding could prevent
us from making expenditures that may be required to grow or maintain our
operations.
Our stock price has been and may continue to be volatile.
The market for technology stocks in general and our common stock in
particular, has been and will likely continue to be extremely volatile. The
following factors could cause the market price of our common stock to fluctuate
significantly:
o the addition or loss of any major customer;
o changes in the financial condition or anticipated capital
expenditure purchases of any existing or potential major customer;
o quarterly variations in our operating results;
o changes in financial estimates by securities analysts;
o speculation in the press or investment community;
o announcements by us or our competitors of significant contracts, new
products or acquisitions, distribution partnerships, joint ventures
or capital commitments;
o sales of common stock or other securities by us or by our
shareholders in the future;
o securities and other litigation;
o announcement of a stock split, reverse stock split, stock dividend
or similar event;
o economic conditions for the telecommunications, networking and
related industries; and
o worldwide economic instability.
RISKS RELATED TO OUR STOCK
We expect to seek to raise additional capital in the future, which may not be
available to us, and if it is available, may dilute the ownership of our common
stock.
In the future, we expect to seek to raise additional funds through public
or private debt or equity financings in order to:
o fund ongoing operations and capital requirements;
o take advantage of opportunities, including more rapid expansion or
acquisition of complementary products, technologies or businesses;
o develop new products; or
o respond to competitive pressures.
Any additional capital raised through the sale of convertible debt or
equity may further dilute an investor's percentage ownership of our common
stock. Furthermore, additional financings may not be available on terms
favorable to us, or at all. A failure to obtain additional funding could prevent
us from making expenditures that may be required to grow or maintain our
operations.
We do not expect to pay dividends.
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. We intend to retain profits, if any, to fund growth and
expansion.
USE OF PROCEEDS
WE WILL NOT RECEIVE ANY PROCEEDS FROM THE SALE OF THE COMMON STOCK OFFERED
BY THIS PROSPECTUS. THE SELLING SHAREHOLDERS WILL RECEIVE ALL OF THE PROCEEDS.
We, however, will receive funds upon any exercise for cash of the warrants
held by the selling shareholders. If any of such warrants are exercised for
cash, we will receive the exercise price for the warrants. Any funds received
upon exercise of the warrants will be applied to our working capital needs.
There can be no assurance that any of the warrants will be exercised.
SELLING SHAREHOLDERS
We have agreed to register 15,372,245 shares of our common stock,
beneficially owned by the selling shareholders. These shares were acquired or
will be acquired by the selling shareholders pursuant to private placement
offerings of our securities (the "Placements") completed in July 2005 and the
warrants issued under the Placements. Included in the total number of shares, we
are registering for resale up to 3,492,658 shares of common stock that may be
issued upon the exercise of warrants issued to certain of the selling
shareholders. The shares of common stock beneficially owned by each of the
selling shareholders are being registered to permit public secondary trading of
these shares, and the selling shareholders may offer these shares for resale
from time to time. See "Plan of Distribution."
13
The following table sets forth the names of the selling shareholders, the
number of shares of common stock owned beneficially by each Selling Shareholder
as of October 9, 2005 and the number of shares that may be offered pursuant to
this Prospectus. Except as may be identified in the footnotes to the table, none
of the selling shareholders has, or within the past three years has had, any
position, office or material relationship with us or any of our predecessors or
affiliates. The table has been prepared based upon information furnished to us
by or on behalf of the selling shareholders.
The selling shareholders may decide to sell all, some, or none of the
shares of common stock listed below. We cannot provide you with any estimate of
the number of shares of common stock that any of the selling shareholders will
hold in the future.
For purposes of this table, beneficial ownership is determined in
accordance with the rules of the SEC, and includes voting power and investment
power with respect to such shares. All percentages are approximate.
As explained below under "Plan of Distribution", we have agreed to bear
certain expenses (other than broker discounts and commissions, if any) in
connection with the list of shares under this Prospectus.
Number of
Shares of
Maximum Number of Common Stock
Shares of Common Owned
Stock Beneficially Following the
Owned Prior Maximum Offering
the Offering Number of Assuming Sale
---------------------- Shares Sold of All Shares
Selling Shareholder Shares Warrants Hereby Offered Hereby
-------------------------------------- ---------- --------- ----------- --------------
Stonestreet Limited Partnership(1) 718,750 359,375 1,078,125 --
Whalehaven Capital(2) 575,000 287,500 862,500 --
Ellis International(3) 359,375 179,688 539,063 --
Bristol Investment Fund(4) 958,332 479,166 1,437,498 --
Alpha Capital(5) 1,005,824 479,166 1,437,498 47,492
NITE Capital, LP(6) 287,500 143,750 431,250 --
Additional Registered Shares issuable
in certain circumstances pursuant to
subscription agreements with foregoing
persons -- -- 3,266,672 --
Adam Sosne 40,000 40,000 --
Alice Evans 8,000 8,000 --
Allan D. Weinberg 3,750 3,750 --
Ann-Marie H. Cooper 3,125 3,125 --
B.P. Butler 6,250 6,250 --
Brian A. Stover 10,000 10,000 --
Charles H. Obermeyer 11,250 11,250 --
Cheryl Noir, Inc. 10,000 10,000 --
Cheryl Stasky Mora 3,750 3,750 --
Cheryll Grant Coleman 6,250 6,250 --
Clifton A. Pufpaff 3,125 3,125 --
Domenic Secondo 20,000 20,000 --
Don A. Jackson 17,067 17,067 --
Donald L. Seidler & Jaclyn Seidler 57,500 57,500 --
Edward F. Orski 80,288 80,288 --
Edwin Earl Spencer 11,250 11,250 --
Emmet / Pauline Tedesco 3,125 3,125 --
Frederick F. Baldwin, Jr. 8,000 8,000 --
Harvey Lowestein 13,942 13,942 --
Herbert J. Hoffman 3,750 3,750 --
Howard L. Murray 6,250 6,250 --
14
Hubert Owen McLamb 5,000 5,000 --
Insight Builders 20,000 20,000 --
Jacg Paltini 10,000 10,000 --
Jackie G. Smith / Victor Lee Smith 10,000 10,000 --
Janice / Tommy Cavenaugh 31,250 31,250 --
Jeffrey M. Ramsay 5,625 5,625 --
John Evans 12,000 12,000 --
John Sutton, Inc. 285,715 285,715 --
Judith Cooperstein 6,250 6,250 --
Kanoy / Fulford 12,500 12,500 --
Kruklitis Family Trust 3,125 3,125 --
Lauren Ann Hon Trust 5,000 5,000 --
Lawrence Broderick 10,192 10,192 --
Margaret M. Lee 5,000 5,000 --
Marshall Robert Davenport Jr. 56,250 56,250 --
Matthew A. Burklund 25,000 25,000 --
Michael A. Frank 10,000 10,000 --
Michael Stone 10,000 10,000 --
Myron Swetlitz 10,000 10,000 --
Nelson Teague 23,384 23,384 --
Paul Arita 17,884 17,884 --
Rachel Alexander 10,000 10,000 --
Raymond Real 10,817 10,817 --
Robert Blumberg 10,000 10,000 --
Robert Tyson & June Tyson 6,250 6,250 --
Romell Reed 3,125 3,125 --
Rosemary Rouen 5,000 5,000 --
Ruth Teresa Tyson 7,740 7,740 --
Scott Taylor 35,769 35,769 --
T.P. Bourneuf 25,201 25,201 --
Ted G. Seawell 3,125 3,125 --
Thomas A. Dunican 5,000 5,000 --
Virginia Beury Helms / Fleet Helms 2,500 2,500 --
William Bergeron 47,500 47,500 --
William D. Carrol 6,250 6,250 --
William E. Gardner / Sue Alvis 10,000 10,000 --
William J. Little 10,000 10,000 --
Dean A. Bodenscatz & 12,500 12,500 25,000 --
GeraldT. Williamson 12,500 12,500 25,000 --
Howard K. Brown 20,000 20,000 40,000 --
James D. Conner 20,000 20,000 40,000 --
Kenneth D. Wickwire 12,500 12,500 25,000 --
Michael T. Macomson 25,000 25,000 50,000 --
Michael L. Cole 12,500 12,500 25,000 --
Philip Ackert 25,000 25,000 50,000 --
Puline Tedesco 20,192 12,500 25,000 7,692
RobertW. Fitzgerald 25,000 25,000 50,000 --
Robert C. Demmy 12,500 12,500 25,000 --
Robert H. McDonald 100,000 100,000 200,000 --
Roderick R. Baker 18,750 18,750 37,500 --
Samuel Cole Porter 13,000 13,000 26,000 --
Ted Bodewschatz 12,500 12,500 25,000 --
William D. Chadwick 25,000 25,000 50,000 --
Andrew J. Dietzler & 12,500 12,500 25,000 --
Arnold R. Atkins 13,125 13,125 26,250 --
Arturo Alonso 12,500 12,500 25,000 --
15
Dominick Schiavone 50,000 50,000 100,000 --
Herbert & Rita Cooper 12,500 12,500 25,000 --
Ronald E. Stasky & 12,500 12,500 25,000 --
Jeffrey G. Roberts 35,000 15,000 30,000 20,000
Joseph & David Kwietnewski 12,500 12,500 25,000 --
Kevin Grenz 43,750 43,750 87,500 --
Larry Street 31,250 31,250 62,500 --
Ronna Fisher 12,500 12,500 25,000 --
Stuart I. Kosh(7) 778,227 350,000 700,000 428,227
Thomas F. Reeves 318,961 56,250 143,750 231,461
DavidBrown 25,000 25,000 50,000 --
Harvey Lowenstein Ira 12,500 12,500 25,000 --
Thomas R. Harkins 41,250 41,250 82,500 --
Thomas R. Harkins & Jayne Harkins 37,500 37,500 75,000 --
Anthony Gallo 9,750 9,750 --
Claude S Morris 16,250 16,250 --
Connie Krupka 3,000 1,000 2,000
Creative Marketing 100,000 400,000 500,000 --
David H. Arrington 3,300 2,333 967
David L. Ebershoff 91,000 33,333 57,667
David S. Trescot 2,000 1,000 1,000
Granite Enterprise 20,000 20,000 --
Harold E. Gear 151,000 66,667 84,333
John H. Trescot Jr. 125,667 66,667 59,000
W. W. Gay 60,000 20,000 40,000
Kelley Smith 2,000 1,500 500
Leigh Trescot 7,000 5,000 2,000
Moshe Sharan 700,000 125,000 575,000
MZM Capital 20,000 54,138 74,138 --
Nancy J Trescot 10,000 1,000 9,000
Raymond B. Bunton 3,000 2,000 1,000
Reuven Michaeli 916,250 392,000 524,250
Ronald E. Clark 3,000 2,000 1,000
Tami Hamilton 20,000 10,000 10,000
Thomas E. Thornhill 3,000 2,000 1,000
VanNoy Thornhill 3,000 2,000 1,000
M500 Inc 125,000 50,000 75,000
Hitron Technologies USA(8) 239,097 239,097 --
Akanji Okuboye 72,490 7,249 65,241
Albert & Delia Silva 25,766 2,577 23,189
Albert Aletto 8,052 805 7,247
Amie Selecman 8,052 805 7,247
Conquest Development (A. Preston) 51,563 5,156 46,407
Anthony Tallman 8,052 805 7,247
Armando & Linda Esteves 8,052 805 7,247
Arthur Levesque 8,052 805 7,247
Bernard Odoy Jr 61,875 6,188 55,687
Carrie Caruso 20,953 2,095 18,858
Charlene Stehling 13,691 1,369 12,322
Christopher Lang 25,781 2,578 23,203
Curtis Frank 13,200 1,320 11,880
Damian Sousa 51,563 5,156 46,407
Dan Hochman 51,563 5,156 46,407
Denise & Christian Carlstrom 8,382 838 7,544
E Lance Vetter 25,781 2,578 23,203
Frank Bianco 16,109 1,611 14,498
16
Pershing, LLC C/F George Yaffe, IRA 103,125 10,313 92,812
Gino & Mary De Conti 8,052 805 7,247
GMN Partnership(9) 150,875 15,087 135,788
Heather Howard 100,000 100,000 --
Jason & Susan Hollander 17,531 1,753 15,778
John De Cecco III 8,052 805 7,247
John Piotrowski 295,206 29,521 265,685
John Rebello III 16,109 1,611 14,498
Jose Martinez 266,436 26,644 239,792
Joseph & Judith Levis 206,250 20,625 185,625
Judith Milner 83,820 8,382 75,438
Kathleen Long 8,055 806 7,249
Kathleen Masino 24,162 2,416 21,746
Ken Hynes & Karen McSweeney 16,109 1,611 14,498
Kevin B. Halter 1,700,000 300,000 1,400,000
Kevin & Janet Miller 48,403 4,840 43,563
Krishna Reddy 8,055 806 7,249
Lauren Spickler 84,317 8,432 75,885
Pershing, LLC C/F Lee Yaffe, IRA 52,800 5,280 47,520
Lee Yaffe 54,450 5,445 49,005
Linda Yaffe 10,313 1,031 9,282
Marc & Karren Yaffe 10,313 1,031 9,282
Mark De Stefano 8,052 805 7,247
Max Plojing 4,192 419 3,773
Michael Wineland 32,219 3,222 28,997
Nicholas Bianco 65,232 6,523 58,709
Nick Iannuzzi 134,111 13,411 120,700
Oli Sjurdagard 82,500 8,250 74,250
Patrick Shea 11,276 1,128 10,148
Frank Bianco 118,790 11,879 106,911
Richard Bianco 16,109 1,611 14,498
Ricky Birkes & Anne Fuery 9,661 966 8,695
Robert Spickler 52,697 5,270 47,427
Ron Harden 157,137 50,814 106,323
Russell McAndrew 25,781 2,578 23,203
Stephen Samuelson 8,052 805 7,247
Stephen Smith 52,593 5,259 47,334
Thad Bydlon 189,216 42,647 146,569
William Scampoli 16,109 1,611 14,498
William Jones 150,000 150,000 --
Byron Butler 12,500 12,500 --
Peter Curriers 118,790 11,879 106,911
RFMJ Inc. 125,000 125,000 --
Ebony Finance 250,000 100,000 150,000
Andreas Meixger 30,000 30,000 --
Robert Kraak 50,000 50,000 --
Paul Burkhart 10,000 10,000 --
Newbridge Securities Corporation(10) -- 75,063 75,063 --
Stefan Gort 10,000 10,000 --
-------------------------------------- ---------- --------- ----------- --------------
TOTAL 14,957,151 3,567,721 15,372,245 6,419,299
------------
* Less than one percent.
(1) Stonestreet Limited Partnership is a Canada Limited Partnership. The
shares beneficially owned consist of 718,750 shares of common stock,
179,688 warrants exercisable at $1.38 per share and 179,688 warrants
exercisable at $1.60 per share. Stonestreet Limited Partnership has
advised the Company that Michael Finklestein has dispositive and voting
power for all of its shares in the Company.
17
(2) Whalehaven Capital Fund LTD is a Bermuda company. The shares beneficially
owned consist of 575,000 shares of common stock, 143,750 warrants
exercisable at $1.37 per share and 143,750 warrants exercisable at $1.60
per share. Whalehaven Capital Fund has informed the Company that Michael
Finkelstein has dispositive and voting power for all of its shares in the
Company.
(3) Ellis International LTD is a Republic of Panama company. The shares
beneficially owned consist of 359,375 shares of common stock, 89,844
warrants exercisable at $1.37 per share and 89,844 warrants exercisable at
$1.60 per share. Ellis International LTD has informed the Company that
Willhelm Ungar has dispositive and voting power for all of its shares in
the Company
(4) Bristol Investment Fund LTD is a Cayman Islands company. The shares
beneficially owned consist of 958,332 shares of common stock, 239,583
warrants exercisable at $1.37 per share and 239,583warrants exercisable at
$1.60 per share. Bristol Investment Fund LTD has informed the Company that
Paul Kessler has dispositive and voting power for all of its shares in the
Company
(5) Alpha Capital AG is a Liechtenstein corporation. The shares beneficially
owned consist of 1,005,824 shares of common stock, 239,583 warrants
exercisable at $1.37 per share and 239,583 warrants exercisable at $1.60
per share. Alpha Capital AG has informed the Company that Konrad Ackerman
has dispositive and voting power for all of its shares in the Company.
(6) NITE Capital, LP is a USA Limited Liability Corporation. The shares
beneficially owned consist of 287,500 shares of common stock, 71,875
warrants exercisable at $1.37 per share and 71,875 warrants exercisable at
$1.60 per share. NITE Capital, LP has informed the Company that Keith A.
Goodman has dispositive and voting power for all of its shares in the
Company
(7) Stuart Kosh will be nominated for election as a director at the next
Shareholder meeting.
(8) Hitron Technologies USA is a USA Corporation. The shares beneficially
owned consist of 239,097 shares of common stock. Hitron Technologies USA
has informed the Company that Fuyung Lai has dispositive and voting power
for all of its shares in the Company.
(9) GMN Partneship is a USA Partnership. The shares beneficially owned consist
of 150,875 shares of common stock. GMN Partneship has informed the Company
that Mr. Julius Grant has dispositive and voting power for all of its
shares in the Company.
(10) Newbridge Corporation is a USA company. The shares beneficially owned
consist of 75, 063 warrants exercisable at $2.23 per share. Newbridge
Corporation has informed the Company that Scott Goldstein and Guy Amico
have dispositive and voting power for all of its shares in the Company.
PLAN OF DISTRIBUTION
The shares may be sold from time to time by the selling shareholders or by
pledges, donees, transferees or other successors in interest. Such sales may be
made in the over-the-counter market or on any stock exchange on which the common
stock of the Company may be listed at the time of sale or otherwise at prices
and terms then prevailing or at prices related to the then current market price,
or in negotiated transactions. The shares may be sold by one or more of the
following:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o broker-dealers may agree with the selling shareholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling shareholders may also sell shares under Rule 144 of the
Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the selling shareholders may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling shareholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling shareholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
We have agreed to pay for all costs and expenses incident to the issuance,
offer, sale and delivery of the shares of common stock offered by the selling
shareholders, including all expenses and fees of preparing, filing and printing
the registration statement and prospectus and related exhibits, amendments and
supplements thereto and mailing of such items. We will not pay sales or
brokerage commissions or discounts with respect to sales of the shares offered
by the selling shareholders.
18
Any broker-dealers or agents that are involved in selling the shares are
"underwriters" within the meaning of the Securities Act in connection with such
sales. In such event, any commissions received by such broker-dealers or agents
and any profit on the resale of the shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. One selling
shareholder (Newbridge Security Corp.) is a registered broker dealer.
We are required to pay all fees and expenses incident to the registration
of the shares, including fees and disbursements of counsel to the selling
shareholders, but excluding brokerage commissions or underwriter discounts. We
have agreed to indemnify the selling shareholders against certain losses,
claims, damages and liabilities under the Securities Act.
DIVIDEND POLICY AND MARKET DATA
Dividends
We have no current plans to pay any future cash dividends on the common
stock. Instead, we intend to retain all earnings, other than those required to
be paid to the holders of the preferred stock, to support our operations and
future growth. The payment of any future dividends on the common stock will be
determined by the Board of Directors based upon our earnings, financial
condition and cash requirements, possible restrictions in future financing
agreements, if any, business conditions and such other factors deemed relevant.
Market Information
The common stock is traded on the Over-the-Counter Bulletin Board under
the symbol VOII. The quotations below reflect inter-dealer prices, without
retail markup, markdown or commissions and may not represent actual
transactions. The following table shows the bid price range of our common stock
for the time periods indicated:
FROM TO HIGH LOW
-------- ---------- ----- -----
1/1/2002 12/31/2003 * *
1/1/2004 3/31/2004 $0.85 $0.80
4/1/2004 6/30/2004 6.75 1.35
7/1/2004 9/30/2004 3.20 1.10
10/01/04 12/31/04 4.75 1.05
01/01/05 03/31/05 4.08 1.61
04/01/05 06/30/05 1.65 1.03
07/01/05 09/30/05 2.38 0.95
*Trading in the shares of our predecessor was sporadic and did not produce
reported quotations.
Holders
As of September 30, 2005 there were approximately 480 shareholders of
record and an unknown number of beneficial holders holding through brokers.
19
BUSINESS HISTORY
We were incorporated on August 3, 1998 under our original name of
Millennia Tea Masters under the laws of the State of Texas. In February 2004 we
exchanged 12,500,000 shares for the assets of two start-up telecommunication
businesses, eGlobalphone, Inc. and VoIP Solutions, Inc. We changed our name to
VoIP, Inc. in April 2004. We consummated the acquisitions of DTNet Technologies,
Inc., a hardware supplier, and VoIP Americas, Inc., a VoIP related company, in
June and September, respectively, of 2004. We decided to exit our former tea
business in December 2004 and focus our efforts and resources in the Voice over
Internet Protocol telecommunications industry. In May 2005 we completed the
acquisition of Caerus, Inc., a VoIP carrier and service provider, and in October
2005 we purchased substantially all of the assets of WQN's, Inc. VoIP business.
Business Overview
We are an emerging global provider of advanced communications services
utilizing Voice over Internet Protocol (VoIP) technology. Internet Protocol
telephony is the real time transmission of voice communications in the form of
digitized "packets" of information over the Internet or a private network,
similar to the way in which e-mail and other data is transmitted. VoIP services
allow consumers and businesses to communicate at dramatically reduced costs
compared to traditional telephony networks.
Since 2004, we have developed our business through complementary and
synergistic strategic acquisitions. These acquisitions have provided us with
important technology, intellectual capital and VoIP expertise, trade names,
domain names, VoIP enhanced service applications, key business relationships and
revenues. We own our network, technology and have the ability to provide
complete product and service solutions, including outsourced customer service
and hardware fulfillment. We are a certified Competitive Local Exchange Carrier
(CLEC) and Interexchange Carrier (IXC) which allows us to receive more favorable
rates from the Regional Bell Operating Companies (RBOCs) and the traditional
long-distance carriers than telephony resellers who are not CLECs or IXCs as
well as provide regulatory compliance in an industry that is moving quickly
towards controls and regulations. We provide a comprehensive portfolio of
advanced telecommunications technologies, enhanced service solutions, and
broadband products to the VoIP industry. Our customers include RBOCs, CLECs,
IXCs, wireless carriers, resellers, Internet Service Providers (ISPs), Cable
Multiple System Operators ("cable operators") and other providers of telephony
services in the United States and various countries around the world
Our goal is to become the premier enabler for packet communication
services for carriers, service providers and cable operators seeking to offer
value-added voice, data and enhanced services products utilizing VoIP
technology.
Our Technology and Network
We began developing our proprietary hardware and software in 2002,
establishing strategic relationships with companies such as Intel, Brooktrout,
Sonus, iCable and other manufacturers of both hardware and software.
Our proprietary softswitch features tools that relieve the
interoperability and cost issues that typically affect the implementation of
VoIP softswitch technology by traditional carriers, enabling them to offer
cost-competitive, viable VoIP services. Our softswitch architecture is protocol
agnostic, allowing seamless integration with the legacy-based networks (referred
to in the industry as Time Division Multiplexing, or TDMs) employed by the
traditional telephony companies and with other packet technologies. Our network
will allow TDM-based networks to access the enhanced capabilities and
efficiencies of packet technology networks. The ability to control the
underlying technology in our network allows us to provide interoperable services
with multiple hardware solutions which may be pre-existing in customer networks.
Based on Microsoft .NET technology, we believe that integration to the
enterprise desktop will drive market acceptance and use of our advanced
services.
Our network currently supports its own media gateways, softswitch
controller, unified messaging systems, voicemail, media trans-coding, billing
and many other integral parts of a complete solution. Using our easy-to-use web
interfaces, our customers have the management tools needed for providing and
maintaining their features and services.
20
Our Network Operations Center is a fully manned, 24x7x365 operation. From
this center we monitor all aspects of the technical environment of our network,
from our nationwide OC-12 backbone to network routers, Session Initiation
Protocol proxies and numerous routing gateways, soft switches and other aspects
of our VoIP infrastructure. Fully redundant technologies are deployed in a
scalable network environment that enables us to compete effectively and
efficiently in the demanding Internet Protocol (IP) telephony marketplace. Our
network incorporates an advanced Multi-Protocol Label Switching (MPLS)
architecture which provides services to carriers and other service providers.
Our network features direct interconnection facilities with multiple RBOCs,
CLECs, IXCs, service providers, cable operators, wireless carriers and
resellers.
We are currently implementing a nationwide expansion of our network
through the establishment of Network Access Points and multiple direct carrier
interconnections nationwide. This expansion will provide us with local access to
substantially all of the major U.S. metropolitan areas while lowering our
transport costs and providing added redundancy and stability for our network. We
anticipate completing this expansion by mid-2006.
We believe we operate the first seamless IP network that interfaces with
Signal System7 (SS7), Q.93 and Sigtran. Our primary network infrastructure will
continue to be integrated with the Sonus-based platform used in our network
today.
Customers, Products and Services
Our products and service offerings target VoIP wholesale customers, RBOCs,
CLECs, IXCs, wireless carriers, ISPs, cable operators and other providers of
telephony services in the United States and various countries around the world.
Call Routing and Termination
We charge our customers termination fees to terminate calls on our
network. We pay termination fees when it is necessary to route calls from our
network to other networks for termination. Our revenues are in large part a
function of the volume of calls handled by our network and what we charge and
pay to handle traffic.
U.S. termination takes place either on our network or that of one of our
network partners to which we route traffic. Our international termination
product features direct routes and connections established to many international
voice carriers worldwide. Carriers use complex least-cost-routing algorithms
that direct traffic to the lowest cost carrier. We believe we have established a
competitive cost structure through the efficiencies of our network design, as
well as through partnerships with key off-net and niche providers. Quality and
reliability are also critical to capture commercial traffic. Our network
supports all TDM/IP protocols and features nationwide coverage with widespread
points of presence throughout the United States. Reliability is provided by our
fully redundant backbone network and monitored 24x7x365 by our manned Network
Operations Center.
VoiceOne Carrier Direct
We are in the early stages of implementing our VoiceOne Carrier Direct
program which we believe will enable us to quickly develop a CLEC customer base.
We are a certified CLEC in 28 states, and will continue to apply for CLEC
certification in other states as required.
We believe that CLECs that want to offer VoIP services have essentially
three options: create their own internal VoIP capabilities, acquire a VoIP
carrier, or partner with a VoIP carrier. The first of these options is
relatively low and expensive requiring a CLEC to devote a significant amount of
resources to (i) develop its VoIP network capabilities and associated retail
services; (ii) maintain its network and develop new retail products, and; (iii)
continuously upgrade its VoIP capabilities to keep pace with technological
changes. The second option would also appear to be relatively expensive in most
cases given the purchase price premium most VoIP carriers have historically
commanded and, once the acquisition is complete, the CLEC would still face
on-going maintenance/ upgrade issues and costs and additional capital
expenditures.
With respect to the third option, we are not currently aware of any
existing VoIP carrier that offers a CLEC the turnkey solution we can provide.
Our VoiceOne Carrier Direct is a partner program for CLECs that provides them
with our technology to IP-enable their TDM networks. With this program we can
supply them with the equipment and expertise to rapidly enter the VoIP services
market without making significant capital expenditures. Because our technology
is protocol agnostic, by implementing the VoiceOne Carrier Direct program our
customers can avoid modifications to their TDM networks and will avoid the
operability issues that can plague the interface of legacy systems with IP
technology. We interface our customers' TDM systems to our VoIP network. We do
not charge the CLECs for equipment that includes softswitch technology, a media
gateway, a service creation environment, a high-quality multi-protocol label
switching network and access to our products and services. In return for our
equipment and expertise, the CLEC pays us fees to terminate calls on our network
and for other services such as Hosted IP Centrex and local inbound. We
anticipate that this strategy will be attractive to the CLECs since it provides
them with a new group of customers and revenue sources without requiring them to
modify their legacy systems or expend capital. We then obtain revenues from
calls the CLECs terminate on our network, and we terminate calls on their
network. We believe this arrangement creates a "win-win" scenario for both
parties.
21
Virtual Service Provider
Our Virtual Service Provider (VSP) offering is a private-labeled VoIP
solution that enables service providers to quickly deliver VoIP services to
their retail subscribers and business customers without the cost of development
or a large investment. Our enhanced services platform provides VSP customers
with a hosted and managed solution. Our enhanced services platform provides
services that support retail subscriber-based VoIP solutions, and an IP Centrex
business solution. In addition, we offer private label branded customer care
services and hardware product fulfillment to the VSP customer base.
Our retail subscriber based VoIP Solution is a residential or small
business service that enables a user to make telephone calls by using their
existing broadband Internet connection. This can eliminate the services provided
by a customer's local and long-distance phone company. The customer keeps its
existing telephone number and is not required to purchase any new telephone
handsets. The process for getting the service is relatively simple. Once the
customer signs up for service with a VoiceOne VSP, it will receive a small
integrated access device (IAD) or our Multimedia Terminal Adapter (MTA) from the
VSP or through our fulfillment center. The subscriber plugs the device into its
broadband internet connection and existing telephone handset. Once the customer
turns it on, the device automatically connects to the Internet, configures
itself and is ready for use. We offer a full suite of features, including caller
ID, call waiting, call forwarding, voicemail, speed dial, call detail records,
music on hold, 3-way calling and others. This enhanced service has been packaged
as a bundle that includes local service, long distance, enhanced voicemail, and
most of the popular calling features.
Other Products and Support Offerings
We offer complementary services and products to support our customers.
These VoiceOne Origination services support all protocols and connection types
and are bundled with the termination product to supplement the VoiceOne Carrier
Direct and VSP service offerings.
DIDs
As a CLEC, we can purchase local numbers for use by our VoiceOne Carrier
Direct and VSP customers. VoiceOne Origination provides our customers with one
of the largest selections of direct inward dial (DID) numbers available. Our Web
based administration and automated XML provisioning saves our customers time
when managing the inventory, access, reservation and allocation of DIDs.
800 Origination
Our 800 Origination service is a flexible solution with IP or TDM
delivery. Our 800 Origination product provides nationwide toll free numbers with
full control over routing. Customers can easily re-route a number due to local
area problems and can log into an easy-to-use, attractive web interface to
manage their 800 numbers. Our 800 Origination service supports geographic
routing and vanity numbers.
v911(TM) Services
Our VoiceOne v911 exceeds the FCC compliant solution for VoIP e911 calls.
Our v911 services go beyond the requirements of the recent FCC order to help
ensure reliability and quality of e911 calls. We utilize our private MPLS
network along with our proprietary softswitch, selective routers, and media
gateway controllers to provide the redundancy necessary for high quality of
service for emergency calls over IP. v911 provides for XML and web interfaces so
that providers can update customer location information automatically, and/or
provide an interface for the customer to update it themselves. Customers'
emergency calls route to the correct Public Service Answering Point (PSAP) via
selective routing. v911 also provides a remedy for nomadic subscribers. When
lines are classified as nomadic, calls will be handled by a call center.
22
ANI Recognition
The ANI Recognition calling platform, known as EasyTalk, is a long
distance service with "ease of use" features for consumers. We believe that
EasyTalk is a generation beyond calling cards. Our network can be programmed to
automatically recognize certain phone numbers and to provide callers from these
numbers immediate access to long-distance services. No calling card or PIN
number calling card number is required, and because the call is routed over the
Internet, the customer avoids the long-distance rates charged by the traditional
telephony carriers. VSP and Carrier Direct customers can private-label this
platform, customizing its web pages. Consumer features include PIN-less dialing,
fast *1 recharge of the service, speed dial, and quick query of current balance.
Providers can specify many billing options and can opt for fraud screening
services, customer support, and use of our payment processing service.
Hosted IP Centrex
Hosted IP Centrex provides the immediate ability to provide complete PBX
functionality for phone service in small office/home office and small/medium
enterprise business environments. Phone service is provided over IP connectivity
from the customer to the Internet, a provider's private IP network, or virtual
private network. All standard features of PBX functionality, as well as more
advanced calling features, are provided to the customer. Management of the
features, phones and options are accomplished through a web management
interface. Changes may be made by users, administrators and the service
provider.
Additional Services
vFax Service - this service provides a personal fax number and web based
management of faxes. vFax allows a consumer to send and receive faxes anywhere
they can receive email.
Voicemail / Unified Messaging - Our unified messaging solutions provide
users an integrated step in bringing together many of the functions, features
and necessities under a simple unified approach of communications. We allow
users to control their communications needs and provide the flexibility to
modify the way they operate. This product integrates with our voice services,
but also can be an adjunct service to carriers in existing markets, allowing
carriers, cable operators and other service providers to enhance their existing
voice offerings.
Pathfinder(TM) 2.0 Provisioning Server Software - Our Pathfinder
application enables broadband service providers to easily adapt our MTA to their
existing platform. Pathfinder fully automates the process of configuring and
provisioning the MTA device. The automated process identifies the user and their
personal profile information before carrying out any instructions that the
Broadband Provider has scheduled.
Fulfillment Services and Value-added Distribution - We operate a
fulfillment center and supply chain solutions provider for our broadband service
provider partners. We are an established and respected supplier of broadband
components and VoIP hardware to the cable television industry. We were awarded
the National Cable Television Cooperative's First Platinum Vendor status, giving
us credibility and direct access to over 1,400 independent cable operators.
Other - We recently acquired substantially all of the assets relating to
WQN, Inc.'s VoIP business. This acquisition will enable us offer high quality
international prepaid virtual calling cards, personal 800 numbers, and VoIP
subscriber based services, such as RocketVoIP, our retail VoIP solution. Our
prepaid calling cards are sold through our website and through a network of over
90 private distributors. Through this network we estimate that our services are
sold through over 10,000 retail outlets, with more than half of these outlets in
Southern California.
Our Strategy
Our objective is to provide reliable, scalable, and competitively-priced
worldwide VoIP communication services with unmatched quality. We plan to achieve
this objective by delivering innovative technologies and services and balancing
the needs of our customers with the needs of our business. We intend to bring
high quality voice products and services, at an affordable price, to residential
consumers and businesses and enhance the ways in which these customers
communicate with the rest of the world.
23
Specific strategies to accomplish this objective include:
o building our CLEC customer base through aggressive marketing of our
VoiceOne Carrier Direct program;
o completing the expansion of our network currently in process;
o capitalizing on our technological expertise to introduce new
products and features;
o offering the best possible service and support to our customers with
a world class customer support organization;
o developing additional distribution channels;
o expanding our market share for our retail calling services;
o increasing our customer base by introducing cost-effective solutions
to interconnect with our network; and
o controlling operating expenses and capital expenditures.
Competition
We compete primarily in the market for enhanced IP communications
services. This market is highly competitive and has numerous service providers.
The market for enhanced Internet and IP communications services is new and
rapidly evolving. We believe that the primary competitive factors determining
success in the Internet and IP communications market are:
o quality of service;
o the ability to meet and anticipate customer needs through multiple
service offerings and feature sets;
o responsive customer care services, and;
o price.
Future competition could come from a variety of companies both in the
Internet and telecommunications industries. These industries include major
companies who have greater resources and larger subscriber bases than we have,
and have been in operation for many years. We also compete in the growing market
of discount telecommunications services including "pure play" VoIP service
providers, calling cards, prepaid cards, call-back services, dial-around or
10-10 calling and collect calling services. In addition, some Internet service
providers have begun to aggressively enhance their real time interactive
communications, including instant messaging, PC-to-PC and PC-to-Phone services,
and Broadband phone services.
Some competitors may be able to bundle services and products that are not
offered by us together with enhanced Internet and IP communications services,
which could place us at a significant competitive disadvantage. Many of our
competitors enjoy economies of scale that can result in lower cost structure for
transmission and related costs, which could cause significant pricing pressures
within the industry. At the same time, we see these potential competitors as
potential customers, and have organized our various reseller and service
provider products and services to meet the emergent needs of these companies.
Our primary competitors include:
o carriers operating in the U.S. and abroad, which include the RBOCs,
AT&T, British Telecom, France Telecom, Deutsche Telecom, NTT, MCI,
Sprint, Level 3, Infonet, Qwest, Broadwing, Ibasis, and Teleglobe;
o subscriber based service provider competitors, which include Vonage,
Packet8, DeltaThree, SunRocket, Time Warner, Comcast and Net2phone.
24
Industry Overview
The advance of broadband delivery of the Internet into residential and
small offices has opened up a large market for high-speed services to be
delivered in a manner that is independent of the actual wires connected to each
property. Nearly three out of four households with basic phone service have
Internet access, and of that 75% of all households in the US, almost half have
broadband access. (Source: Nielsen/NetRatings) The penetration of broadband is
rising at around 2.5% per month. These growth figures are even higher in other
nations, which have only recently been implementing systems after understanding
and modeling their platforms on what has become the standard in the United
States. An additional factor in the cost savings of VoIP is the relatively
inexpensive nature of IP transit data at the core of the Internet. In the late
90's, a large amount of capital was invested in fiber connectivity between major
metropolitan areas. Due to market forces, this fiber became available at
incredibly inexpensive rates, and a "bandwidth glut" or "fiber glut" occurred at
the core of the Internet, driving costs down.
VoIP is a technology that enables voice communications over the Internet
through the compression of voice into data packets that can be transmitted over
data networks and then converted back into voice at the other side. Data
networks, such as the Internet or local area networks (LANs), have always
utilized packet-switched technology to transmit information between two
communicating terminals (for example, a PC downloading a page from a web server,
or one computer sending an e-mail message to another computer). The most common
protocol used for communicating on these packet switched networks is internet
protocol, (IP). VoIP allows for the transmission of voice along with other data
over these same packet switched networks, and provides an alternative to
traditional telephone networks, which uses a fixed electrical connection to
carry voice signals through a series of switches to the final destination. VoIP
has experienced significant growth in recent months. The telephone networks
maintained by many local and long distance telephone companies were designed
solely to carry low-fidelity audio signals with a high level of reliability.
Although these traditional telephone networks are very reliable for voice
communications, they are not well suited to service the explosive growth of
digital communication applications for the following reasons:
o Until recently, telephone companies have avoided the use of packet
switched networks for transmitting voice calls due to the potential
for poor sound quality attributable to latency issues (delays) and
lost packets which can prevent real-time transmission. Recent
improvements in packet switch technology, compression and broadband
access technologies, as well as improved hardware and provisioning
techniques, have significantly improved the quality and usability of
packet-switched voice calls.
o Packet-switched networks have been built mainly for carrying non
real-time data, and the advantages of such networks are their
efficiency, flexibility, reliability and scalability. Bandwidth is
only consumed when needed, networks can be built in a variety of
configurations to suit the number of users, client/server
application requirements and desired availability of bandwidth and
many terminals can share the same connection to the network. As a
result, significantly more traffic can be transmitted over a packet
switched network, such as a home network or the Internet, than a
circuit-switched telephony network. Packet switching technology
allows service providers to converge their traditionally separate
voice and data networks and more efficiently utilize their networks
by carrying voice, video, fax and data traffic over the same
network. The improved efficiency of packet switching technology
creates network cost savings that can be passed on to the consumer
in the form of lower telephony rates. The exponential growth of the
Internet in recent years has proven the scalability and reliability
of these underlying packet switched IP based networks. As broadband
connectivity has become more available and less expensive, it is now
possible for service providers like us to offer voice services that
run over these IP networks to consumers and business worldwide.
The growth of the Internet in recent years has proven the scalability of
these underlying packet switched networks. As broadband connectivity, including
cable modem and digital subscriber line, or DSL, has become more available and
less expensive, it is now possible for service providers like us to offer voice
and video services that run over these IP networks to businesses and residential
consumers. Providing such services has the potential to both substantially lower
the cost of telephone service and equipment costs to these customers and to
increase the breadth of features available to our subscribers. Services like
full-motion, two-way video are now supported by the bandwidth spectrum commonly
available to broadband customers, whether business or residential.
As the wireless industry has shown, disruptive new technology with better
product and service features has the effect of luring customers to regularly
change carriers. To minimize this risk of churn, carriers must continually
expand their service offering in order to retain their existing customers. With
the growing acceptance of packet and VoIP telephony, the incumbent carriers are
again faced with a disruptive technology with a lower cost of service.
25
Human Resource Team; VoIP Inc. Group
VoIP, Inc. currently employs 72 persons in the following capacities: 8
officers, 27 general and administrative employees, and 37 technology personnel.
We consider our relations with our employees to be good. We have never had a
work stoppage, and none of our employees is represented by collective bargaining
agreements. We believe that our future success will depend in part on our
ability to attract, integrate, retain and motivate highly qualified personnel,
and upon the continued service of our senior management and key technical
personnel. None of our key personnel is bound by employment agreements that
prohibit them from ending their employment at any time. Competition for
qualified personnel in our industry and geographical location is intense. We
cannot assure you that we will be successful in attracting, integrating,
retaining and motivating a sufficient number of qualified employees to conduct
our business in the future.
Legal Proceedings
On April 8, 2005, Volo Communications, Inc. ("Volo") (a wholly-owned
subsidiary of Caerus, Inc.) filed suit against MCI WorldCom Network Services,
Inc. d/b/a UUNET ("MCI"). Volo alleges that MCI engaged in a pattern and
practice of over-billing Volo for the telecommunications services it provided
pursuant to the parties' Services Agreement, and that MCI refused to negotiate
such overcharges in good faith. Volo also seeks damages arising out of MCI's
fraudulent practice of submitting false bills by, among other things, re-routing
long distance calls over local trunks to avoid access charges, and then billing
Volo for access charges that were never incurred. On April 4, 2005, MCI declared
Volo in default of its obligations under the Services Agreement, claiming that
Volo owes a past due amount of $8,365,980, and threatening to terminate all
services to Volo within 5 days. By this action Volo alleges claims for (1)
breach of contract; (2) fraud in the inducement; (3) primary estoppel; and (4)
deceptive and unfair trade practices. Volo also seeks a declaratory judgment
that (1) MCI is in breach of the Services Agreement; (2) $8,365,980 billed by
MCI is not "due and payable" under that agreement; and (3) MCI's default letter
to Volo is in violation of the Services Agreement. Volo seeks direct, indirect
and punitive damages in an amount to be determined at trial.
On May 26, 2005, MCI filed an Answer, Affirmative Defenses, Counterclaim
and Third-Party Complaint naming Caerus, Inc. as a third-party defendant. MCI
asserts a breach of contract claim against Volo, a breach of guarantee claim
against Caerus, Inc., and a claim for unjust enrichment against both parties,
seeking an amount to be determined at trial. On July 11, 2005, Volo and Caerus,
Inc. answered the counterclaim and third-party complaint, and filed a
third-party counterclaim against MCI for declaratory judgment, fraud in the
inducement, and breach of implied duty of good faith and fair dealing. Volo and
Caerus, Inc. seek direct, indirect, and punitive damages in an amount to be
determined at trial. Discovery should commence shortly. The Company is currently
unable to assess the likelihood of a favorable or unfavorable outcome.
Properties
Our headquarters are in Fort Lauderdale, Florida. We have offices and
facilities in a number of other locations. Following is a list of our leased
offices and facilities as of October 12, 2005.
26
Location Purpose App. sq. ft. Annual Rent
------------------------------- ------------------------------ ------------ -----------
12330 SW 53rd Street, Suite 712 Principal executive offices 3,200 $ 39,648
Ft. Lauderdale, FL 33330
151 S. Wymore Rd, Suite 3000 Network facilities and offices 11,500 196,872
Altamonte Springs, FL 32714
13101 56th Court N., Suite 813 Fullfillment center 4,500 35,304
Clearwater, FL 33760
14911 Quorum Dr., Suite 140 Offices 6,250 54,000
Dallas, Texas 75254
17806 Pioneer Blvd, Suite 106 Offices 1,000 41,000
Artesia, California 90701
Manufacturing and Sources of Supply
Our products are manufactured by iCable System Co. Ltd. a South Korean
Company. iCableSystem provides offshore inventory and delivery services
worldwide and large scale orders are shipped directly from Korea to providers at
any destination. iCableSystem has in-house PC board pressing, case design and
manufacturing, and board processing facilities, making them less susceptible to
supply chain dropouts than other manufacturers.
The primary chipset used in the CPE units is the Broadcom chipset, for
which there is an available supply path and rapid delivery periods. It is not
anticipated that there will be any significant shortfalls in the ability to
produce equipment or deliver equipment, given past experience and current
operating procedures, even under heavy volume sales.
Equipment for VoIP Solutions, Inc. which involve a "solution" delivery for
a customer, are primarily software driven, and do not involve significant
hardware resources that are manufactured in-house.
Inventories
All the inventories are kept in our warehouse facility in Clearwater,
Florida. Our local inventory and supply methods provide adequate capacity for
most order volumes, but special orders or multi-thousand unit deliveries are
typically drop-shipped from Korea. All softswitch and "back office" solution
materials are also kept on-site for customer deployment, except in cases where
local purchase of equipment is less difficult or less costly than in-country
sourcing.
The "cascading provisioning" server method that is used in the network
allows for the "out-of-box" configuration and deployment of CPE hardware without
ever being configured on the customer's network. This means that deployment time
can be reduced drastically for field-shipping equipment, and no intermediate
warehouse or customer care steps are required. Devices are delivered from
overseas and can be directly put into use by any of our customers without manual
configuration. This is significantly different than most other hardware and
softswitch providers, in that our solution removes the requirement for customer
configuration of equipment (which is confusing and slow) or two-step shipping
(which is costly and slow.)
27
Intellectual Property
The Company has developed several important intellectual property
features. VoiceOne has developed and the network provides a ubiquitous E911
solution to fully comply with the FCC's recent order imposing E911 requirements
on VoIP Service Providers. VoiceOne's 911 service is known as i-911 and we
believe it is the most accurate and advanced in the industry. A key feature of
the i-911 service is that it can route emergency calls for the customer whose
location is constant as well as the customer who often moves the location of his
VoIP device. Customers can update their location information in real time, so
that their i-911 call will be delivered to the appropriate Public Safety
Answering Point (PSAP) in the new location. To further support the FCC 911
mandate, VoIP, Inc. has applied for a patent for its state-of-the-art 911
compliant VoIP Multimedia Terminal Adaptor.
VoIP Inc. has developed Pathfinder as a "cascading provisioning server"
feature for deployment of zero-touch hardware deployment and is a new
development that is exclusive to VoIP, Inc.'s platform. The system allows each
device to auto-provision without any customer interaction even in situations
where there are multiple levels of VAR or resellers to distribute the product to
their customers (to any number of resale levels.) This allows for installations
without any customer service or technical support time spent in configuration
issues.
The Company has developed significant software resources in all areas of
its business. Many of the core features of the Company's services and
deliverables are constructed on software that has been custom-designed and
completely owned by the Company. Hardware inventory control, accounting, least
cost routing, customer records, telephony element management, network monitoring
and administration, billing reconciliation, and internal sales resource tools
are some of the integrated features of the Company's software development
effort.
Regulation
The Company currently is a value added service provider. The hardware,
integration and softswitch portions of our business are expected to remain
unthreatened by regulation in major nations in which the Company expects to do
business. The eGlobalphone service offering may potentially experience
regulatory pressures as the United States makes changes in its
telecommunications law to encompass VoIP services. The imposition of government
regulation on our business could adversely affect our operations by requiring
additional expense to meet compliance requirements.
1) Regulation is expected to be applied to the following areas of our
service: E911, CALEA (law enforcement wiretap) and USF taxation.
a. Our existing E911 service addresses this concern already and
we are working with industry groups to also address E911
delivery via the network when that technology becomes mature
and affordable. The combined delivery methods should
adequately protect the Company against negative regulatory or
economic pressure in the future.
b. CALEA data delivery is almost complete in the system for the
basics of call status and PIN tapping. The additional steps of
call monitoring and call splitting are yet to be even defined,
though it is not anticipated that their deployment would
require anything other than minor expense for adequate
compliance with these laws, given current technology.
c. USF (Universal Service Fee) taxation has been explicitly not
required for data services. The classification of VoIP as a
value added data service has clearly indicated that it is
outside of the USF charter.
2) Comments by the FCC staff have indicated that VoIP will be handled
in a relatively "hands-off" manner until the industry is more mature
and capable of competing directly with RBOC and ILEC carriers. This
is anticipated to be at least another two years.
3) Even with additional regulations and if they were to be applied, the
costs of compliance would be significantly lower than those of
traditional telephony, as these regulatory structures are already
being considered and compensated for in design aspects of the
network.
4) Our primary focus on non-US customers should limit our exposure in
the United States.
5) Federal Regulations
28
Federal Regulation
The Federal Communications Commission (FCC) regulates interstate and
international telecommunications services. The FCC imposes extensive regulations
on common carriers such as incumbent local exchange carriers ("ILECs") that have
some degree of market power. The FCC imposes less regulation on common carriers
without market power, such as Volo. The FCC permits these nondominant carriers
to provide domestic interstate services (including long-distance and access
services) without prior authorization; but it requires carriers to receive an
authorization to construct and operate telecommunications facilities and to
provide or resell telecommunications services between the United States and
international points.. Under the Telecommunications Act of 1996 (the "1996
Act"), any entity, including cable television companies and electric and gas
utilities, may enter any telecommunications market, subject to reasonable state
regulation of safety, quality and consumer protection. Because implementation of
the 1996 Act is subject to numerous federal and state policy rulemaking
proceedings and judicial review, there is still uncertainty as to what impact it
will have on Volo. The 1996 Act is intended to increase competition. The 1996
Act opens the local services market by requiring ILECs to permit interconnection
to their networks and establishing ILEC obligations with respect to:
o Reciprocal Compensation. Requires all ILECs and CLECs to complete
calls originated by competing carriers under reciprocal arrangements
at prices based on a reasonable approximation of incremental cost or
through mutual exchange of traffic without explicit payment.
o Resale. Requires all ILECs and CLECs to permit resale of their
telecommunications services without unreasonable restrictions or
conditions. In addition, ILECs are required to offer wholesale
versions of all retail services to other telecommunications carriers
for resale at discounted rates, based on the costs avoided by the
ILEC in the wholesale offering.
o Interconnection. Requires all ILECs and CLECs to permit their
competitors to interconnect with their facilities. Requires all
ILECs to permit interconnection at any technically feasible point
within their networks, on nondiscriminatory terms and at prices
based on cost (which may include a reasonable profit). At the option
of the carrier seeking interconnection, colocation of the requesting
carrier's equipment in an ILEC's premises must be offered, except
where the ILEC can demonstrate space limitations or other technical
impediments to colocation.
o Unbundled Access. Requires all ILECs to provide nondiscriminatory
access to specified unbundled network elements (including certain
network facilities, equipment, features, functions and capabilities)
at any technically feasible point within their networks, on
nondiscriminatory terms and at prices based on cost (which may
include a reasonable profit).
o Number Portability. Requires all ILECs and CLECs to permit, to the
extent technically feasible, users of telecommunications services to
retain existing telephone numbers without impairment of quality,
reliability or convenience when switching from one
telecommunications carrier to another.
o Dialing Parity. Requires all ILECs and CLECs to provide "1+" equal
access to competing providers of telephone exchange service and toll
service, and to provide nondiscriminatory access to telephone
numbers, operator services, directory assistance, and directory
listing, with no unreasonable dialing delays.
o Access to Rights-of-Way. Requires all ILECs and CLECs to permit
competing carriers access to poles, ducts, conduits and
rights-of-way at regulated prices.
The FCC has to date treated ISPs as "enhanced service providers," exempt
from federal and state regulations governing common carriers, including the
obligation to pay access charges and contribute to the universal service fund.
Nevertheless, regulations governing disclosure of confidential communications,
copyright, excise tax, and other requirements may apply to the provision of
Internet access services.
29
The FCC, on March 10, 2004, adopted a Notice of Proposed Rulemaking, which
will address a variety of issues concerning the regulatory treatment of VoIP
telephony. At the same time, the FCC ruled on a petition which dealt with a VoIP
service that never used the PSTN, was offered free to members of the service,
and did not involve the transport of the calls. The FCC determined the service
was not a telecommunications service under the Act. We cannot predict the
outcome of these proceedings or other FCC or state proceedings that may affect
our operations or impose additional requirements, regulations or charges upon
our provision of Internet access and related Internet Protocol-based telephony
services.
The FCC and many state public utilities commissions have implemented rules
to prevent unauthorized changes in a customer's pre-subscribed local and long
distance carrier services (a practice commonly known as "slamming.") Pursuant to
the FCC's slamming rules, a carrier found to have slammed a customer is subject
to substantial fines. In addition, the FCC's slamming rules allow state public
utilities commissions to elect to administer and enforce the FCC's slamming
rules. These slamming liability rules substantially increase a carrier's
possible liability for unauthorized carrier changes, and may substantially
increase a carrier's administrative costs in connection with alleged
unauthorized carrier changes. The Communications Assistance for Law Enforcement
Act (CALEA) provides rules to ensure that law enforcement agencies would be able
to properly conduct authorized electronic surveillance of digital and wireless
telecommunication services. CALEA requires telecommunications carriers to modify
their equipment, facilities, and services used to provide telecommunications
services to ensure that they are able to comply with authorized surveillance
requirements. Our switches are CALEA compliant. The FCC is currently looking at
whether VoIP and other Internet enabled communications services should continue
to be unregulated Internet services. We cannot predict the outcome of such
proceedings or that any increased level of regulation resulting therefrom will
not have a material adverse affect on our business or operations.
State Regulation
The 1996 Act is intended to increase competition in the telecommunications
industry, especially in the local exchange market. With respect to local
services, ILECs are required to allow interconnection to their networks and to
provide unbundled access to network facilities, as well as a number of other
pro-competitive measures. Because the implementation of the 1996 Act is subject
to numerous state rulemaking proceedings on these issues, it is currently
difficult to predict how quickly full competition for local se
Local Regulation
Our network is subject to numerous local regulations such as building
codes and licensing. Such regulations vary on a city-by-city, county- by-county
and state-by-state basis.
30
Increasing interest by U.S. states in the regulation of voice over IP services
could result in laws or regulatory actions that harm our business.
Several states have recently shown an interest in regulating voice over
IP, or VoIP, services, as they do for providers of traditional telephone
service. If this trend continues, and if state regulation is not preempted by
action by the U.S. federal government, we may become subject to a "patchwork
quilt" of state regulations and taxes, which would increase our costs of doing
business, and adversely affect our operating results and future prospects.
Our company and industry are highly regulated, which restricts our ability to
compete in our target markets and imposes substantial compliance costs on us
that adversely impact our results.
We are subject to varying degrees of regulation from federal, state and
local authorities. This regulation imposes substantial compliance costs on us.
It also restricts our ability to compete. For example, in each state in which we
desire to offer our services, we are required to obtain authorization from the
appropriate state commission. If any required authorization for any of our
markets or services is revoked or otherwise terminated, our ability to operate
in the affected markets would be adversely affected.
Attempts to limit the basic competitive framework of the Telecom Act could
interfere with the successful implementation of our business plan.
Successful implementation of our business plan is predicated on the
assumption that the basic framework for competition in the local exchange
services market established by the Telecom Act will remain in place. We expect
that there will be attempts to limit or eliminate this basic framework through a
combination of federal legislation, new rulemakings by the FCC and ILEC
challenges to existing and proposed regulations. It is not possible to predict
the nature of any such action or its impact on our business and operations.
31
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND PLAN OF OPERATION
The information presented in this section should be read in conjunction
with the information contained in the financial statements, including the notes
thereto, and the other financial statements appearing elsewhere in this
Prospectus.
General
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the notes thereto and the other financial
information appearing elsewhere in this Prospectus. Certain statements contained
in this Prospectus and other written material and oral statements made from time
to time by us do not relate strictly to historical or current facts. As such,
they are considered "forward-looking statements" that provide current
expectations or forecasts of future events. Such statements are typically
characterized by terminology such as "believe," "anticipate," "should,"
"intend," "plan," "will," "expect," "estimate," "project," "strategy" and
similar expressions. Our forward-looking statements generally relate to the
prospects for future sales of our products, the success of our marketing
activities, and the success of our strategic corporate relationships. These
statements are based upon assumptions and assessments made by our management in
light of its experience and its perception of historical trends, current
conditions, expected future developments and other factors our management
believes to be appropriate. These forward-looking statements are subject to a
number of risks and uncertainties, including the following: our ability to
achieve profitable operations and to maintain sufficient cash to operate its
business and meet its liquidity requirements; our ability to obtain financing,
if required, on terms acceptable to it, if at all; the success of our research
and development activities; competitive developments affecting our current
products; our ability to successfully attract strategic partners and to market
both new and existing products; exposure to lawsuits and regulatory proceedings;
our ability to protect our intellectual property; governmental laws and
regulations affecting operations; our ability to identify and complete
diversification opportunities; and the impact of acquisitions, divestitures,
restructurings, product withdrawals and other unusual items. A further list and
description of these risks, uncertainties and other matters can be found
elsewhere in this Prospectus. Except as required by applicable law, we undertake
no obligation to update any forward-looking statements, whether as a result of
new information, future events or otherwise.
Balance Sheet Data:
June 30, 2005
(unaudited) December 31, 2004
------------- -----------------
Goodwill and other intangible assets $30,765,594 $6,923,854
Total assets 43,250,279 10,215,552
Notes payable, current 7,736,929 760,000
Total liabilities (all current) 20,542,992 2,108,114
Shareholders' equity 22,707,287 8,107,438
Six Months Ended Year Ended
June 30, December 31,
------------------------ ------------------------
Statement of Operations Data: 2005 2004 2004 2003
----------- --------- ----------- ---------
(Unaudited)
Revenue $ 3,916,920 $ 85,298 $ 2,619,393 $ 0
Operating (loss)(1) (5,033,437) (430,981) (4,160,050) 0
Net (loss) (1) (5,033,437) (430,981) (4,014,739) (352,968)
Net (loss) per common share (0.19) (0.05) (0.27) (0.20)
(1) The year ended December 31, 2004 includes $3,520,000 non-cash compensation
expenses resulting from the issuance to executive officers of warrants to
purchase 4,400,000 shares of common stock for $1.00 per share in August,
2004.
See "Financial Statements" beginning on Page F-1.
Results of Operations
We commenced operations during the fourth quarter of 1998 and focused
significant resources through December 2003 in procuring and importing inventory
and developing sales and distribution channels for our tea business, which was
discontinued in 2004. Accordingly, we generated only minimal revenues and
experienced cumulative losses of approximately $624,647, through December 31,
2003. Our net loss for the year ended December 31, 2003 was $352,968, or $0.20
per share.
32
In 2004 we changed our focus to the IP telephony business. Our 2004 fiscal
year revenues were provided primarily by DTNet Technologies, Inc., and
Voipamericas, companies we acquired in June and September, respectively, of the
year ended December 31, 2004. Sales generated for us by DTNet and Voipamericas
amounted to approximately $1.6 million and $0.6 million respectively, in 2004.
The sales generated by DTNet and our hardware sales generated substantially all
of our gross profit for the year ended December 31, 2004. Our operating expenses
totaled $4,909,174 for the year ended December 31, 2004 and were comprised of
$2,721,296 for compensation and related expenses and $2,187,878, for general and
administrative expenses. Our net loss for the 2004 fiscal year was $4,014,739 or
$0.27 per share.
Net losses for the respective six months ended June 30, 2005 and 2004 were
$5,033,437 and $430,981, respectively, reflecting levels of revenues and gross
profit that were inadequate to support our operating cost structure. Our net
loss per share was $0.19 and $0.05 for the six months ended June 30, 2005 and
2004, respectively. Revenues for the six months ended June 30, 2005 increased by
approximately $3.8 million, to $3,916,920 from the comparable 2004 period. This
revenue increase is attributable to the inclusion of the results of DTNet and
Voipamericas in 2005. The increase in gross profit to $812,074 for the six
months ended June 30, 2005 from $26,375 for the comparable 2004 period is
attributable to our revenue increase. Our operating expenses increased from
$457,356 for the six months ended June 30, 2004 to $5,845,511 for the six months
ended June 30, 2005 due to the addition of the operating costs of the
subsidiaries we acquired in the second and third quarters of 2004.
Total assets at June 30, 2005 were $43,250,279, up $33,034,727 from
December 31, 2004. This increase in assets and the corresponding increase in
accounts payable and other current liabilities are almost entirely related to
the acquisition of Caerus, Inc. on May 31, 2005. We have recorded significant
amounts of goodwill and intangible assets in connection with the acquisition of
Caerus and other acquisitions. Goodwill and intangible assets comprised 71% of
our total assets at June 30, 2005. We expect to record additional amounts of
goodwill and intangible assets in connection with our WQN, Inc. acquisition,
which was completed on October 5, 2005.
Under Statement of Financial Accounting Standards No. 142 we are required
to periodically evaluate the carrying values of our goodwill and intangible
assets. If in the future such carrying values exceed their fair values, we will
be required to record an impairment charge in our consolidated statement of
operations. Such an impairment charge could have a significant adverse impact on
our operating results and financial condition.
Liquidity and Capital Resources and Plan of Operation
As of June 30, 2005, we had cash and cash equivalents of $1,068,514, as
compared to $1,141,205 at December 31, 2004. Cash and cash equivalents decreased
by $72,691 for the six months ended June 30, 2005. We used $4,583,648 in cash
for our operating activities. We funded our operating activities through private
placements of notes payable and common stock. These financing activities
provided us with net cash of $4,548,736 for the six months ended June 30, 2005.
Liquidity for the period from inception through June 30, 2005 has been
provided by sales of common stock through private placements and borrowing from
affiliates. We anticipate that we will continue to experience negative cash
flows from operations. We have incurred losses since the inception of our
business and as of June 30, 2005 our accumulated deficit was $9,672,823. We have
not achieved profitability in any quarter or year. We may incur additional net
losses in future quarters or years.
We have $7,736,929 due under outstanding notes payable as of June 30, 2005
consisting of a note payable to a shareholder ($1,053,196), convertible notes
($1,552,925) and a loan payable to a lending institution ($5,130,818).
The note payable to the shareholder bears interest at 3.75% and matures on
December 31, 2005.
Of the $1,552,995 convertible notes payable, $125,000 was converted into
166,667 shares of common stock in July 2005. The remaining balance of $1,427,995
represents 8% notes issued pursuant to a subscription agreement, convertible
into 1,784,895 shares of common stock. In connection with these notes the
holders received warrants to purchase 829,447 shares of common stock at $1.60
per share and 892,448 shares of common stock at $1.43 per share. The
subscription agreement for these notes requires the issuance of an additional
$1,427,916 of these 8% notes, convertible into 1,784,895 shares of common stock,
within five business days following the effective date of a Company registration
statement on Form SB-2. In connection with these notes the Company will issue
warrants for the purchase of 892,447 shares of common stock at $1.60 per share
and 892,448 shares of common stock at a per share price equal to 110% of the
volume weighted average price for the five business days immediately preceding
the effective date of the Form SB-2.
Borrowings under the loan payable to the lending institution are repayable
over a three-year period and bear interest at 12.5% per annum. Additional
borrowings under this facility are contingent upon, among other things, our
success in raising certain levels of additional equity financing. The loan
agreement contains customary covenants and restrictions and provides the lender
the right to a perfected first-priority, secured interest in all of Caerus,
Inc.'s assets, as well as rights to preferred stock warrants. We are currently
in violation of certain requirements of the debt facility. Accordingly, the full
amount of the note at June 30, 2005 has been classified as current. No default
on this loan has been declared.
We will need to significantly increase our revenues, and earn adequate
margins on these revenues, to become profitable. We believe we will be able to
add new customers and increase our revenues with the completion of the
nationwide expansion of our network. Our revenues will also increase, as
compared to prior periods, as a result of our recent acquisition of Caerus and
the VoIP assets of WQN. We estimate that the expansion of our network will
require approximately $4.0 million. We will continue to be dependent upon the
sale of debt and equity securities not only to complete our network expansion,
but to fund our existing operations. We are presently pursuing this additional
financing. However, we may not be successful in obtaining further debt or equity
financing for our business.
Critical Accounting Policies and Estimates
We have identified the policies and significant estimation processes below
as critical to our business operations and the understanding of our results of
operations. This listing is not intended to be a comprehensive list. In many
cases, the accounting treatment of a particular transaction is specifically
dictated by accounting principles generally accepted in the United States, with
no need for management's judgment in their application. In other cases,
management is required to exercise judgment in the application of accounting
principles with respect to particular transactions. The impact and any
associated risks related to these policies on our business operations is
discussed throughout "Management's Discussion and Analysis of Financial
Condition and Results of Operations" where such policies affect reported and
expected financial results. For a detailed discussion on the application of
these and other accounting policies, see Note B in the Notes to Consolidated
Financial Statements for the year ended December 31, 2004, included in this Form
SB-2. Our preparation of our consolidated financial statements requires us to
make estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
consolidated financial statements, and the reported amounts of revenue and
expenses during the reporting periods. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. Actual results may differ from those estimates and such
differences could be significant.
33
Revenue recognition - Our revenue is derived from fees charged to
terminate voice services over our network, from monthly recurring charges
associated with Internet services, and from sales of hardware product.
Variable revenue is earned based on the number of minutes during a call
and is recognized upon completion of a call. Revenue for each customer is
calculated from information received through our network switches. We track the
information from the switch and analyze the call detail records against stored
detail information about revenue rates.
Fixed revenue is earned from monthly recurring services provided to
customers that are fixed and recurring in nature, and are contracted for over a
specified period of time. Revenue recognition commences after the provisioning,
testing, and acceptance of the service by the customer. The monthly charges
continue until the expiration of the contract, or until cancellation of the
service by the customer.
Revenue from product sales is recognized when persuasive evidence of an
arrangement exists, delivery to customer has occurred, the sales price is fixed
and determinable, and collectibility of the related receivable is probable.
Accounts receivable - Accounts receivable are stated at the amount we
expect to collect from outstanding balances. We provide for probable
uncollectible amounts based on our assessment of the current status of the
individual receivables.
Business combinations - We account for business combinations in accordance
with Statement of Financial Accounting Standards No. 141 "Business Combinations"
(SFAS No. 141). SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations. SFAS No. 141 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually by comparing carrying value
to the respective fair value in accordance with the provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS No. 142). This pronouncement also requires that the intangible assets with
estimated useful lives be amortized over their respective estimated useful
lives.
Impairment of long-lived assets - We review the recoverability of our
long-lived assets, such as property and equipment, when events or changes in
circumstances occur that indicate that the carrying value of the asset group may
not be recoverable. The assessment of possible impairment is based on our
ability to recover the carrying value of the asset or asset group from the
expected future pre-tax cash flows (undiscounted and without interest charges)
of the related operations. If these cash flows are less than the carrying value
of such asset, an impairment loss is recognized for the difference between
estimated fair value and carrying value. The measurement of impairment requires
us to estimate future cash flows and the fair value of long-lived assets.
Stock based compensation - We apply the fair value method of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" (SFAS No. 123) in accounting for its stock options. This standard
states that compensation cost is measured at the grant date based on the value
of the award and is recognized over the service period, which is usually the
vesting period. The fair value for each option granted is estimated on the date
of the grant using the Black-Scholes option pricing model. The fair value of all
vested options granted has been charged to salaries, wages, and benefits in
accordance with SFAS No. 123.
Recent accounting pronouncements - In November 2004, FASB issued Statement
No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4." Statement
No. 151 requires that abnormal amounts of costs, including idle facility
expense, freight, handling costs and spoilage, should be recognized as current
period charges. The provisions of this Statement are effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. We do not
expect the adoption of this Statement to have a material impact on our financial
statements.
In December 2004, FASB issued Statement No. 153, "Exchange of Nonmonetary
Assets - an amendment of Accounting Principles Board ("APB") Opinion No. 29."
Statement No. 153 amends APB Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have a
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of this Statement are effective for nonmonetary
exchange occurring in fiscal periods beginning after June 15, 2005. We do not
expect the adoption of this Statement to have material impact on our financial
statements.
34
In December 2004, FASB issued Statement No. 123R, "Share -Based Payment."
Statement No. 123R revises Statement No. 123, supersedes APB Opinion No. 25 and
amends Statement No. 95. Statement No. 123R requires the cost of employee
services received in exchange for an award of equity instruments be recognized
over the period during which an employee is required to provide service in
exchange for the award. The provisions of this Statement are effective for
public entities that do not file as small business issuers as of the beginning
of the first interim period or annual reporting period that begins after June
15, 2005. We do not expect the adoption of this Statement to have a material
impact on our financial statements.
Payments Due by Period
The following table illustrates our outstanding debts and the terms of
that debt as of June 30, 2005:
2006-
Contractual Obligations Total Remainder of 2005 2008
----------------------- ---------- ----------------- --------
Long-term debt $0 $0 $0
Notes payable $7,736,929 $7,736,929 $0
Operating leases $594,905 $ 149,905 $445,000
Purchase obligations $0 $0 $0
---------- ----------------- --------
Total $8,331,834 $7,886,834 $445,000
========== ================= ========
Recent Developments
We have recently made a number of announcements regarding key developments
in our business.
We launched the industry's private network 911 service (v911) for
broadband and packet communications in September 2005.
We began adding an additional 48 CLEC customers and cities to our Voice
One direct network footprint. This expansion is anticipated to be completed in
November 2005.
We closed our acquisition of the assets of WQN, Inc.'s VoIP business on
October 5, 2005.
During October 2005 we interconnected our Voice One network with Stealth
Communications' Voice Peering FabricTM (VPF), the world's largest peering
network. VPF allows members to exchange VoIP traffic without relying on the
traditional Public Switched Telephone Network. VPF members now have the ability
to exchange traffic directly with our network and access the services we offer,
including our v911 services.
MANAGEMENT
Directors, Executive Officers and Control Persons
The following table contains information concerning the Company's
executive officers and directors.
Start Date
Name Age Position with Company with Company
---------------- --- ------------------------------------- -------------
Steven Ivester 41 Chairman, Chief Executive Officer March 2004
Osvaldo Pitters 47 Chief Financial Officer May 2004
Bill Burbank 47 Chief Operating Officer December 2004
Shawn Lewis 38 Chief Technology Officer May 2005
Clive Raines 46 Chief Marketing Officer March 2004
B. Michael Adler 58 Prospective Director October 2005
Stuart Kosh 49 Prospective Director December 2005
George Firestone 73 Director October 2005
Thomas Reeves* 57 Prospective Director October 2005
---------------
* Anticipated.
35
Steven Ivester - Chairman & Chief Executive Officer
Mr. Ivester has been a successful technology inventor and entrepreneur
since 1982. In 1985 he established a chain of automotive service centers, All
State Auto Centers (Founder & President) and sold the business in 1991. He
subsequently established, expanded and sold a chain of computer stores known as
21st Century Computers. In 1997, Mr. Ivester became President and CEO of
Navigator, PC, which invented a series of rugged waterproof military grade
navigational computer and display systems. From 2001 to 2004, he consulted for
Voice over IP companies and was responsible for the specification and
development of IP desktop telephone devices, Multimedia Terminal Adaptors, and
portable WiFi phones in addition to sourcing, negotiation and quality assurance.
In early 2004, Mr. Ivester founded VoIP, Inc.
Osvaldo Pitters - Chief Financial Officer
Osvaldo has a successful track record and progressive working experience
managing finance, administration, accounting and auditing functions in the US,
England, UK and Latin America. Osvaldo worked 10 years with
PriceWaterhouseCoopers in the Audit Department in Latin America and in England,
UK. Osvaldo also worked 7 years with Pepsi Cola International in the Finance
Area in several countries within the Latin American region. He also worked for
two years as Deputy General Manager of Banco Republica in Lima, Peru. Before
joining us, from January 2003 to April 2004, Osvaldo was the Controller of the
Cima Telecom Group in Miami, Florida. Osvaldo is a 1983 graduate of the Santiago
University, Chile and a 1985 post graduate of the Cambridge University, UK.
Bill Burbank - Chief Operating Officer
Bill Burbank brings over 25 years of success in Business Development and
Operations to our company. Bill has extensive experience in working with both
private and public emerging technology development companies. He was co-founder
of Incite Global Services, a consulting firm specializing in Business
Development, Operations and Crisis Management for emerging companies in the high
tech communications sector. Prior to IGS, he was the Senior Vice President of
Sales and Chief Marketing Officer for Intraco Systems, Inc., a provider of
virtual office solutions and applied speech recognition applications. Bill was
co-founder and President of Foresight Technology. At Foresight, he played an
instrumental role in fostering Foresight's leadership in computer telephone
integration (CTI) and customer premise-based speech recognition products. Prior
to Foresight, Burbank served as Vice President of Worldwide Sales and Marketing
for Registry Magic Inc., where he led the sales of the company's speech
recognition call routing system. As Vice President of Sales for The Automatic
Answer Inc., a voice and unified messaging software company.
Shawn M. Lewis - Chief Technology Officer
Shawn M. Lewis oversees all of our Technological and Engineering
activities. Prior to accepting our CTO position, Mr. Lewis was President and CEO
of Caerus, Inc. and its three subsidiaries, Volo Communications, Caerus
Networks, Inc., and Caerus Billing & Mediation, Inc. Shawn Lewis wrote the
patent for the first Softswitch and SS7 Media Gateway for XCOM Technologies,
Inc., a CLEC he co-founded at the time of the Telecommunications Act in 1996 and
directed before its acquisition by Level 3 in 1998. Level 3 proceeded to make
these patents public, which created the packet communications industry. His next
venture, set-top box vendor, River Delta, sold to Motorola. His third successful
venture, Caerus, Inc. empowers carriers and service providers to begin selling
advanced services and realizing revenues and profits immediately.
Clive Raines - Chief Marketing Officer
Clive is a VoIP industry pioneer holding senior management positions with
several United States based VoIP start ups prior to co-founding VoIP Inc. Born
in England and a resident of New Zealand, his professional qualifications are
complemented by extensive international marketing and business development
experience in the Telco, computer and wireless industries. His experience has
assisted the Company in the development of unique market driven products,
solutions and services. Clive's industry experience commenced when he
established the first private telephone, PBX and Interconnect businesses to
compete with the incumbent PTT when New Zealand deregulated in 1987. After
selling these businesses in 1993, Clive progressed to the Computer Telephony
Integration and Call Center industries as they emerged and later became involved
with Internet related businesses as the first VoIP calls were being made. In
1997 he relocated to Sydney, Australia to help found the first Internet start up
to be listed on the Australian stock exchange. He was later recruited by a VoIP
equipment vendor based in California to develop business and marketing plans for
a new VoIP Telco. During this period he traveled to Sarajevo to establish
satellite based payphones for multinational troops to be able to call home and
developed other value added services for global markets. During the period 1998
- 2002 Clive developed marketing plans and an international business model for
USA Talks, the first company to offer VoIP based unlimited calling with the
United States for a flat monthly charge. He relocated to London and served from
1998 to 2002 as European CEO and opened a UK office offering the same services
to UK consumers. He has also traveled extensively establishing wholesale carrier
services with direct routes to developing countries in Africa, the Middle East
and Asia utilizing VoIP. In 2003, Clive was instrumental in launching Voiceglo,
a VoIP Telco service providing home line replacement services based on the newly
available SIP technology.
36
B. Michael Adler - Prospective Director
B. Michael Adler is the founder of WQN, Inc. and has been its Chairman of
the Board since its inception in 1996. Mr. Adler is the Chief Executive Officer
of Eagle Venture Capital, LLC, a Delaware limited liability company, formerly
known as WorldQuest Networks, LLC, and a Director of Intellicall, Inc., a
publicly traded manufacturer of pay phones and call processing equipment
(American Stock Exchange symbol "ICL"). Mr. Adler founded Intellical in 1984 and
served as Chairman or Vice Chairman of the Board from its inception until
November 1993. From 1994 to July 1999, Mr. Adler was the Chairman of the Board
of The Payphone Company Limited, a company that owns a wireless pay telephone
network in Sri Lanka.
Stuart Kosh - Prospective Director
Mr. Kosh moved to Florida in 1978 to join his father and brother at Kosh
Ophthalmic, Inc., a wholesale optical laboratory with annual sales of $15
million, where he managed 100 employees. In 1998, the company was sold to
Essilor of America and Mr. Kosh maintains his position as General Manager. His
leadership roles have included involvement with the Big Brothers Big Sisters
Program of Broward County as a mentor to needy youth. For the past 15 years, Mr.
Kosh has been involved with the National Multiple Sclerosis Society. He has
served on their board and chairs their annual golf tournament which raises over
$50,000. Presently he is serving on the Temple Dor Dorim Board of Directors.
George Firestone - Director
Senator Firestone was elected Florida's 20th Secretary of State of Florida
in 1978, and was re-elected for two additional terms. Previously, he served as a
member of the House of Representatives and as a member of the Florida Senate.
During his legislative tenure, he was responsible for the passage of laws
permitting international banking and foreign trade zones. This provided the
groundwork for Florida becoming a major center for international business and
finance. He has led trade missions and traveled extensively throughout Europe,
Asia, Africa and South America and has visited 41 countries. Senator Firestone
currently serves as the state of Florida's "Special Envoy" to the Foreign
Consular Corp of Florida. He has a long history of valued legislative service,
including serving as a member of the Florida Cabinet, the state's Chief
Elections Officer, and Chief Cultural Officer. A distinguished military career,
Senator Firestone served in the U.S. Army as Sergeant First Class and graduated
in the top 25 percent of his class at the Non-commissioned Officer Academy in
Munich, Germany. In the private sector, Senator Firestone is Chairman and CEO of
Tecton, Inc., a financial and operations Management Company. He is a licensed
real estate broker and developer, and insurance broker specializing in the field
of estate planning and business insurance for individuals and corporations.
Senator Firestone is a vice president, general manager, and stockholder of
Gray Security Service, which provides security investigations of commercial and
industrial matters. He serves on the board of Eastern National Bank of Miami.
His long public service support includes serving as chairman of the city of
Miami Economic Advisory Board; member of the Dade County Personnel Advisory
Board; and receiver and trustee of the U.S. Bankruptcy Court. Accolades and
awards abound throughout Senator Firestone's career, including the Florida
Democratic Party Award for Outstanding Service and Leadership, and the Florida
Times Union Award for Most Outstanding First Term Senator. A lecturer and
published author, Senator Firestone works with the National Conference of State
Legislators and the Citizens Conference on State Legislators, and he writes
articles on various issues of interest to senior citizens and condominium
owners.
Thomas Reeves - Prospective Director
Mr. Reeves graduated from Cal State University with a BS in Business
Administration and also holds an AA degree from Chabot College. Mr. Reeves has a
broad professional career that began with Shaklee Corporation as Contract
Manufacturing Manager and was later promoted to Director of Purchasing. In 1980
he accepted a Vice President position with Nutrition Pak Corporation. From 1984
to 1992 Mr. Reeves was President of Torick Inc. an electrical wire harness
manufacturer. In 1992 he started Transportation Safety Technologies where he was
President and CEO. From 2000 to present he has been President of TRJB Inc. a
holding company for various companies in the hospitality industry. In addition,
Mr. Reeves has been actively involved in supporting the American Cancer Society
and is a committee member of the Cystic Fibrosis Foundation.
Organization of the Board of Directors and Management
From February 2004 until September 2005, Mr. Ivester served as the sole
member of the Board of Directors. In September 2005, the Company was proud to
announce the addition of Senator George Firestone to a seat on the Board. The
Company intends to effect a reorganization of management during the coming
weeks, as follows: On October 17, 2005, B. Michael Adler will replace Steven
Ivester as CEO. Ten days after filing an Information Statement pursuant to SEC
Rule 14f, Mr. Ivester will resign as a director and Mr. Adler will be appointed
to fill his vacancy. At the same time, an additional seat on the Board will be
created, and Thomas Reeves will be appointed to fill the seat. At the Company's
next annual shareholders meeting, anticipated to occur in November or December
2005, the entire Board will be reelected, along with Stuart Kosh and possibly
one other director. Mr. Ivester will remain associated with the Company as a
Consultant and observer on the Board.
At the meeting of the Board of Directors following the shareholders
meeting, the Board will be organized to create an Audit Committee and
Compensation Committee, and will adopt a Code of Conduct and charters for the
Audit and Compensation Committees.
37
Executive Compensation
Summary Compensation Table. The following table sets forth the
compensation earned by the Company's Chief Executive Officer for the year ended
December 31, 2004 in salary and bonus for services rendered in all capacities to
the Company for the fiscal years ended December 31, 2004, 2003 and 2002:
Annual Compensation Long-Term Compensation
------------------------------- -------------------------
Securities
Underlying
Other Annual Options or All Other
Name/Principal Position Year Salary Bonus Compensation Warrants Compensation
----------------------- ---- -------- ----- ------------ ---------- ------------
Steven Ivester, CEO 2004 $125,000 $ 0 $ 0 0 0
2003 0 0 0 0 0
2002 0 0 0 0 0
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal at Fiscal
Year End Year End
--------------------------- ---------------------------
Number of Shares
Name Acquired or Exercised Realized Value Exercisable Unexercisable Exercisable Unexercisable
---- --------------------- -------------- ----------- ------------- ----------- -------------
None
Estimated Future Payments under
Non-Stock Price-Based Plans
-------------------------------
Number of Performance or Other
Shares, Under or Period Until Threshold Target Maximum
Name Other Rights # Maturation or Payout ($ or #) ($ or #) ($ or #)
---- ---------------- -------------------- --------- -------- --------
None
Stock Option Plan
The Company's Stock Option Plan (the "2004 Option Plan") provides for the
grant to eligible employees and directors of options for the purchase of Common
Stock. The Option Plan covers, in the aggregate, a maximum of 4,000,000 shares
of Common Stock and provides for the granting of both incentive stock options
(as defined in Section 422 of the Internal Revenue Code of 1986) and
nonqualified stock options (options which do not meet the requirements of
Section 422). Under the Option Plan, the exercise price may not be less than the
fair market value of the Common Stock on the date of the grant of the option.
The Board of Directors administers and interprets the Option Plan and is
authorized to grant options there under to all eligible employees of the
Company, including officers. The Board of Directors designates the optionees,
the number of shares subject to the options and the terms and conditions of each
option. Each option granted under the Option Plan must be exercised, if at all,
during a period established in the grant which may not exceed 10 years from the
later of the date of grant or the date first exercisable. An optionee may not
transfer or assign any option granted and may not exercise any options after a
specified period subsequent to the termination of the optionee's employment with
the Company.
Certain Relationships and Related Transactions
The Company was organized by Kevin Halter and members of his family in
1998, when they purchased 1,000,000 shares at its par value. Then in March 2004,
the Company sold 12,500,000 shares of stock to Steven Ivester for par value
($12,500), plus his agreement to contribute two operating companies. Such
companies were contributed in May 2004, effective April 15, 2004.
As of December 31, 2003, the Company had amounts due to affiliated
entities and/or shareholders and/or officers of approximately $151,000. These
advances were unsecured, due upon demand and are non-interest bearing.
Subsequently, in April 2004, the Company issued 339,242 shares of common stock
to satisfy the balance due at December 31, 2003.
38
Promoters
On February 27, 2004, the Company issued and sold 12,500,000 shares of
common stock to Steven Ivester in exchange for cash of $12,500 and his agreement
to contribute the intellectual property rights and related assets of two
start-up companies formed to engage in the telecommunications industry. The
shares issued represented approximately 88% of the shares outstanding after the
exchange, as a result of which Mr. Ivester became the controlling shareholder of
the Company.
On May 25, 2004 (but effective for all purposes as of April 15, 2004), the
Company completed the acquisition of two Florida-based subsidiaries,
eGlobalphone, Inc. and VoIP Solutions, Inc., both Florida Corporations.
On August 4, 2004, the Company issued warrants to purchase 2,200,000
shares of common stock for an exercise price of $1.00 per share to each of John
Todd and Clive Raines. Mr. Todd's warrants were exchanged for 750,000 shares in
a net cashless exercise in February 2005.
Messrs. Ivester, Todd and Raines may be considered to be "promoters" of
the Company.
DESCRIPTION OF SECURITIES
General
The following summary is qualified in its entirety by reference to the
Company's Articles of Incorporation and its By-Laws. The Company's authorized
capital stock consists of 100,000,000 shares of common stock, $.001 par value
per share.
Common Stock
As of September 30, 2005, 56,588,004 common shares of the Company's common
stock are held of record by approximately 326 persons. Each share of common
stock entitles the holder of record thereof to cast one vote on all matters
acted upon at the Company's shareholder meetings. Directors are elected by a
plurality vote. Because holders of common stock do not have the cumulative
voting rights, holders or a single holder of more than 50% of the outstanding
shares of common stock present and voting at an annual meeting at which a quorum
is present can elect all of the Company's directors. Holders of common stock
have no preemptive rights and have no right to convert their common stock into
any other securities. All of the outstanding shares of common stock are fully
paid and non-assessable.
Holders of common stock are entitled to receive ratably such dividends, if
any as may be declared from time to time by the Board of Directors in its sole
discretion from funds legally available therefore. In the event the Company is
liquidated, dissolved or wound up, holders of common stock are entitled to share
ratably in the assets remaining after liabilities and all accrued and unpaid
cash dividends are paid.
Transfer Agent
The Company's transfer agent is Securities Transfer Corporation, Frisco,
Texas.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our Common Stock as of October 9, 2005, before this
offering and as adjusted to reflect the sale of 15,372,245 shares in this
offering, by all officers and directors and by all those known by us to be
beneficial owners of more than 5% of our Common Stock.
Unless otherwise specified, the business address of the shareholder is our
address as set forth in this memorandum. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally means sole or shared power to vote or direct the voting or to dispose
or direct the disposition of any Common Stock. Except as indicated by footnote,
and subject to community property laws where applicable, the persons named in
the table below have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them.
39
Beneficial
Beneficial Ownership
Ownership(1) After
Before Offering Offering
----------------------- ----------
Beneficial Owner Shares Percentage Shares
----------------------------------------------------- ---------- ---------- ----------
Steven Ivester ...................................... 8,250,000 14.6% 8,250,000
Shawn Lewis ......................................... 5,346,231 9.4% 5,346,231
Clive Raines ........................................ 1,000,000 1.8% 1,000,000
Bill Burbank ........................................ 1,000,000 1.8% 1,000,000
Osvaldo Pitters ..................................... 500,000 0.8% 500,000
Thomas Reeves ....................................... 318,961 0.5% 318,961
Stuart Kosh ......................................... 778,227 1.3% 778,227
Michael Adler ....................................... 0 0% 0
George Firestone .................................... 0 0% 0
LEGAL MATTERS
Legal matters in connection with the common stock being offered hereby
will be passed upon for the Company and selling shareholders or by Andrews Kurth
LLP, Dallas, Texas.
EXPERTS
Our financial statements as of December 31, 2004, in this Prospectus, have
been audited by the firm of Berkovits, Lago & Company, LLP , independent
registered certified public accountants, as set forth in their report herein
included, and have been so included in reliance upon such report being given
upon their authority as experts in accounting and auditing. Our financial
statements and the financial statements for our subsidiary, Caerus, Inc. as of
December 31, 2003, in this Prospectus have been audited by the firm of Tschopp,
Whitcomb & Orr, P.A. and Moore Stephens Lovace, P.A., respectively, independent
registered certified public accountants, as set forth in their report herein
included, and have been so included in reliance upon such report being given
upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2, together with all
amendments, schedules and exhibits thereto, pursuant to the Securities Act with
respect to the securities offered by this prospectus. This prospectus does not
contain all information set forth in the registration statement and the
exhibits. The statements contained in this prospectus as to the contents of any
contract or other document identified as exhibits in this prospectus are
materially complete, but in each instance, reference is made to a copy of such
contract or document filed as an exhibit to the Registration Statement. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement and exhibits which may
be inspected without charge at the Commission's principal office 100 F Street,
NW, Washington, D. C. 20549.
We are subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith will
file reports, proxy statements and other information with the Commission Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities of the Commission at 100 First Street, NE,
Washington, D. C. 20549. Copies of such material may also be obtained from the
Public Reference Section of the Commission at prescribed rates. Our Registration
Statement on Form SB-2, as well as any reports to be filed under the Exchange
Act can also be obtained electronically after we have filed such documents with
the Commission through a variety of databases, including among others, the
Commission's Electronic Data Gathering, Analysis and Retrieval ("EDGAR")
program, Knight-Ridder Information, Inc., Federal Filings/Dow Jones and
Lexis/Nexis. Additionally, the Commission maintains a Website (http://www
sec.gov) that contains such information regarding the Company.
We intend to furnish our shareholders with annual reports containing
audited financial statements and such other reports as we deem appropriate or as
may be required by law.
Requests for information may be directed to Steven Ivester, CEO, c/o the
Company at 12330 S.W. 53rd Street, Suite 712, Fort Lauderdale, Florida 33330,
telephone (954) 434-2000.
40
INDEX TO FINANCIAL STATEMENTS
VoIP, Inc. Financial Statements Page
--------------------------------------------------------------------------------- -----
Reports of Independent Certified Public Accountants F-1-2
Consolidated Balance Sheets December 31, 2004 and 2003 F-3
Consolidated Statements of Operations for Years Ended December 31, 2004 and 2003 F-4
Consolidated Statement of Changes in Shareholders Equity for years Ended
December 31, 2004 and 2003 F-5
Consolidated Statements of Cash Flow for Years Ended December 31, 2004 and 2003 F-6
Notes to Consolidated Financial Statements for Year Ended December 31, 2004 F-7
Report of Independent Certified Public Accountants F-16
Consolidated Balance Sheets for June 30, 2005 and December 31, 2004 F-17
Consolidated Statements of Operations for Six Months Ended June 30, 2005 and 2004
And Three Months Ended June 30, 2005 and 2004 F-18
Consolidated Statements of Cash Flows for Six Months Ended June 30, 2005 and 2004 F-19
Notes to Financial Statements for Six Months Ended June 30, 2005 and 2004 F-20
Proformas Page
--------------------------------------------------------------------------------- -----
Proforma Condensed Combined Statement of Operations for Three Months Ended
June 30, 2005 - Unaudited F-27
Proforma Condensed Combined Statement of Operations for Six Months
Ended June 30, 2005 - Unaudited F-28
Proforma Condensed Combined Statement of Operations for Year Ended
December 31, 2004 - Unaudited F-29
Proforma Condensed Combined Statement of Operations for Three Months Ended
June 30, 2004 - Unaudited F-30
Proforma Condensed Combined Statement of Operations for Six Months Ended
June 30, 2004 - Unaudited F-31
Notes to Unaudited Pro Forma Condensed Combined Financial Statements F-32
Caerus, Inc. Financial Statements Page
--------------------------------------------------------------------------------- -----
Report of Independent Certified Public Accountants F-33
Consolidated Balance Sheets December 31, 2004 and 2003 F-34
Consolidated Statements of Operations for Years Ended December 31, 2004 and
The Period May 15, 2002 through December 31, 2003 F-35
Consolidated Statement of Changes in Shareholders Equity for years Ended
December 31, 2004 and the Period May 15, 2002 through December 31, 2003 F-36
Consolidated Statements of Cash Flow for Years Ended December 31, 2004 and
The Period May 15, 2002 through December 31, 2003 F-37
Notes to Consolidated Financial Statements for Year Ended December 31, 2004 and
The Period May 15, 2002 through December 31, 2003 F-38
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------------------------------
Board of Directors
VoIP, Inc. and Subsidiaries
Fort Lauderdale, Florida
We have audited the accompanying consolidated balance sheet of VoIP, Inc. and
Subsidiaries ("the Company") as of December 31, 2004, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year ended December 31, 2004. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company has determined that it
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we do not express such an opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above presents
fairly, in all material respects, the consolidated financial position of VoIP,
Inc. and its subsidiaries, as of December 31, 2004, and the results of
operations and cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ Berkovits, Lago & Company, LLP
Fort Lauderdale, Florida
March 16, 2005
F-1
TSCHOPP, WHITCOMB & ORR, P.A.
2600 Maitland Center Parkway, Suite 330
Maitland, Florida 32751
Report of Independent Certified Public Accountants
Board of Directors and Stockholder
Millennia Tea Masters, Inc.
We have audited the accompanying balance sheet of Millenia Tea Masters, Inc. as
of December 31, 2003 and the related statements of operations, changes in
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Millennia Tea Masters, Inc. as
of December 31, 2003, and the results of its operations and its cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has experienced limited
sales and incurred cumulative operating losses since its inception through
December 31, 2003. The Company has been dependent upon the proceeds from the
sales of common stock and advances from related parties to provide working
capital. This situation raises a substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Tschopp, Whitcomb & Orr, P.A.
---------------------------------
January 30, 2004
Maitland, Florida
F-2
VoIP Inc.
Consolidated Balance Sheets
December 31, 2004 and 2003
Dec. 31, 2004 Dec. 31, 2003
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,141,205 $ --
Accounts receivable, net of allowance of $136,795 818,071 --
Due from related parties 245,402 --
Inventory 187,451 --
Assets from discontinued operations 412,419 259,459
Other current assets 43,702 --
------------- -------------
Total Current Assets 2,848,250 259,459
------------- -------------
Property and equipment, net 419,868 --
Intangibles 6,923,854 --
Other assets 23,580 --
------------- -------------
TOTAL ASSETS $ 10,215,552 $ 259,459
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,224,974 $ --
Bank loans and note payable 760,000 --
Liabilities from discontinued operations -- 151,167
Other current liabilities 123,140 --
------------- -------------
Total Liabilities 2,108,114 151,167
------------- -------------
Shareholders' equity:
Common stock - $0.001 par value
100,000,000 shares authorized
24,258,982 and 1,730,939 issued
and outstanding, respectively 24,259 1,731
Additional paid-in capital 12,722,565 731,208
Accumulated deficit (4,639,386) (624,647)
------------- -------------
Total shareholders' equity 8,107,438 108,292
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,215,552 $ 259,459
============= =============
The accompanying notes are an integral part of these financial statements.
F-3
VoIP Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2004 and 2003
Year ended Year ended
December 31, 2004 December 31, 2003
----------------- -----------------
Revenues $ 2,619,393 $ --
Cost of Sales 1,870,269 --
----------------- -----------------
Gross Profit 749,124 --
Operating expenses
Compensation and related expenses 2,721,296 --
General and administrative expenses 2,187,878 --
----------------- -----------------
Loss from operations (4,160,050) --
Provision for income taxes -- --
----------------- -----------------
Net loss before discontinued operations (4,160,050) --
Income (Loss) from discontinued operations 145,311 (352,968)
----------------- -----------------
Net Loss (4,014,739) (352,968)
================= =================
Basic and diluted loss per share:
Loss before discontinued operations $ (0.28) $ --
Income from discontinued operations net of income taxes $ 0.01 $ (0.20)
----------------- -----------------
Total $ (0.27) $ (0.20)
================= =================
Weighted average number of shares outstanding 14,597,312 1,730,939
================= =================
The accompanying notes are an integral part of these financial statements.
F-4
VoIP, Inc.
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 2004 and 2003
Common Stock Common Stock Additional Accumulated
Shares Amount Paid-in Capital Deficit Total
------------ ------------ --------------- ----------- -----------
Balance as of December 31, 2002 1,730,939 $ 1,731 $ 731,208 $ (271,679) $ 461,260
Loss for the for the year -- -- -- (352,968) (352,968)
------------ ------------ --------------- ----------- -----------
Balance as of December 31, 2003 1,730,939 1,731 731,208 (624,647) 108,292
------------ ------------ --------------- ----------- -----------
Common stock issued 12,500,000 12,500 -- -- 12,500
Common Stock issued for services received 568,235 568 342,432 -- 343,000
Common stock issued to investors for cash received 5,520,566 5,521 3,610,598 -- 3,616,119
Common stock issued for services 339,242 339 150,827 -- 151,166
Common Stock issued for acquisition of DTNet Tech 2,500,000 2,500 4,747,500 -- 4,750,000
Common Stock issued for acquisition of VoipAmericas 1,000,000 1,000 1,099,000 -- 1,100,000
Warrants issued to two company officers -- -- 1,936,000 -- 1,936,000
Warrants issued for intellectual property 100,000 100 105,000 -- 105,100
Loss for the year -- -- -- (4,014,739) (4,014,739)
------------ ------------ --------------- ----------- -----------
Balance December 31, 2004 24,258,982 $ 24,259 $ 12,722,565 $(4,639,386) $ 8,107,438
============ ============ =============== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
VoIP Inc.
Consolidated Statements of Cash Flows
Years ended December 31, 2004 and 2003
Year ended Year ended
December 31, 2004 December 31, 2003
----------------- -----------------
Cash flows from operating activities:
Continuing operations:
Net loss $ (4,160,050) $ --
Adjustments to reconcile net loss to net
cash used in operating activities -- --
Depreciation 82,832 --
Provision for bad debt 136,795 --
Common shares issued for services 494,166 --
Warrants issued to employees 1,936,000 --
Shares issued for intellectual property 105,000 --
Changes in operating assets and liabilities net of
assets and liabilities acquired:
Accounts receivable (555,007) --
Due from related parties (245,402) --
Inventory 144,913 --
Other current assets 8,531 --
Accounts payable (296,305) --
Other current liabilities (315,587) --
----------------- -----------------
Net cash used in continuing operating activities (2,664,114) --
----------------- -----------------
Discontinued operations:
Income (loss) from discontinued operations 145,311 (352,968)
Changes in assets, liabilities, and net results (408,000) 274,262
----------------- -----------------
Net cash used in discontinued operating activities (262,689) (78,706)
----------------- -----------------
Net used in operating activities (2,926,803) (78,706)
----------------- -----------------
Cash flows from investing activities Continuing operations:
Cash from acquisitions 104,872 --
Purchase of property and equipment (157,881) --
Cash for intellectual property (50,000) --
Purchase of other assets (21,100) --
----------------- -----------------
Net cash used in continuing investing activities (124,109) --
----------------- -----------------
Discontinued operations:
Cash from affiliates -- 82,196
----------------- -----------------
Net cash provided by discontinued investing activities -- 82,196
----------------- -----------------
Net cash provided by (used in) investing activities (124,109) 82,196
----------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of notes payable 560,000 --
Proceeds from sales of common stock 3,628,618 --
----------------- -----------------
Net cash provided by investing activities 4,188,618 --
Net increase in cash 1,137,706 3,490
Cash at beginning of year 3,499 9
----------------- -----------------
Cash at end of year $ 1,141,205 $ 3,499
================= =================
Non-cash investing and financing activities:
Common stock issued for services $ 494,166 $ --
================= =================
Warrants issued to employees $ 1,936,000 $ --
================= =================
Shares issued for intellectual property $ 105,000 $ --
================= =================
The accompanying notes are an integral part of these financial statements.
F-6
VoIP, Inc.
Notes to Financial Statements
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
The Company was incorporated on August 3, 1998 under its original name of
Millennia Tea Masters, Inc. under the laws of the State of Texas. The Company
began operations in October 1998 with its initial order of imported teas from
Sri Lanka. On February 27, 2004 the Company entered into a stock purchase
agreement that provided for the sale of 12,500,000 shares of its common stock in
exchange for $12,500 and a commitment by the purchaser to contribute the assets
of two start-up companies in the telecommunications business, eGlobalphone, Inc.
and VOIP Solutions, Inc. into the Company.
On April 13, 2004 the Company changed its name to VoIP, Inc. and began to
develop and manufacture innovative IP telephony customer premise equipment,
provide premium voice over the internet subscriber based telephony services and
state of the art long range WiFi technology solutions, for residential and
enterprise customers, including multimedia applications.
During December 2004 the Company decided to exit the tea import business in
order to focus its efforts and resources in the "Voice over Internet Protocol"
(VoIP) telecommunications industry. In connection with the decision the Company
sold its imported tea inventory and began to wind down its tea import
operations. The assets, liabilities, and results of operations of the imported
tea business have been classified as discontinued operations on the accompanying
consolidated financial statements.
The Company offers quality Voice over IP (VoIP) based solutions offering
residential and business customers more user friendly and affordable ways to
communicate. VoIP, Inc. also manufactures products and provides services to
Internet Service Providers, Telecommunication Service Providers and Cable
Operators in strategic countries around the world. VoIP, Inc., through its
subsidiaries, provides a comprehensive portfolio of IP multimedia-based
solutions ranging from subscriber based voice services, to SIP based
infrastructure design and deployment, to broadband customer premise equipment
design and implementation services, as well as engineering design, manufacturing
and distribution of wireless broadband technology.
The Company's operations consist of one segment.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, eGlobalphone, Inc., VoIP Solutions, Inc., DTNet
Technologies, Inc., and VoIP Americas, Inc. from their respective dates of
acquisition. All significant inter-company balances and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities; disclosure of contingent
assets and liabilities at the date of the financial statements; and the reported
amounts of revenues and expenses. Actual results could differ from those
estimates.
Cash and cash equivalents
For purposes of reporting cash flows, the Company considers all cash on hand, in
banks, including amounts in book overdraft positions, certificates of deposit
and other highly liquid debt instruments with a maturity of three months or less
at the date of purchase to be cash and cash equivalents. Cash overdraft
positions may occur from time to time due to the timing of making bank deposits
and releasing checks, in accordance with the Company's cash management policies.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from
outstanding balances. Management provides for probable uncollectible amounts
using the reserve method based on its assessment of the current status of the
individual receivables and after using reasonable collection efforts. As of
December 31, 2004 the balance of the allowance for uncollectible accounts
amounted to $136,795. There was no allowance as of December 31, 2003.
F-7
Inventory
Inventory consists of finished goods and is valued at the lower of cost or
market using the first-in, first-out method.
Advertising expenses
Advertising and marketing expenses are charged to operations as incurred.
Income Taxes
The Company and its subsidiaries file consolidated federal and state income tax
returns. The Company has adopted Statement of Financial Accounting Standards No.
109 in the accompanying consolidated financial statements. The only temporary
differences included therein are attributable to differing methods of reflecting
depreciation for financial statement and income tax purposes.
Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing the net income (loss)
for the year by the weighted-average number of shares of common stock
outstanding. The calculation of fully diluted earnings (loss) per share assumes
the dilutive effect of the exercise of outstanding options and warrants at
either the beginning of the respective period presented or the date of issuance,
whichever is later. Common stock equivalents represent the dilutive effect of
the assumed exercise of the outstanding stock options and warrants, using the
treasury stock method.
Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and notes
payable, as applicable, approximates fair value due to the short term nature of
these items and/or the current interest rates payable in relation to current
market conditions.
Revenue Recognition
Revenue from product sales is recognized when persuasive evidence of an
arrangement exists, delivery to customer has occurred, the sales price is fixed
and determinable, and collectibility of the related receivable is probable. The
recognition of revenues from Internet telephony services are deferred for new
subscribers of eGlobalphone and Voipsolutions until it deems that the customer
has accepted the service. Subsequent revenues are recognized at the beginning of
each customer's month.
Property, plant, and equipment
Property, plant, and equipment are stated at cost. Depreciation is provided over
the estimated useful lives of the related assets using the straight line method.
The useful life of assets ranges from three to five years. The leasehold
improvements are amortized over the life of the related lease.
Business combinations
The Company accounts for business combinations in accordance with Statement of
Financial Accounting Standard No. 141 Business Combinations ("SFAS No. 141").
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations. SFAS No. 141 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually by comparing carrying value to the respective fair
value in accordance with the provisions of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). This
pronouncement also requires that the intangible assets with estimated useful
lives be amortized over their respective estimated useful lives.
F-8
Impairment of long-lived assets
VoIP, Inc. reviews the recoverability of its long-lived assets, such as plant,
equipment and intangibles when events or changes in circumstances occur that
indicate that the carrying value of the asset group may not be recoverable. The
assessment of possible impairment is based on the Company's ability to recover
the carrying value of the asset or asset group from the expected future pre-tax
cash flows (undiscounted and without interest charges) of the related
operations. If these cash flows are less than the carrying value of such asset,
an impairment loss is recognized for the difference between estimated fair value
and carrying value. The measurement of impairment requires management to
estimate future cash flows and the fair value of long-lived assets.
Recent accounting pronouncements
In November 2004, FASB issued Statement No. 151, "Inventory Costs - an amendment
of ARB No. 43, Chapter 4." Statement No. 151 requires that abnormal amounts of
costs, including idle facility expense, freight, handling costs and spoilage,
should be recognized as current period charges. The provisions of this Statement
are effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. The Company does not expect the adoption of this Statement to
have a material impact on its financial statements.
In December 2004, FASB issued Statement No. 153, "Exchanges of Nonmonetary
Assets - an amendment of Accounting Principles Board ("APB") Opinion No. 29."
Statement No. 153 amends APB Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have a
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of this Statement are effective for nonmonetary
exchanges occurring in fiscal periods beginning after June 15, 2005. The Company
does not expect the adoption of this Statement to have a material impact on its
financial statements.
In December 2004, FASB issued Statement No. 123R, "Share-Based Payment."
Statement No. 123R revises Statement No. 123, supersedes APB Opinion No. 25 and
amends Statement No. 95. Statement No. 123R requires the cost of employee
services received in exchange for an award of equity instruments be recognized
over the period during which an employee is required to provide service in
exchange for the award. The provisions of this Statement are effective for
public entities that do not file as small business issuers as of the beginning
of the first interim period or annual reporting period that begins after June
15, 2005. The Company does not expect the adoption of this Statement to have a
material impact on its financial statements.
Stock Based Compensation
The Company applies the fair value method of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS No. 123") in
accounting for its stock options. This standard states that compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. The fair value for
each option granted is estimated on the date of the grant using the
Black-Scholes option pricing model. The fair value of all vested options granted
has been charged to salaries, wages, and benefits in accordance with SFAS No.
123.
NOTE C - PROPERTY AND EQUIPMENT, NET
As of December 31, 2004 property and equipment consists of the following:
Office Equipment $ 519,810
Furniture & Fixtures 56,748
Vehicles 4,769
Leasehold Improvements 4,562
---------
Total 585,889
Less accumulated depreciation (166,021)
---------
Total $ 419,868
=========
Depreciation expense for 2004 amounted to $82,832. There was no depreciation
expense for 2003.
F-9
NOTE D - INTANGIBLES
As of December 31, 2004 intangibles consist of the following:
Goodwill-acquisition of DTNet Technologies, Inc. $5,210,553
Goodwill-acquisition of Voipamericas, Inc. 1,408,301
Intellectual property 305,000
----------
Total $6,923,854
==========
The goodwill on the acquisition of DTNet Technologies, Inc. (DTNet) represents
the fair market value of DTNet liabilities as of the date of the acquisition
plus $4,750,000 which represents the market value of 2,500,000 shares of Company
stock issued pursuant to its acquisition.
The goodwill on the acquisition of Voipamericas represents the fair market value
of Voipamericas liabilities as of the date of the acquisition plus $1,100,000
which represents the market value of 1,000,000 shares of the Company's stock
pursuant to this acquisition.
Intellectual property is carried at cost which is comprised of $50,000 paid in
cash in 2004, $150,000 due in the first quarter of 2005, and the value assigned
to 100,000 Company common shares and 400,000 warrants issued pursuant to this
transaction. The valuation of the shares was $1.05 while the value was $105,000.
The value of the warrants was determined using the Black-Scholes model
calculated as of October 14, 2004. As these warrants were not "in the money",
these warrants have been assigned a value of zero. This model uses the
annualized deviation calculation and utilizes industry averages as a comparison
for adequate statistical results in the valuation. This is a standard financial
model that considers the statistical annual volatility of the market changes in
a stock price. (See Note H)
Intellectual property consists of the following:
a) all rights of the Company of Record in the telephone numbers 1(800)TALKTIME,
1(888)TALKTIME, AND 1(877)TALKTIME.COM
b) all rights to the URL's (domain names) 800TALKTIME.COM, 1800TALKTIME.COM, and
1-800-TALKTIME.COM
c) all rights to U.S. Trademark Registration No. 2,209,316 directed to the mark
1-800-TALKTIME and the goodwill associated therewith.
NOTE E - ACCOUNTS PAYABLES AND ACCRUED EXPENSES
As of December 31, 2004 Accounts Payables and accrued expenses consist of the
following:
Account Payables Trade $ 988,815
Accrued Expenses 233,711
Other 2,448
----------
Total $1,224,974
==========
NOTE F - BANK LOANS AND NOTE PAYABLE
As of December 31, 2004 bank loans and note payable consists of the following:
Bank Loan:
Revolving Line of Credit $187,000
Promissory Note 13,000
--------
Sub-total 200,000
Note Payable 560,000
--------
Total $760,000
========
a) The revolving line of credit with the Bank of Tampa is interest only
payable at prime plus 1.0% monthly. The promissory note is payable
in monthly installments of approximately $6,200 including interest
at a rate of 7.5%. The loans are collateralized by receivables,
inventory and equipment. Both balances were fully paid in January
2005.
b) In December 2004 the Company issued a note payable to a shareholder
in the amount of $560,000 at an interest rate of 3.75% with a
maturity date of December 2005. As mentioned in Note K on January 6,
2005, the Company issued another note payable amounting to
$1,040,000 to the same shareholder under the same terms and
conditions as the previous one.
F-10
NOTE G - ACQUISITIONS
On May 25, 2004 (but effective for all purposes as of April 15, 2004), the
Company completed the acquisition of two Florida-based entities, (eGlobalphone,
Inc. and VoIP Solutions, Inc.). Contribution of these start-up companies was the
basis for the original decision to issue a controlling block of shares of common
stock to Mr. Ivester. eGlobalphone, Inc. and VoIP Solutions Inc. are both
Florida corporations.
In June 2004, the Company acquired DTNet Technologies, Inc. a Florida
Corporation. The acquisition was financed through the issuance of 2,500,000
shares of the Company's common stock with a value of $4,750,000 in exchange for
all issued and outstanding shares of DTNet common stock.
In September 2004, VoIP Inc. closed the acquisition of VoIP Americas, a Florida
corporation. The acquisition was financed through the issuance of 1,000,000
shares of the Company's restricted common stock with the value of $1,100,000 in
exchange for all issues and outstanding shares of VoIP Americas.
NOTE H - WARRANTS
On August 4th, 2004, the Company issued 4,400,000 warrants to two executives to
acquire 2,200,000 Company common shares at $1.00 each. The compensation expenses
of $1,936,000, is in the accompanying Consolidated Statement of Operations.
A summary of the Company's warrants as of December, 31 2004 is presented below:
2004
----------------------------
Weighted average
Warrants exercise price
--------- ----------------
Warrants outstanding at beginning or year --
Granted to two company officers 4,400,000 $ 1.00
Granted to a third party 400,000 $ 1.75
Expired --
Exercised --
--------- ----------------
Warrants outstanding at end of year 4,800,000 $ 1.06
========= ================
The value of warrants issued to the Company officers and the value of the
400,000 warrants granted to the third party was estimated using the
Black-Scholes option pricing model with the following assumptions; risk free
rate 3.35%, no dividend yield, expected life of five years and volatility of
175% and 152%, respectively.
F-11
NOTE I - 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 December 31,
2004 are as follows:
Year ending Dec 31
------------------
2005 $52,772
2006 15,155
-------
$67,927
=======
NOTE J - RELATED PARTY TRANSACTIONS
As of December 31, 2004 the due from related party consists in the following:
DTNet, Inc. (*) $ 134,317
DTNet International (*) 119,974
Mozart Communication 21,794
Com Laser 5,850
Due to related parties (36,533)
---------
$ 245,402
=========
* The above entities are related to a shareholder of the Company. These
advances are unsecured, due upon demand and are non-interest bearing.
NOTE K - INCOME TAXES
The components of the Company's consolidated income tax provision are as
follows:
Year ended December 31,
2004 2003
----------- ---------
Current Benefits $(1,365,000) (119,000)
Valuation allowance 1,365,000 119,000
----------- ---------
Total -- --
=========== =========
2004 2003
----------- ---------
Long-term deferred tax assets arising from
net operating loss carry forward $(1,485,000) $(119,000)
Valuation allowance 1,485,000 119,000
----------- ---------
Total -- --
=========== =========
The reconciliation of income tax provision at statutory rate to the reported
income tax expense is as follows:
F-12
Year ended December 31,
2004 2003
---- ----
Computed at statutory rate 34% 34%
State tax net of federal benefits -- --
Valuation allowance (34%) (34%)
---- ----
Total -- --
==== ====
At December 31, 2004 and December 31, 2003 deferred tax assets are related
solely to the Company's net operating loss carry forward of approximately
$4,014,739 and $303,000, respectively, which have been reduced by a valuation
allowance. If these carry forwards are not utilized, they will begin to expire
in 2018.
NOTE L - STOCKHOLDERS' EQUITY
On February 27, 2004, the Company issued and sold 12,500,000 shares of common
stock to Steven Ivester in exchange for cash of $12,500 and his agreement to
contribute the intellectual property rights and related assets of two start-up
companies formed to engage in the telecommunications industry. The shares issued
represented approximately 88% of the shares outstanding after the exchange, as a
result of which Mr. Ivester became the controlling shareholder of the Company.
On April 1, 2004, the Company issued 142,902 shares to two accredited investors
in satisfaction of accounts payable totaling $71,421.
In May 2004, the Company issued 1,143,250 shares to twenty-two individual
accredited investors.
In May 2004, the Company issued 168,235 shares to one individual accredited
investor in exchange for services.
On May 10, 2004, the Company issued 67,300 shares to fourteen individual
accredited investors at a price of $3.00 per share.
On May 19, 2004, the Company issued 196,340 shares to two accredited investors
in satisfaction of accounts payable totaling $79,745.
On June 25, 2004, the Company closed the acquisition of DTNet Technologies, Inc.
("DTNet") a Florida corporation. The acquisition was effective through the
issuance of 2,500,000 shares of VoIP, Inc. restricted common stock in exchange
for all issued and outstanding shares of DTNet common stock.
In July 2004, the Company issued 668,688 shares to six individual existing
accredited investors. Also effective July 2004, registrant issued 41,688 shares
to four accredited individual investors.
On August 4, 2004, the Company issued 4,400,000 warrants to two executives to
acquire 4,400,000 shares at $1.00 per share. As explained in Note N, subsequent
events, in February 2005, 2,200,000 warrants were exchanged for restricted
shares.
In August 2004, the Company issued 50,000 shares to one individual accredited
investor in satisfaction of accounts payable totaling $50,000.
In August 2004, the Company issued 653,319 shares to forty-six individual
accredited investors.
In September 2004, the Company issued 38,461 shares to one accredited investor.
On September 1st, 2004, VoIP Inc. closed the acquisition of VoIP Americas, a
Florida corporation. The acquisition took the form of an exchange of 1,000,000
shares of VoIP restricted common stock in exchange for all the issued and
outstanding shares of VoIP Americas common stock.
In October 2004, the Company issued 251,831 shares to twelve accredited
investors.
F-13
In October 2004, the Company issued 100,000 shares to one individual accredited
investor.
In November 2004, the Company issued 2,249,500 shares to five accredited
investors.
In November 2004, the Company issued 318,500 shares to twelve accredited
investors.
In December 2004, the Company issued 79,659 shares to five accredited investors.
In December 2004, the Company issued 400,000 shares to sixteen accredited
investors.
NOTE M - DISCONTINUED OPERATIONS
In December 2004, the Company decided to exit the tea business and sold all its
tea inventory, therefore, those transactions have been presented as discontinued
operations for the year ended December 31, 2004, and 2003.
Assets, liabilities, and results of the discontinued tea operations of the
Millennia Tea Master division are as follows:
Assets from the discontinued operation:
2004 2003
-------- --------
Cash $ 4,419 $ 3,499
Notes receivable from purchaser of tea
(non-interest bearing due in four equal
installments through
December 31, 2005) 408,000 --
Tea inventory at net realizable value -- 251,534
Other assets -- 4,426
-------- --------
Total $412,419 $259,459
======== ========
2004 2003
-------- --------
Liabilities from discontinued operations:
Due to related parties -- 151,167
-------- --------
Total $ -- $151,167
======== ========
F-14
Results from discontinued operations:
2004 2003
-------- ---------
Revenues $408,613 $ 8,678
Cost of sales 263,302 11,213
-------- ---------
Gross profit 145,311 (2,535)
Other expenses -- 350,433
-------- ---------
Income (loss) from discontinued operations $145,311 $(352,968)
======== =========
NOTE N - SUBSEQUENT EVENTS
On January 6, 2005, the Company issued a Note Payable to its controlling
shareholder in the amount of $1,040,000 at an interest rate of 3.75%, maturing
in December 2005.
On January 26, 2005, the Company filed a Form S-8 registration statement in
connection with the Company's Stock Option Plan. The plan provides for the grant
to eligible employees and directors of options for the purchase of Common Stock.
The Option Plan covers, in the aggregate, a maximum of 4,000,000 shares of
Common Stock and provides for the granting of both incentive stock options (as
defined in Section 422 of the Internal Revenue Code of 1986) and nonqualified
stock options (options which do not meet the requirements of Section 422). Under
the Option Plan, the exercise price may not be less than the fair market value
of the Common Stock on the date of the grant of the option.
On February 14, 2005, an officer exercised a Stock Purchase Warrant to purchase
2,200,000 shares of VoIP, Inc. common stock by surrendering such Warrant, and,
based upon an agreement with the Company, receiving in return 750,000 shares of
restricted common stock in a net exercise.
On February 23, 2005, VoIP, Inc. and its subsidiary eGlobalPhone, Inc. executed
an Asset Purchase Agreement for the purchase of certain intellectual property
rights associated with the trade names TALKTIME and TALKTIME.COM. In exchange
for the rights, the Registrant issued 100,000 shares of restricted common stock,
warrants to purchase 400,000 shares at $1.70 per share, and agreed to pay
$200,000 cash. Negotiations started during the last quarter of 2004, therefore
all the cash disbursements, liabilities, shares issued, and commitments were
recorded in that period.
F-15
Report of Independent Registered Public Accounting Firm
To The Board of Directors and Shareholders
VoIP, Inc.
We have reviewed the accompanying consolidated balance sheet of VoIP, Inc. and
Subsidiaries (the "Company") as of June 30, 2005 and the consolidated statements
of operations and cash flows for the six and three month periods ended June 30,
2005 and 2004. These interim financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with the standards of the Public Company Accounting Oversight Board, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of the Company as of December 31, 2004, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
year then ended (not presented herein); and in our report dated March 16, 2005,
we expressed an unqualified opinion on those financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 2004 is fairly presented in all material
respects, in relation to the balance sheet from which it has been derived.
/s/ Berkovits, Lago & Company, LLP
----------------------------------
Ft. Lauderdale, Florida August 15, 2005 except for Notes A, D, E, and J as to
which the date is October 7, 2005
F-16
VoIP, Inc.
Consolidated Balance Sheets
June 30, 2005 and December 31, 2004
(Unaudited)
June 30, 2005 Dec. 31, 2004
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,068,514 $ 1,141,205
Accounts receivable, net of allowance of
$99,047 and $136,795 respectively 1,023,226 818,071
Due from related parties 169,537 245,402
Inventory 889,373 187,451
Assets from discontinued operations less
valuation allowance of $200,000 in 2005 192,000 412,419
Other current assets 209,884 43,702
------------- -------------
Total current assets 3,552,534 2,848,250
Property and equipment, net 8,637,267 419,868
Goodwill and other intangible assets 30,765,594 6,923,854
Other assets 294,884 23,580
------------- -------------
TOTAL ASSETS $ 43,250,279 $ 10,215,552
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 10,472,720 $ 1,224,974
Notes payable 7,736,929 760,000
Other current liabilities 2,333,343 123,140
------------- -------------
Total current liabilities 20,542,992 2,108,114
------------- -------------
Shareholders' equity:
Common stock - $0.001 par value
100,000,000 shares authorized
47,166,380 and 24,258,982 shares
issued and outstanding respectively 47,167 24,259
Additional paid-in capital 32,332,943 12,722,565
Accumulated deficit (9,672,823) (4,639,386)
------------- -------------
Total shareholders' equity 22,707,287 8,107,438
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 43,250,279 $ 10,215,552
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
VoIP, Inc.
Consolidated Statements of Operations
Six Months Ended June 30, 2005 and 2004
And Three Months Ended June 30, 2005 and 2004
(Unaudited)
Six Months Ended Six Months Ended Three Months Ended Three Months Ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
---------------- ---------------- ------------------ ------------------
Revenues $ 3,916,920 $ 85,298 $ 1,909,773 $ 85,298
Cost of sales 3,104,846 58,923 1,303,911 58,923
---------------- ---------------- ------------------ ------------------
Gross profit 812,074 26,375 605,862 26,375
Operating expenses 5,845,511 457,356 4,132,002 435,033
---------------- ---------------- ------------------ ------------------
Loss from operations (5,033,437) (430,981) (3,526,140) (408,658)
Provision for income taxes -- -- -- --
---------------- ---------------- ------------------ ------------------
Net loss $ (5,033,437) $ (430,981) $ (3,526,140) $ (408,658)
================ ================ ================== ==================
Basic and diluted loss per share: $ (0.19) $ (0.05) $ (0.12) $ (0.03)
================ ================ ================== ==================
Weighted average number of
shares outstanding 26,940,458 8,255,570 30,012,632 16,233,813
================ ================ ================== ==================
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
VoIP, Inc.
Consolidated Statements of Cash Flows
Six Months ended June 30, 2005 and 2004
(Unaudited)
Six Months Ended Six Months Ended
June 30, 2005 June 30, 2004
---------------- ----------------
Cash flows from operating activities
Net loss $ (5,033,437) $ (430,981)
Adjustments to reconcile net loss to net
cash (used in) operating activities
Depreciation and amortization 540,400 293
Provision for bad debt 99,047 --
Provision on assets from discontinued operations 200,000 --
Common shares issued for services 748,325 143,000
Stock option plan 127,238 --
Common shares exchanged for warrants 239,500 --
Changes in operating assets and liabilities
net of assets and liabilities acquired:
Accounts receivable (174,591) --
Inventory (701,922) (2,460)
Other current assets 342,534 (33,719)
Accounts payable (134,456) 83,455
Other current liabilities (836,286) --
---------------- ----------------
Net cash (used in) operating activities (4,583,648) (240,412)
---------------- ----------------
Cash flows from investing activities
Cash from acquisitions -- (173,182)
Purchase of property and equipment (37,779) (20,231)
---------------- ----------------
Net cash used in investing activities (37,779) (193,413)
---------------- ----------------
Cash flows from financing activities
Proceeds from issuance of notes payable 2,615,339 --
Payments on notes payables (769,228) --
Proceeds from sales of common stock 2,702,625 591,400
---------------- ----------------
Net cash provided by financing activities 4,548,736 591,400
Change in cash and cash equivalents (72,691) 157,575
Cash and cash equivalents at beginning of period 1,141,205 3,499
---------------- ----------------
Cash and cash equivalents at end of period $ 1,068,514 $ 161,074
================ ================
Non-cash investing and financing activities:
Goodwill on acquisition $ (24,101,000) $ --
Issuance of common stock and warrants
on acquisitions $ 13,819,119 $ --
Issuance of stock for debt conversion $ 1,996,478 $ --
Net liabilities assumed net of cash $ 8,285,403 $ --
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
VoIP, Inc.
Notes to Financial Statements
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
The Company was incorporated on August 3, 1998 under its original name of
Millennia Tea Masters, Inc. under the laws of the State of Texas.
On February 27, 2004 the Company entered into a stock purchase agreement that
provided for the sale of 12,500,000 shares of its common stock in exchange for
$12,500 and a commitment by the purchaser to contribute the assets of two
start-up companies in the telecommunications business, eGlobalphone, Inc. and
VOIP Solutions, Inc.
On April 13, 2004 the Company changed its name to VoIP, Inc. and began to
develop and manufacture internet protocol telephony customer premise equipment,
provide voice over the internet subscriber based telephony services and long
range WiFi technology solutions for residential and enterprise customers
including multimedia applications.
During December 2004 the Company decided to exit the tea import business in
order to focus its efforts and resources in the voice over internet protocol
(VoIP) telecommunications industry. In connection with the decision the Company
sold its imported tea inventory and began to wind down its tea import
operations. The assets, liabilities, and results of operations of the imported
tea business have been classified as discontinued operations in the accompanying
consolidated financial statements.
On May 31, 2005 the Company acquired 100 percent of Caerus, Inc. and its wholly
owned subsidiaries Volo Communications, Inc., Caerus Networks, Inc., and Caerus
Billing, Inc. in exchange for 16.9 million of the Company's common shares.
Volo Communications, Inc. is a licensed facilities-based Competitive Local
Exchange Carrier and Inter Exchange Carrier. Volo Communications, Inc. markets
its network products and services under the VoiceOne brand name. It has Network
Access Points operating in Orlando, Atlanta, New York, Dallas and Los Angeles.
Caerus Networks, Inc. is a technology research and development subsidiary, and
Caerus Billing, Inc. is a billing and mediation subsidiary.
The Company offers quality (VoIP) based solutions, providing residential and
business customers more user friendly and affordable ways to communicate. The
Company also manufactures products and provides services to Internet Service
Providers, Telecommunication Service Providers and Cable Operators in strategic
countries around the world. The Company, through its subsidiaries, provides a
comprehensive portfolio of IP multimedia-based solutions ranging from subscriber
based voice services, to SIP based infrastructure design and deployment, to
broadband customer premise equipment design and implementation services, as well
as engineering design, manufacturing and distribution of wireless broadband
technology.
The Company's operations consist of one segment.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Caerus, Inc. (after its May 31, 2005
acquisition), eGlobalphone, Inc., VoIP Solutions, Inc., DTNet Technologies,
Inc., and VoIP Americas, Inc. from their respective dates of acquisition. All
significant inter-company balances and transactions have been eliminated in
consolidation.
Unaudited Consolidated Interim Financial Statements
The accompanying consolidated financial statements for the three and six months
periods ended June 30, 2005 and 2004 are unaudited but, in the opinion of
management, include all necessary adjustments (consisting of normal, recurring
in nature) for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented. Interim results are
not necessarily indicative of results for a full year. Therefore, the results of
operations for the three and six month periods ended June 30, 2005 are not
necessarily indicative of operating results to be expected for 2005.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses. Actual results could differ from
those estimates.
F-20
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all cash on hand, in
banks, including amounts in book overdraft positions, certificates of deposit
and other highly liquid debt instruments with a maturity of three months or less
at the date of purchase to be cash and cash equivalents. Cash overdraft
positions may occur from time to time due to the timing of making bank deposits
and releasing checks, in accordance with the Company's cash management policies.
Our subsidiary, Caerus, Inc. has cash restrictions to support letters of credit
which in turn support operating license bonds required by several states'
regulatory agencies. The amount of restricted cash as of June 30, 2005 was
$60,000.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from
outstanding balances. Management provides for probable uncollectible amounts
based on its assessment of the current status of the individual receivables and
after using reasonable collection efforts. As of June 30, 2005 and December 31,
2004 the balance of the allowance for uncollectible accounts amounted to $99,047
and $136,795, respectively.
Inventory
Inventory consists of finished goods and is valued at the lower of cost or
market using the first-in, first-out method.
Advertising Expenses
Advertising and marketing expenses are charged to operations as incurred.
Income Taxes
The Company and its subsidiaries file consolidated federal and state income tax
returns. The Company has adopted Statement of Financial Accounting Standards No.
109 in the accompanying consolidated financial statements. The only temporary
differences included therein are attributable to differing methods of reflecting
depreciation for financial statement and income tax purposes.
Earnings (loss) per Share
Basic earnings (loss) per share is computed by dividing the net income (loss)
for the period by the weighted-average number of shares of common stock
outstanding. The calculation of fully diluted earnings (loss) per share assumes
the dilutive effect of the exercise of outstanding options and warrants at
either the beginning of the respective period presented or the date of issuance,
whichever is later. Common stock equivalents represent the dilutive effect of
the assumed exercise of the outstanding stock options and warrants, using the
treasury stock method.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable and notes
payable, as applicable, approximate fair value due to the short term nature of
these items and/or the current interest rates payable in relation to current
market conditions.
Revenue Recognition
Revenue from product sales is recognized when persuasive evidence of an
arrangement exists, delivery to customer has occurred, the sales price is fixed
and determinable, and collectibility of the related receivable is probable. The
recognition of revenues from Internet telephony services are deferred for new
subscribers of eGlobalphone and VoIP Solutions until it deems that the customer
has accepted the service. Subsequent revenues are recognized at the beginning of
each customer's month. The recognition of revenue from Internet telephony
services are recorded as rendered. Revenues related to long distance, carrier
access service and certain other usage-driven charges are billed monthly in
arrears and the associated revenues are recognized during the month of service.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation is provided over
the estimated useful lives of the related assets using the straight line method.
The useful life of assets ranges from three to five years. The leasehold
improvements are amortized over the life of the related lease.
Under the Statement of Position ("SOP") 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use," the Company expenses
computer software costs related to internal-use software that is incurred in the
preliminary project stage. When the capitalization criteria of SOP 98-1 have
been met, costs of developing or obtaining internal-use computer software are
capitalized. Amortization of internal-use software over a 5-year estimated
useful life commenced upon the software being placed in service beginning
January 1, 2004. Amortization of internal-use software for the period ended June
30, 2005 was approximately $77,000.
F-21
Business Combinations
The Company accounts for business combinations in accordance with Statement of
Financial Accounting Standard No. 141 Business Combinations ("SFAS No. 141").
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations. SFAS No. 141 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually by comparing carrying value to the respective fair
value in accordance with the provisions of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). This
pronouncement also requires that the intangible assets with estimated useful
lives be amortized over their respective estimated useful lives.
Impairment of Long-Lived Assets
The Company reviews the recoverability of its long-lived assets, such as plant,
equipment and intangibles when events or changes in circumstances occur that
indicate that the carrying value of the asset group may not be recoverable. The
assessment of possible impairment is based on the Company's ability to recover
the carrying value of the asset or asset group from the expected future pre-tax
cash flows (undiscounted and without interest charges) of the related
operations. If these cash flows are less than the carrying value of such asset,
an impairment loss is recognized for the difference between estimated fair value
and carrying value. The measurement of impairment requires management to
estimate future cash flows and the fair value of long-lived assets.
Concentration of Credit Risk
Financial instruments that may subject the Company to concentrations of credit
risk consist principally of cash and cash equivalents and accounts receivable.
The Company has investment policies and procedures that are reviewed
periodically to minimize credit risk. One customer represented approximately 98%
of our subsidiary Caerus, Inc.'s accounts receivable as of June 30, 2005 and
approximately 91% of Caerus, Inc.'s revenues for the six months ended June 30,
2005.
NOTE C - ACQUISITION OF CAERUS, INC.
On May 31, 2005 the Company acquired 100 percent of Caerus, Inc. and its wholly
owned subsidiaries Volo Communications, Inc., Caerus Networks, Inc., and Caerus
Billing, Inc. in exchange for 16.9 million of the Company's common shares. The
acquisition was accounted for as a business combination in accordance with
Statement of Financial Accounting Standard No. 141 "Business Combinations"
("SFAS No. 141").
The purchase price was allocated to the identifiable net assets acquired
including the identifiable intangible assets based on their estimated fair
market values at the date of acquisition. The goodwill, intangible assets and
property recorded for the acquisition of Caerus, Inc. (Caerus) represent the
fair market value of liabilities as of the date of acquisition, plus $13,819,118
which represents the value of the Company's common stock and options issued
pursuant to the acquisition, plus acquisition-related costs. The common stock
issued to acquire Caerus was valued at the closing market price of the stock on
the date of the acquisition, less a 25% discount due to restrictions on the
shares. The amortizable lives of the intangible assets recorded for Caerus range
from one to nine years.
F-22
The fair market value of the assets acquired on May 31, 2005 is as follows:
Fair Value of
Assets Acquired
---------------
Cash $ 66,485
Accounts receivable 285,578
Deposits 108,500
Other current assets 156,659
Property and equipment, net 8,451,763
Other assets 271,609
Accounts payable (9,382,323)
Note payable (6,960,818)
Customer deposits (1,026,750)
Other current liabilities (2,252,703)
---------------
Sub total (10,282,000)
Intangible assets 13,800,000
Goodwill 10,301,000
---------------
Sub total 24,101,000
---------------
Purchase price $ 13,819,000
===============
NOTE D - GOODWILL AND OTHER INTANGIBLE ASSETS
a) As of June 30, 2005 goodwill consisted of the following: Amount
------------
Acquisition of Caerus, Inc. $ 10,301,000
Acquisition of DTNet Technologies, Inc. 5,210,553
Acquisition of Voipamericas, Inc. 1,408,301
------------
Sub total 16,919,854
------------
b) As of June 30, 2005 intangible assets consisted of the following:
Ingangibles with finite lives: Useful Life Years Amount
----------------- ------------
Technology - Caerus, Inc. 4.0 $ 6,000,000
Customer relationships - Caerus, Inc. 6.0 5,800,000
Trade names - Caerus, Inc. 9.0 1,300,000
Non-compete agreements - Caerus, Inc. 1.0 500,000
Carrier licenses - Caerus, Inc. Unamortized 200,000
------------
Sub total 13,800,000
Less accumulated amortization (259,260)
------------
Sub total 13,540,740
Ingangibles with indefinite lives:
Intellectual property 305,000
------------
Sub total 13,845,740
------------
Total $ 30,765,594
============
F-23
The goodwill on the acquisition of DTNet Technologies, Inc. (DTNet) represents
the fair market value of DTNet liabilities as of the date of the acquisition
plus $4,750,000 which represents the market value of 2,500,000 shares of Company
stock issued pursuant to its acquisition.
The goodwill on the acquisition of Voipamericas represents the fair market value
of Voipamericas liabilities as of the date of the acquisition plus $1,100,000
which represents the market value of 1,000,000 shares of the Company's stock
pursuant to this acquisition.
Intellectual property is carried at cost which is comprised of $200,000 paid in
cash and the value assigned to 100,000 Company common shares and 400,000
warrants issued pursuant to this transaction. The valuation of the shares was
$1.05 while the value was $105,000. The value of the warrants was determined
using the Black-Scholes model calculated as of October 14, 2004. This model uses
the annualized deviation calculation and utilized industry averages as a
comparison for adequate statistical results in the valuation. This is a standard
financial model that considers the statistical annual volatility of the market
changes in a stock price.
Intellectual property consists of the following:
a) all rights of the Company of Record in the telephone numbers
1(800)TALKTIME, 1(888)TALKTIME, AND 1(877)TALKTIME.COM
b) all rights to the URL's (domain names) 800TALKTIME.COM,
1800TALKTIME.COM, and 1-800-TALKTIME.COM
c) all rights to U.S. Trademark Registration No. 2,209,316 directed to
1-800-TALKTIME and the goodwill associated therewith.
NOTE E - EXCHANGE OF WARRANTS FOR SHARES
In February, 2005 an executive of the Company and the Company agreed to exchange
his 2,200,000 warrants for 750,000 restricted shares of the Company. This
created additional compensation of $239,500, shown in the compensation and
related expenses in the consolidated statement of operations, which is the
difference between the market price on the date of exchange and the value on the
date of the issuance of the warrants.
NOTE F - STOCK OPTION PLAN
On January 26, 2005, the Company filed a Form S-8 registration statement in
connection with the Company's Stock Option Plan. The plan provides for the grant
to eligible employees, consultants, and directors of options for the purchase of
Common Stock. The Option Plan covers, in the aggregate, a maximum of 4,000,000
shares of Common Stock and provides for the granting of both incentive stock
options (as defined in Section 422 of the Internal Revenue Code of 1986) and
nonqualified stock options (options which do not meet the requirements of
Section 422). Under the Option Plan, the exercise price may not be less than the
fair market value of the Common Stock on the date of the grant of the option.
The Company uses the fair value method of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS No. 123") in
accounting for its stock options. This standard states that compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. The fair value for
each option granted is estimated on the date of the grant using the minimum
value method.
The vested options as of June 30, 2005 amounting to $127,238 are shown under the
compensation and related expenses on the Consolidated Statement of Operation.
F-24
NOTE G - NOTES PAYABLE
As of June 30, 2005 Notes Payable consist of the following:
a. Note Payable to Shareholder $1,053,196
b. Note Payable - Convertible 1,427,925
c. Note Payable - Convertible 125,000
d. Note Payable to lending institution 5,130,818
----------
Notes Payable Total $7,736,939
----------
a. Represents the balance due a shareholder at an interest rate of 3.75% with
a maturity date of December 31, 2005.
b. Represents 8% notes issued pursuant to a subscription agreement,
convertible into 1,784,895 shares of common stock. In connection with
these notes the holders received warrants to purchase 829,447 shares of
common stock at $1.60 per share and 892,448 shares of common stock at
$1.43 per share. The subscription agreement for these notes requires the
issuance of an additional $1,427,916 of these 8% notes, convertible into
1,784,895 shares of common stock, within five business days following the
effective date of a Company registration statement on Form SB-2. In
connection with these notes the Company will issue warrants for the
purchase of 892,447 shares of common stock at $1.60 per share and 892,448
shares of common stock at a per share price equal to 110% of the volume
weighted average price for the five business days immediately preceding
the effective date of the Form SB-2.
c. This note bears interest at 12% and in July, 2005 was converted into
166,667 shares of common stock.
d. Represents the balance of a loan payable by Caerus, Inc. These borrowings
are repayable over a three-year period and bear interest at 12.5% per
annum. Additional borrowings under this facility are contingent upon,
among other things, the Company raising certain levels of additional
equity financing. The loan agreement contains customary covenants and
restrictions and provides the lender the right to a perfected
first-priority, secured interest in all of the Caerus, Inc.'s assets, as
well as rights to preferred stock warrants. Caerus, Inc. is currently in
violation of certain requirements of the debt facility. Accordingly, the
full amount of the note at June 30, 2005 has been classified as current.
No default on this loan has been declared.
NOTE H - LITIGATION
On April 8, 2005, Volo Communications, Inc. ("Volo") (a wholly-owned subsidiary
of Caerus, Inc.) filed suit against MCI Worldcom Network Services, Inc. d/b/a
UUNET ("MCI"). Volo alleges that MCI engaged in a pattern and practice of
over-billing Volo for the telecommunications services it provided pursuant to
the parties' Services Agreement, and that MCI refused to negotiate such
overcharges in good faith. Volo also seeks damages arising out of MCI's
fraudulent practice of submitting false bills by, among other things, re-routing
long distance calls over local trunks to avoid access charges, and then billing
Volo for access charges that were never incurred. On April 4, 2005, MCI declared
Volo in default of its obligations under the Services Agreement, claiming that
Volo owes a past due amount of $8,365,980, and threatening to terminate all
services to Volo within 5 days. By this action Volo alleges claims for (1)
breach of contract; (2) fraud in the inducement; (3) primary estoppel; and (4)
deceptive and unfair trade practices. Volo also seeks a declaratory judgment
that (1) MCI is in breach of the Services Agreement; (2) $8,365,980 billed by
MCI is not "due and payable" under that agreement; and (3) MCI's default letter
to Volo is in violation of the Services Agreement. Volo seeks direct, indirect
and punitive damages in an amount to be determined at trial.
On May 26, 2005, MCI filed an Answer, Affirmative Defenses, Counterclaim and
Third-Party Complaint naming Caerus, Inc. as a third-party defendant. MCI
asserts a breach of contract claim against Volo, a breach of guarantee claim
against Caerus, Inc., and a claim for unjust enrichment against both parties,
seeking an amount to be determined at trial. On July 11, 2005, Volo and Caerus,
Inc. answered the counterclaim and third-party complaint, and filed a
third-party counterclaim against MCI for declaratory judgment, fraud in the
inducement, and breach of implied duty of good faith and fair dealing. Volo and
Caerus, Inc. seek direct, indirect, and punitive damages in an amount to be
determined at trial. Discovery should commence shortly. The Company is currently
unable to assess the likelihood of a favorable or unfavorable outcome.
NOTE I - SUBSEQUENT EVENTS
On October 5, 2005, the Company through a wholly owned subsidiary purchased
substantially all of the assets of WQN, Inc. relating to WQN's "Voice over
Internet Protocol" business.
Pursuant to the Asset Purchase Agreement, Acquisition Sub purchased the Assets
for a purchase price consisting of (1) a Convertible Promissory Note, in the
principal amount of $3,700,000 and convertible into 3,557,692 shares of the
Company's common stock (the "Purchase Note"), (2) 1,250,000 restricted shares of
the Company's common stock, par value $0.001 per share (the "Common Stock") and
(3) a warrant (the "Purchase Warrant") to purchase 5,000,000 shares of Common
Stock for $0.001 per share. In addition, the Asset Purchase Agreement provides
that, in the event that the accounts payable of WQN transferred to the Company
in the Asset Purchase exceed the accounts receivable transferred to the Company
in the Asset Purchase, WQN will pay the Company the difference. If WQN is
required to pay such difference, the Company will issue additional shares of
Common Stock at the rate of one share per dollar of such excess, up to 500,000
shares.
F-25
VOIP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The Following unaudited pro forma condensed combined financial statements are
derived from and should be read in conjunction with the historical consolidated
financial statements and related notes of VOIP, INC. ("VOIP" or the "Company"),
and CAERUS, INC. ("CAERUS"). On June 1, 2005, the Company, and Caerus announced
the closing of the merger of Volo Acquisition Corp., a wholly-owned subsidiary
of the Company with and into Caerus, with Caerus as the surviving corporation
(the "Merger"). The Merger was completed pursuant to an Agreement and Plan of
Merger (the "Merger Agreement'), executed on May 31, 2005.
The unaudited pro forma condensed combined statements of operation for the six
month periods ended June 30, 2005 and 2004, and the year ended December 31, 2004
give effect to the merger of Caerus and the Company with the conversion of all
Caerus capital stock into 16,434,470 shares of common stock, par value $0.001,
of the Company.
The unaudited pro forma condensed combined statements of operations assume that
the merger was consummated at the beginning of the respective period.
The unaudited pro forma condensed combined balance sheet presents the combined
financial position of the Company and Caerus as if the Merger was consummated on
January 01, 2005.
The unaudited pro forma condensed combined financial statements have been
prepared based on currently available information and assumptions that are
deemed appropriate by the Company's management. The pro forma information is for
informational purposes only and is not intended to be indicative of the actual
consolidated results that would have been reported had the transactions occurred
on the dates indicated, nor does the information represent a forecast of the
consolidated financial position at any future date or the combined financial
results of the Company and Caerus for any future period.
F-26
VoIP Inc.
Proforma Consolidated Statement of Operations (Unaudited)
Three Months Ended June 30, 2005
VoIP, Inc. Caerus, Inc. Adjustments Consol
----------- ------------ ----------- ------------
Revenues $ 1,260,274 $ 2,289,399 $ -- $ 3,549,673
Cost of Sales 638,369 2,785,740 -- 3,424,109
----------- ------------ ----------- ------------
Gross Profit (Loss) 621,905 (496,341) -- 125,564
Operating expenses 3,133,639 2,246,261 518,518 5,898,418
----------- ------------ ----------- ------------
Loss from operations (2,511,734) (2,742,602) (518,518) (5,772,854)
Provision for income taxes -- -- -- --
----------- ------------ ----------- ------------
Net Loss $(2,511,734) $ (2,742,602) $ (518,518) $ (5,772,854)
=========== ============ =========== ============
Basic and diluted loss per share: $ (0.19)
============
Weighted average number of shares outstanding 30,012,632
============
The accompanying notes are an integral part of this pro forma consolidated
statement of operations.
F-27
VoIP Inc.
Proforma Consolidated Statement of Operations (Unaudited)
Six Months Ended June 30, 2005
VoIP, Inc. Caerus, Inc. Adjustments Consol
----------- ------------ ----------- ------------
Revenues $ 3,267,421 $ 7,284,244 $ -- $ 10,551,665
Cost of Sales 2,439,304 9,143,457 -- 11,582,761
----------- ------------ ----------- ------------
Gross Profit (Loss) 828,117 (1,859,213) -- (1,031,096)
Operating expenses 4,847,148 4,098,918 1,296,295 10,242,361
----------- ------------ ----------- ------------
Loss from operations (4,019,031) (5,958,131) (1,296,295) (11,273,457)
Provision for income taxes -- -- -- --
----------- ------------ ----------- ------------
Net Loss $(4,019,031) $ (5,958,131) $(1,296,295) $(11,273,457)
=========== ============ =========== ============
Basic and diluted loss per share: $ (0.42)
============
Weighted average number of shares outstanding 26,940,458
============
The accompanying notes are an integral part of this proforma consolidated
statement of operations.
F-28
VoIP Inc.
Proforma Consolidated Statement of Operations
Year Ended December 31, 2004
VoIP, Inc. Caerus, Inc. Adjustments Consolidated
----------- ------------ ----------- ------------
Revenues $ 2,619,393 $ 14,379,365 $ -- $ 16,998,758
Cost of Sales Network and termination costs 1,870,269 15,765,201 -- 17,635,470
----------- ------------ ----------- ------------
Gross Profit (Loss) 749,124 (1,385,836) -- (636,712)
Operating expenses 4,763,863 7,225,759 3,111,108 15,100,730
----------- ------------ ----------- ------------
Loss from operations (4,014,739) (8,611,595) (3,111,108) (15,737,442)
Provision for income taxes -- -- -- --
----------- ------------ ----------- ------------
Net Loss $(4,014,739) $ (8,611,595) $(3,111,108) $(15,737,442)
=========== ============ =========== ============
Basic and diluted loss per share: $ (0.51)
============
Weighted average number of shares outstanding 31,031,782
============
The accompanying notes are an integral part of these pro forma consolidated
statement of operations.
F-29
VoIP Inc.
Proforma Consolidated Statement of Operations (Unaudited)
Three Months Ended June 30, 2004
VoIP, Inc. Caerus, Inc. Adjustments Consol
--------- ------------ ----------- -----------
Revenues $ 85,298 $ 2,332,453 $ -- $ 2,417,751
Cost of Sales 58,923 2,700,914 -- 2,759,837
--------- ------------ ----------- -----------
Gross Profit (Loss) 26,375 (368,461) -- (342,086)
Operating expenses 435,033 1,793,909 777,777 3,006,719
--------- ------------ ----------- -----------
Loss from operations (408,658) (2,162,370) (777,777) (3,348,805)
Provision for income taxes -- -- -- --
--------- ------------ ----------- -----------
Net Loss $(408,658) $ (2,162,370) $ (777,777) $(3,348,805)
========= ============ =========== ===========
Basic and diluted loss per share: $ (0.10)
===========
Weighted average number of shares outstanding 32,668,283
===========
The accompanying notes are an integral part of this pro forma consolidated
statement of operations.
F-30
VoIP Inc.
Proforma Consolidated Statement of Operations (Unaudited)
Six Months Ended June 30, 2004
VoIP, Inc. Caerus, Inc. Adjustments Consol
--------- ------------ ----------- -----------
Revenues $ 85,298 $ 5,369,624 $ -- $ 5,454,922
Cost of Sales 58,923 5,348,592 -- 5,407,515
--------- ------------ ----------- -----------
Gross Profit (Loss) 26,375 21,032 -- 47,407
Operating expenses 457,356 2,746,438 1,555,554 4,759,348
--------- ------------ ----------- -----------
Loss from operations (430,981) (2,725,406) (1,555,554) (4,711,941)
Provision for income taxes -- -- -- --
--------- ------------ ----------- -----------
Net Loss $(430,981) $ (2,725,406) $(1,555,554) $(4,711,941)
========= ============ =========== ===========
Basic and diluted loss per share: $ (0.19)
===========
Weighted average number of shares outstanding 24,690,040
===========
The accompanying notes are an integral part of this proforma consolidated
statement of operations.
F-31
VOIP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
(1) VOIP, INC. Basis of Presentation
Historical financial information for VOIP, INC. as of June 30, 2005 and
for the three and six months ended June 30, 2005 and 2004 and the year
ended December 31, 2004 has been derived from VOIP, INC.'s historical
statements.
(2) CAERUS, INC. Basis of Presentation
Historical financial information for CAERUS, INC. as of June 30, 2005 and
for the three and six months ended June 30, 2005 and 2004 and the year
ended December 31, 2004 has been derived from CAERUS, INC.'s historical
statements.
(3) VOIP, INC. and CAERUS, INC. Merger
On June 1, 2005, the Company, and Caerus, Inc. announced the closing of
the merger of Volo Acquisition Corp., a wholly-owned subsidiary of the
Company with and into Caerus, Inc. with Caerus, Inc. as the surviving
corporation (the "Merger"). The Merger was completed pursuant to an
Agreement and Plan of Merger (the "Merger Agreement'), executed on May 31,
2005 by the conversion of all Caerus, Inc. capital stock into 16,434,470
shares of common stock, par value $0.001, of the Company.
(4) Pro Forma Statements of Operations Adjustments
Adjustments to the pro forma Statements of Operations represent
amortization of certain intangible assets recorded in connection with the
acquisition.
F-32
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Caerus, Inc.
Altamonte Springs, Florida
We have audited the accompanying consolidated balance sheets of Caerus, Inc. as
of December 31, 2004 and 2003, and the related consolidated statements of
operations, changes in stockholders' equity (deficit), and cash flows for the
year ended December 31, 2004 and for period May 15, 2002 (date of inception)
through December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Caerus,
Inc. as of December 31, 2004 and 2003, and the results of its operations and
cash flows for the year ended December 31, 2004 and for the period May 15, 2002
(date of inception) through December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company has incurred significant losses and negative
cash flows from operations, has a working capital deficit, and has significant
unresolved litigation as discussed in Note 8 to the financial statements. These
matters, among other things, raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans related to these matters are
also discussed in Note 1. These financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Moore Stephens Lovelace, P.A.
---------------------------------
Certified Public Accountants
Orlando, Florida
July 25, 2005
F-33
CAERUS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
2004 2003
------------ -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 19,414 $ 25,078
Restricted cash 60,224 196
Accounts receivable 2,098,598 358,522
Note receivable - related party -- 179,974
Supplies, deposits and prepaid expenses 70,999 350,199
------------ -----------
TOTAL CURRENT ASSETS 2,249,235 913,969
------------ -----------
PROPERTY AND EQUIPMENT
Telecommunications equipment and computers 6,390,973 732,205
Furniture and fixtures 61,960 21,624
Leasehold improvements 163,808 146,358
Purchased and developed software 473,228 598,243
------------ -----------
7,089,969 1,498,430
Less accumulated depreciation and amortization (824,580) (183,408)
------------ -----------
NET PROPERTY AND EQUIPMENT 6,265,389 1,315,022
------------ -----------
OTHER ASSETS
Deferred loan origination costs, net 285,075 --
Lease deposit and other 28,959 65,000
------------ -----------
TOTAL ASSETS $ 8,828,658 $ 2,293,991
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 7,137,293 $ 452,094
Note payable 6,006,899 --
Convertible notes payable - related party 1,830,000 1,050,000
Deferred revenue and customer deposits 38,750 60,576
------------ -----------
TOTAL CURRENT LIABILITIES 15,012,942 1,562,670
------------ -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - $.01 par value; 50,000,000 shares authorized;
14,940,508 and 11,948,367 shares issued and outstanding, respectively 149,405 119,484
Preferred stock - $.01 par value; 25,000,000 shares authorized;
-0- shares issued and outstanding -- --
Additional paid-in capital 4,618,253 2,952,184
Accumulated deficit (10,951,942) (2,340,347)
------------ -----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (6,184,284) 731,321
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 8,828,658 $ 2,293,991
============ ===========
F-34
CAERUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Year Ended December 31, 2004, and
The Period May 15, 2002 (Date of Inception) Through December 31, 2003
2004 2002-2003
------------ ------------
(Development
Stage)
SALES $ 14,379,365 $ 1,191,287
COST OF SALES
Network and termination costs 15,103,149 900,681
Testing and sales concessions 662,052 --
------------ ------------
TOTAL COST OF SALES 15,765,201 900,681
------------ ------------
GROSS PROFIT (LOSS) (1,385,836) 290,606
------------ ------------
OPERATING EXPENSES
Equipment and computer expenses 603,189 97,068
Office expenses 228,108 206,215
Labor-related expenses 2,973,070 1,214,240
Professional fees 814,243 400,872
Marketing 217,835 16,689
Litigation settlement 326,205 --
Rent, utilities and security 246,545 355,481
Taxes and licenses 55,527 25,390
Travel, lodging and entertainment 163,555 90,928
Depreciation and amortization 641,172 183,409
Asset impairment charge 299,122 --
------------ ------------
TOTAL EXPENSES 6,568,571 2,590,292
------------ ------------
LOSS FROM OPERATIONS (7,954,407) (2,299,686)
OTHER EXPENSES
Interest expense, net (657,238) (19,654)
Other expense, net 50 (21,007)
------------ ------------
NET LOSS $ (8,611,595) $ (2,340,347)
============ ============
F-35
CAERUS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For The Year Ended December 31, 2004, and
The Period May 15, 2002 (Date of Inception) Through December 31, 2003
Common Stock
$.01 Par Value Additional Total
--------------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity (Deficit)
---------- -------- ---------- ------------ ----------------
BALANCE - MAY 15, 2002 -- $ -- $ -- $ -- $ --
ISSUANCE OF FOUNDER STOCK 5,400,000 54,000 -- -- 54,000
SALE OF COMMON STOCK 6,186,592 61,866 2,721,909 -- 2,783,775
ISSUANCE OF COMMON STOCK
FOR SERVICES 150,000 1,500 81,750 -- 83,250
ISSUANCE OF COMMON STOCK
FOR PROPERTY AND EQUIPMENT 211,775 2,118 148,525 -- 150,643
NET LOSS -- -- -- (2,340,347) (2,340,347)
---------- -------- ---------- ------------ ----------------
BALANCE - DECEMBER 31, 2003 11,948,367 119,484 2,952,184 (2,340,347) 731,321
ISSUANCE OF COMMON STOCK 712,071 7,121 273,139 -- 280,260
ISSUANCE OF COMMON STOCK
FOR DEBT 2,280,070 22,800 1,097,200 -- 1,120,000
ISSUANCE OF STOCK WARRANTS
IN CONNECTION WITH SECURED
NOTE PAYABLE -- -- 218,813 -- 218,813
EMPLOYEE STOCK OPTIONS -
COMPENSATION EXPENSE
RECOGNIZED -- -- 76,917 -- 76,917
NET LOSS -- -- -- (8,611,595) (8,611,595)
---------- -------- ---------- ------------ ----------------
BALANCE - DECEMBER 31, 2004 14,940,508 $149,405 $4,618,253 $(10,951,942) $ (6,184,284)
========== ======== ========== ============ ================
F-36
CAERUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Year Ended December 31, 2004, and
The Period May 15, 2002 (Date of Inception) Through December 31, 2003
2004 2002-2003
----------- ------------
(Development
Stage)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(8,611,595) $ (2,340,347)
Adjustments to reconcile net loss to net cash used in operating activities:
Litigation settlement 326,205 --
Depreciation and amortization 641,172 183,408
Asset impairment charge 299,122 --
Amortization of deferred loan fees 56,613 --
Stock issued to Founder -- 54,000
Stock issued for services -- 83,250
Expense related to employee stock options 76,917 --
Forgiveness of related-party loan 415,323 --
Changes in:
Restricted cash (60,028) (196)
Accounts receivable (2,066,281) (358,522)
Supplies, deposits and prepaid expenses 279,200 (415,199)
Other assets 36,041 --
Accounts payable and accrued expenses 6,685,199 452,094
Deferred revenue (21,826) 60,576
----------- ------------
NET CASH USED IN OPERATING ACTIVITIES (1,943,938) (2,280,936)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (5,890,661) (1,347,787)
Additions to related-party loan (235,349) (179,974)
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (6,126,010) (1,527,761)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 8,900,000 1,050,000
Repayment of note payable (993,101) --
Proceeds from issuance of common stock 280,260 2,783,775
Payments for loan origination costs (122,875) --
----------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,064,284 3,833,775
----------- ------------
NET CHANGE IN CASH (5,664) 25,078
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 25,078 --
----------- ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 19,414 $ 25,078
=========== ============
F-37
Caerus, Inc.
NOTES TO consolidated FINANCIAL STATEMENTS
For The Year Ended December 31, 2004 and
For The Period May 15, 2002 (Date of Inception)
Through December 31, 2003
NOTE 1 - DESCRIPTION OF BUSINESS
Caerus, Inc. and subsidiaries (collectively referred to as the "Company") were
incorporated on May 15, 2002 and are wholesale providers of advanced
telecommunications technologies and services to carriers and service providers,
including Inter Exchange Carriers ("IXCs"), Competitive Local Exchange Carriers
("CLECs"), Internet Service Providers, Cable Operators and Enhanced Voice and
Data Service Providers. Through its wholesale-only model, the Company has
positioned itself as a "carrier's carrier" and offers protocol-agnostic packet
switched technologies to address the gap between traditional communications and
"next generation" platforms.
During the period May 15, 2002 (date of inception) to December 31, 2003, the
Company was in the process of developing its resources, enhancing its
proprietary technology, building a nationwide network with five physical
interconnection points (cities), working with potential customers on testing its
network, and attracting key engineering professionals; accordingly, the Company
was considered to be a development stage enterprise. In January 2004, the
Company became fully operational and management determined that the Company was
no longer in a development stage.
The Company offers a comprehensive suite of Internet Protocol ("IP")-based
broadband packet voice services, IP and Time Division Multiplexing ("TDM")
origination/termination services, IP PBX-hosted services, and unified messaging
services that include enhanced voice and data solutions. The suite of services
is complemented by a Service Creation Environment that enables the Company to
develop custom applications and features "on the fly" for its customers.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
The Company has incurred significant losses and negative cash flows from
operations since its inception. Additionally, the Company has a working capital
deficit of $12,763,707 and an accumulated deficit of $10,951,942 at December 31,
2004. Management continues to undertake steps as part of a plan to attempt to
improve liquidity and operating results with the goal of sustaining Company
operations. These steps include seeking (a) to increase high-margin sales; and
(b) to control overhead costs and operating expenses. Management plans, in this
regard, to continue the implementation of a stabilized and fully operational
network, adding recurring-revenue customers, attracting an experienced
management team capable of building a profitable company, and securing funding
to meet current obligations.
There can be no assurance that the Company can successfully accomplish these
steps. Accordingly, the Company's ability to continue as a going concern is
uncertain and dependent upon continuing to achieve improved operating results
and cash flows or obtaining additional financing. These consolidated financial
statements do not include any adjustments to the amounts and classification of
assets and liabilities that might be necessary should the Company be unable to
continue in business.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For financial presentation purposes, the Company considers short-term, highly
liquid investments with original maturities of three months or less to be cash
equivalents.
F-38
Restricted Cash and Letters of Credit
Certain cash is restricted to support standby letters of credit which, in turn,
support operating license bonds required by several states' regulatory agencies.
These standby letters of credit are generally in force for one year with
automatic one-year extensions. Maximum draws available to the beneficiary as of
December 31, 2004 were $60,000. If the Company was required to obtain
replacement standby letters of credit as of December 31, 2004 for those
currently outstanding, it is the Company's opinion that the replacement costs
would not significantly vary from the present fee structure.
Accounts Receivable
Accounts receivable result from the sale of the Company's services, net of
estimated allowances. The Company estimates an allowance for doubtful accounts
based on a specific-identification basis. The Company had no allowance for
doubtful accounts as of December 31, 2004 and 2003.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are
calculated on a straight-line basis over the assets' useful lives, which range
from three to ten years. Leasehold improvements are amortized over the estimated
useful lives of the improvements, or the term of the lease, if shorter.
Maintenance and repairs are expensed as incurred, while renewals and betterments
are capitalized. Upon the sale or other disposition of property, the cost and
related accumulated depreciation are removed from the accounts, and any gain or
loss is recognized in operations.
Under the Statement of Position ("SOP") 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use," the Company expenses
computer software costs related to internal-use software that is incurred in the
preliminary project stage. When the capitalization criteria of SOP 98-1 have
been met, costs of developing or obtaining internal-use computer software are
capitalized. The Company capitalized approximately $772,350 of costs incurred
for internally developed software during the period from inception through
December 31, 2004. Amortization of internal-use software over a 5-year estimated
useful life commenced upon the software being placed in service beginning
January 1, 2004. Amortization of internal-use software for the periods ended
December 31, 2004 and 2003 was approximately $77,000 and $-0-, respectively.
During 2004, the Company suspended a number of software development projects
and, accordingly, recognized a related asset impairment charge of $299,122 in
2004.
Deposits
Deposits consist primarily of an equipment deposit, a refundable office lease
deposit and various other deposits outstanding with service providers.
Deferred Revenue
Deferred revenue represents fees for services that have not yet met the criteria
to be recognized as revenue.
Revenue Recognition
Revenue is recognized when earned. Revenue related to long distance, carrier
access service and certain other usage-driven charges are billed monthly in
arrears, and the associated revenues are recognized during the month of service.
Income Taxes
The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are recorded to reflect the tax
consequences in future years of differences between the tax basis of assets and
liabilities and their financially reported amounts at each year-end, based on
enacted laws and statutory rates applicable to the periods in which differences
are expected to affect taxable income. As of December 31, 2004, the Company had
a deferred tax asset of approximately $3,000,000, the components of which
consisted primarily of the Company's net losses, fixed asset depreciation and
stock-based compensation. Also at December 31, 2004, the Company had a net
operating loss carryforward of approximately $11,000,000 for federal income tax
purposes that will begin to expire in 2022, and that is subject to significant
limitations based upon the occurrence of certain changes in ownership of the
Company.
F-39
A valuation allowance is provided against the future benefits of deferred tax
assets if it is determined that it is more likely than not that the future tax
benefits associated with the deferred tax asset will not be realized. Due to
recurring losses since inception and the resultant uncertainty of the
realization of the tax loss carryforward, the Company has established a 100%
valuation allowance against the carryforward benefit. Accordingly, no
provision/benefit for income taxes has been included in these consolidated
financial statements.
Concentration of Credit Risk
Financial instruments that may subject the Company to concentrations of credit
risk consist principally of cash and cash equivalents and accounts receivable.
The Company has investment policies and procedures that are reviewed
periodically to minimize credit risk.
One customer represented approximately 98% and 90% of the Company's accounts
receivable as of December 31, 2004 and 2003, respectively, and approximately 91%
and 95% of the Company's revenues for the year ended December 31, 2004 and for
the period May 15, 2002 (date of inception) through December 31, 2003,
respectively. The loss of this customer would have a significant adverse affect
on the Company's operations.
Concentration of Supplier Risk
One supplier represented approximately 86% of the Company's accounts payable as
of December 31, 2004, and approximately 94% of the Company's cost of sales for
the year ended December 31, 2004 (see Note 8).
Stock-based Compensation
The Company uses the fair value method of Statement of Financial Accounting
Standards No. 123R, "Accounting for Stock Based Compensation" in accounting for
its stock options. This standard states that compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period. The fair value for each
option granted is estimated on the date of the grant using the minimum value
method.
Estimates
The preparation of these consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Estimates also affect the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Significant management estimates
affect the carrying value of, among other things, internal-use software, cost of
goods sold (see Note 7), the estimating of the fair value of the Company's
common stock (see Note 3), and the evaluation of existing disputes and claims
(see Notes 7 and 8).
Reclassifications
Certain reclassifications have been made to the 2003 financial statements to
conform to the 2004 presentation.
NOTE 3 - CONVERTIBLE NOTES PAYABLE - RELATED PARTY
During 2003, the Company issued two one-year convertible notes to a stockholder
of the Company, $1,050,000 and $70,000 of which were funded in the periods ended
December 31, 2003 and 2004, respectively. These notes accrued interest at 12%
per annum, with all interest and principal due in September and December 2004.
These notes, which had certain anti-dilution provisions and which were
collateralized by substantially all of the assets of the Company, were converted
into common stock in May 2004 (see Note 6) and the convertible notes were
cancelled and the principal amount was satisfied in full.
The Company determined the conversion rates based upon its evaluation of the
Company's common stock on the issuance dates. The Company's evaluations were
based upon, among other things, peer company valuations, industry and market
conditions, the Company's current financial position, terms and conditions of
funding available to the Company at the time of issuance, etc.
F-40
During 2004, the Company issued two one-year convertible notes to a stockholder
of the Company, totaling $1,830,000. These notes accrue interest at 12% per
annum, with monthly principal and interest payments originally scheduled through
August and November 2004. Restrictive covenants pertaining to the note payable
discussed in Note 4 to these financial statements precluded payment of scheduled
principal and interest on these notes, therefore, these notes are currently due.
However, the same covenants preclude payment until the note described in Note 4
to these financial statements is paid in full. These one-year notes are
collateralized by substantially all of the assets of the Company (see Note 8).
Interest expense incurred with respect to these notes during the year ended
December 31, 2004 and the period May 15, 2002 (date of inception) through
December 31, 2003, was $122,223 and $19,653, respectively.
Interest payments made with respect to these notes during the year ended
December 31, 2004 and the period May 15, 2002 (date of inception) through
December 31, 2003, were $42,560 and $-0-, respectively.
NOTE 4 - NOTE PAYABLE
In June 2004, the Company secured a $15,000,000 debt facility and drew down the
first $7,000,000 traunch primarily for the purpose of funding network equipment
purchases. These borrowings are repayable over a three-year period and bear
interest at 12.5% per annum. Additional borrowings under this facility are
contingent upon, among other things, the Company raising certain levels of
additional equity financing. The loan agreement contains customary covenants and
restrictions and provides the lender the right to a perfected first-priority,
secured interest in all of the Company's assets, as well as rights to preferred
stock warrants (see Notes 6 and 8).
Interest paid under this debt facility during the year ended December 31, 2004,
was $484,867.
The Company is currently in violation of several of the restrictive covenants in
this debt facility. Under its provisions, the lender has the right to call the
related note payable due. Accordingly, the full amount of the note at December
31, 2004 has been classified as current.
NOTE 5 - NOTE RECEIVABLE - RELATED PARTY
During the period May 15, 2002 (date of inception) through December 31, 2004,
the Company advanced $415,323 to an officer of the Company. In 2005, these
advances were characterized as compensation and were forgiven; accordingly,
their carrying value was reduced to zero at December 31, 2004. In addition, the
Company agreed to pay the related federal income tax withholding of
approximately $104,000 on behalf of the related party, which was accrued at
December 31, 2004.
NOTE 6 - STOCKHOLDERS' EQUITY
In June 2002, the Company increased its authorized shares to 100,000 shares of
$0.01 par value common stock. In July 2002, the Company increased its authorized
shares to 3,000,000 shares of $0.01 par value common stock and approved a
2-for-1 common stock split. In October 2002, the Company increased its
authorized shares to 6,000,000 shares of $0.01 par value common stock. In July
2003, the Company approved an additional 3-for-1 common stock split and an
increase in the authorized shares of common stock to 18,000,000. The Articles of
Amendment for this amendment were not filed with the state of Delaware until
2004. The accompanying consolidated financial statements and related notes
present all of these amendments as if they were effected for all periods
presented.
In 2002, 5,400,000 shares of common stock were issued to the founder of the
Company. These shares were recorded at their par value.
In 2002, the Company issued 150,000 shares of its common stock for legal
services provided to the Company, which were recorded at their estimated fair
value of $83,250.
During the period May 15, 2002 (date of inception) through December 31, 2003,
the Company issued 5,965,957 shares of its common stock and received net
proceeds of $2,783,775. Offering costs related to these sales consisted of the
issuance of an additional 220,635 shares of the Company's common stock.
F-41
During the period May 15, 2002 (date of inception) through December 31, 2003,
the Company issued 211,775 shares of its common stock in consideration for
leasehold improvements and equipment, of which 190,211 of the shares were issued
to the founder of the Company. These shares were recorded at their estimated
fair value of $150,643.
In May 2004, $1,120,000 of convertible notes payable to a shareholder were
converted into 2,280,070 shares of common stock.
In May and August 2004, the Company issued 500,000 and 212,071 shares of its
common stock for cash of $100,000 and $180,260, respectively.
In May 2004, the Company authorized the issuance of up to 25,000,000 shares of
$.01 par value preferred stock, the terms of which will be decided upon by the
Company's Board of Directors.
In August 2004, the Company approved increasing the authorized common stock to
50,000,000 shares. However, the related state filing has yet to be effected.
Rights to Convert to Preferred Stock
At December 31, 2004, related parties held 12,989,445 shares of common stock
that had the right to be converted into preferred shares; however, as of
December 31, 2004, no shares of preferred stock had been issued by the Company
(see Note 8).
Stock Options
During October 2004, the Board approved the Company's 2004 Stock Option Plan
(the "Plan"), whereby 4,000,000 shares of the Company's common stock were
reserved for issuance under the Plan to selected directors, officers, employees
and consultants of the Company. As of December 31, 2004, options to purchase
2,164,969 shares of common stock for $0.85 per share were issued and outstanding
under the Plan. These options expire ten years from the date of issuance. They
vest from 36 to 48 months of employment following the date of option issuance.
These options had an estimated fair value of $330,599 at the date of grant,
using the minimum-value method with the following assumptions:
Expected life (in years) 10.0
Risk-free interest rate 2.0%
Dividend yield 0.0%
Related 2004 compensation expense was $76,917, determined by amortizing the
options' estimated fair value at grant date over their vesting period. The
weighted average remaining contractual life of the options outstanding at
December 31, 2004 was 9.8 years (see Note 8). The Company had no stock options
outstanding at December 31, 2003.
Stock Warrants
In 2004, the Company granted a series of warrants to purchase shares of
preferred stock, the specific terms of which had yet to be determined, at an
exercise price of $0.85 per share, in conjunction with the long-term note
payable issuance (see Note 4). These warrants expire at the earlier of ten years
from their issuance date, or five years after a potential initial public
securities offering. At the warrant holder's election, these warrants may be
exercised on a non-cash basis whereby the warrant holder uses the surplus of the
preferred stock's then-fair market value per share over the $0.85 exercise price
as payment for the preferred stock purchased under these warrants.
F-42
These warrants had estimated fair values totaling $218,813 at their grant dates,
recognized as additional paid-in capital and deferred loan origination costs.
Additional information pertaining to these warrants issued and outstanding at
December 31, 2004 is as follows:
Date Granted Shares
---------------------------------------------------- ---------
June, 2004 1,235,294
August, 2004 766,020
October, 2004 383,010
---------
Total Issued and Outstanding 2,384,324
=========
Also in conjunction with the long-term note payable issuance (see Note 4), the
Company granted warrants to purchase up to $1.0 million of common or preferred
stock that may be issued in conjunction with any future securities offering of
at least $5.0 million, upon the same price and conditions as afforded to
third-party investors in said potential securities offering.
In August 2004, the Company issued warrants to purchase 150,000 shares of common
stock to a former employee whose employment was terminated in June 2004. Such
warrants are exercisable at $0.85 per share, and expire on June 26, 2006. The
Company had no stock warrants outstanding at December 31, 2003.
NOTE 7 - OTHER COMMITMENTS AND CONTINGENCIES
Operating Leases
In August 2002, the Company entered into an operating lease for office space,
which expires in February 2008. Approximate minimum future lease payments due
under this operating lease, are as follows:
Year Ending
December 31, Amount
------------ --------
2005 $196,000
2006 $202,000
2007 $208,000
2008 $ 35,000
During the year ended December 31, 2004 and the period May 15, 2002 (date of
inception) through December 31, 2003, $172,700 and $234,000, respectively, were
charged to operations for rent expense related to this operating lease.
Legal and Regulatory Proceedings
The Company's 100%-owned subsidiary, Volo Communications, Inc., settled its
breach of contract dispute related to a 2003 "take or pay" sales contract with
the Company. In connection with this settlement, the Company wrote off its
previously recorded account receivable of $326,205 in 2004.
Vendor Dispute
Certain transport and termination costs incurred by the Company are recorded at
vendor invoice amount less any amounts that have been formally disputed, for
which the Company expects to receive a credit. Disputed amounts are based upon
management's detailed review of vendor call records and contract provisions;
accordingly, the recorded transport and termination costs represent management's
estimates of what is ultimately due and payable. During the year ended December
31, 2004, and the period May 15, 2002 (date of inception) through December 31,
2003, $4,500,000 and $2,500,000, respectively, of one vendor's charges were
formally disputed. As of December 31, 2004, approximately $4,759,000 remained in
dispute and are, therefore, not included in the accompanying financial
statements (see Note 8). Differences between the disputed amounts and final
settlements, if any, are reported in operations in the year of settlement.
Other
Telecommunications industry revenues are subject to statutory and regulatory
changes, interpretations of contracts, etc., all of which could materially
affect our revenues. Generally, our customers have sixty days from the invoice
date to dispute any billed charges. Management reviews all billings for
compliance with applicable rules, regulations and contract terms and believes
that it is in compliance therewith; accordingly, no allowance has been recorded
in the accompanying financial statements for potential disputed charges.
F-43
NOTE 8 - SUBSEQUENT EVENTS
Capital Stock Transactions
In February 2005, the Company issued 511,750 shares of Series B preferred stock
for $818,800 cash. In May 2005, 7,289,445 shares of common stock were converted
into 5,944,669 shares of Series A preferred stock. Both Series A and Series B
preferred stock are convertible into common stock, and they carry voting rights
equal to the equivalent number of common shares into which they are convertible.
Also, both Series A and Series B preferred stock contain equal and ratable
dividend and liquidation preferences over common stock.
Litigation
On April 8, 2005, Volo Communications, Inc. ("Volo") (a wholly-owned subsidiary
of Caerus, Inc.) filed suit against MCI Worldcom Network Services, Inc. d/b/a
UUNET ("MCI"). Volo alleges that MCI engaged in a pattern and practice of
over-billing Volo for the telecommunications services it provided pursuant to
the parties' Services Agreement, and that MCI refused to negotiate such
overcharges in good faith. Volo also seeks damages arising out of MCI's alleged
fraudulent practice of submitting false bills by, among other things, re-routing
long distance calls over local trunks to avoid access charges, and then billing
Volo for access charges that were never incurred. On April 4, 2005, MCI declared
Volo in default of its obligations under the Services Agreement, claiming that
Volo owes a past due amount of $8,365,980 through March, 2005, and threatening
to terminate all services to Volo within 5 days. On April 12, 2005, MCI
terminated all services to Volo. By these actions, Volo alleges claims for (1)
breach of contract; (2) fraud in the inducement; (3) primary estoppel; and (4)
deceptive and unfair trade practices. Volo also seeks a declaratory judgment
that (1) MCI is in breach of the Services Agreement; (2) $8,365,980 billed by
MCI is not "due and payable" under that agreement; and (3) MCI's default letter
to Volo is in violation of the Services Agreement. Volo seeks direct, indirect
and punitive damages in an amount to be determined at trial.
On May 26, 2005, MCI filed an Answer, Affirmative Defenses, Counterclaim and
Third-Party Complaint naming Caerus, Inc. as a third-party defendant. MCI
asserts a breach of contract claim against Volo, a breach of guarantee claim
against Caerus, Inc., and a claim for unjust enrichment against both parties,
seeking an amount to be determined at trial. On July 11, 2005, Volo and Caerus,
Inc. answered the counterclaim and third-party complaint, and filed a
third-party counterclaim against MCI for declaratory judgment, fraud in the
inducement, and breach of implied duty of good faith and fair dealing. Volo and
Caerus, Inc. seek damages in an amount to be determined at trial. MCI has filed
a motion to strike certain of Caerus' affirmative defenses and a motion to
dismiss Caerus' counterclaims. Discovery should commence shortly. While
management is optimistic about the outcome of this litigation, it is currently
unable to assess the ultimate likelihood of a favorable or unfavorable outcome;
accordingly, no related provision or liability has been made in the accompanying
financial statements.
Merger
On May 31, 2005, the Company consummated an Agreement and Plan of Merger
("Merger Agreement") with VoIP, Inc. ("VoIP") (OTCBB:VOII.OB), whereby 100% of
Caerus, Inc.'s common and preferred stock, stock options and warrants were
exchanged for the common stock of a wholly-owned subsidiary of VoIP. The VoIP
subsidiary's name was then changed to Caerus, Inc. Also in conjunction with this
merger, the holder of the $1,830,000 notes payable at December 31, 2004 referred
to in Note 3 agreed to exchange those notes plus accrued interest for an
equivalent number of shares of VoIP common stock valued at $1.23 per share.
F-44
You may rely on the information contained in this prospectus. We have not
authorized anyone to provide information different from that contained in this
prospectus. Neither the delivery of this prospectus nor the sale of common
shares means that information contained in this prospectus is correct after the
date of this prospectus. This prospectus is not an offer to sell or solicitation
of an offer to buy our common shares in any circumstances under which the offer
or solicitation is unlawful.
----------------------
TABLE OF CONTENTS
Heading Page
------------------------------------ ----
Prospectus Summary 2
Risk Factors 6
Use of Proceeds 15
Dividend Policy and Market Data 15
Business and Properties 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 25
Management 36
Principal Shareholders 43
Description of Securities 44
Plan of Distribution 48
Investor Suitability Requirement 49
Legal Matters 51
Experts 51
Available Information 51
Index to Financial Statements F-1
Until __________, 2005 (90 days from the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
UP TO 15,372,245 SHARES
COMMON STOCK
VoIP, Inc.
-------------------
P R O S P E C T U S
-------------------
______________, 2004
PART II
INFORMATION NOT REQUIRED TO BE IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The Registrant's Articles of Incorporation provide that no director of the
Registrant will be personally liable to the Registrant or any of its
shareholders for monetary damages arising from the director's breach of
fiduciary duty as a director, with certain limited exceptions.
Pursuant to the Texas Business Corporation Act (the "Act"), every Texas
corporation has the power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was a director, officer, employee
or agent of the corporation or is or was serving in such a capacity at the
request of the corporation for another corporation, partnership, joint venture,
trust or other enterprise, against any and all expenses, judgments, fines and
amounts paid in settlement and reasonably incurred in connection with such
action, suit or proceeding. The power to indemnify applies only if such person
acted in good faith and in a manner such person reasonably believed to be in the
best interests, or not opposed to the best interests, of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of
the corporation as well, but only to the extent of defense and settlement
expenses and not to any satisfaction of a judgment or settlement of the claim
itself, and with the further limitation that in such actions no indemnification
shall be made in the event of any adjudication of negligence or misconduct
unless the court, in its discretion, believes that in light of all the
circumstances indemnification should apply. The Registrant's Articles of
Incorporation contain provisions authorizing it to indemnify its officers and
directors to the fullest extent permitted by the Act.
Item 25. Other Expenses of Issuance and Distribution
The estimated expenses of the registration, all of which will be paid by
the Company, are as follows:
SEC Filing Fee $ 2,005
Accounting Fees and Expenses 25,000
Legal Fees and Expenses 15,000
--------
TOTAL $ 42,005
Item 26. Recent Sales of Unregistered Securities
Common stock - Registrant has sold and issued the shares of common stock
described below within the past three years that were not registered under the
Act.
Effective July 2004, registrant issued 668,688 shares to six individual
existing accredited investors. Also effective July 2004, registrant issued
41,688 shares to four accredited individual investors.
Effective August 2004, registrant issued 50,000 shares to one individual
accredited investor in satisfaction of accounts payable totaling $50,000.
Effective August 2004, registrant issued 653,319 shares to 46 individual
accredited investors.
Effective September 10th, 2004, registrant issued 1,000,000 shares to
acquire all issues and outstanding shares of Voipamericas Inc., common stock.
Effective September 2004, registrant issued 38,461 shares to one
accredited investor.
On November 11, 2004, Registrant issued and sold 1,937,500 shares of
common stock, for a purchase price of $0.80 per share, to four accredited
investors in a private placement pursuant to Rule 506 of SEC Regulation D, for
aggregate proceeds of $1,550,000 (net proceeds of approximately $1,400,000 to
Registrant). The investors also received five-year warrants to purchase a total
of 589,250 shares for an exercise price of $1.75 per share, and thirty-day
warrants to purchase 968,750 shares for an exercise price of $1.20 per share.
On November 17, 2004, Registrant issued and sold 312,500 shares of common
stock, for a purchase price of $0.80 per share, to one additional accredited
investor in a private placement pursuant to Rule 506 of SEC Regulation D, for
aggregate proceeds of $250,000 (net proceeds of approximately $225,000 to
Registrant). The investor also received five-year warrants to purchase a total
of 75,000 shares for an exercise price of $1.75 per share, and thirty-day
warrants to purchase 125,000 shares for an exercise price of $1.20 per share.
Effective January 2005, registrant issued 187,500 shares of common stock
for cash of $328,125.
Effective January 2005, registrant issued 312,500 shares of common stock
for cash of $375,000.
Effective February 2005, registrant issued 812,500 shares of common stock
for cash of $975,000.
Effective February 2005, registrant issued 750,000 shares of common stock
for exchanging warrants issued in August 2004.
Effective March 2005, registrant issued 56,650 shares of common stock for
services provided to the company.
Effective April 2005, registrant issued 166,250 shares of common stock for
cash of $125,000.
Effective May 2005, registrant issued 93,750 shares of common stock for
cash of $75,000.
Effective June 2005, registrant issued 1,196,875 shares of common stock
for cash of $949,500.
Effective June 2005, registrant issued 1,440,000 shares of common stock
for services provided to the company.
Effective June 2005, registrant issued 16,434,470 shares of common stock
for the acquisition of Caerus, Inc. and its subsidiaries.
Effective June 2005, registrant issued 1,623,153 shares of common stock
for a subsidiary debt conversion.
On July 5, 2005, Registrant issued and sold $2,855,381 principal amount of
Convertible Notes to five accredited investors, for a purchase price of
$2,483,346.
Effective July 2005, registrant issued 826,750 shares of common stock for
cash of $576,400.
Effective July 2005, registrant issued 250,326 shares of common stock for
services provided to the company.
Effective August 2005, registrant issued 62,500 shares of common stock for
cash of $50,000.
Effective August 2005, registrant issued 476,250 shares of common stock
for services provided to the company.
Effective August 2005, registrant issued 1,643,750 shares of common stock
for cash of $1,472,500. in connection with the exercise of warrants.
Effective September 2005, registrant issued 4,888,250 shares of common
stock for cash of $3,910,600.
Effective September 2005, registrant issued 30,500 shares of common stock
for cash of $25,925 in connection with the exercise of employee stock options.
Effective September 2005, registrant issued 1,501,001 shares of common
stock for the conversion of 2,200,000 warrants.
Effective September 2005, registrant issued 222,278 shares of common stock
for services provided to the company.
All such shares were issued pursuant to exemptions provided by Section
4(2) of the Securities Act of 1933 and Regulation D.
Item 27. Exhibits
(b) Exhibits
(3) 2.1 Stock Contribution Agreement dated May 25, 2004, between
Registrant and Steven Ivester
(11) 2.2 Agreement and Plan of Merger with Caerus, Inc. dated as of May
31, 2005
(12) 2.3 Asset Purchase Agreement dated as of August 3, 2005, by and
between VoIP, Inc. Acquisition Company and WQN, Inc.
(1) 3.1.1 Articles of Incorporation
(3) 3.1.2 Amendment of Articles of Incorporation
(1) 3.2 Bylaws
(3) 4.1 Specimen Stock Certificate
5.1 Opinion of Andrews Kurth LLP
(3) 10.1 2004 Stock Option Plan
(2) 10.2 Stock Purchase Agreement dated February 27, 2004 between
Registrant and Steven Ivester
(4) 10.3 Stock Purchase Agreement dated June 25, 2004 among Registrant,
DTNet Technologies and Marc Moore
(5) 10.4 Stock Purchase Agreement among Carlos Rivas, Albert Rodriguz,
Registrant and Vox Consulting Group Inc.
(6) 10.5.1 Subscription Agreement
(6) 10.5.2 Form of Class A Warrant
(6) 10.5.3 Form of Class B Warrant
(7) 10.6.1 Stock Purchase Warrant issued to Ivano Angelaftri
(7) 10.6.2 Stock Purchase Warrant issued to Ebony Finance
(8) 10.7 Net Exercise Agreement with John Todd
(9) 10.8 Asset Purchase Agreement dated February 23, 2005
(10) 10.9.1 Subscription Agreement
(10) 10.9.2 Form of Class C Warrant
(10) 10.9.3 Form of Class D Warrant
(10) 10.9.4 Form of Convertible Note
(10) 10.9.5 Security Agreement
(10) 10.9.6 Security and Pledge Agreement
(10) 10.9.7 Guaranty
10.10 Caerus, Inc. Merger Documents dated May 31, 2005:
(11) 10.10.1 Option Exchange Agreement
(11) 10.10.2 Registration Rights Agreement
(11) 10.10.3 Exchange Agreement
(11) 10.10.4 Registration Rights Agreement
(11) 10.10.5 Consent and Waiver Agreement
(11) 10.10.6 Guaranty
(11) 10.10.7 Security Agreement
(11) 10.10.8 Employment Agreement
10.11 WQN, Inc. Documents dated August 3, 2005:
(12) 10.11.1 Warrant
(12) 10.11.2 Security Agreement between VoIP, Inc. and WQN, Inc.
(12) 10.11.3 Consent, Waiver and Acknowledgement by and among Cedar
Boulevard Lease Funding, Inc., VoIP, Inc. and certain
subsidiaries of VoIP, Inc.
(12) 10.11.4 Third Amendment to Subordinated Loan and Security
Agreement by and among Cedar Boulevard Lease Funding, Inc.,
VoIP, Inc. and certain subsidiaries of VoIP, Inc.
(12) 10.11.5 Security Agreement between Cedar Boulevard Lease Funding, Inc.
and VoIP Acquisition Company
(12) 10.11.6 Guaranty between Cedar Boulevard Lease Funding, Inc. and VoIP
Acquisition Company Promissory Note
(13) 21.1 Subsidiaries of the Registrant
(13) 23.1 Consent of Tschopp, Whitcomb & Orr, P.A.
(13) 23.2 Consent of Berkovits, Lago & Company, LLP
(13) 23.3 Consent of Andrews Kurth LLP -- included in Exhibit 5.1
(13) 23.4 Consent from Moore Stephens Lovelace, P.A.
(13) 23.5 Consent of M. Adler
(13) 23.6 Consent of S. Kosh
(13) 23.7 Consent of T. Reeves
(1) Filed as exhibits to Registrant's Form 10SB filed January 19,
2000
(2) Filed as exhibit to Form 8-K filed March 3, 2004
(3) Filed as exhibit to Form 8-K filed June 9, 2004
(4) Filed as exhibit to Form 8-K filed July 7, 2001
(5) Filed as exhibit to Form 8-K filed September 16, 2004
(6) Filed as exhibit to form 8-K filed November 17, 2004
(7) Filed as exhibit to form 8-K filed December 15, 2004
(8) Filed as exhibit to form 8-K filed February 16, 2005
(9) Filed as exhibit to form 8-K filed March 1, 2005
(10) Filed as exhibit to form 8-K filed June 6, 2005
(11) Filed as exhibit to form 8-K filed July 11, 2005
(12) Filed as exhibit to form 8-K filed August 9, 2005
(13) Filed herewith
Item 28. Undertakings
The undersigned Registrant hereby undertakes as follows:
(a) (1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration Statement;
and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities being registered that remain unsold at the end of the offering.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Fort
Lauderdale, State of Florida, on October 14, 2005.
VoIP, INC.
By: /s/ Steven Ivester
-----------------------------------
Steven Ivester, President and Chief
Executive Officer
In accordance with requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
SIGNATURE TITLE DATE
------------------------ ---------------------------------- ----------------
/s/ Steven Ivester Chairman, Chief Executive Officer, October 14, 2005
------------------------ Director, and President
Steven Ivester
/s/ Osvaldo Pitters Chief Financial Officer October 14, 2005
------------------------
Osvaldo Pitters
/s/ George Firestone Director October 14, 2005
------------------------
George Firestone