UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 31, 2005
VOIP, INC.
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(Exact name of registrant as specified in its charter)
Texas 000-28985 75-2785941
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(State of Incorporation) (Commission File No.) (IRS Employer
Identification No.)
12330 SW 53rd Street, Suite 712, Ft. Lauderdale, Florida 33330
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(Address of principal execute offices, including zip code)
(954) 434-2000
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(Registrant's telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 2.01 Completion of Acquisition or Disposition of Assets
Registrant filed a Form 8K on June 6, 2005, describing in Item 1.01 the
merger of Volo Acquisition Corp., a wholly-owned subsidiary of the Company with
and into Caerus, Inc ("Caerus"). Pursuant to Item 9.01(a)(4) of Form 8-K,
financial statements of the acquired businesses and financial statements are
being filed by amendment hereby. This Amendment should be read in conjunction
with the Form 8-K filed on June 6, 2005.
Item 9.01. Financial Statements and Exhibits
INDEX
Independent Auditor's Report...................................................3
Consolidated Financial Statements:
Balance Sheets..............................................................4
Statements of Operations....................................................5
Statements of Changes in Stockholders' Equity (Deficit).....................6
Statements of Cash Flows....................................................8
Notes to Financial Statements...............................................9
Unaudited Pro Forma Consolidated Balance Sheets and Statements of
Operations..........................................................20
2
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 Stephen Lovelace, P.A.
Certified Public Accountants
Orlando, Florida
July 25, 2005
3
CAERUS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Unaudited
June 30 December 31, December 31,
2005 2004 2003
------------ ------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 26,041 $ 19,414 $ 25,078
Restricted cash 60,000 60,224 196
Accounts receivable 276,533 2,098,598 358,522
Note receivable - related party -- -- 179,974
Supplies, deposits and prepaid expenses 202,602 70,999 350,199
------------ ------------ ------------
TOTAL CURRENT ASSETS 565,176 2,249,235 913,969
------------ ------------ ------------
PROPERTY AND EQUIPMENT
Telecommunications equipment and computers 9,064,542 6,390,973 732,205
Furniture and fixtures 62,537 61,960 21,624
Leasehold improvements 165,447 163,808 146,358
Purchased and developed software 473,228 473,228 598,243
------------ ------------ ------------
9,765,754 7,089,969 1,498,430
Less accumulated depreciation and amortization (1,504,371) (824,580) (183,408)
------------ ------------ ------------
NET PROPERTY AND EQUIPMENT 8,261,383 6,265,389 1,315,022
------------ ------------ ------------
OTHER ASSETS
Goodwill 29,674,557
Deferred loan origination costs, net 218,696 285,075 --
Lease deposit and other 28,959 28,959 65,000
------------ ------------ ------------
TOTAL ASSETS $ 38,748,771 $ 8,828,658 $ 2,293,991
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 11,105,741 $ 7,137,293 $ 452,094
Note payable 5,130,818 6,006,899 --
Due to parent company 3,331,933
Convertible notes payable - related party -- 1,830,000 1,050,000
Deferred revenue and customer deposits 542,750 38,750 60,576
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 20,111,242 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 35,288,343 4,618,253 2,952,184
Accumulated deficit (16,650,814) (10,951,942) (2,340,347)
------------ ------------ ------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 18,637,529 (6,184,284) 731,321
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 38,748,771 $ 8,828,658 $ 2,293,991
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
4
Caerus, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
Development
Stage
Unaudited Year May 15, 2002
Six months ended through
ended December 31, December 31,
June 30, 2005 2004 2003
-------------- -------------- --------------
SALES $ 7,284,244 $ 14,379,365 $ 1,191,287
COST OF SALES 9,143,457 15,765,201 900,681
-------------- -------------- --------------
GROSS PROFIT (LOSS) (1,859,213) (1,385,836) 290,606
-------------- -------------- --------------
OPERATING EXPENSES
Equipment and computer expenses 301,131 603,189 97,068
Office expenses 90,820 228,108 206,215
Labor-related expenses 1,339,355 2,973,070 1,214,240
Professional fees 527,614 814,243 400,872
Marketing 139,445 217,835 16,689
Litigation settlement -- 326,205 --
Rent, utilities and security 96,402 246,545 355,481
Taxes and licenses 74,613 55,527 25,390
Travel, lodging and entertainment 88,838 163,555 90,928
Depreciation and amortization 746,170 641,172 183,409
Asset impairment charge -- 299,122 --
-------------- -------------- --------------
TOTAL EXPENSES 3,404,388 6,568,571 2,590,292
-------------- -------------- --------------
LOSS FROM OPERATIONS (5,263,601) (7,954,407) (2,299,686)
OTHER EXPENSES
Interest expense, net (440,284) (657,238) (19,654)
Other expense, net 5,013 50 (21,007)
-------------- -------------- --------------
NET LOSS $ (5,698,872) $ (8,611,595) $ (2,340,347)
============== ============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
5
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)
============ ============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
6
Caerus, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)
For The Six Months Ended June 30, 2005
Common Stock Preferred Stock Total
$.01 Par Value $.01 Par Value Additional Stockholders'
-------------------------- ---------------------- Paid-In Accumulated Equity
Shares Amount Shares Amount Capital Deficit (Deficit)
----------- ------------ ---------- --------- ----------- ------------ ------------
Balance -
December 31, 2004 14,940,508 $ 149,405 -- $ -- $ 4,618,253 $(10,951,942) $ (6,184,284)
Issuance of preferred
stock for cash 511,750 5,118 813,682 818,800
Conversion of common stock
to preferred stock (7,289,445) (72,894) 5,944,669 59,447 13,448 --
Employee stock options -
compensation expense recognized 27,328 27,328
Exchange of common stock,
options and warrants in
conjunction with the Merger
Agreement with VoIP, Inc. (7,651,063) (76,511) (6,456,419) (64,565) 141,075 --
Recognition of goodwill in
conjunction with the Merger
Agreement with VoIP, Inc. 29,674,557 29,674,557
Net loss (5,698,872) (5,698,872)
----------- ------------ ---------- --------- ----------- ------------ ------------
Balance - June 30, 2005 -- $ -- -- $ -- $35,288,343 $(16,650,814) $ 18,637,529
=========== ============ ========== ========= =========== ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
7
Caerus, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Development
Unaudited Stage
Six months Year May 15, 2002
ended ended through
June 30, December 31, December 31,
2005 2004 2003
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,698,872) $(8,611,595) $ (2,340,34)
Adjustments to reconcile net loss to net cash used in
operating activities:
Litigation settlement 326,205 --
Depreciation and amortization 679,791 641,172 183,408
Asset impairment charge 299,122 --
Amortization of deferred loan fees 66,379 56,613 --
Stock issued to Founder -- 54,000
Stock issued for services -- 83,250
Expense related to employee stock options 27,328 76,917 --
Forgiveness of related-party loan 415,323 --
Changes in:
Restricted cash 224 (60,028) (196)
Accounts receivable 1,822,065 (2,066,281) (358,522)
Supplies, deposits and prepaid expenses (131,603) 279,200 (415,199)
Other assets 36,041 --
Accounts payable and accrued expenses 3,968,448 6,685,199 452,094
Deferred revenue 504,000 (21,826) 60,576
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES 1,237,760 (1,943,938) (2,280,93)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (2,675,785) (5,890,661) (1,347,78)
Additions to related-party loan (235,349) (179,974)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,675,785) (6,126,010) (1,527,76)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from parent 3,331,933
Repayment of convertible notes payable - related party (1,830,000)
Proceeds from borrowings 8,900,000 1,050,000
Repayment of note payable (876,081) (993,101) --
Proceeds from issuance of common stock 280,260 2,783,775
Proceeds from issuance of preferred stock 818,800
Payments for loan origination costs (122,875) --
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,444,652 8,064,284 3,833,775
----------- ----------- -----------
NET CHANGE IN CASH 6,627 (5,664) 25,078
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 19,414 25,078 --
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 26,041 $ 19,414 $ 25,078
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
8
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.
9
There can be no assurance that the Company can successfully accomplish
these steps. Accordingly, the Company's ability to continue as a going
concern is uncertain and dependent upon continuing to achieve improved
operating results and cash flows or obtaining additional financing. These
consolidated financial statements do not include any adjustments to the
amounts and classification of assets and liabilities that might be
necessary should the Company be unable to continue in business.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For financial presentation purposes, the Company considers short-term, highly
liquid investments with original maturities of three months or less to be cash
equivalents.
Restricted Cash and Letters of Credit
Certain cash is restricted to support standby letters of credit which, in turn,
support operating license bonds required by several states' regulatory agencies.
These standby letters of credit are generally in force for one year with
automatic one-year extensions. Maximum draws available to the beneficiary as of
December 31, 2004 were $60,000. If the Company was required to obtain
replacement standby letters of credit as of December 31, 2004 for those
currently outstanding, it is the Company's opinion that the replacement costs
would not significantly vary from the present fee structure.
Accounts Receivable
Accounts receivable result from the sale of the Company's services, net of
estimated allowances. The Company estimates an allowance for doubtful accounts
based on a specific-identification basis. The Company had no allowance for
doubtful accounts as of December 31, 2004 and 2003.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are
calculated on a straight-line basis over the assets' useful lives, which range
from three to ten years. Leasehold improvements are amortized over the estimated
useful lives of the improvements, or the term of the lease, if shorter.
Maintenance and repairs are expensed as incurred, while renewals and betterments
are capitalized. Upon the sale or other disposition of property, the cost and
related accumulated depreciation are removed from the accounts, and any gain or
loss is recognized in operations.
10
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.
11
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).
12
Reclassifications
Certain reclassifications have been made to the 2003 financial statements to
conform to the 2004 presentation.
NOTE 3 - CONVERTIBLE NOTES PAYABLE - RELATED PARTY
During 2003, the Company issued two one-year convertible notes to a stockholder
of the Company, $1,050,000 and $70,000 of which were funded in the periods ended
December 31, 2003 and 2004, respectively. These notes accrued interest at 12%
per annum, with all interest and principal due in September and December 2004.
These notes, which had certain anti-dilution provisions and which were
collateralized by substantially all of the assets of the Company, were converted
into common stock in May 2004 (see Note 6) and the convertible notes were
cancelled and the principal amount was satisfied in full.
The Company determined the conversion rates based upon its evaluation of the
Company's common stock on the issuance dates. The Company's evaluations were
based upon, among other things, peer company valuations, industry and market
conditions, the Company's current financial position, terms and conditions of
funding available to the Company at the time of issuance, etc.
During 2004, the Company issued two one-year convertible notes to a stockholder
of the Company, totaling $1,830,000. These notes accrue interest at 12% per
annum, with monthly principal and interest payments originally scheduled through
August and November 2004. Restrictive covenants pertaining to the note payable
discussed in Note 4 to these financial statements precluded payment of scheduled
principal and interest on these notes, therefore, these notes are currently due.
However, the same covenants preclude payment until the note described in Note 4
to these financial statements is paid in full. These one-year notes are
collateralized by substantially all of the assets of the Company (see Note 8).
Interest expense incurred with respect to these notes during the year ended
December 31, 2004 and the period May 15, 2002 (date of inception) through
December 31, 2003, was $122,223 and $19,653, respectively.
Interest payments made with respect to these notes during the year ended
December 31, 2004 and the period May 15, 2002 (date of inception) through
December 31, 2003, were $42,560 and $-0-, respectively.
NOTE 4 - NOTE PAYABLE
In June 2004, the Company secured a $15,000,000 debt facility and drew down the
first $7,000,000 tranche 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).
13
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. Although no default has been asserted against the Company,
under the provisions of the facility, 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.
14
During the period May 15, 2002 (date of inception) through December 31, 2003,
the Company issued 5,965,957 shares of its common stock and received net
proceeds of $2,783,775. Offering costs related to these sales consisted of the
issuance of an additional 220,635 shares of the Company's common stock.
During the period May 15, 2002 (date of inception) through December 31, 2003,
the Company issued 211,775 shares of its common stock in consideration for
leasehold improvements and equipment, of which 190,211 of the shares were issued
to the founder of the Company. These shares were recorded at their estimated
fair value of $150,643.
In May 2004, $1,120,000 of convertible notes payable to a shareholder were
converted into 2,280,070 shares of common stock.
In May and August 2004, the Company issued 500,000 and 212,071 shares of its
common stock for cash of $100,000 and $180,260, respectively.
In May 2004, the Company authorized the issuance of up to 25,000,000 shares of
$.01 par value preferred stock, the terms of which will be decided upon by the
Company's Board of Directors.
In August 2004, the Company approved increasing the authorized common stock to
50,000,000 shares. However, the related state filing has yet to be effected.
Rights to Convert to Preferred Stock
At December 31, 2004, related parties held 12,989,445 shares of common stock
that had the right to be converted into preferred shares; however, as of
December 31, 2004, no shares of preferred stock had been issued by the Company
(see Note 8).
Stock Options
During October 2004, the Board approved the Company's 2004 Stock Option Plan
(the "Plan"), whereby 4,000,000 shares of the Company's common stock were
reserved for issuance under the Plan to selected directors, officers, employees
and consultants of the Company. As of December 31, 2004, options to purchase
2,164,969 shares of common stock for $0.85 per share were issued and outstanding
under the Plan. These options expire ten years from the date of issuance. They
vest from 36 to 48 months of employment following the date of option issuance.
These options had an estimated fair value of $330,599 at the date of grant,
using the minimum-value method with the following assumptions:
Expected life (in years) 10.0
Risk-free interest rate 2.0%
Dividend yield 0.0%
Related 2004 compensation expense was $76,917, determined by amortizing the
options' estimated fair value at grant date over their vesting period. The
weighted average remaining contractual life of the options outstanding at
December 31, 2004 was 9.8 years (see Note 8). The Company had no stock options
outstanding at December 31, 2003.
15
Stock Warrants
In 2004, the Company granted a series of warrants to purchase shares of
preferred stock, the specific terms of which had yet to be determined, at an
exercise price of $0.85 per share, in conjunction with the long-term note
payable issuance (see Note 4). These warrants expire at the earlier of ten years
from their issuance date, or five years after a potential initial public
securities offering. At the warrant holder's election, these warrants may be
exercised on a non-cash basis whereby the warrant holder uses the surplus of the
preferred stock's then-fair market value per share over the $0.85 exercise price
as payment for the preferred stock purchased under these warrants.
These warrants had estimated fair values totaling $218,813 at their grant dates,
recognized as additional paid-in capital and deferred loan origination costs,
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%
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.
16
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.
17
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.
18
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.
19
VOIP, INC. AND SUBSIDIARIES
UNAUDITED PRO FROMA CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS
The Following unaudited pro forma condensed combined statement of operation is
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 balance sheet presents the combined
financial position of the Company and Caerus as if the merger was consummated on
December 31, 2004.
The unaudited pro forma condensed statement of operations for the six months
ended June 30, 2005 gives 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 statement of operations have been
prepared based on currently available information and assumptions that are
deemed appropriate by the Company's management. The pro forma information is for
informational purposes only and is not intended to be indicative of the actual
consolidated results that would have been reported had the transactions occurred
on the dates indicated, nor does the information represent a forecast of the
consolidated financial position at any future date or the combined financial
results of the Company and Caerus for any future period.
20
VoIP Inc.
Unaudited Proforma Consolidated Balance Sheet
December 31, 2004
--------------------------------------------------------------------------------
VoIP, Inc. Caerus, Inc. Elim's Consol
------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,141,205 $ 79,638 $ 1,220,843
Accounts receivable, net 818,071 2,098,598 2,916,669
Due from related parties 245,402 -- 245,402
Inventory 187,451 -- 187,451
Assets from discontinued operations 412,419 -- 412,419
Other current assets 43,702 70,999 114,701
------------ ------------ ------------ ------------
Total Current Assets 2,848,250 2,249,235 -- 5,097,485
------------ ------------ ------------ ------------
Property and equipment, net 419,868 6,265,389 6,685,257
Intangibles / Goodwill 6,923,854 -- 25,576,959 a 32,500,813
Other assets 23,580 314,034 337,614
------------ ------------ ------------ ------------
TOTAL ASSETS $ 10,215,552 $ 8,828,658 $ 25,576,959 $ 44,621,169
============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,224,974 $ 7,137,293 $ 8,362,267
Bank loans and notes payable 760,000 6,006,899 6,766,899
Notes payable - related party -- 1,830,000 1,830,000
Liabilities from discontinued operations -- -- --
Other current liabilities 123,140 38,750 161,890
------------ ------------ ------------ ------------
Total Liabilities 2,108,114 15,012,942 -- 17,121,056
------------ ------------ ------------ ------------
Shareholders' equity:
Common stock - $0.001 par value 24,259 149,405 (132,971)b 40,693
Additional paid-in capital 12,722,565 4,618,253 14,757,988 b 32,098,806
Accumulated deficit (4,639,386) (10,951,942) 10,951,942 b (4,639,386)
------------ ------------ ------------ ------------
Total shareholders' equity 8,107,438 (6,184,284) 25,576,959 27,500,113
------------ ------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,215,552 $ 8,828,658 $ 25,576,959 $ 44,621,169
============ ============ ============ ============
The accompanying notes are an integral part of these pro forma financial
statements
21
VoIP Inc.
Unaudited Proforma Consolidated Statement of Operations
For the Year Ended December 31, 2004
--------------------------------------------------------------------------------
VoIP, Inc. Caerus, Inc. Elim's Consol
------------ ------------ ------------ ------------
Revenues $ 2,619,393 $ 14,379,365 $ 16,998,758
Cost of Sales 1,870,269 15,103,149 16,973,418
------------ ------------ ------------ ------------
Gross Profit (Loss) 749,124 (723,784) -- 25,340
------------ ------------ ------------ ------------
Operating expenses
Compensation and related expenses 2,721,296 2,973,070 5,694,366
General and administrative expenses 2,187,878 4,347,875 6,535,753
------------ ------------ ------------ ------------
Loss from operations (4,160,050) (8,044,729) -- (12,204,779)
Interest & other expenses -- 566,866 566,866
------------ ------------ ------------ ------------
Loss from continuing operations before income
taxes and discontinued operations (4,160,050) (8,611,595) -- (12,771,645)
Provision for income taxes -- -- --
------------ ------------ ------------ ------------
Net loss before discontinued operations (4,160,050) (8,611,595) -- (12,771,645)
Income (Loss) from discontinued operations 145,311 -- 145,311
------------ ------------ ------------ ------------
Net Loss $ (4,014,739) $ (8,611,595) $ -- $(12,626,334)
============ ============ ============ ============
The accompanying notes are an integral part of these pro forma financial
statements
22
VoIP Inc.
Unaudited Proforma Consolidated Statement of Operations
For the Six Months Ended June 30, 2005
--------------------------------------------------------------------------------
VoIP, Inc. Caerus, Inc. Elim's 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 4,647,148 3,839,659 8,486,807
Loss from operations (3,819,031) (5,698,872) -- (9,517,903)
------------ ------------ ------------ ------------
Loss before income taxes
(3,819,031) (5,698,872) -- (9,517,903)
Provision for income taxes -- -- --
------------ ------------ ------------ ------------
Net Loss $ (3,819,031) $ (5,698,872) $ -- $ (9,517,903)
============ ============ ============ ============
Basic and diluted loss per share: $ (0.35)
============
Weighted average number of shares outstanding 26,940,458
============
The accompanying notes are an integral part of these pro forma financial
statements
23
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 March 31, 2005 and
for the three months ended March 31, 2005 and 2004 and the year ended
December 31, 2004 has been derived from VoIP, Inc.'s historical
statements.
CAERUS, INC. BASIS OF PRESENTATION
Historical financial information for Caerus, Inc. as of March 31, 2005 and
for the three months ended March 31, 2005 and 2004 and the year ended
December 31, 2004 has been derived from Caerus, Inc.'s historical
statements.
(2) VOIP, INC. AND CAERUS, INC. MERGER
On June 1, 2005, the Company, and Caerus, Inc. announced the closing of
the merger of Volo 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.
(3) PRO FORMA BALANCE SHEET ADJUSTMENTS
Following are brief descriptions of the pro forma adjustments to the
balance sheet to reflect the merger of the Company and Caerus, Inc.
A Goodwill is the excess of the purchase price, based on the market
value of the 16,434,470 shares issued, over the book value of
Caerus, Inc. on May 31, 2005. As listed in the following table:
Total paid in VoIP, Inc stock and warrants 16,434,470
VoIP share market value - close of Market on May 31, 2005 $ 1.18
-----------
Total cost of Caerus, Inc. to VoIP, Inc. $19,392,675
Plus: Negative equity of Caerus, Inc. as of May 31, 2005 10,281,881
-----------
Goodwill $29,674,557
===========
B Adjustments to eliminate Caerus, Inc. stockholders' equity accounts,
and reflect new VoIP, Inc. common shares issued.
(4) PRO FORMA STATEMENTS OF INCOME ADJUSTMENTS None were required.
(5) ACQUISITION APPRAISAL
The Company is in the process of obtaining a professional appraisal of the
Caerus, Inc. acquisition. The acquisition created Goodwill in the amount
of $29,674,557. If the appraisal indicates that amount would best be
allocated between Goodwill, other intangible assets and/or paid in capital
the appropriate adjustment will be made.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: August 16, 2005 VoIP, INC.
(Registrant)
By: /s/ Steven Ivester
-------------------------------------
Steven Ivester
President and Chief Executive Officer
25