As filed with the Securities and Exchange Commission on August 12, 2005
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 75-278/5941
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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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. |_|
CALCULATION OF REGISTRATION FEE
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Proposed
Proposed Maximum
Title of Each Amount MaximumOffering Aggregate Amount of
Class of Securities to be Price Per Offering Registration
to be Registered Registered(1) Share(2) Price Fee
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Common Stock, $0.001 par 15,372,245 $1.03 $15,833,412 $2005
value
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(1) In addition, pursuant to Rule 416(c) under the Securities Act of 1933, as
amended (the "Securities Act"), this Registration Statement also covers an
indeterminate number of additional shares that may be issuable in
connection with share splits, share dividends or similar transactions.
(2) Estimated pursuant to Rule 457(c) under the Securities Act, solely for the
purpose of calculating the registration fee, based on the average of the
bid and asked prices for the Company's common stock as reported within
five business days prior to the date of this filing.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment that specifically states this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933, as amended, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
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SUBJECT TO COMPLETION DATED AUGUST 12, 2005
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PROSPECTUS
15,372,245
SHARES
VoIP, INC.
COMMON STOCK
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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 fro 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 July 28, 2004, the closing bid price for
our common stock on the OTCBB was $1.06 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.
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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 Our net losses in 2004 were $4,014,739.
o Our net losses for the period ending March 31, 2005 were $1,507,297
versus a loss of $22,324 for the same period in 2004.
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.
o As of June 30, 2005, a total of 11,030,986 shares of common stock
are issuable upon exercise of warrants at rates from $1.00 to $1.70
per share, 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.
THE COMPANY
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 and Properties" beginning on page 22, and "Management Discussion and
Analysis and Plan of Operation," beginning on page 29.
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 14 4or
Rule 144A under the Securities Act.
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SELECTED FINANCIAL INFORMATION
Balance Sheet Data: March 31, 2005
(unaudited) December 31, 2004
---------------- -----------------
Total assets $ 11,420,368 $ 10,215,552
Long-term liabilities, net -- --
Total liabilities 2,765,565 2,108,114
Shareholders' equity 8,654,803 8,107,438
Three Months Ended Year Ended
March 31 December 31,
Statements of Operations Data: 2005 2004 2004 2003
----------- ----------- ----------- -----------
Revenue $ 2,007,147 $ 0 $ 2,619,393 $ 0
Operating (loss)(1) (1,507,297) (22,324) (4,160,050) 0
Net (loss) (1) (1,507,297) (22,324) (4,014,739) (352,968)
Net (loss) per common share (0.06) (0.01) (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.
Pro Forma Balance Sheet Data: March 31, 2005
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(unaudited)
Total assets $49,094,926 (2)
Long-term liabilities, net --
Total liabilities 21,047,448
Shareholders' equity 28,047,478
Year Ended
Three Months Ended December 31
Pro Forma March 31 (unaudited) (unaudited)
Statements of Operations Data: 2005 2004 2004
------------ ------------ ------------
Revenue $ 7,001,992 $ 3,037,171 $ 16,998,758
Operating (loss) (4,485,292) (552,300) (11,452,405)
Net (loss) (4,722,826) (585,359) (11,964,282)
Net (loss) per common share (0.11) (0.03) (0.39)
(2) Includes $27,946,359 of goodwill that is still under review as to
proper purchase price allocation.
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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 Regional Bell operating company's systems and
provisioning processes;
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 we anticipate future losses and negative cash
flow.
Since inception, we have incurred operating losses, and as of March 31,
2005, we have an accumulated deficit of $6,146,683. We have incurred a net loss
of $4,014,739 for the year ended December 31, 2004, and $1,507,297 for the
quarter ended March 31, 2005. We generated negative cash flow used in operating
activities of $2,926,803 during 2004.
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Our revenues may not grow or even continue at their current level. We will
need to increase our revenues significantly to become profitable or
significantly increase our gross profit margins, however, if our revenues do not
increase as much as we expect or if our expenses increase at a greater pace than
revenues, we may not achieve profitability or, if we became profitable, we may
not be able to sustain or increase profitability on a quarterly or annual basis.
We may incur additional costs and expenses in 2005 related to:
o marketing and advertising related to traffic generation and brand
development;
o purchases of equipment for our operations and network
infrastructure;
o the continued development of our Web site transaction processing and
network infrastructure;
o development and improvement of additional products and services;
o the hiring of additional personnel; and
o evaluating and completing potential acquisitions of other companies.
Our financial results could suffer if we are unable to maintain or grow
sales levels of telephony services.
Our revenues have been generated from a limited number of customers, and we will
not be successful if we do not grow our customer base.
We commenced our current business in early 2004, and we have a limited
operating history. To date, we have sold our products to a limited number of
customers. To be successful, we will need to greatly expand our customer base
and users of our products.
The growth of our customer base could be adversely affected by:
o customer unwillingness to implement our new VoIP products;
o any delays or difficulties that we may incur in completing the
development and introduction of our planned products or product
enhancements;
o new product introductions by our competitors;
o any failure of our products to perform as expected; or
o any difficulty we may incur in meeting customers' delivery
requirements.
If we do not expand our customer base to include additional customers that
deploy our products in all of their applications, our revenues will not grow
significantly, or at all.
We will not retain customers or attract new customers if we do not anticipate
and meet specific customer requirements or if our products do not interoperate
with our customers' existing networks.
To achieve market acceptance for our products, we must effectively
anticipate, and adapt in a timely manner to, customer requirements and offer
products that meet changing customer demands. Prospective customers may require
product features and capabilities that our current products do not have. The
introduction of new or enhanced products also requires that we carefully manage
the transition from older products in order to minimize disruption in customer
ordering patterns and ensure that adequate supplies of new products can be
delivered to meet anticipated customer demand. If we fail to develop products
and offer services that satisfy customer requirements, or to effectively manage
the transition from older products, our ability to create or increase demand for
our products would be seriously harmed and we may lose current and prospective
customers.
Many of our customers will require that our products be designed to
interface with their existing networks, each of which may have different
specifications. Issues caused by an unanticipated lack of interoperability may
result in significant warranty, support and repair costs, divert the attention
of our engineering personnel from our hardware and software development efforts
and cause significant customer relations problems. If our products do not
interoperate with those of our customers' networks, installations could be
delayed or orders for our products could be cancelled, which would seriously
harm our gross margins and result in loss of revenues or customers.
The unpredictability of our quarterly results may adversely affect the trading
price of our common stock.
Our revenues and operating results will vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control and
any of which may cause our stock price to fluctuate. The primary factors that
may affect our revenues and results include the following:
o fluctuation in demand for our VoIP products and the timing and size
of customer orders;
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o cancellations or deferrals of existing customer orders or the
renegotiations of existing contractual commitments;
o the length and variability of the sales cycle for our products;
o new product introductions and enhancements by our competitors and
us;
o timing of revenues recognition and amount of deferred revenues;
o changes in our pricing policies, the pricing policies of our
competitors and the prices of the components of our products;
o our ability to develop, introduce and ship new products and product
enhancements that meet customer requirements in a timely manner;
o the mix of product configurations sold;
o our ability to obtain sufficient supplies of sole or limited source
components;
o our ability to attain and maintain production volumes and quality
levels for our products;
o costs related to acquisitions of complementary products,
technologies or businesses; and
o general economic conditions, as well as those specific to the
telecommunications, networking and related industries.
Our operating expenses are largely fixed in the short-term and, as a
result, a delay in generating or recognizing revenues for the reasons set forth
above, or for any other reason, could cause significant variations in our
operating results. If revenues for a particular quarter are below expectations,
we may not be able to reduce operating expenses proportionally for the quarter.
Any such revenue shortfall would, therefore, have a disproportionate effect on
our operating results for the quarter.
We believe that quarter-to-quarter comparisons of our operating results
are not a good indication of our future performance. It is likely that in some
future quarters, our operating results may be below the expectations of public
market analysts and investors. In this event, the price of our common stock will
probably substantially decrease.
We have incurred substantial losses resulting from issuance of warrants at
prices below the market value of the common stock.
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. Resulting
compensation expenses of $1,936,000, is included in the accompanying
Consolidated Statement of Operations for 2004.
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.
If we fail to retain needed personnel, the implementation of our business plan
could slow or our future growth could halt.
Our business depends upon highly-skilled engineering, sales, marketing and
customer support personnel. Any failure to retain needed qualified personnel
could impair our growth. Our future success depends upon the continued services
of our executive officers who have critical industry experience and
relationships that we rely on to implement our business plan. None of our
officers or key employees is bound by employment agreements for any specific
term. The loss of the services of any of our officers or key employees could
delay the development and introduction of, and negatively impact our ability to
sell, our products.
We may face risks associated with international sales that could impair our
ability to grow our revenues abroad.
We intend to market our products into international markets. This
expansion will require significant management attention and financial resources
to successfully develop direct and indirect international sales and support
channels. In addition, we may not be able to develop international market demand
for our products, which could impair our ability to grow our revenues. We have
limited experience marketing, distributing and supporting our products
internationally and, to do so, we expect that we will need to develop versions
of our products that comply with local standards. Furthermore, international
operations are subject to other inherent risks, including.
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o greater difficulty collecting accounts receivable and longer
collection periods;
o difficulties and costs of staffing and managing international
operations;
o the impact of differing technical standards outside the United
States
o the impact of recessions in economies outside the United States;
o unexpected changes in regulatory requirements and currency exchange
rates;
o certification requirements;
o reduced protection for intellectual property rights in some
countries;
o fluctuation in currency exchange rates;
o potentially adverse tax consequences; and
o political and economic instability
We are entirely dependent upon our VoIP products and our future revenues depend
upon their commercial success.
Our future growth depends upon the commercial success of our VoIP
products. The success of our VoIP products is dependent upon future demand for
VoIP telephony systems and services. In order for the IP telephony market to
continue to grow, several things need to occur. Telephone and cable service
providers must continue to invest in the deployment of high speed broadband
networks to residential and commercial customers. VoIP networks must improve
quality of service for real-time communications, managing effects such as packet
loss, and unreliable bandwidth, so that toll-quality service can be provided.
VoIP telephony equipment and services must achieve a similar level of
reliability that users of the public switched telephone network have come to
expect from their telephone service. VoIP telephony service providers must offer
cost and feature benefits to their customers that are sufficient to cause the
customers to switch away from traditional telephony service providers. If any or
all of these factors fail to occur, our business may not grow.
If we fail to compete successfully, our ability to increase our revenues or
maintain profitability will be impaired.
Competition in the telecommunications market is intense. This market has
historically been dominated by large companies that possess greater resources
and operating histories. We will also face competition from other large
telecommunications and networking companies, some of which have entered our
market by acquiring companies that design competing products. In addition,
several smaller and most private companies have announced products that target
the same market opportunities similar to those we address. Because this market
is rapidly evolving, additional competitors with significant financial resources
may enter these markets and further intensify competition.
Many of our current and potential competitors have significantly greater
selling and marketing, technical, manufacturing, financial and other resources.
Further, some of our competitors sell significant amounts of other products to
our current and prospective customers. Our competitors' broad product
portfolios, coupled with already existing relationships. may cause our customers
to buy our competitors' products or harm our ability to attract new customers.
To compete effectively, we must deliver products that:
o provide extremely high reliability and voice quality;
o scale easily and efficiently;
o interoperate with existing network designs and other vendors'
equipment;
o provide effective network management;
o are accompanied by comprehensive customer support and professional
services; and
o provide a cost-effective and space-efficient solution for service
providers.
If we are unable to compete successfully against our current and future
competitors, we could experience price reductions, order cancellations, loss of
revenues and reduced gross margins.
We depend upon contract manufacturers and any disruption in these relationships
may cause us to fail to meet the demands of our customers and damage our
customer relationships.
We rely on a small number of contract manufacturers to manufacture our
products according to our specifications and to fill orders on a timely basis.
Our contract manufacturers provide comprehensive manufacturing services,
including assembly of our products and procurement of materials. Each of our
contract manufacturers also builds products for other companies and may not
always have sufficient quantities of inventory available to fill our orders or
may not allocate their internal resources to fill these orders on a timely
basis. We do not have long-term supply contracts with our manufacturers 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.
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We and our contract manufacturers rely on a single or limited source(s) for
supply of some components of our products, and if we fail to adequately predict
our manufacturing requirements or if our supply of any of these components is
disrupted, we will be unable to shop our products.
We and our contract manufacturers currently purchase several key
components of our products from single or limited sources. We purchase these
components on a purchase order basis. If we overestimate our component
requirements, we could have excess inventory, which would increase our costs. If
we underestimate our requirements, we may not have adequate supply, which could
interrupt manufacturing of our products and result in delays in shipments and
revenues.
We currently do not have long-term supply contracts with our component
suppliers and they are not required to supply us with products for any specified
periods, in any specified quantities or at any set price, except as may be
specified in a particular purchase order. In the event of a disruption or delay
in supply, or inability to obtain products, we may not be able to develop an
alternate source in a timely manner or at favorable prices, or at all. A failure
to find acceptable alternative sources could hurt our ability to deliver
high-quality products to our customers and negatively affect our operating
margins. In addition, our reliance on our suppliers exposes us to potential
supplier production difficulties or quality variations. 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.
If we are not able to obtain necessary licenses of third-party technology at
acceptable prices, or at all, our products could 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.
Our ability to compete and our business could be jeopardized if we are unable to
protect our intellectual property or become subject to intellectual property
rights litigation, which could require us to incur significant costs.
We currently rely on a combination of patent, copyright, trademark and
trade secret laws and restrictions on disclosure to protect our intellectual
property rights. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our
products, services or technology. Monitoring unauthorized use of our products is
difficult and we cannot be certain that the steps we have taken will prevent
unauthorized use of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States. If
competitors are able to use our technology, our ability to compete effectively
could be harmed.
In addition, we may receive inquiries from other patent holders and may
become subject to claims that we infringe their intellectual property rights.
Any parties asserting that our products infringe upon their proprietary rights
would force us to license their patents for substantial royalty payments or to
defend ourselves and possibly our customers or contract manufacturers in
litigation. These claims and any resulting licensing arrangement or lawsuit, if
successful, could subject us to significant royalty payments or liability for
damages and invalidation of our proprietary rights. Any potential intellectual
property litigation also could force us to do one or more of the following:
o stop selling, incorporating or using our products that use the
challenged intellectual property;
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o obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may
not be available on reasonable terms, or at all; or
o redesign those products that use any allegedly infringing
technology.
Any lawsuits regarding intellectual property rights, regardless of their
success, would be time-consuming, expensive to resolve and would divert our
management's time and attention.
Any investments or acquisitions we make could disrupt our business and seriously
harm our financial condition.
We have made three acquisitions since June 2004 , and we intend to
consider investing in, or acquiring, complementary products, technologies or
businesses. A total of 19.9 million shares of common stock have been issued in
these acquisitions, representing 42% of all shares outstanding as of August
2005. In the event of future investments or acquisitions, we could:
o issue stock that would dilute our current shareholders' percentage
ownership;
o incur debt or assume liabilities;
o incur significant impairment charges related to the write-off of
goodwill and purchased intangible assets;
o incur significant amortization expenses related to purchased
intangible assets; or
o incur large and immediate write-offs for in-process research and
development and stock-based compensation.
Our integration of any acquired products, technologies or businesses will
also involve numerous risks, including:
o problems and unanticipated costs associated with combining the
purchased products, technologies or businesses;
o diversion of management's attention from our core business;
o adverse effects on existing business relationships with suppliers
and customers;
o risks associated with entering markets in which we have limited or
no prior experience; and
o potential loss of key employees, particularly those of the acquired
organizations.
We may be unable to successfully integrate any products, technologies,
businesses or personnel that we might acquire in the future without significant
costs or disruption to our business.
We have encountered a number of problems with the Companies we have
acquired, including that they have failed to operate profitably or generate
positive cash flow, certain financial information has been determined to be
inaccurate, and undisclosed liabilities and contingencies have been discovered.
We are reviewing possible legal action against certain of the sellers regarding
these matters.
To date we have experienced the following problems in the integration of our
acquisition:
The integration of the VoIP Inc. network onto the Voice One network, took
longer than expected by approximately 30 days. This delay was primarily caused
by the learning curve on what the integration required by both technical teams.
Even though the businesses are very similar; the customer base was somewhat
different, and this required additional training for the combined team, in order
to ensure that the service level was not affected and that the transition was
seamless to the customers. We successfully achieved this objective.
Another issue encountered was the integration of the teams as some of the
skill sets and systems knowledge had to be shared and accepted into the new
culture. This was additionally hampered by the physical distance between both
entities.
If we are subject to employment claims, we could incur substantial costs in
defending ourselves.
We may become subject to employment claims in connection with employee
terminations. In addition, companies in our industry whose employees accept
positions with competitors frequently claim that their competitors have engaged
in unfair hiring practices. These claims may result in material litigation. We
could incur substantial costs defending ourselves or our employees against those
claims, regardless of their merits. In addition, defending ourselves from those
types of claims could divert our management's attention from our operations. If
we are found liable in connection with any employment claim, we may incur
significant costs that could adversely impact our financial condition and
results of operations.
10
The Company is substantially controlled by its management.
As of March 31, 2005 the executive officers, key employees and directors
of the Company and their family members and associates beneficially owned
approximately 61% of the shares of outstanding common stock. Accordingly, and
because there is no cumulative voting for directors, our executive officers and
directors will be in a position to influence the election of all the directors
of the Company and to control through their stock ownership the business of the
Company.
RISK FACTORS RELATED TO OUR INDUSTRY
Our business may be adversely affected by developments in the telecommunications
industry.
Through the year 2000, the telecommunications market experienced rapid
growth spurred by a number of factors, including deregulation in the industry,
entry of a large number of new emerging service providers, growth in data
traffic and the availability of significant capital from the financial markets.
Commencing in 2001 and continuing thereafter, the telecommunications industry
experienced a reversal of some of these trends, marked by a sharp contraction in
the availability of capital, dramatic reductions in capital expenditures by
service providers and financial difficulties and, in some cases, bankruptcies
experienced by service providers. These conditions caused a substantial
reduction in demand for telecommunications equipment.
We expect the developments described above to continue to affect our
business in the following manner:
o our ability to accurately forecast revenues is diminished;
o our revenues could be reduced; and
o we may incur losses because a high percentage of our operating
expenses are and will continue to be fixed in the short-term.
Our business, operating results and financial condition could be
materially and adversely affected by any one or a combination of the above.
We may not be able to compete with providers that can bundle long distance
services with other offerings.
Our competitors may be able to bundle services and products that we do not
offer together with long distance or Internet telephony services. These services
could include wireless communications, voice and data services, Internet access
and cable television. This form of bundling would put us at a competitive
disadvantage if these providers can combine a variety of service offerings at a
single attractive price. In addition, some of the telecommunications and other
companies that compete with us may be able to provide customers with lower
communications costs or other incentives with their services reducing the
overall cost of their communications packages, and significantly increasing
pricing pressures on our services. This form of competition could significantly
reduce our revenues.
We may be vulnerable to technical malfunctions which could adversely affect our
operations.
We depend upon our software systems, communications hardware and enhanced
services platform to conduct our telephony sales and telephone routing, manage
our network, track accounting balances and perform other vital functions. If we
experience substantial technical difficulties with our hardware or software, we
may not succeed in routing traffic effectively, or in tracking account balances
accurately, which could adversely affect our operations. We have experienced
periodic system interruptions, which we believe will continue to occur from
time-to-time. Since our operations depend on our ability to successfully expand
our network and to integrate new technologies and equipment into our network,
there is an increased risk of system failure as well as a natural strain on the
system.
Our systems may not accommodate significant growth in the number of users which
could have a negative effect on our operations.
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. Decreasing
telecommunication rates may diminish or negatively impact the pricing of our
services.
11
International and domestic telecommunication rates have decreased
significantly over the last few years in most of the markets in which we operate
and we anticipate that this trend will continue. Users who select our services
to take advantage of our current pricing differential between our rates and
traditional telecommunications rates may switch to traditional
telecommunications carriers as our pricing differential diminishes and we may be
unable to attract new customers in the future. Continued rate decreases could
require us to lower our rates to remain competitive and could reduce our gross
profit margins.
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-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.
Recently one of our Internet telephony competitors was sued by a state
government for providing false, misleading and confusing information regarding
how 911 services work for broad band phone service. We can't predict what impact
this will make on our VoIP services which currently do not include 911 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 authorization 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.
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 will need to spend significant amounts of capital to
enhance and expand our services to keep pace with changing technologies.
The Internet industry may become subject to increased government regulation
which could have a negative effect on our operations.
Various actions have been taken by the United States Congress and the
Federal courts that, in some cases impose some forms of regulation on the
Internet, and in other cases protect the Internet from regulation. Domestic and
international authorities regularly consider proposed legislation that could
result in new regulations on the Internet. It is impossible to say at this time
whether and to what extent the Internet may ultimately be regulated domestically
or internationally. Increased regulation of the Internet may decrease its
growth, which may negatively impact the cost of doing business via the Internet
or otherwise materially adversely affect our business, results of operations and
financial condition.
12
In addition, because our services are accessible worldwide, and we
facilitate the sale of goods to users worldwide, other jurisdictions may claim
that we are required to comply with their laws and could subject us to taxes and
penalties for the failure to comply.
Sales tax collection by states may adversely affect our growth.
We do not currently collect sales or other similar taxes for services sold
through our Web site. However, one or more states may seek to impose sales tax
or similar collection obligations on out-of-state companies, such as ours, which
engage in Internet commerce. A successful assertion by one or more states or any
other country that we should collect sales or other taxes on the sale of cards
or services on our system could have a material adverse effect on our
operations.
The market for VoIP products for the new public network is evolving and our
business will suffer if it does not develop as we expect.
The market for our products is rapidly evolving. Our technology may not be
widely accepted as a platform for voice and a viable market for our products may
not develop or be sustainable. If this market does not develop, or develops more
slowly than we expect, we may not be able to sell our products in significant
volumes, or at all.
If we do not respond rapidly to technological changes or to changes in industry
standards, our products could become obsolete.
The market for VoIP products is likely to be characterized by rapid
technological change and frequent new product introductions. We may be unable to
respond quickly or effectively to these developments. We may experience
difficulties with software development, hardware design, manufacturing or
marketing that could delay or prevent our development, introduction or marketing
of new products and enhancements. The introduction of new products by our
competitors, the market acceptance of products based on new or alternative
technologies or the emergence of new industry standards could render our
existing or future products obsolete. If the standards adopted are different
from those that we have chosen to support, market acceptance of our products may
be significantly reduced or delayed. If our products become technologically
obsolete, we may be unable to sell our products in the marketplace and generate
revenues.
RISKS RELATED TO OUR STOCK
We may 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 may 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:
13
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.
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 of the warrants held by
the selling shareholders. If any of such warrants are exercised, 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."
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 August 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.
14
Maximum Number of
Shares of Common Stock Number of Shares of
Selling Shareholder Beneficially Owned Prior Common Stock Owned Balance After the
the Offering Following the Offering Offering
Assuming
Maximum Sale of All
Number of Shares
Shares Warrants Shares Sold Offered Shares
Hereby Hereby Warrants
Stonestreet Limited Partnership 718,750 359,375 718,750 359,375 - -
Whalehaven Capital 575,000 287,500 575,000 287,500 - -
Ellis International 359,375 179,688 359,375 179,688 - -
Bristol Investment Fund 958,332 479,166 958,332 479,166 - -
Alpha Capital 1,005,824 479,166 958,332 479,166 47,492 -
Additional Registered Shares Issuable
in certain circumstances pursuant to
subscription agreemens with
foregoing persons - - 3,857,278 - - -
Adam Sosne 15,000 15,000 - - -
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 - - -
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 - - -
15
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 12,500 12,500 - -
Gerald T. Williamson 12,500 12,500 12,500 12,500 - -
Howard K. Brown 20,000 20,000 20,000 20,000 - -
James D. Conner 20,000 20,000 20,000 20,000 - -
Kenneth D. Wickwire 12,500 12,500 12,500 12,500 - -
Michael T. Macomson 25,000 25,000 25,000 25,000 - -
Michael L. Cole 12,500 12,500 12,500 12,500 - -
Philip Ackert 25,000 25,000 25,000 25,000 - -
Puline Tedesco 20,192 12,500 12,500 12,500 7,692 -
Robert W. Fitzgerald 25,000 25,000 25,000 25,000 - -
Robert C. Demmy 12,500 12,500 12,500 12,500 - -
Robert H. McDonald 100,000 100,000 100,000 100,000 - -
Roderick R. Baker 18,750 18,750 18,750 18,750 - -
Samuel Cole Porter 13,000 13,000 13,000 13,000 - -
Ted Bodewschatz 12,500 12,500 12,500 12,500 - -
William D. Chadwick 25,000 25,000 25,000 25,000 - -
Andrew J. Dietzler & 12,500 12,500 12,500 12,500 - -
Arnold R. Atkins 13,125 13,125 13,125 13,125 - -
Arturo Alonso 12,500 12,500 12,500 12,500 - -
Dominick Schiavone 50,000 50,000 50,000 50,000 - -
Herbert & Rita Cooper 12,500 12,500 12,500 12,500 - -
Ronald E. Stasky & 12,500 12,500 12,500 12,500 - -
Jeffrey G. Roberts 35,000 15,000 15,000 15,000 20,000 -
Joseph & David Kwietnewski 12,500 12,500 12,500 12,500 - -
Kevin Grenz 43,750 43,750 43,750 43,750 - -
Larry Street 31,250 31,250 31,250 31,250 - -
Ronna Fisher 12,500 12,500 12,500 12,500 - -
Stuart I. Kosh 1,334,477 350,000 350,000 350,000 984,477 -
NITE Capital, LP 287,500 143,750 287,500 143,750 - -
Thomas F. Reeves 152,711 56,250 56,250 56,250 96,461 -
David Brown 25,000 25,000 25,000 25,000 - -
Harvey Lowenstein Ira 12,500 12,500 12,500 12,500 - -
Thomas R. Harkins 41,250 41,250 41,250 41,250 - -
Thomas R. Harkins & 37,500 37,500 37,500 37,500 - -
Anthony Gallo 9,750 9,750 - - -
C. Ben Bates, Jr. 4,000 3,000 - 1,000 -
Claude S Morris 16,250 16,250 - - -
Connie Krupka 3,000 1,000 - 2,000 -
Creative Marketing 100,000 400,000 100,000 400,000 - -
David H. Arrington 3,300 2,333 - 967 -
David L. Ebershoff 91,000 55,000 - 36,000 -
David S. Trescot 2,000 1,000 - 1,000 -
Granite Enterprise 20,000 20,000 - - -
Harold E. Gear 151,000 85,000 - 66,000 -
Jack Trescot 125,667 57,000 - 68,667 -
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 20,000 54,138 - -
Nancy J Trescot 10,000 1,000 - 9,000 -
16
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 -
Van Noy Thornhill 3,000 2,000 - 1,000 -
M500 Inc 125,000 50,000 - 75,000 -
Hitron Technologies USA 239,097 239,097 - - -
WW Gay 80,000 30,000 - 50,000 -
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 -
Andrew 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 -
George Yaffe 103,125 10,313 - 92,812 -
Gino & Mary De Conti 8,052 805 - 7,247 -
GMN Partnership, (Julius Grant & Co.) 167,639 16,764 - 150,875 -
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 249,672 24,967 - 224,705 -
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 -
Lee Yaffe 107,250 10,725 - 96,525 -
Linda Yaffe 10,313 1,031 - 9,282 -
Marcg & 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 -
Peter Currier 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 -
17
Stephen Samuelson 8,052 805 - 7,247 -
Stephen Smith 52,593 5,259 - 47,334 -
Thad Bydlon 189,216 39,400 - 149,816 -
William Scampoli 16,109 1,611 - 14,498 -
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 - 75,063 75,063 - -
Stefan Gort 10,000 10,000 - - -
TOTAL 14,589,861 3,567,721 11,879,587 3,492,658 6,567,552 -
18
--------------------------
* 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.
(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.
(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.
(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 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.
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.
19
We have agreed to pay for all costs and expenses incident to the issuance,
offer, sale and delivery of the shares of common stock offered by the selling
shareholders, including all expenses and fees of preparing, filing and printing
the registration statement and prospectus and related exhibits, amendments and
supplements thereto and mailing of such items. We will not pay sales or
brokerage commissions or discounts with respect to sales of the shares offered
by the selling shareholders.
Any broker-dealers or agents that are involved in selling the shares are
"underwriters" within the meaning of the Securities Act in connection with such
sales. In such event, any commissions received by such broker-dealers or agents
and any profit on the resale of the shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. No selling
shareholder 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
*Trading in the shares of our predecessor was sporadic and did not produce
reported quotations.
Holders
As of March 31, 2005 there were approximately 310 shareholders of record
and an unknown number of beneficial holders holding through brokers.
BUSINESS AND PROPERTIES
VoIP, Inc., headquartered in Fort Lauderdale, FL, is an emerging global
provider of Voice over Internet Protocol (VoIP) based solutions enabling
residential and business customers more user friendly and affordable ways to
communicate. Through its subsidiaries, VoIP, Inc. provides a comprehensive
portfolio of advanced telecommunications technologies, enhanced services,
broadband products, and fulfillment services to the VoIP industry. Customers
include Inter Exchange Carriers (IXC's), Competitive Local Exchange Carriers
(CLEC's), Internet Service Providers (ISP's), Cable Operators and VoIP Service
Providers in the United States and various countries around the world.
20
The Company operates multiple wholly-owned subsidiaries and business
units, each with a specific industry focus. VoIP's subsidiaries and business
units include 1-800-Talk-Time, VoiceOne Carrier Services, VoIP Solutions, Inc.
and DTNet Technologies, Inc. The VoiceOne business unit provides wholesale IP
and TDM Access and Termination Services to Carriers worldwide. The national
Multi-Protocol Label Switching (MPLS) network has been specially designed with a
protocol agnostic soft switch architecture, accepting traffic from traditional
Time Division Multiplexed (TDM) carrier circuits to the emerging industry
standard Session Initiation Protocol (SIP) traffic transported by Internet
Protocol (IP). VoiceOne currently has Network Access Points (NAPs) operating in
Orlando, Atlanta, New York, Dallas and Los Angeles. A total of 22 NAPs are
planned to be operational by the end of 2005 that will be capable of addressing
the top 100 MSA's representing 93 percent of the domestic population. VoIP
Solutions focus is to provide Enhanced Services that complement the core access
and termination services provided by VoiceOne. VoIPSolution's Virtual Service
Provider (VSP) program provides a complete hosted and managed solution that
enables Service Providers to offer their own branded VoIP telephony services to
their subscriber base without the investment of ownership. In addition, VoIP
Solutions manufacturers CPE products including the Multi-media Terminal Adapter
(MTA) with a built in router which enables anyone with a broadband connection to
use a regular telephone to make VoIP calls at significant savings. DTNet
Technologies, Inc. is a world-class Fulfillment and Supply Chain Solutions
Provider for the group's telecommunications and broadband partners as well as a
Value-Added Distributor of broadband products and services. The Company is an
established and respected leader in the supply of Broadband components and CPE
to the Cable industry. DTNet was awarded the National Cable Television
Cooperative's (NCTC) first Platinum Vendor status, giving the company instant
creditability and direct access to over 1400 independent cable companies. The
OEM distribution of DSL modems, Cable modems and WiFi routers has been
complemented by the Multimedia Terminal Adaptor (MTA) used by VoIP Service
Providers and supported by VoiceOne Pathfinder auto provisioning. This operation
also provides centralized, cost-effective and efficient warehousing, shipping,
receiving and fulfillment for all VOIP, Inc. subsidiary companies. Our strategy
is to integrate the strengths of our subsidiaries and become a recognized leader
in providing IP telephony services, customer premise equipment, bundled IP
solution packages, IPcarriage services and innovative wireless fidelity ("WiFi")
technology solutions for residential and enterprise customers.
I-800-Talk-Time Summary
1-800-TalkTime(R) is the VoIP, Inc. business unit that provides retail
subscriber based broadband communications, offering residential and business
enterprise phone services around the globe. 1-800-TalkTime(R) offers
communication services that allow customers to use the power of their broadband
connection to make local and long distance calls worldwide. 1-800-TalkTime(R)
uses any DSL, cable modem, wireless or other broadband Internet connection
anywhere in the world to access the network. Once on the network, VoiceOne is
used to terminate calls globally. Customers have a choice of rate plans that
include a United States telephone number that can be chosen from a selection of
area codes. Customers use the two line MTA (telephone / PBX adaptor) supplied by
the Company or can connect any compatible telephone adaptor or USB telephone.
The service works independently of any telephone either replacing existing
service or providing one or two additional telephone lines. The cost of long
distance and international minutes are much less than competitive local phone
service operators with the option of bundled and unlimited plan products.
Service is typically prepaid with customers signing up online and paying
by credit card. Payments and provisioning are fully automated, the two services
obtain revenues from three major sources - promotion leading to direct web site
sign up, monthly service charges and call charges.
VoiceOne Summary
VoiceOne is a leading wholesale provider of packet communications services
to CLEC's, ISPs, IXC's cable companies and other communication service providers
("Carriers"). The Company's solutions are targeted at Carriers that wish to
provide Voice over Internet Protocol ("VoIP") and other value-added voice, data
and enhanced services. The VoiceOne network was designed and built over the last
three years by Shawn Lewis and his team of engineers. Shawn has spent the last
two and a half years developing the technology that serves as the core for VoIP
Inc.'s subsidiaries and business units.
The national MPLS network has been specially designed with protocol
agnostic soft switch architecture, accepting traffic from traditional Time
Division Multiplexed (TDM) carriers to the emerging industry standard Session
Initiation Protocol (SIP) traffic transported by Internet Protocol (IP).
21
Network Access Points (NAPs) are presently commissioned in Orlando,
Atlanta, New York, Dallas and Los Angeles with Chicago currently being deployed.
A total of 22 additional NAPs are planned to be operational by the end of 2005
that will be capable of addressing the top 100 MSA's representing 93% of the
domestic population.
VoiceOne has developed business and technology alliances with Sonus
Networks (NASDAQ NM:SONS) and Intel Corporation (NASDAQ NM:INTC) that enable the
companies to jointly develop their proprietary, next generation voice, data and
enhanced communication services. These alliances have given VoIP, Inc. a
substantial competitive advantage in the emerging Voice over IP (VoIP) industry.
VoiceOne has developed FCC compliant and is deploying FCC approved E911
emergency access to the existing infrastructure without using another party's
data base. Once 911-PSTN line is connected on the 911-PSTN port, our Multimedia
Terminal Adaptor patent pending automated voice switching service is available.
In case of power outage or the Internet is not available, the relay will be
switched to 911-PSTN line automatically. So that a user is able to get the 911
emergency service like a normal phone, 911-PSTN backup function provides the
911-PSTN lifeline and supports lasting voice service through the 911-PSTN line
as well as VoIP.
Telephone numbers supplied by VoiceOne are fully compliant with the new
E911 regulations.
VOIP Solutions Summary
VoIP Solutions supplies a suite of Enhanced Services solutions for the
growing industry of IP Telephony Service Providers facilitated by the VoiceOne
network. As consumer and business acceptance of VoIP increases, CLEC's and other
providers of traditional telephone services must offer VoIP services and be able
to market services outside of their traditional geographic boundaries to remain
competitive. Cable operators and ISP's view VoIP as an incremental new bundled
service revenue opportunity.
Most new entrants to the VoIP service business have discovered that
developing the technology, sourcing telephone numbers, billing integration,
service features, Customer Premises Equipment provisioning and many other issues
make their entry to this lucrative market capital intensive and challenging. The
recent regulatory requirements pertaining to E911 access from VoIP service
telephone numbers add even more complexity to providing service at the quality
of an ROBC.
VoIP Solutions provides a number of value added solutions to meet the
needs of each primary customer group. Each service provides a clear
differentiation from competitors who offer little more than the commodity of
terminating minutes. They cater to new emerging markets and have the potential
for high international profit margins. The reach of the VoiceOne network
provides access to local line services and global termination.
To maintain our philosophy of being the carriers' carrier, all services
are white labeled and dynamic, permitting service providers to package, brand
and sell the products to meet the needs of their targeted markets. VoIP
Solutions will work with a client to customize a solution including the
provision of hardware, software and services to meet their requirements. The
primary product groups are defined below.
The company maintains a stock of all VoIP-Solution's products for sale to
end-users, carriers and resellers. Included is the primary product "MTA"
(Multimedia Terminal Adaptor) which are manufactured with varying options to
meet the demands of today's network operators for tomorrow's future IP networks.
Products include:
VoIP ADSL Modem (SIP)
MTA-A201C - 1 line VoIP, 1 line PSTN
MTA-A201W - 2 lines VoIP / LAN (802.11b) or (g)
MTA-A201CW - 1 line VoIP, 1 line PSTN / LAN (802.11b) or (g)
VoIP Cable Modem (SIP)
MTA-C102 - 2 Line VoIP
MTA-C101C - 1 Line VoIP, 1 Line PSTN
MTA-C102W - 2 lines VoIP / LAN (802.11b) or (g)
MTA-C102CW - 1 line VoIP, 1 line PSTN / LAN (802.11b) or (g)
VoIP MTA (SIP)
MTA-102 - 2 lines VoIP
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MTA-102C - 1 line VoIP, 1 line PSTN
MTA-102W - 2 lines VoIP / LAN (802.11b) or (g)
MTA-102CW - 1 line VoIP, 1 line PSTN / LAN (802.11b) or (g)
The Company has developed intellectual property and software for the soft
switch platform and associated applications developed for the1-800-talk-time
product offering. This includes the source code for the switching servers and
related application servers. An agreement with Porta One provides access to
software source code and database schemas that permit custom application, layer
development and integration. Along with the billing and back office application,
VoIP Solutions can supply all of the components, services and customization to
fully equip a VoIP Telco.
Human Resource Team; VoIP Inc. Group
VoIP, Inc. currently employs 55 persons in the following capacities: 7
executive officers, 23 general and administrative, and 25 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.
Our corporate headquarters are located at: 12330 SW 53rd Street, Ft.
Lauderdale, FL 33330.
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.
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.
23
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 (except for CPE, as
mentioned.)
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.)
Industry Overview
USA - VoIP Market - Analysis & Statistics
In 2005, VoIP entered the mainstream residential telephony market in the
USA, which is rapidly becoming a billion dollar industry. Until 2004, Vonage was
the main provider of residential VoIP. In 2005, the lead was taken over by the
powerful MSOs, or cable TV companies. Government policy supports VoIP.
Threatened with major revenue and customer losses, the wire line telcos have
responded by investing billions to build out fiber networks and recapture
customers lost to cable. Cellular companies derive 80% of their revenue from
voice calls, and are likely to be the greatest losers from VoIP technology.
VOIP MARKET OVERVIEW AND ANALYSIS
EARLY DEVELOPMENT-1995 - 2002
The technology was first introduced in America in 1995, when companies
such as Net2Phone started letting people call free from PC to PC using IP
addresses, but with very poor sound quality.
In the late 1990s, Cisco, Lucent and others built adapters to convert
analog voice signals into packets at the caller's home, so regular phones could
be used. They also developed gateways to translate packets and IP addresses into
voice conversations and phone numbers at phone switching stations so calls could
use traditional phone lines. This improved the quality, but not enough.
In 2002, TeleGeography reported that 10% of US international calls used
VoIP. At that time, prepaid calling cards that charge a few cents per minute
were the key users of VoIP networks.
In 2002 and 2003, growth in VoIP was small and largely limited to a niche
market for technology savvy users. VoIP had been heralded as a large emerging
industry since 1997, but by 2003 it still accounted for only 10% of total voice
traffic in the US, and a smaller percentage of end-user connections.
Vonage Holdings Corporation was the first company to use VoIP technology
with a nationwide offering in 2002. Vonage subscribers can use the service
wherever they can plug a phone and the adapter into a broadband line, the phone
number stays with the device.
24
VoIP ENTERS THE MAINSTREAM - 2005
In 2005 the cable companies started to sell VoIP to their 40 million cable
customers, and market their triple play bundles, namely voice, Internet and TV,
to attract new customers from around 80 million homes which are passed across
their coverage areas. Technology research firm, Strategy Analysis, released a
report in February 2005 predicting cable VoIP subscribers would grow from 3.3
million to over 5 million by the end of the year.
In January 2005, Comcast launched VoIP in Indianapolis, Philadelphia and
Springfield and announced that it would launch the service into 20 more cities
by year-end and over its entire cable network of 21 million subscribers by
mid-2006. Comcast is the country's largest cable operator. Its digital cable
network passes 40 million homes in 41 states. By early 2005, 8 million of the
company's 21 million subscribers had broadband Internet access over cable modem,
and 1.4 million used the cable to carry their voice calls, at that time
transmitted over the traditional switched network.
The initiative sent a shock wave through the wire line market. Although
smaller companies such as Vonage had offered VoIP since 2002, Comcast had a
larger captive market in its cable TV subscribers, greater network coverage,
extensive financial backing and political clout. The entry of Comcast into the
VoIP market was a threat to the te1co incumbents. The move formalized the
consolidation of the telecommunications and the broadcasting markets into a
single market of triple play operators, delivering bundled entertainment and
communications services, including broadband Internet access, multi-channel
television, high-definition programming, video-on-demand and voice calls over a
single access line. Cable operators and wire line te1cos now compete head
to-head to be the primary pipeline to the home.
Customers
Our significant customers include the following: Anew Broadband, Inc.,
Cima Telecom, Inc., SpeedVoip, Inc., Voip4U, Limited., eVoice International,
Inc., Acumen Telecommunications, Inc., Virtual Communications, Inc., Parrot
Communications, Inc., and FMC Telecom, Inc. These customers accounted for
approximately 45% of our revenues during the 2004 fiscal year
We also have the following companies testing or in the final field beta
tests of our hardware and various products: IBM, Scientific Atlanta, Sprint,
Alcatel, Quest and DSLI.
Marketing and Business Strategy
Volo Communications has promoted its services using the VoiceOne brand.
The Company plans to capture high volume domestic origination and termination
business from CLEC's and other TDM based carriers with an increasing penetration
of the international termination market. The brand is promoted through industry
publications and a number of trade shows. Accounts are being won from Level 3
and other larger competitors through the provision of customized flexible
solutions to meet the needs of each client. VoIP Solutions adds additional value
to the VoiceOne network by providing value added enhanced services, each
targeted at specific market segments. The combination of the backbone network
and unique enhanced services provides the ability to supply a complete end to
end solution from a single source.
1-800-Talktime plans to support the marketing of 1-800-Talktime Service
with an extensive communications campaign that will include mass market
advertising on television, radio and in print and through direct mail, virtual
marketing and online advertising in addition to an extensive network of
resellers through out the world. We have emphasized sales in the international
marketplace through resellers and wholesalers, believing that the need for a
less expensive service is vital in many countries globally. We will seek
marketing partners in each country that is identified as a potential market in
order to provide a local presence. Manuals, interfaces, voice prompts, and
operators will be tailored for the primary language of the nationality, and the
sales force will operate locally to provide "high-touch" comfort to these
localized markets. A major opportunity for resale is being developed with a
private retail wireless vendor, to allow for a very "high-touch" interaction
with customers. This model has proven to be successful in wireless sales, and it
is believed that the same marketing strategy and distribution channel will be
successful for other telephony services that the company can offer consumers.
Most competitors are focused on the United States market. While providing
innovative and focused solutions for reseller channels in the United States, we
will be focused on the international market. The highest margin revenue stream
is from the off net termination of international calls from customers outside
the United States. The extensive industry experience and potential customer and
partner contacts of the Company executives will assist the rapid establishment
of competitive services and aggressive international sales channels.
25
Each country has domestic and regional markets. Through the use of
multiple web sites, regional rate plans and multi-language support, and
multi-currency billing, we will work with in-country partners to provide local
Points of Presence (POP's) that will permit local telephone and 800 numbers to
be available for local marketing and for the sale to overseas customers.
Interconnection with local carriers and PTT's will in turn reduce the off net
termination costs to that country and open access to the multi-billion dollar
international wholesale minutes market.
Competition
At the present time, we believe that with a comprehensive suite of
components, VoIP, Inc. will be able to provide to customers a full range of
products and services targeting many different market segments. Many of these
solutions are offered by a wide variety of competitors, most of which are larger
and better capitalized than we.
The primary competitors of each company include the following:
o Volo Communications: Level 3, Qwest, MCI, Sprint.
o 1-800-Talktime: Vonage, Packet8, DeltaThree, Voicepulse
o VoIP Solutions/iMax: (Hardware): Sipura, Grandstream, Cisco,
Mediatrix
o VoIP Solutions: (SIP softswitch): Nuera, Broadsoft, Pingtel, Nortel
o VoIP Solutions: (integration): Accenture, Hughes Software
o Wireless: (Hardware) Cisco, 3 Com, Motorola, Terabeam
We believe that we may be able to compete effectively on a basis that we
can offer an end to end solution to meet the needs of many different market
segments. Most customers prefer a single point of contact and responsibility. In
most situations, multiple vendors and carriers are required to deliver a
solution making it impossible to have any single vendor accept responsibility
for overall performance. The VoiceOnetm network is highly scalable as is the
general cost structure. This ensures that fixed network costs, variable costs
and general overheads are kept as low as possible. Competitors cannot achieve
this as they have multiple layers of fixed overheads and existing investment in
outdated circuit switched technology and networks that can only be replaced with
time and significant additional capital.
A major competitive advantage is that many of the network components and
applications have been developed from the ground up by our engineers. The
resulting applications, cost efficiencies and flexibility cannot simply be
purchased off the shelf by our competitors. Real time automatic self
provisioning and other applications have significantly reduced the number of
accounting, support and provisioning related employees required to service
customers.
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.
26
Regulation
The Company currently is as a value added service provider. The hardware,
integration, softswitch, and wireless portions of the firm 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.
MANAGEMENT DISCUSSION AND ANALYSIS
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.
27
Balance Sheet Data: March 31, 2005
(unaudited) December 31, 2004
---------------- ----------------
Total assets $ 11,420,368 $ 10,215,552
Long-term liabilities, net -- --
Total liabilities 2,765,565 2,108,114
Shareholders' equity 8,654,803 8,107,438
Three Months Ended Year Ended
March 31, December 31,
Statements of Operations Data: 2005 2004 2004 2003
----------- ----------- ----------- -----------
Revenue $ 2,007,147 $ 0 $ 2,619,393 $ 0
Operating (loss)(1) (1,507,297) (22,324) (4,160,050) 0
Net (loss) (1) (1,507,297) (22,324) (4,014,739) (352,968)
----------- ----------- ----------- -----------
Net (loss) per common share (0.06) (0.01) (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
The Company commenced operations during the fourth quarter of 1998 and
focused significant resources through December 2003 in procuring and importing
its tea inventory and developing sales and distribution channels. Accordingly,
the Company has generated only minimal revenues and experienced cumulative
losses of approximately $624,647 as of December 31, 2003 which amount includes
the recording of an inventory reserve of $251,534 during 2003.
For the respective quarters ended March 31, 2005 and 2004, the Company had
revenues of $2,007,147 and $0.
For the respective years ended December 31, 2004 and 2003, the Company had
revenues of $2,619,393 and $0.
The significant increase in revenues was provided primarily by
Voipamericas and DTNet which were aqurired companies and the sales increases
occurred prior to the acquisition dates. As mentioned in the financial
statements, the company acquired DTNet Technologies, Inc. in June 2004 and
Voipamericas in September 2004. DTNet provides customer premises equipment to
cable and DSL Internet providers throughout North America. DTNet sales were
approximately $4.7 million in 2003. Voipamericas revenues for the first nine
months of the year were $1.4 million. Management believes that the acquisitions
of DTNet and Voipamericas will provide proven distribution channels and
leadership in sales throughout the Americas. DTNet and Voipamericas complement
the company's strategy to deliver Voice over Internet Protocol over a wireless
local loop and deliver service provider solutions to cable operators.
28
Net losses for the respective quarters ended March 31, 2005 and 2004 were
$1,507,297 and $22,324. Net loss per share was approximately $0.06 and $0.01
respectively for each period. Total net losses for the respective years ended
December 31, 2004 and 2003 were $4,014,739 and $352,968. Net loss per share was
approximately ($0.27) and $(0.20) respectively for each year. This included the
one time event of the issuance of 4,400,000 warrants to two executives to
acquire 2,200,000 Company shares at $1.00 each. The difference between the
market value and the $1.00 share price is $3,520,000. Additionally, there is an
increase of $884,937 in operating costs attributable basically to start up
operations.
Liquidity and Capital Resources
As of March 31, 2005, we had cash and cash equivalents approximating
$925,534 compared to $1,141,205 at December 31, 2004. We currently have one
borrowing arrangement with a balance of $ 1.2 million as of March 31, 2005, with
notes payable to a shareholder. Cash used in operating activities of $2.2
million in first quarter 2005, was primarily attributable to the net loss of
$1.5 million, which includes $239,000 as a non cash item related to the
valuation of the common stocks exchanged for warrants during the period.
Additionally, includes $108,000 as non cash items for the valuation of the
Company Stock Option Plan vested as of March 31, 2005. Cash provided by
financing activities in first quarter 2005 consisted primarily of $1.7 million
of proceeds resulting from the sale of common stock to investors in private
placement transactions during the whole first quarter 2005 and proceeds from
issuance of note payable of $1.0 million.
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. 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.
Liquidity for the period from inception through March 31, 2005 has been
mainly provided by sales of common stock through private placements and
borrowing from affiliates. Management has taken actions directly related to the
generation of product sales during first quarter 2005, showing revenues for $2.0
million on first quarter 2005.
In June 2005 the Company signed an agreement with subscribers to convert
their loan of $1,552,915 into the Company's Common Shares.
The Company anticipates that all working capital requirements for 2005
will be satisfied from its operations and, in addition working capital resources
are anticipated to be obtained from the sales of securities through private
placements. An additional $1.2 million of funding will become immediately
available to us at the time of the effectiveness of this registration statement.
Caerus, Inc. and its subsidiaries were acquired on June 1, 2005. Their
revenue exceeded $14 million in 2004 and is projected to exceed $24 million in
2005. Caerus, Inc. and its subsidiaries continue to install new call termination
capabilities. The Company will be increasingly positioned as the year progresses
to satisfy existing revenue demands as well as pursue new revenue opportunities.
In addition, Volo plans to add a new sales channel (independent sales
representatives and agents) in the 4th quarter of 2005 to tap additional
markets. As revenue increases, the Company also expects to be in a position to
negotiate more favorable terms with its telecommunications vendors, thereby
improving gross margin.
29
Payments Due by Period
The following table illustrates our outstanding debts and the terms of
that debt as of December 31, 2004:
Contractual Obligations Total Less than 1 Year
--------------------------------------------------------------------------
Long-Term Debt $ 0.00 $ 0.00
Notes Payable to shareholder $1,209,334 $1,209,334
Operating Leases $ 35,572 $ 35,572
Purchase Obligations $ 0.00 $ 0.00
-----------------------------
Total $1,244,906 $1,244,906
=============================
Recent Developments
We have recently made a number of announcements regarding key business
development milestones that should start to materially contribute to our
revenues and profitability improvement during the last two quarters of 2005.
t 0 0 On June 1, 2005 VoIP, Inc. completed the acquisition of Caerus and
began the process of merging operations. As part of the agreement, VoIP, Inc.
has acquired 100 percent of the business of Caerus, Inc. and its wholly owned
subsidiaries Volo Communications, Inc., Caerus Networks, Inc., and Caerus
Billing, Inc. in exchange for 16.9 million common shares of VoIP Inc. The
Company will continue to operate Caerus, Inc. and its subsidiaries under their
existing names. Proforma statements relating to the acquisition of Caerus, Inc.
are included in section F.
The VoiceOne Network Operations Center (NOC) which is part of Caerus,
Inc., is a fully manned 24 x 7 operation and is the heartbeat of Volo
Communications. The NOC is where the company monitors all aspects of the
technical environment, from its nationwide OC-12 backbone to network routers,
SIP proxies and numerous routing gateways, soft switches and other aspects of
its VOIP infrastructure. Fully redundant technologies are deployed in a scalable
network environment that enables the company to compete effectively and
efficiently in the ever-evolving and demanding IP telecommunications
marketplace. The VoiceOne network incorporates an advanced MPLS (Multi-Protocol
Label Switching) architecture which is designed and operated to offer
world-class services to carriers and service providers. VoiceOne features direct
interconnection facilities with multiple LECs (Local Exchange Carriers), CLECs,
IXCs, service providers, cable operators, wireless carriers and resellers.
On May 04, 2005, VoIP Inc. subsidiary VoIP Solutions Inc. signed a Virtual
Service Provider (VSP) Agreement with Telebit Telecomunicacoes e Participacoes
Ltda, an affiliate of America Latina Telecomunicacoes Avancadas S/A.
The Company's Enhanced Services Platform will permit Telebit to offer
customers rate plans and services in the local currency and language. Telebit
will have a local gateway connected to VoIP Solutions' U.S. network hub
permitting interconnection with local carriers for local telephone numbers and
access to wholesale international termination. Rates and calling plans will be
established to meet the local market demand and competition. VoIP Solutions own
Customer Premise Equipment, the MTA V102; a 2 line analog telephone adaptor is
being supplied for the services.
On May 02, 2005, VoIP, Inc. signed six (6) new Virtual Service Provider
(VSP) Agreements with ISP and Telco companies through its wholly owned
subsidiary, VoIP Solutions, Inc. The VSP enhanced services platform is a fully
hosted and managed solution with wholesale network services that enable Service
Providers to sell their own branded VoIP telephone service and rate plans
through a customized web site. The Company's network currently provides
telephone numbers from over 35 States and terminates calls to over 220
Countries. VoIP Solutions also manufactures its own Multimedia Terminal Adaptor
(MTA) with integrated router, connecting any analog phone to the network via a
broadband Internet connection with secure auto provisioning and QOS. Under each
Agreement, VoIP Inc. will supply their MTA exclusively to the Service Providers.
30
The new Domestic Service Provider agreements are with; Intercel Limited,
Herndon, VA - Internet Telephone Corporation, Pinecrest, FL - MachMedia Inc.,
Portland, OR - TouchFON International, American Fork, UT - Advanced
Communication Solutions, Pineville, WV - TeleCable Services, LLC, Milwaukee, WI.
On April 28, 2005, VoIP Inc. subsidiary VoIP Americas became the first
carrier to successfully complete IP Voice Trunking interoperability and
compliance testing with Avaya (NYSE: AV), Communication Manager. The official
compliance testing was conducted under Avaya's stringent Developer Connection
Program in Avaya's New Jersey Research and Development facility.
The award winning Nativevoip(TM) offering allows enterprises with new and
existing VoIP-enabled PBX's to connect to the Public Switched Telephone Network
(PSTN) utilizing their existing Internet connections. VoIP Americas assures
"Quality of Service" across The Internet by providing the industry's first VoIP
Service Level Agreement - voipsla(TM). This service will allow enterprises to
fully leverage their VoIP investments and realize toll and access savings of
between 40% and 60% while enjoying enhanced services such as on-line call
details and immediate provisioning of network services.
MANAGEMENT
Directors, Executive Officers, Promoters and Control Persons
The following table contains information concerning the Company's
executive officers and directors.
Name Age Position with Company Start Date
with Company
Steven Ivester 41 Chairman, Chief Executive Officer, March 2004
Secretary and Sole Director
Clive Raines 46 President of International Operations March 2004
Osvaldo Pitters 46 Chief Financial Officer May 2004
Bill Burbank 47 Chief Operating Officer December 2004
Shawn Lewis 38 Chief Technology Officer May 2005
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 Latin American Region. He also worked for two
years as Deputy General Manager of Banco Republica in Lima, Peru. Before joining
VoIP Inc, 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 the 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, he drove sales to
achieve growth that earned the company the distinction of being named one of
Inc. Magazine's 500 fastest growing private companies for three consecutive
years.
31
Shawn M. Lewis - Chief Technology Officer
-----------------------------------------
Shawn M. Lewis oversees all Technological and Engineering activities of VoIP,
Inc. Prior to accepting the 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. The market has
enthusiastically responded to Caerus' approach and service offerings.
Clive Raines - President International Operations
-------------------------------------------------
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.
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
32
Number of Securities Underlying Value of Unexercised In-the-
Unexercised Options at Fiscal Money Options at Fiscal
Year End Year End
-------- --------
Number of
Shares
Acquired or Realized
Name Exercised Value Exercisable Unexercisable Exercisable Unexercisable
---- --------- ----- ----------- ------------- ----------- -------------
None
Estimated Future Payments under
Non-Stock Price-Based Plans
Performance or
Number of Other Period Until
Shares, Under or Maturation or Threshold Target Maximum
Name Other Rights # 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 thereunder 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.
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.
33
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 June 30, 2005, 47,166,380 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 August 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.
34
Beneficial
Ownership
Beneficial Ownership(1) After
Before Offering Offering
--------------- --------
Beneficial Owner Shares Percentage Shares
---------------- ------ ---------- ------
Steven Ivester......................... 9,975,000 20.9% 9,975,000
Clive Raines........................... 2,200,000(1) 4.0% 2,200,000
Shawn Lewis............................ 5,346,231 11.2% 5,346,231
All officers and directors as a group 17,321,231 36.4% 17,321,231
(5 persons)............................
------------
(1) Represents warrants to purchase common shares at $1.00 per share.
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 as of December 31, 2003, in this Prospectus have been audited by the
firm of Tschopp, Whitcomb & Orr, P.A., 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 450 Fifth Street, NW,
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.
35
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-4
Consolidated Statements of Operations for Years Ended December 31, 2004 and 2003 F-5
Consolidated Statement of Changes in Shareholders Equity for years Ended
December 31, 2004 and 2003 F-6
Consolidated Statements of Cash Flow for Years Ended December 31, 2004 and 2003 F-7
Notes to Consolidated Financial Statements for Year Ended December 31, 2004 F-8
Consolidated Balance Sheet for March 31, 2005 F-16
Consolidated Statements of Operations for Three Months Ended
March 31, 2005 and 2004 F-17
Consolidated Statements of Cash Flows for Three Months Ended
March 31, 2005 and 2004 F-18
Notes to Financial Statements for Three Months Ended
March 31, 2005 and 2004 F-19
Proformas Page
--------- ----
Proforma Condensed Combined Balance Sheet March 31, 2005 - Unaudited F-24
Proforma Condensed Combined Statement of Operations for Three Months
Ended March 31, 2005 - Unaudited F-25
Proforma Condensed Combined Statement of Operations for Year
Ended December 31, 2004 - Unaudited F-26
Proforma Condensed Combined Statement of Operations for Three Months
Ended March 31, 2004 - Unaudited F-27
Caerus, Inc. Financial Statements Page
--------------------------------- ----
Report of Independent Certified Public Accountants F-30
Consolidated Balance Sheets December 31, 2004 and 2003 F-31
Consolidated Statements of Operations for Years Ended December 31, 2004 and
The Period May 15, 2002 Through December 31, 2003 F-32
Consolidated Statement of Changes in Shareholders Equity for years Ended
December 31, 2004 and The Period May 15, 2002 Through December 31, 2003 F-33
Consolidated Statements of Cash Flow for Years Ended December 31, 2004 and
The Period May 15, 2002 Through December 31, 2003 F-34
Notes to Consolidated Financial Statements for Year Ended December 31, 2004 and
The Period May 15, 2002 Through December 31, 2003 F-35
36
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, FL 32751
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors and Stockholder
Millennia Tea Masters, Inc.
We have audited the accompanying balance sheets of Millennia Tea Masters, Inc.
as of December 31, 2003 and the related statements of operations, changes in
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
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 audits provide 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, December 31,
2004 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
Additional
Common Stock Common Stock Paid- Accumulated
Shares Amount 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, December 31,
2004 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.
F-7
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from
outstanding balances. Management provides for probable uncollectible amounts
using the reserve method based on its assessment of the current status of the
individual receivables and after using reasonable collection efforts. As of
December 31, 2004 the balance of the allowance for uncollectible accounts
amounted to $136,795. There was no allowance as of December 31, 2003.
Inventory
Inventory consists of finished goods and is valued at the lower of cost or
market using the first-in, first-out method.
Advertising expenses
Advertising and marketing expenses are charged to operations as incurred.
Income Taxes
The Company and its subsidiaries file consolidated federal and state income tax
returns. The Company has adopted Statement of Financial Accounting Standards No.
109 in the accompanying consolidated financial statements. The only temporary
differences included therein are attributable to differing methods of reflecting
depreciation for financial statement and income tax purposes.
Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing the net income (loss)
for the year by the weighted-average number of shares of common stock
outstanding. The calculation of fully diluted earnings (loss) per share assumes
the dilutive effect of the exercise of outstanding options and warrants at
either the beginning of the respective period presented or the date of issuance,
whichever is later. Common stock equivalents represent the dilutive effect of
the assumed exercise of the outstanding stock options and warrants, using the
treasury stock method.
Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and notes
payable, as applicable, approximates fair value due to the short term nature of
these items and/or the current interest rates payable in relation to current
market conditions.
Revenue Recognition
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.
F-9
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.
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
F-10
Note F - Bank Loans and Note Payable
As of December 31, 2004 bank loans and note payable consists of the following:
a) Bank Loan:
Revolving Line of Credit $187,000
Promissory Note 13,000
--------
Sub-total 200,000
b) Note Payable 560,000
Total $760,000
========
a) The revolving line of credit with the Bank of Tampa is interest only
payable at prime plus 1.0% monthly. The promissory note is payable
in monthly installments of approximately $6,200 including interest
at a rate of 7.5%. The loans are collateralized by receivables,
inventory and equipment. Both balances were fully paid in January
2005.
b) In December 2004 the Company issued a note payable to a shareholder
in the amount of $560,000 at an interest rate of 3.75% with a
maturity date of December 2005. As mentioned in Note K on January 6,
2005, the Company issued another note payable amounting to
$1,040,000 to the same shareholder under the same terms and
conditions as the previous one.
Note G - Acquisitions
On May 25, 2004 (but effective for all purposes as of April 15, 2004), the
Company completed the acquisition of two Florida-based entities, (eGlobalphone,
Inc. and VoIP Solutions, Inc.). Contribution of these start-up companies was the
basis for the original decision to issue a controlling block of shares of common
stock to Mr. Ivester. eGlobalphone, Inc. and VoIP Solutions Inc. are both
Florida corporations.
In June 2004, the Company acquired DTNet Technologies, Inc. a Florida
Corporation. The acquisition was financed through the issuance of 2,500,000
shares of the Company's common stock with a value of $4,750,000 in exchange for
all issued and outstanding shares of DTNet common stock.
In September 2004, VoIP Inc. closed the acquisition of VoIP Americas, a Florida
corporation. The acquisition was financed through the issuance of 1,000,000
shares of the Company's restricted common stock with the value of $1,100,000 in
exchange for all issues and outstanding shares of VoIP Americas.
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
exercise
Warrants 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 operatiing loss carry forward $(1,485,000) $ (119,000)
Valuation allowance 1,485,000 119,000
----------- -----------
Total -- --
=========== ===========
F-12
The reconciliation of income tax provision at statutory rate to the reported
income tax expense is as follows:
Year ended December 31,
2004 2003
----------- -----------
Computed at statutory rate 34% 34%
State tax net of federal benefits -- --
Valuation allowance (34%) (34%)
----------- -----------
Total -- --
=========== ===========
At December 31, 2004 and December 31, 2003 deferred tax assets are related
solely to the Company's net operating loss carry forward of approximately
$4,014,739 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.
F-13
In September 2004, the Company issued 38,461 shares to one accredited investor.
On September 1st, 2004, VoIP Inc. closed the acquisition of VoIP Americas, a
Florida corporation. The acquisition took the form of an exchange of 1,000,000
shares of VoIP restricted common stock in exchange for all the issued and
outstanding shares of VoIP Americas common stock.
In October 2004, the Company issued 251,831 shares to twelve accredited
investors.
In October 2004, the Company issued 100,000 shares to one individual accredited
investor.
In November 2004, the Company issued 2,249,500 shares to five accredited
investors.
In November 2004, the Company issued 318,500 shares to twelve accredited
investors.
n 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 -- 4,425
-------- --------
Total $ 412,419 $ 259,458
========= =========
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 -- 350,423
--------- ---------
Income (loss) from discontinued operations $ 145,311 $(352,958)
========= =========
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, shares issued, and commitments were recorded in that period.
F-15
VoIP Inc.
Consolidated Balance Sheet
March 31, 2005
(Unaudited)
Mar. 31, 2005
------------
ASSETS
Current Assets:
Cash and cash equivalents $ 925,534
Accounts receivable, net of allowance of $98,197
and $136,795, respectively 1,234,173
Due from related parties 245,402
Inventory 965,181
Assets from discontinued operations 392,000
Other current assets 232,168
------------
Total Current Assets 3,994,458
Property and equipment, net 421,240
Intangibles 6,923,854
Other assets 80,816
------------
TOTAL ASSETS $ 11,420,368
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,491,035
Notes payable 1,209,334
Other current liabilities 65,196
------------
Total current liabilities 2,765,565
------------
Shareholders' equity:
Common stock - $0.001 par value
100,000,000 shares authorized
26,378,132 and 24,258,982 issued
and outstanding, respectively 26,379
Additional paid-in capital 14,775,107
Accumulated deficit (6,146,683)
------------
Total shareholders' equity 8,654,803
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,420,368
============
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
VoIP Inc.
Consolidated Statements of Operations
For Three Months Ended March 31, 2005 and 2004
(Unaudited) (Unaudited)
Three Months Three Months
Ended March 31, Ended March 31,
2005 2004
------------ ------------
Revenues $ 2,007,147 $ --
Cost of Sales 1,800,935 --
------------ ------------
Gross Profit 206,212 --
Operating expenses
Compensation and related expenses 815,370 --
General and administrative expenses 898,139 22,324
------------ ------------
Loss from operations (1,507,297) (22,324)
Provision for income taxes -- --
------------ ------------
Net loss $ (1,507,297) $ (22,324)
============ ============
Basic and diluted loss per share: $ (0.06) $ (0.01)
Weighted average number of shares outstanding 25,705,857 1,730,939
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
VoIP Inc.
Consolidated Statements of Cash Flows
Three Months ended March 31, 2005 and 2004
(Unaudited) (Unaudited)
Three Months Three Months
Ended March 31, Ended March 31,
2005 2004
----------- -----------
Cash flows from operating activities
Net loss $(1,507,297) $ (22,324)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation 47,980 --
Common shares issued for services 28,325 --
Stock option plan 108,713 --
Common shares exchanged for warrants 239,500 --
Changes in operating assets and liabilities:
net of assets and liabilities acquired:
Accounts receivable (416,102) --
Assets from discontinued operations 20,419 --
Inventory (777,730) (233)
Other current assets (188,466) (3,750)
Accounts payable 266,061 10,308
Other current liabilities (57,944) --
----------- -----------
Net cash used in operating activities (2,236,541) (15,999)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (49,352) --
Purchase of other assets (57,236) --
----------- -----------
Net cash used in investing activities (106,588) --
----------- -----------
Cash flows from financing activities
Proceeds from issuance of notes payable 1,040,000 --
Payments on notes payables (590,667) --
Proceeds from sales of common stock 1,678,125 12,500
----------- -----------
Net cash provided by financing activities 2,127,458 12,500
Change in cash and cash equivalents (215,671) (3,499)
Cash and cash equivalents at beginning of period 1,141,205 3,499
----------- -----------
Cash and cash equivalents at end of period $ 925,534 $ --
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 13,088 $ --
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
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 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.
Unaudited Consolidated Interim Financial Statements
The accompanying consolidated financial statements for the three months ended
March 31, 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 flow for
the interim periods presented. Interim results are not necessarily indicative of
results for a full year. Therefore, the results of operations for the three
months ended March 31, 2005 are not necessarily indicative of operating results
to be expected for a full year.
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.
F-19
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
March 31, 2005 the balance of the allowance for uncollectible accounts amounted
to $98,197. There was an allowance of $136,795 as of December 31, 2004.
Inventory
Inventory consists of finished goods and is valued at the lower of cost or
market using the first-in, first-out method.
Advertising expenses
Advertising and marketing expenses are charged to operations as incurred.
Income Taxes
Income taxes - The Company and its subsidiaries file consolidated federal and
state income tax returns. The Company has adopted Statement of Financial
Accounting Standards No. 109 in the accompanying consolidated financial
statements. The only temporary differences included therein are attributable to
differing methods of reflecting depreciation for financial statement and income
tax purposes.
Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing the net income (loss)
for the 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 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 VoIP Solutions 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-20
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.
Note C - Intangibles
As of March 31, 2005 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 $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 the
mark 1-800-TALKTIME and the goodwill associated therewith.
Note D - 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 E - Stock Option Plan
On January 26, 2005, the Company filed 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.
F-21
The vested options as of March 31, 2005 amounting to $108,713, are shown under
the compensation and related expenses on the Consolidated Statement of
Operation.
Note F - Notes Payable
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. Additionally, 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.
As of March 31, 2005 the balance for notes payable was $1,209,334.
Note G - Subsequent Events
On May 16, 2005, The Company announced that it has advanced $475,000 dollars and
had signed a letter of intent to acquire Caerus, Inc. which includes all
wholly-owned subsidiaries; Volo Communications, Inc., Caerus Networks Inc, and
Caerus Billing, Inc.
Under the proposed purchase terms, VoIP, Inc. will acquire 100% of the stock and
assets of Caerus, Inc in exchange for the issuance of 15 million common shares
of VoIP, Inc.
F-22
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 three
month periods ended March 31, 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
March 31, 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-23
VOIP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2005
Unaudited
VOIP, INC. CAERUS, INC. ELIM'S CONSOL
------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 925,534 $ 159,095 $ 1,084,629
Accounts receivable, net 1,234,173 544,229 1,778,402
Due from related parties 245,402 12,899 258,301
Inventory 965,181 8,120 973,301
Assets from discontinued operations 392,000 -- 392,000
Loan origination costs -- 251,886 251,886
Other current assets 232,168 201,548 433,716
------------ ------------ ------------ ------------
Total Current Assets 3,994,458 1,177,777 -- 5,172,235
------------ ------------ ------------ ------------
Property and equipment, net 421,240 8,521,464 8,942,704
Intangibles 6,923,854 9,000 27,946,359 a 34,879,213
Other assets 80,816 19,958 100,774
------------ ------------ ------------ ------------
TOTAL ASSETS $ 11,420,368 $ 9,728,199 $ 27,946,359 $ 49,094,926
============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,491,035 $ 10,748,526 $ 12,239,561
Bank loans and notes payable 1,209,334 5,486,707 6,696,041
Notes payable - related party 1,830,000 1,830,000
Liabilities from discontinued operations -- -- --
Other current liabilities 65,196 216,650 281,846
------------ ------------ ------------ ------------
Total current liabilities 2,765,565 18,281,883 -- 21,047,448
------------ ------------ ------------ ------------
Shareholders' equity:
Common stock - $0.001 par value 26,379 149,405 (132,971)b 42,813
Preferred stock -- 55,998 (55,998)b --
Additional paid-in capital 14,775,107 5,408,384 13,967,857 b 34,151,348
Accumulated deficit (6,146,683) (14,167,471) 14,167,471 b (6,146,683)
------------ ------------ ------------ ------------
Total shareholders' equity 8,654,803 (8,553,684) 27,946,359 28,047,478
------------ ------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,420,368 $ 9,728,199 $ 27,946,359 $ 49,094,926
============ ============ ============ ============
The accompanying notes are an integral part of these pro forma financial
statements
F-24
VOIP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005
Unaudited
VOIP, INC. CAERUS, INC. ELIM'S CONSOL
------------ ------------ ------------ ------------
Revenues $ 2,007,147 $ 4,994,845 $ 7,001,992
Cost of Sales 1,800,935 6,357,717 8,158,652
------------ ------------ ------------ ------------
Gross Profit (Loss) 206,212 (1,362,872) -- (1,156,660)
------------ ------------ ------------ ------------
Operating expenses
Compensation and related expenses 815,370 826,703 1,642,073
General and administrative expenses 898,139 788,420 1,686,559
------------ ------------ ------------ ------------
Loss from operations (1,507,297) (2,977,995) -- (4,485,292)
Interest expense & other -- 237,534 237,534
------------ ------------ ------------ ------------
Loss before income taxes (1,507,297) (3,215,529) -- (4,722,826)
Provision for income taxes -- --
------------ ------------ ------------ ------------
NET LOSS $ (1,507,297) $ (3,215,529) $ -- $ (4,722,826)
============ ============ ============ ============
Basic and diluted loss per share: $ (0.06) $ (0.20) $ (0.11)
============ ============ ============
Weighted average number of shares outstanding 25,705,857 16,434,470 42,140,327
============ ============ ============
The accompanying notes are an integral part of these pro forma financial
statements
F-25
VOIP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
Unaudited
VOIP, INC. CAERUS, INC. ELIM'S CONSOL
------------ ------------ -------------- ------------
Revenues $ 2,619,393 $ 14,379,365 $ -- $ 16,998,758
Cost of Sales
Network and termination costs 1,870,269 15,103,149 -- 16,973,418
Testing and sales concessions -- 662,052 -- --
------------ ------------ -------------- ------------
Gross Profit (Loss) 749,124 (1,385,836) -- 25,340
------------ ------------ -------------- ------------
Operating expenses
Compensation and related expenses 2,721,296 2,973,070 -- 5,694,366
General and administrative expenses 2,187,878 3,595,501 -- 5,783,379
------------ ------------ -------------- ------------
Loss from operations (4,160,050) (7,954,407) -- (11,452,405)
Interest & other expenses -- 657,188 -- 657,188
------------ ------------ -------------- ------------
Loss from continuing operations before income
taxes and discontinued operations (4,160,050) (8,611,595) -- (12,109,593)
Provision for income taxes -- -- --
------------ ------------ -------------- ------------
Net loss before discontinued operations (4,160,050) (8,611,595) -- (12,109,593)
Income (Loss) from discontinued operations 145,311 -- 145,311
------------ ------------ -------------- ------------
NET LOSS $ (4,014,739) $ (8,611,595) $ -- $(11,964,282)
============ ============ ============== ============
Basic and diluted loss per share:
Loss before discontinued operations $ (0.28) $ (0.52) $ (0.39)
Income from discontinued operations net of income taxes $ 0.01 $ -- $ 0.00
------------ ------------ ------------
Total $ (0.28) $ (0.52) $ (0.39)
============ ============ ============
Weighted average number of shares outstanding 14,597,312 16,434,470 31,031,782
============ ============ ============
The accompanying notes are an integral part of these pro forma financial
statements
F-26
VOIP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
Unaudited
VOIP, INC. CAERUS, INC. ELIM'S CONSOL
------------ ------------ -------------- ------------
Revenues $ -- $ 3,037,171 $ -- $ 3,037,171
Cost of Sales -- 2,647,678 -- 2,647,678
------------ ------------ -------------- ------------
Gross Profit -- 389,493 -- 389,493
------------ ------------ -------------- ------------
Operating expenses
Compensation and related expenses -- 409,033 -- 409,033
General and administrative expenses 22,324 510,436 -- 532,760
------------ ------------ -------------- ------------
Loss from operations (22,324) (529,976) -- (552,300)
Interest expense & other -- 33,059 -- 33,059
------------ ------------ -------------- ------------
Loss before income taxes (22,324) (563,035) -- (585,359)
Provision for income taxes -- -- -- --
------------ ------------ -------------- ------------
NET LOSS $ (22,324) $ (563,035) $ -- $ (585,359)
============ ============ ============== ============
Basic and diluted loss per share: $ (0.01) $ (0.03) $ (0.03)
Weighted average number of shares outstanding 1,730,939 16,434,470 18,165,409
============ ============ ============
The accompanying notes are an integral part of these pro forma financial
statements
F-27
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.
(2) 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.
(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 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
March 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 March 31, 2005 8,553,684
-----------
Goodwill $ 27,946,359 (7)
===========
B Adjustments to eliminate Caerus, Inc. stockholders' equity accounts, and
reflect new VoIP, Inc. common shares issued.
(5) PRO FORMA STATEMENTS OF INCOME ADJUSTMENTS None were required.
(6) SUBSEQUENT EVENTS
On May 31, 2005 the Company consummated an Agreement and Plan of Merger
("Merger Agreement") with Caerus, Inc., whereby 100% of Caerus, Inc. common and
preferred stock, stock options and warrants were exchanged for 16.9 million
shares of common stock of VoIP.
The goodwill on the acquisition of Caerus, Inc. represents the negative
net asset value of Caerus as of the date of the acquisition plus $19,392,675
which represents the market value of the 16,434,470 Company's shares and
warrants issued pursuant to this acquisition.
(7) REEVALUATION OF ASSETS ACQUIRED AND LIABILITIES ASSUMED.
The accompanying condensed combined balance sheet reflects goodwill of
approximately $28 million (approximately 57% of total combined assets) resulting
from the May 31, 2005 acquisition of Caerus, Inc. Accounting principles
generally accepted in the United States require that assets acquired and
liabilities assumed be recorded at their respective fair market value. Had an
evaluation of assets acquired and liabilities assumed been conducted, it is
probable that amounts reflected as goodwill could have been assigned to other
identifiable assets and liabilities. Management is in the process of conducting
an evaluation to determine the proper valuation of assets acquired and
liabilities assumed in order to determine the proper carrying value of those
items and the ultimate recovery of the remaining goodwill, if any.
F-28
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTING FIRM
To the Board of Directors
VoIP, Inc.
We consent to the inclusion in the Registration Statement on Form SB-2 of VoIP,
Inc. (filed on August 12, 2005) of our report dated July 25, 2005 on our audit
of the consolidated financial statements of Caerus, Inc. as of December 31, 2004
and 2003, and for the year ended December 31, 2004 and for the period May 15,
2002 (date of inception) through December 31, 2003.
/s/ Moore Stephens Lovelace, P.A.
Orlando, Florida
August 12, 2005
F-29
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-30
CAERUS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
ASSETS
2004 2003
------------ ------------
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-31
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-32
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-33
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-34
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.
F-35
NOTE 1 - DESCRIPTION OF BUSINESS (CONTINUED)
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.
F-36
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT (CONTINUED)
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-37
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES (CONTINUED)
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).
F-38
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
F-39
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.
F-40
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
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%
F-41
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
Related 2004 compensation expense was $76,917, determined by amortizing
the options' estimated fair value at grant date over their vesting period.
The weighted average remaining contractual life of the options outstanding
at December 31, 2004 was 9.8 years (see Note 8). The Company had no stock
options outstanding at December 31, 2003.
STOCK WARRANTS
In 2004, the Company granted a series of warrants to purchase shares of
preferred stock, the specific terms of which had yet to be determined, at
an exercise price of $0.85 per share, in conjunction with the long-term
note payable issuance (see Note 4). These warrants expire at the earlier
of ten years from their issuance date, or five years after a potential
initial public securities offering. At the warrant holder's election,
these warrants may be exercised on a non-cash basis whereby the warrant
holder uses the surplus of the preferred stock's then-fair market value
per share over the $0.85 exercise price as payment for the preferred stock
purchased under these warrants.
These warrants had estimated fair values totaling $218,813 at their grant
dates, recognized as additional paid-in capital and deferred loan
origination costs. Additional information pertaining to these warrants
issued and outstanding at December 31, 2004 is as follows:
DATE GRANTED SHARES
---------------------------- ------------------
June, 2004 1,235,294
August, 2004 766,020
October, 2004 383,010
------------------
Total Issued and Outstanding 2,384,324
==================
Also in conjunction with the long-term note payable issuance (see Note 4),
the Company granted warrants to purchase up to $1.0 million of common or
preferred stock that may be issued in conjunction with any future
securities offering of at least $5.0 million, upon the same price and
conditions as afforded to third-party investors in said potential
securities offering.
In August 2004, the Company issued warrants to purchase 150,000 shares of
common stock to a former employee whose employment was terminated in June
2004. Such warrants are exercisable at $0.85 per share, and expire on June
26, 2006. The Company had no stock warrants outstanding at December 31,
2003.
F-42
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.
F-44
NOTE 8 - SUBSEQUENT EVENTS (CONTINUED)
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-45
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
PER SHARE
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 $ 2005
Printing Expenses
Accounting Fees and Expenses
Legal Fees and Expenses
Blue Sky Fees and Expenses
-------
TOTAL $ 2005
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.
II-1
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.
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
(14) 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
II-2
(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) 15.1 Report of Independent Registered Public Accounting Firm
regarding unauditer interim financial information
(13) 21.1 Subsidiaries of the Registrant
(13) 23.1 Consent of Tschopp, Whitcomb and Orr
(13) 23.2 Consent of Berkovits Lago & Company, LLP
(14) 23.3 Consent of Andrews Kurth LLP
(13) 23.4 Consent from Moore Stephens Lovelace, P.A.
(1) Filed as exhibits to Registrant's Form 10SB filed January 19, 2000
(2) Filed as exhibit to Form 8-K filed March 3, 2004
(3) Filed as exhibit to Form 8-K filed June 9, 2004
(4) Filed as exhibit to Form 8-K filed July 7, 2001
(5) Filed as exhibit to Form 8-K filed September 16,2004
(6) Filed as exhibit to form 8-K filed November 17, 2004
(7) Filed as exhibit to form 8-K filed December 15, 2004
(8) Filed as exhibit to form 8-K filed February 16, 2005
(9) Filed as exhibit to form 8-K filed March 1, 2005
(10) Filed as exhibit to form 8-K filed June 6, 2005
(11) Filed as exhibit to form 8-K filed July 11, 2005
(12) Filed as exhibit to form 8-K filed August 9, 2005
(13) Filed herewith
(14) To be filed by amendment
II-3
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.
II-4
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 August 12, 2005.
VOIP, INC.
By: /s/ Steven Ivester
-----------------------------------
Steven Ivester, President and Chief
Executive Officer
POWER OF ATTORNEY
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, August 12, 2005
----------------------------- Director, and President
Steven Ivester
/s/ Osvaldo Pitters Chief Financial Officer August 12, 2005
-----------------------------
Osvaldo Pitters
II-5