Pursuant to Rule 424(b)(3)
Registration Number 333-121211
PROSPECTUS SUPPLEMENT NUMBER TWO
(TO PROSPECTUS DATED JANUARY 5, 2005)
4,349,000 Shares
VoIP, Inc.
COMMON STOCK
This prospectus supplement supplements the prospectus dated January 5,
2005 relating to the offer and sale by the selling stockholders identified in
the prospectus of up to 4,349,000 shares of our common stock. This prospectus
supplement includes our Quarterly Report on Form 10-QSB, which was filed with
the Securities and Exchange Commission on August 17, 2005.
The information contained in such Quarterly Report is current as of the
date of such report. This prospectus supplement should be read in conjunction
with the prospectus dated January 5, 2005, which is to be delivered with this
prospectus supplement. This prospectus supplement is qualified by reference to
the prospectus except to the extent that the information in this prospectus
supplement updated and supercedes the information contained in the prospectus
dated January 5, 2005, including any supplements or amendments thereto.
Investing in the shares involves risks. See "Risk Factors" beginning on
page 5 of the prospectus dated January 5, 2005 and the risk factors included in
our Annual Report on Form 10KSB for the year ended December 31, 2004.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus supplement is August 17, 2005.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
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(Mark one)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
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OF 1934
For the transition period from _________ to ________
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Commission File Number: 000-28985
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VoIP, Inc.
(Exact name of small business issuer as specified in its charter)
Texas 75-2785941
----------------------------- ----------------------------
(State of incorporation) (IRS Employer ID Number)
12330 SW 53rd Street, Suite 712, Fort Lauderdale, FL 33330
-----------------------------------------------------
(Address of principal executive offices)
(954) 434-2000 (Issuer's
telephone number)
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES |X| NO |_|
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: August 2, 2005: 47,750,975.
Transitional Small Business Disclosure Format (check one): YES |_| NO |X|
Registrant is an accelerated filer (check one): YES |_| NO |X|
VoIP, Inc.
Form 10-QSB for the Quarter ended June 30, 2005
Table of Contents
Page
Part I - Financial Information
Report of Independent Registered Public Accounting Firm 3
Item 1 Financial Statements 4
Item 2 Management's Discussion and Analysis or
Plan of Operation 12
Item 3 Controls and Procedures 18
Part II - Other Information
Item 1 Legal Proceedings 18
Item 2 Changes in Securities (to be completed) 18
Item 3 Defaults upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Signatures 20
2
Report of Independent Registered Public Accounting Firm
To The Board of Directors and Stockholders
VoIP, Inc.
We have reviewed the accompanying consolidated balance sheet of VoIP, Inc. and
Subsidiaries (the "Company") as of June 30, 2005 and the consolidated statements
of operations and cash flows for the six and three month periods ended June 30,
2005. These interim financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with the standards of the Public Company Accounting Oversight Board, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
The accompanying June 30, 2005 balance sheet reflects goodwill of approximately
$30 million (approximately 61% of total consolidated 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 recorded as goodwill could have been assigned to other identifiable
assets and liabilities. Based on information furnished to us by management, we
believe that the Company may have excluded from the June 30, 2005 balance sheet
certain identifiable intangible assets with definite useful lives, that if
recognized would have reduced goodwill and increased depreciation and
amortization expense by an amount that cannot be determined without a proper
evaluation. 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 the those items and the ultimate
recoverability of the remaining goodwill, if any.
Based on our review, with the exception of the matter described in the preceding
paragraph, we are not aware of any material modifications that should be made to
the accompanying interim financial statements for them to be in conformity with
accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of the Company as of December 31, 2004, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
year then ended (not presented herein); and in our report dated March 16, 2005,
we expressed an unqualified opinion on those financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 2004 is fairly presented in all material
respects, in relation to the balance sheet from which it has been derived.
/s/ Berkovits, Lago & Company, LLP
Ft. Lauderdale, Florida
August 15, 2005
3
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
VoIP, Inc.
Consolidated Balance Sheets
June 30, 2005 and December 31, 2004
(Unaudited)
June 30, 2005 Dec. 31, 2004
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,068,516 $ 1,141,205
Accounts receivable, net of allowance of
$99,047 and $136,795 respectively 1,023,226 818,071
Due from related parties 169,536 245,402
Inventory 889,373 187,451
Assets from discontinued operations, net of
allowance of $200,000 in 2005 192,000 412,419
Other current assets 209,883 43,702
------------ ------------
Total Current Assets 3,552,534 2,848,250
Property and equipment, net 8,637,267 419,868
Goodwill and other intangible 36,598,411 6,923,854
Other assets 294,883 23,580
------------ ------------
TOTAL ASSETS $ 49,083,095 $ 10,215,552
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 10,472,720 $ 1,224,974
Notes payable 7,736,929 760,000
Other current liabilities 2,333,344 123,140
------------ ------------
Total current liabilities 20,542,993 2,108,114
------------ ------------
Shareholders' equity:
Common stock - $0.001 par value
100,000,000 shares authorized
47,166,380 and 24,258,982 issued
and outstanding respectively 47,167 24,259
Additional paid-in capital 37,906,499 12,722,565
Accumulated deficit (9,413,564) (4,639,386)
------------ ------------
Total shareholders' equity 28,540,102 8,107,438
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 49,083,095 $ 10,215,552
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
VoIP, Inc.
Consolidated Statements of Operations
For Six Months Ended June 30, 2005 and 2004
And Three Months Ended June 30, 2005 and 2004
(Unaudited)
Six Months Six Months Three Months Three Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2005 2004 2005 2004
-------------- -------------- -------------- --------------
Revenues $ 3,916,920 $ 85,298 $ 1,909,773 $ 85,298
Cost of sales 3,104,846 58,923 1,303,911 58,923
-------------- -------------- -------------- --------------
Gross profit 812,074 26,375 605,862 26,375
Operating expenses 5,586,252 457,356 3,872,743 435,033
-------------- -------------- -------------- --------------
Loss from operations (4,774,178) (430,981) (3,266,881) (408,658)
Provision for income taxes -- -- -- --
-------------- -------------- -------------- --------------
Net loss $ (4,774,178) $ (430,981) $ (3,266,881) $ (408,658)
============== ============== ============== ==============
Basic and diluted loss per share: $ (0.18) $ (0.05) $ (0.11) $ (0.03)
Weighted average number of
shares outstanding 26,940,458 8,255,570 30,012,632 16,233,813
============== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
5
VoIP, Inc.
Consolidated Statements of Cash Flows
Six Months ended June 30, 2005 and 2004
(Unaudited)
Six Months Six Months
Ended June 30, Ended June 30,
2005 2004
------------ ------------
Cash flows from operating activities
Net loss $ (4,774,178) $ (430,981)
Adjustments to reconcile net loss to net
cash (used in) operating activities
Depreciation 281,141 293
Provision for bad debt 99,047 --
Provision on assets from discontinued operations 200,000 --
Common shares issued for services 748,325 143,000
Stock option plan 127,238 --
Common shares exchanged for warrants 239,500 --
Changes in operating assets and liabilities
net of assets and liabilities acquired:
Accounts receivable (174,591) --
Inventory (701,922) (2,460)
Other current assets 342,534 (33,719)
Accounts payable (134,456) 83,455
Other current liabilities (836,286) --
------------ ------------
Net cash (used in) operating activities (4,583,648) (240,412)
------------ ------------
Cash flows from investing activities
Cash from acquisitions -- (173,182)
Purchase of property and equipment (37,779) (20,231)
------------ ------------
Net cash used in investing activities (37,779) (193,413)
------------ ------------
Cash flows from financing activities
Proceeds from issuance of notes payable 2,615,339 --
Payments on notes payables (769,228) --
Proceeds from sales of common stock 2,702,625 591,400
------------ ------------
Net cash provided by financing activities 4,548,736 591,400
Change in cash and cash equivalents (72,691) 157,575
Cash and cash equivalents at beginning of period 1,141,205 3,499
------------ ------------
Cash and cash equivalents at end of period $ 1,068,514 $ 161,074
============ ============
Non-cash investing and financing activities:
Goodwill on acquisition $(29,674,557) $ --
Issuance of common stock and warrants
on acquisitions $ 19,392,676 $ --
Issuance of stock for debt conversion $ 1,996,478 $ --
Net liabilities assumed net of cash $ 8,285,403 $ --
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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.
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 in 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.
On May 31, 2005 the Company 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 the right to receive 16.9 million
of the Company's common shares.
Volo Communications, Inc. is a licensed facilities-based Competitive Local
Exchange Carrier and Inter Exchange Carrier. Volo Communications, Inc. markets
its network products and services under the VoiceOne brand name. It has Network
Access Points operating in Orlando, Atlanta, New York, Dallas and Los Angeles.
Caerus Networks, Inc. is a technology research and development subsidiary, and
Caerus Billing, Inc. is a billing and mediation subsidiary.
The Company's operations consist of one segment.
Note B - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Caerus, Inc. (after its May 31, 2005
acquisition), eGlobalphone, Inc., VoIP Solutions, Inc., DTNet Technologies,
Inc., and VoIP Americas, Inc. from their respective dates of acquisition. All
significant inter-company balances and transactions have been eliminated in
consolidation.
Unaudited Consolidated Interim Financial Statements
The accompanying consolidated financial statements for the three and six month
periods ended June 30, 2005 and 2004 are unaudited but, in the opinion of
management, include all necessary adjustments (consisting of normal, recurring
in nature) for a fair presentation of the financial position, results of
operations and cash 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 and six month periods ended June 30, 2005 are not
necessarily indicative of operating results to be expected for 2005.
7
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.
Our subsidiary, Caerus, Inc. has cash restrictions to support letters of credit
which in turn support operating license bonds required by several states'
regulatory agencies. The amount of restricted cash as of June 30, 2005 was
$60,000.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from
outstanding balances. Management provides for probable uncollectible amounts
using the reserve method based on its assessment of the current status of the
individual receivables and after using reasonable collection efforts. As of June
30, 2005 the balance of the allowance for uncollectible accounts amounted to
$99,047. 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
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. The recognition of revenue from Internet telephony
services are recorded as rendered. Revenues related to long distance, carrier
access service and certain other usage-driven charges are billed monthly in
arrears and the associated revenues are recognized during the month of service.
8
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation is provided over
the estimated useful lives of the related assets using the straight line method.
The useful life of assets ranges from three to five years. The leasehold
improvements are amortized over the life of the related lease.
Under the Statement of Position ("SOP") 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use," the Company expenses
computer software costs related to internal-use software that is incurred in the
preliminary project stage. When the capitalization criteria of SOP 98-1 have
been met, costs of developing or obtaining internal-use computer software are
capitalized. Amortization of internal-use software over a 5-year estimated
useful life commenced upon the software being placed in service beginning
January 1, 2004. Amortization of internal-use software for the period ended June
30, 2005 was approximately $77,000.
Business Combinations
The Company accounts for business combinations in accordance with Statement of
Financial Accounting Standard No. 141 Business Combinations ("SFAS No. 141").
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations. SFAS No. 141 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually by comparing carrying value to the respective fair
value in accordance with the provisions of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). This
pronouncement also requires that the intangible assets with estimated useful
lives be amortized over their respective estimated useful lives.
Impairment of Long-lived Assets
The Company reviews the recoverability of its long-lived assets, such as plant,
equipment and intangibles when events or changes in circumstances occur that
indicate that the carrying value of the asset group may not be recoverable. The
assessment of possible impairment is based on the Company's ability to recover
the carrying value of the asset or asset group from the expected future pre-tax
cash flows (undiscounted and without interest charges) of the related
operations. If these cash flows are less than the carrying value of such asset,
an impairment loss is recognized for the difference between estimated fair value
and carrying value. The measurement of impairment requires management to
estimate future cash flows and the fair value of long-lived assets.
Concentration of Credit Risk
Financial instruments that may subject the Company to concentrations of credit
risk consist principally of cash and cash equivalents and accounts receivable.
The Company has investment policies and procedures that are reviewed
periodically to minimize credit risk.
One customer (Broadwing) represented approximately 98% of our subsidiary,
Caerus, Inc.'s accounts receivable as of June 30, 2005 and approximately 91% of
the Company's revenues for the six months ended June 30, 2005.
Note C - Intangibles
As of June 30, 2005 intangibles consist of the following:
Goodwill - acquisition of Caerus Communications $29,674,557
Goodwill - acquisition of DTNet Technologies, Inc. 5,210,553
Goodwill - acquisition of Voipamericas, Inc. 1,408,301
Intellectual property 305,000
-----------
Total $36,598,411
===========
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.
9
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 shares and warrants issued
pursuant to this acquisition. This goodwill of approximately $29.7 million
represents approximately 60% of total combined assets. 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 with definite useful lives that if
recognized would have reduced goodwill and increased depreciation and
amortization expense by an amount that cannot be determined without a proper
evaluation. Management is in the process of obtaining an independent 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.
The goodwill on the acquisition of DTNet Technologies, Inc. (DTNet) represents
the negative net asset 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 negative net
asset value of Voipamericas liabilities as of the date of the acquisition plus
$1,100,000 which represents the market value of 1,000,000 shares of the
Company's stock issued pursuant to this acquisition.
Intellectual property is carried at cost which is comprised of $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 common shares
and warrants was $105,000 based on $1.05 per share. 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 a Form S-8 registration statement in
connection with the Company's Stock Option Plan. The plan provides for the grant
to eligible employees, consultants, and directors of options for the purchase of
Common Stock. The Option Plan covers, in the aggregate, a maximum of 4,000,000
shares of Common Stock and provides for the granting of both incentive stock
options (as defined in Section 422 of the Internal Revenue Code of 1986) and
nonqualified stock options (options which do not meet the requirements of
Section 422). Under the Option Plan, the exercise price may not be less than the
fair market value of the Common Stock on the date of the grant of the option.
The Company uses the fair value method of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS No. 123") in
accounting for its stock options. This standard states that compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. The fair value for
each option granted is estimated on the date of the grant using the minimum
value method.
The vested options as of June 30, 2005 amounting to $127,238 are shown under the
compensation and related expenses on the Consolidated Statement of Operation.
10
Note F - Notes Payable
As of June 30, 2005 Notes Payable consist of the following:
a. Note Payable to Shareholder $1,053,196
b. Note Payable Convertible 1,552,915
c. Note Payable by subsidiary (Caerus, Inc.) to lender 5,130,818
----------
Notes Payable Total $7,736,929
==========
a. Represents the balance due a shareholder at an interest rate of 3.75% with
a maturity date of December 31, 2005.
b. In June 2005 the Company signed an agreement with subscribers to convert
their loan of $1,552,915 into the Company's Common Shares once the
registration is approved.
c. Represents the balance of a loan payable by the subsidiary Caerus, Inc. to
Cedar Boulevard Leasing LLC. These borrowings are repayable over a
three-year period and bear interest at 12.5% per annum. Additional
borrowings under this facility are contingent upon, among other things,
the Company raising certain levels of additional equity financing. The
loan agreement contains customary covenants and restrictions and provides
the lender the right to a perfected first-priority, secured interest in
all of the Caerus, Inc.'s assets, as well as rights to preferred stock
warrants. Caerus, Inc. is currently in violation of certain requirements
of the debt facility. No default has been declared. Accordingly, the full
amount of the note at June 30, 2005 has been classified as current.
Note G - Litigation
On April 8, 2005, Volo Communications, Inc. ("Volo") (a wholly-owned subsidiary
of Caerus, Inc.) filed suit against MCI Worldcom Network Services, Inc. d/b/a
UUNET ("MCI"). Volo alleges that MCI engaged in a pattern and practice of
over-billing Volo for the telecommunications services it provided pursuant to
the parties' Services Agreement, and that MCI refused to negotiate such
overcharges in good faith. Volo also seeks damages arising out of MCI's
fraudulent practice of submitting false bills by, among other things, re-routing
long distance calls over local trunks to avoid access charges, and then billing
Volo for access charges that were never incurred. On April 4, 2005, MCI declared
Volo in default of its obligations under the Services Agreement, claiming that
Volo owes a past due amount of $8,365,980, and threatening to terminate all
services to Volo within 5 days. By this action Volo alleges claims for (1)
breach of contract; (2) fraud in the inducement; (3) primary estoppel; and (4)
deceptive and unfair trade practices. Volo also seeks a declaratory judgment
that (1) MCI is in breach of the Services Agreement; (2) $8,365,980 billed by
MCI is not "due and payable" under that agreement; and (3) MCI's default letter
to Volo is in violation of the Services Agreement. Volo seeks direct, indirect
and punitive damages in an amount to be determined at trial.
On May 26, 2005, MCI filed an Answer, Affirmative Defenses, Counterclaim and
Third-Party Complaint naming Caerus, Inc. as a third-party defendant. MCI
asserts a breach of contract claim against Volo, a breach of guarantee claim
against Caerus, Inc., and a claim for unjust enrichment against both parties,
seeking an amount to be determined at trial. On July 11, 2005, Volo and Caerus,
Inc. answered the counterclaim and third-party complaint, and filed a
third-party counterclaim against MCI for declaratory judgment, fraud in the
inducement, and breach of implied duty of good faith and fair dealing. Volo and
Caerus, Inc. seek direct, indirect, and punitive damages in an amount to be
determined at trial. Discovery should commence shortly. The Company is currently
unable to assess the likelihood of a favorable or unfavorable outcome.
Note H - Subsequent Events:
On August 3, 2005, VoIP, Inc. (the "Company") and WQN, Inc. ("WQN") executed an
Asset Purchase Agreement, pursuant to which, among other things, VoIP
Acquisition Company ("Acquisition Sub"), a wholly-owned subsidiary of the
Company, will purchase substantially all of the assets of WQN relating to WQN's
"Voice over Internet Protocol" business.
11
Pursuant to the Asset Purchase Agreement, Acquisition Sub will purchase
the Assets for a purchase price consisting of (1) a Convertible Promissory Note,
in the principal amount of $3,700,000 (the "Purchase Note"), (2) 1,250,000
shares of the Company's restricted common stock, par value $0.001 per share (the
"Common Stock") and (3) a warrant (the "Purchase Warrant") to purchase 5,000,000
shares of Common Stock for $0.001 per share. In addition, the Asset Purchase
Agreement provides that, in the event that the accounts payable of WQN
transferred to the Company in the Asset Purchase exceed the accounts receivable
transferred to the Company in the Asset Purchase, WQN will pay the Company the
difference. If WQN is required to pay such difference, the Company will issue
additional shares of Common Stock at the rate of one share per dollar of such
excess, up to 500,000 shares.
ITEM 2. Management's Discussion and Analysis and Plan of Operation
(1) Caution Regarding Forward-Looking Information
This quarterly report contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the Company
or management as well as assumptions made by and information currently available
to the Company or management. When used in this document, the words
"anticipate," "believe," "estimate," "expect" and "intend" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current view of
the Company regarding future events and are subject to certain risks,
uncertainties and assumptions, including the risks and uncertainties noted.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. In each instance, forward-looking information should be considered in
light of the accompanying meaningful cautionary statements herein.
(2) Results of Operations
For the six months ended June 30, 2005 and 2004 the Company had revenues of
$3,916,920 and $85,298 respectively. For the three months ended June 30, 2005
and 2004 the Company had revenues of $1,909,773 and $85,298 respectively.
The significant increase in revenues was primarily driven by the acquisition of
Caerus, Inc. (for one month only) and VoIP Solutions, Inc. Caerus revenue growth
was driven by domestic wholesale terminations as well as Domestic long-distance
wholesale. VoIP Solutions revenue was primarily driven by increases in the
number of Virtual Service Providers (VSP's).
On May 31 2005, the Company completed the acquisition of Caerus, Inc. and
immediately began the process of merging operations. As part of the agreement,
the Company 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 of the Company's common shares.
Volo Communications, Inc. is a licensed facilities-based CLEC (Competitive Local
Exchange Carrier) and IXC (Inter Exchange Carrier). Caerus Networks, Inc. is a
technology research and development subsidiary, and Caerus Billing, Inc. is a
billing and mediation subsidiary. Caerus, Inc. and its three subsidiaries
generated revenues during calendar year 2004 that totaled $14 million.
Through the wholesale-only model Volo is a "carrier's carrier," and will
continue as a leader in the broadband voice marketplace. Volo will continue to
market its network products and services under the VoiceOne brand name.
Volo 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
metropolitan areas, representing 93 percent of the domestic population.
12
The VoiceOne Network Operations Center (NOC) 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.
In June 2004 the company acquired DTNet Technologies, Inc. and in September 2004
it acquired VoIP Americas. DTNet provides customer premises equipment to cable
and DSL Internet providers throughout North America. VoIP Americas provides
International and domestic wholesale terminations. Management believes that
these acquisitions complement the company's strategy to deliver Voice over
Internet Protocol over a wireless local loop and deliver service provider
solutions to cable operators and small to medium size carriers and Virtual
Service Providers (VSP's). DTNet has the distribution channels for the end users
and VoIP Americas has the market knowledge, systems, and turn key solutions for
today's sophisticated end users.
The cost of sales consists primarily of purchases, assembly and testing of
customer premise equipment performed by third party vendors. Additionally, it
includes the direct costs associated with the origination and termination of
International/Domestic wholesale minutes.
The gross profit amount of approximately $812,074 represents a gross margin of
21%. The Company anticipates that the gross profit margin percentage will
improve with additional growth in revenue. The company is attaining volume
discounts from its suppliers. The company believes that these discounts will
continue to improve as our sales strategy is deployed through out our different
product lines.
Operating expenses consist primarily of salaries and related personnel costs,
general corporate functions including finance, human resources, facilities,
legal and professional fees, insurance and general corporate overhead costs.
Total operating expenses for the six months ended June 30, 2005 and June 30,
2004 were $5,586,252 and $457,356 respectively. The principal components for
2005 are general and administrative expenses $2,029,223, wages and salaries
$1,690,579, commissions $1,173,136, and professional fees $611,211. The expense
increases were primarily due to the Company's entrance into the VoIP business,
expansion via marketing as well as acquisition, and the related legal and
professional costs of operating a public company.
Net losses for the respective quarters ended June 30, 2005 and 2004 were
approximately $3,266,881 and $408,658 respectively. Net loss per share was
approximately $0.11 and $0.03 respectively. 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 for each during 2004. The difference between the market
value and the $1.00 share price is $1,936,000. This included a one time event in
the exchange of company shares for warrants issued to an executive. The market
value of the shares amounting to approximately $239,500 as of the transaction
date was recognized as compensation expense in the consolidated statement of
operation.
(3) Liquidity and Capital Resources
As of June 30, 2005, we had cash and cash equivalents approximating $1,068,516
compared to $1,141,205 at December 31, 2004. We currently have three borrowing
arrangements with a balance of $ 7.7 million as of June 30, 2005, with notes
payable to a shareholder of $1.1 million, notes convertible of $1.5 million and
note payable of $5.1 million. Cash used in operating activities of $4.6 million
in the first two quarters of 2005, was primarily attributable to the net loss of
$4.8 million. Cash provided by financing activities in the first two quarters of
2005 consisted primarily of $2.7 million of proceeds resulting from the sale of
common stock to investors in private placement transactions and proceeds from
issuance of notes payable of $2.6 million.
13
Liquidity for the period from inception through June 30, 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 the first two quarters of 2005, showing revenues for $3.9
million.
The Company anticipates that all working capital requirements for 2005 will be
satisfied from the operation of the acquired business and the sales of
additional securities through private placements. There are outstanding
commitments for the sale of $1.5 million of convertible notes, but there are no
other commitments in place for funding.
Payments Due by Period
The following table illustrates our outstanding debts and the terms of
that debt as of June 30, 2005:
Less than 1-3 3-5
Contractual Obligations Total 1 Year Years Years
--------------------------------------------------------------------------------------------
Long-Term Debt $ 0.00 $ 0.00 $ 0.00 $ 0.00
Notes Payable $ 7,736,929 $ 7,736,929 $ 0.00 $ 0.00
Operating Leases $ 35,572 $ 149,905 $ 445,000 $ 0.00
Purchase Obligations $ 0.00 $ 0.00 $ 0.00 $ 0.00
-----------------------------------------------------------
Total $ 7,772,501 $ 7,866,834 $445000 $ 0.00
===========================================================
Plan of Operations
The Company has incurred losses since its inception and, as of June 30, 2005,
has an accumulated deficit of approximately $9,400,000. We have not achieved
profitability on an annual or quarterly basis and may incur additional net
losses in future quarters and years. The growth in revenues has been consistent
and Management expects to be in a break even position by the end of 2005.
The revenue growth will be achieved by acquisitions and the launch of new
products and services developed by the Company. The Company has had discussions
with various financing sources to obtain any capital that may be needed to
finance acquisitions in order to generate sufficient revenues to attain
profitability.
The Company does not expect material research and development expenses during
the year or the purchase of substantial equipment.
The Company currently has 55 employees and it does not expect a significant
change in the number of employees unless acquisitions are completed.
The Company is constantly exploring acquisitions, and any material acquisition
could have a substantial impact on these plans.
14
VOIP, INC. AND SUBSIDIARIES
UNAUDITED PRO FROMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
The Following unaudited pro forma condensed combined statements of operations
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 statement of operations for the six months
ended June 30, 2005 gives effect to the merger of Caerus and the Company with
the conversion of all Caerus capital stock into 16,434,470 shares of common
stock, par value $0.001, of the Company.
The unaudited pro forma condensed combined statement of operations assumes that
the Merger was consummated on January 1, 2004.
The unaudited pro forma condensed combined Statement of Operations have been
prepared based on currently available information and assumptions that are
deemed appropriate by the Company's management. The pro forma information is for
informational purposes only and is not intended to be indicative of the actual
consolidated results that would have been reported had the transactions occurred
on the dates indicated, nor does the information represent a forecast of the
consolidated financial position at any future date or the combined financial
results of the Company and Caerus for any future period.
15
VoIP, Inc.
Proforma Consolidated Statement of Operations (Unaudited)
For the Three Months Ended June 30, 2005
VoIP, Inc. Caerus, Inc. Elim's Consol
------------ ------------ ------------ ------------
Revenues $ 1,260,274 $ 2,289,399 $ -- $ 3,549,673
Cost of Sales 638,369 2,785,740 -- 3,424,109
------------ ------------ ------------ ------------
Gross Profit (Loss) 621,905 (496,341) -- 125,564
------------ ------------ ------------ ------------
Operating expenses 2,933,639 1,987,002 -- 4,920,641
------------
Loss from operations (2,311,734) (2,483,343) -- (4,795,077)
------------ ------------ ------------ ------------
Provision for income taxes -- -- --
------------ ------------ ------------ ------------
Net Loss $ (2,311,734) $ (2,483,343) $ -- $ (4,795,077)
============ ============ ============ ============
Basic and diluted loss per share: $ (0.16)
============
Weighted average number of shares outstanding 30,012,632
============
The accompanying notes are an integral part of the pro forma consolidated
financial statements.
16
VoIP, Inc.
Unaudited Proforma Consolidated Statement of Operations
For the Six Months Ended June 30, 2005
VoIP, Inc. Caerus, Inc. Elim's Consol
------------ ------------ ------------ ------------
Revenues $ 3,267,421 $ 7,284,244 $ -- $ 10,551,665
Cost of Sales 2,439,304 9,143,457 -- 11,582,761
------------ ------------ ------------ ------------
Gross Profit (Loss) 828,117 (1,859,213) -- (1,031,096)
------------ ------------ ------------ ------------
Operating expenses 4,647,148 3,839,659 -- 8,486,807
Loss from operations (3,819,031) (5,698,872) -- (9,517,903)
------------ ------------ ------------ ------------
Loss before income taxes
(3,819,031) (5,698,872) -- (9,517,903)
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Net Loss $ (3,819,031) $ (5,698,872) $ -- $ (9,517,903)
============ ============ ============ ============
Basic and diluted loss per share: $ (.35)
============
Weighted average number of shares outstanding 26,940,458
============
The accompanying notes are an integral part of these consolidated financial
statements.
17
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. for the three and six
months ended June 30, 2005 has been derived from VoIP, INC. historical
statements.
(2) CAERUS, INC. Basis of Presentation
Historical financial information for CAERUS, INC. as of and for the three
and six months ended June 30, 2005 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. See Footnote C
in the Financial Statements above regarding Goodwill and the pending
reevaluation of assets and liabilities acquired and assumed.
(4) Pro Forma Statements of Income Adjustments None were required.
(5) Acquisition appraisal
The Company is in the process of obtaining a professional appraisal of the
Caerus, Inc. acquisition. The acquisition created Goodwill in the amount
of $29,674,557. If the appraisal indicates that amount would best be
allocated between Goodwill, other intangible assets and/or paid in capital
the appropriate adjustment will be made.
Goodwill is the excess of the purchase price, based on the market value of
the 16,434,470 shares issued, over the book value of Caerus, Inc. on May
31, 2005. As listed in the following table:
Total paid in VoIP, Inc stock and warrants 16,434,470
VoIP share market value -
close of Market on May 31, 2005 $ 1.18
-----------
Total cost of Caerus, Inc. to VoIP, Inc. $19,392,675
Plus: Negative equity of Caerus, Inc.
as of May 31, 2005 10,281,881
-----------
Goodwill $29,674,557
===========
Item 3. Controls and Procedures
Within the 90 days prior to the filing date of this report, the Company
performed an evaluation of the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. This
evaluation was done under the supervision and with the participation of the
Company's President and Chief Financial Officer. Based upon that evaluation,
they concluded that the Company's disclosure controls and procedures are
effective in gathering, analyzing and disclosing information needed to satisfy
the Company's disclosure obligations under the Exchange Act. The two executive
officers responsible for the financial reporting and disclosure are also in
control of the books and records of the Company and are involved first hand in
the decision making process of material transactions.
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company is involved from time to time in legal proceedings and litigation
incidental to the conduct of its business.
See Financial Statement Note G for litigation between Volo Communications, Inc
(a wholly-owned subsidiary of Caerus, Inc.) and MCI WorldCom Network Services,
Inc. d/b/a UUNET.
Item 2 - Changes in Securities
The following unregistered securities have been issued during the second
quarter of 2005:
18
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.
All such shares were issued pursuant to exemptions provided by
Section 4(2) of the Securities Act of 1933 and Regulation D.
On August 12, 2005 the Company filed a Registration Statement for
the resale of up to 15,377,245 shares by 185 selling shareholders.
Item 3 - Defaults on Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
The Company has held no regularly scheduled, called or special meetings of
shareholders during the reporting period.
Item 5 - Other Information
None
Item 6 - Exhibits
(a) Exhibits
No. Description
31.1 Certification by CEO pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification by CFO pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification by CEO pursuant to 18 USC Section 1350 as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by CFO pursuant to 18 USC Section 1350 as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002.
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VoIP, INC.
August 15, 2005 /s/ Steven Ivester
---------------------------------
Steven Ivester
President and CEO
/s/ Osvaldo Pitters
---------------------------------
Osvaldo Pitters
Chief Financial Officer
20