Nevada | ||
88-0476779 | ||
(State of Incorporation) | (IRS Employer Identification No.) |
Large accelerated filer o Accelerated FileroNon-accelerated filer oSmaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Nox
Part I. Financial Information | |||||
Item 1. | Consolidated Financial Statements | ||||
Consolidated Balance Sheets at | 2 | ||||
Consolidated Statements of Operations for the Three and | 3 | ||||
Consolidated Statement of Changes in Stockholders’ Deficit for the | 4 | ||||
Consolidated Statements of Cash Flows for the | 5 | ||||
Notes to Consolidated Financial Statements (unaudited) | 6 | ||||
Management’s Discussion and Analysis | 22 | ||||
| |||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 34 | |||
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Item
| Controls and Procedures | 34 | |||
Part II. Other Information | |||||
Item 1. | Legal Proceedings | 35 | |||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 35 | |||
Item 4. | Submission of Matters to a Vote of Security Holders | 35 | |||
Other Information | 35 | ||||
Item
| Exhibits | 35 | |||
| |||||
36 |
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June 30, 2008 | December 31, 2007 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Cash | $ | 295 | $ | 277 | ||||
Accounts receivable, net of allowance for doubtful accounts of $125 at June 30, 2008 and December 31, 2007 | 2,098 | 1,875 | ||||||
Deposits | 150 | 180 | ||||||
Other current assets | 441 | 333 | ||||||
Total current assets | 2,984 | 2,665 | ||||||
Property and equipment, net | 555 | 937 | ||||||
Goodwill | 1,800 | 1,800 | ||||||
Other intangible assets, net | 101 | 119 | ||||||
Other long-term assets | 36 | 36 | ||||||
Total Assets | $ | 5,476 | $ | 5,557 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
Accounts payable, trade | $ | 9,289 | $ | 8,924 | ||||
Accrued expenses | 3,557 | 3,519 | ||||||
Bank overdraft | 520 | 464 | ||||||
Deferred revenues and customer deposits | 617 | 586 | ||||||
Borrowings under line of credit facilities net of debt discount of $607 | 963 | 190 | ||||||
Current portion of amounts and notes due to related parties | 75 | 215 | ||||||
Current portion of long-term capital lease obligations | 138 | 170 | ||||||
Promissory notes, including $250 from related parties | — | 600 | ||||||
Secured notes net of debt discount of $742 | 1,178 | — | ||||||
Liability for warrant put feature | 120 | — | ||||||
Total current liabilities | 16,457 | 14,668 | ||||||
Capital lease obligations, net of current portion | 63 | 106 | ||||||
Liability for warrant put feature | 78 | — | ||||||
Total long-term liabilities | 141 | 106 | ||||||
Total liabilities | 16,598 | 14,774 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ Deficit | ||||||||
Common stock – $0.001 par value; 150,000,000 and 50,000,000 shares authorized at June 30, 2008 and December 31, 2007; 61,353,971 and 59,575,194 shares issued and outstanding at June 30, 2008 and December 31, 2007 | 62 | 60 | ||||||
Additional paid-in capital | 27,603 | 25,807 | ||||||
Deferred stock based compensation | (113 | ) | (167 | ) | ||||
Accumulated deficit | (38,674 | ) | (34,917 | ) | ||||
Total stockholders’ deficit | (11,122 | ) | (9,217 | ) | ||||
Total Liabilities and Stockholders’ Deficit | $ | 5,476 | $ | 5,557 |
September 30, 2008 | December 31, 2007 | ||||||
(unaudited) | |||||||
ASSETS | |||||||
Cash | $ | 1,047 | $ | 277 | |||
Accounts receivable, net of allowance for doubtful accounts of $125 at September 30, 2008 and December 31, 2007 | 2,256 | 1,875 | |||||
Deposits | 150 | 180 | |||||
Other current assets | 414 | 333 | |||||
Total current assets | 3,867 | 2,665 | |||||
Property and equipment, net | 473 | 937 | |||||
Goodwill | 1,800 | 1,800 | |||||
Other intangible assets, net | 92 | 119 | |||||
Other long-term assets | 36 | 36 | |||||
Total Assets | $ | 6,268 | $ | 5,557 | |||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | |||||||
Accounts payable, trade | $ | 10,587 | $ | 8,924 | |||
Accrued expenses | 3,568 | 3,519 | |||||
Bank overdraft | 555 | 464 | |||||
Deferred revenues and customer deposits | 867 | 586 | |||||
Borrowings under line of credit facilities net of debt discount of $273 in 2008 | 1,887 | 190 | |||||
Notes payable, related party | 75 | 215 | |||||
Current portion of long-term capital lease obligations | 141 | 170 | |||||
Promissory notes, including $250 from related parties | — | 600 | |||||
Secured notes, including $500 from related parties net of debt discount of $572 in 2008 | 1,348 | — | |||||
Liability for warrant put feature | 180 | — | |||||
Total current liabilities | 19,208 | 14,668 | |||||
Capital lease obligations, net of current portion | 32 | 106 | |||||
Liability for warrant put feature | 78 | — | |||||
Total long-term liabilities | 110 | 106 | |||||
Total liabilities | 19,318 | 14,774 | |||||
Commitments and contingencies | |||||||
Stockholders’ Deficit | |||||||
Preferred stock — $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2008 and December 31, 2007 | — | — | |||||
Common stock — $0.001 par value; 150,000,000 and 50,000,000 shares authorized at September 30, 2008 and December 31, 2007; 61,553,971 and 59,575,194 shares issued and outstanding at September 30, 2008 and December 31, 2007 | 62 | 60 | |||||
Additional paid-in capital | 27,383 | 25,807 | |||||
Deferred stock based compensation | — | (167 | ) | ||||
Accumulated deficit | (40,495 | ) | (34,917 | ) | |||
Total stockholders’ deficit | (13,050 | ) | (9,217 | ) | |||
Total Liabilities and Stockholders’ Deficit | $ | 6,268 | $ | 5,557 |
Three Months Ended September 30, | Nine months Ended September 30 , | ||||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
Net revenues | $ | 6,402 | $ | 5,709 | $ | 18,930 | $ | 15,879 | |||||
Network costs | 5,799 | 5,581 | 17,545 | 17,156 | |||||||||
Gross profit (loss) | 603 | 128 | 1,385 | (1,277 | ) | ||||||||
Operating expenses | |||||||||||||
Sales and marketing (includes stock based compensation of $11 for each of the three months ended September 30, 2008 and 2007, respectively and $32 for each of the nine months ended September 30, 2008 and 2007, respectively) | 438 | 477 | 1,316 | 1,586 | |||||||||
General and administrative (includes stock based compensation of $74 and $77 for the three months ended September 30, 2008 and 2007, respectively and $233 and $1,170 for the nine months ended September 30, 2008 and 2007, respectively.) | 1,337 | 1,719 | 4,188 | 6,494 | |||||||||
Total operating expenses | 1,775 | 2,196 | 5,504 | 8,080 | |||||||||
Operating loss | (1,172 | ) | (2,068 | ) | (4,119 | ) | (9,357 | ) | |||||
Interest expense, net (includes amortization of debt discount of $273 and $0 for the three months ended September 30, 2008 and 2007, respectively and $628 and $0 for the nine months ended September 30, 2008 and 2007, respectively) | 648 | 157 | 1,551 | 297 | |||||||||
Gain on forgiveness of debt | — | — | (92 | ) | — | ||||||||
Loss on liability for options and warrants | — | — | — | 5,615 | |||||||||
Loss before provision for income taxes | (1,820 | ) | (2,225 | ) | (5,578 | ) | (15,269 | ) | |||||
Provision for income taxes | — | 5 | — | 5 | |||||||||
Net loss | $ | (1,820 | ) | $ | (2,230 | ) | $ | (5,578 | ) | $ | (15,274 | ) | |
Basic and diluted net loss per common share | $ | (0.03 | ) | $ | (0.04 | ) | $ | (0.09 | ) | $ | (0.26 | ) | |
Shares used to calculate basic and diluted net loss per common share (in thousands) | 61,438 | 59,575 | 60,335 | 59,575 |
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Net revenues | $ | 6,140 | $ | 4,931 | $ | 12,527 | $ | 10,170 | ||||||||
Network costs | 5,614 | 5,326 | 11,746 | 11,576 | ||||||||||||
Gross profit (loss) | 526 | (395 | ) | 781 | (1,406 | ) | ||||||||||
Operating expenses | ||||||||||||||||
Sales and marketing (includes stock based compensation of $11 and $11 for the three months ended June 30, 2008 and 2007, respectively and $21 and $21 for the six months ended June 30, 2008 and 2007, respectively) | 401 | 521 | 877 | 1,108 | ||||||||||||
General and administrative (includes stock based compensation of $79 and $939 for the three months ended June 30, 2008 and 2007, respectively and $159 and $1,094 for the six months ended June 30, 2008 and 2007, respectively) | 1,440 | 2,963 | 2,851 | 4,777 | ||||||||||||
Total operating expenses | 1,841 | 3,484 | 3,728 | 5,885 | ||||||||||||
Operating loss | (1,315 | ) | (3,879 | ) | (2,947 | ) | (7,291 | ) | ||||||||
Interest expense, net (includes amortization of debt discount of $263 and $0 for the three months ended June 30, 2008 and 2007, respectively and $355 and $0 for the six months ended June 30, 2008 and 2007, respectively) | 526 | 6 | 902 | 140 | ||||||||||||
Gain on forgiveness of debt | — | — | (92 | ) | — | |||||||||||
(Gain) loss on liability for options and warrants | — | (14 | ) | — | 5,615 | |||||||||||
Loss before provision for income taxes | (1,841 | ) | (3,871 | ) | (3,757 | ) | (13,046 | ) | ||||||||
Provision for income taxes | — | — | — | — | ||||||||||||
Net loss | $ | (1,841 | ) | $ | (3,871 | ) | $ | (3,757 | ) | $ | (13,046 | ) | ||||
Basic and diluted net loss per common share | $ | (0.03 | ) | $ | (0.06 | ) | $ | (0.06 | ) | $ | (0.22 | ) | ||||
Shares used to calculate basic and diluted net loss per common share (in thousands) | 61,354 | 59,575 | 60,561 | 59,575 |
Balance at January 1, 2008 — $ — 59,575,194 $ 60 $ 25,807 $ (167 ) $ (34,917 ) $ (9,217 ) Reclassification of deferred stock-based compensation — — — — ) — — Stock-based compensation — — — — 265 — 265 Warrant issuance — — — — 1,214 — — 1,214 Cashless warrants exercise relating to equipment purchase — — 635,612 1 165 — — 166 Stock issuance — — 200,000 — 100 — — 100 Stock issued on cashless exercise of stock options — — 1,143,165 1 (1 ) — — — Net loss for the nine months ended September 30, 2008 — — — — — — (5,578 ) (5,578 ) Balance at September 30, 2008 — $ — 61,553,971 $ 62 $ 27,383 $ $ (40,495 ) $ (13,050 )
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Preferred Stock | Common Stock | Additional Paid-In Capital | Deferred Stock Based Compensation | Accumulated Deficit | Total Stockholders’ Deficit | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||
Balance at January 1, 2008 | — | $ | — | 59,575,194 | $ | 60 | $ | 25,807 | $ | (167 | ) | $ | (34,917 | ) | $ | (9,217 | ) | |||||||||||||||
Amortization of stock-based compensation | — | — | — | — | 126 | 54 | — | 180 | ||||||||||||||||||||||||
Warrant issuance | — | — | — | — | 1506 | — | — | 1,506 | ||||||||||||||||||||||||
Cashless warrants exercise | — | — | 635,612 | 1 | 165 | — | — | 166 | ||||||||||||||||||||||||
Stock issued on cashless exercise | — | — | 1,143,165 | 1 | (1 | ) | — | — | — | |||||||||||||||||||||||
Net loss for the six months ended June 30, 2008 | — | — | — | — | — | — | (3,757 | ) | (3,757 | ) | ||||||||||||||||||||||
Balance at June 30, 2008 | — | $ | — | �� | 61,353,971 | $ | 62 | $ | 27,603 | $ | (113 | ) | $ | (38,674 | ) | $ | (11,122 | ) |
Cash flows from operating activities: Net loss $ (5,578 ) $ (15,274 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 524 799 Stock based compensation 265 1,202 Amortization of debt discount 628 — Loss on options and warrants — 5,615 Stock issuance for consulting 100 — Gain on forgiveness of debt (92 ) — (Increase) decrease in operating assets: Accounts receivable (381 ) (609 ) Deposits 30 16 Other current assets (81 ) (189 ) Other long-term assets — (8 ) Increase (decrease) in operating liabilities: Accounts payable, trade 1,662 2,636 Accrued expenses 307 (2,301 ) Deferred revenues and customer deposits 281 (281 ) Net cash used in operating activities (2,335 ) (8,394 ) Cash flows from investing activities: Purchase of property and equipment (33 ) (79 ) Cash flows from financing activities: Proceeds from secured notes 1,320 — Bank overdraft 91 — Payment of amounts to related party (140 ) (304 ) Proceeds from line of credit 1,969 — Net proceeds from escrow for private placement — 10,235 Cash refunded from reduction of private placement fees — 176 Repayment of related party credit facility — (1,125 ) Principal payments on capital lease obligations (102 ) (144 ) Net cash provided by financing activities 3,138 8,838 Net increase in cash 770 365 Cash at beginning of period 277 151 Cash at end of period $ 1,047 $ 516
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Six Months Ended June 30, | ||||||||
2008 | 2007 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (3,757 | ) | $ | (13,046 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 400 | 537 | ||||||
Stock based compensation | 180 | 1,115 | ||||||
Amortization of debt discount | 355 | — | ||||||
Loss on options and warrants | — | 5,615 | ||||||
Gain on forgiveness of debt | (92 | ) | — | |||||
(Increase) decrease in operating assets: | ||||||||
Accounts receivable | (223 | ) | (243 | ) | ||||
Deposits | 30 | 16 | ||||||
Other current assets | (108 | ) | (57 | ) | ||||
Other long-term assets | — | (8 | ) | |||||
Increase (decrease) in operating liabilities: | ||||||||
Accounts payable, trade | 364 | 150 | ||||||
Accrued expenses | 296 | (1,956 | ) | |||||
Deferred revenues and customer deposits | 32 | (339 | ) | |||||
Net cash used in operating activities | (2,523 | ) | (8,216 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | — | (79 | ) | |||||
Net cash used in investing activities | — | (79 | ) | |||||
Cash flows from financing activities: | ||||||||
Proceeds from secured notes | 1,320 | — | ||||||
Bank overdraft | 56 | — | ||||||
Payment of amounts to related party | (140 | ) | (304 | ) | ||||
Proceeds from line of credit | 1,380 | — | ||||||
Net proceeds from escrow for private placement | — | 10,235 | ||||||
Cash refunded from reduction of private placement fees | — | 176 | ||||||
Repayment of related party credit facility | — | (1,125 | ) | |||||
Principal payments on capital lease obligations | (75 | ) | (85 | ) | ||||
Net cash provided by financing activities | 2,541 | 8,897 | ||||||
Net increase in cash | 18 | 602 | ||||||
Cash at beginning of period | 277 | 151 | ||||||
Cash at end of period | $ | 295 | $ | 753 |
The accompanying notes are an integral part of these consolidated financial statements.
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the Company determines that collection of revenues are not reasonably assured, amounts are deferred and recognized as revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash.
Telecommunications equipment | ||
Telecommunications software | 18 months to 2 years | |
Computer equipment | 2 years | |
Office equipment and furniture | 3 years | |
Leasehold improvements | Useful life or remaining lease term, which ever is shorter |
· | significant underperformance relative to expected historical or projected future operating results; |
· | significant changes in the manner of use of the acquired assets or the strategy for our overall business; and |
· | significant negative industry or economic trends. |
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the asset exceeds the fair value of the asset, based on the fair market value if available, or discounted cash flows if not. To date, the Company has not had an impairment of long-lived assets and is not aware of the existence of any indicators of impairment.
December 31, 2007 | |||||
Risk-free interest rate | % | ||||
Expected lives (in years) | 2.8 | ||||
Dividend yield | % | ||||
Expected volatility | 71% | % | |||
Forfeiture rate | % |
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instruments issued to non-employees in accordance with the provisions of SFAS 123(R). All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more readily measured. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counterparty’s performance is complete or the date on which it is probable that performance will occur.
September 30, 2007 | ||||
Risk-free interest rate | % | |||
Expected lives (in years) | 4.3 Years | |||
Dividend yield | % | |||
Expected volatility | % | |||
Forfeiture rate | % |
—- The Company accounts for the issuance of detachable stock purchase warrants in accordance with APB No. 14 and SFAS No. 150, whereby it separately measures the fair value of the debt and the detachable warrants, and in the case of detachable warrants with put features to the Company for cash, it also values the put feature as a separate component of the detachable warrant, and allocates the proceeds from the debt on a pro-rata basis to each. The resulting discount from the fair value of the debt allocated to the warrant and put feature for cash, which are accounted for as paid-in capital and a liability, respectively, is amortized over the estimated life of the debt. The liability created by the put feature for cash will be realized if the put is exercised or will be reversed and accounted for as paid-in-capital if the put feature expires unexercised. In accordance with the provisions of EITF Issue No. 98-5 “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and Issue No. 00-27 “Application of EITF Issue No. 98-5 ‘Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios’ to Certain Convertible Instruments,” the Company allocates a portion of the proceeds received to any embedded beneficial conversion feature, based on the difference between the effective conversion price of the proceeds allocated to the convertible debt and the fair value of the underlying common stock on the date the debt is issued. In addition, for the detachable stock purchase warrants, the Company first allocates proceeds to the stock purchase warrants and the debt and then allocates the resulting debt proceeds between the beneficial conversion feature, which is accounted for as paid-in capital, and the initial carrying amount of the debt. — - Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, accounts receivable, accounts payable, accrued expenses, and short term debt. The Company maintains its cash with a major financial institution located in the United States. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000$250,000 per account. Periodically throughout the year the Company maintained balances in excess of federally insured limits. The Company encounters a certain amount of risk as a result of a concentration of revenue from a few significant customers and services provided from vendors. Credit is extended to customers based on an evaluation of their financial condition. The Company generally does not require collateral or other security to support accounts receivable. The Company performs ongoing credit evaluations of its customers and records an allowance for potential bad debts based on available information. To date, such losses, if any, have been within management’s expectations.
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clarifies that a noncontrolling interest in a subsidiary is an ownership interest that should be reported as equity in the consolidated financial statements. The provisions of SFAS No. 160 are effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is evaluating the impact of the adoption of SFAS 160 and believes there will be no material impact on our consolidated financial statements or financial condition.
In May 2008, the FASB issued SFAS No.163, “Accounting for Financial Guarantee Insurance Contracts — an interpretation of SFAS 60.” SFAS 163 clarifies SFAS 60, “Accounting and Reporting by Insurance Enterprises,” by requiring expanded disclosures about financial guarantee insurance contracts. Additionally, it requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event), when there is evidence that credit deterioration has occurred in an insured financial obligation. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for some disclosures about the insurance enterprise’s risk-management activities, which are effective the first period (including interim periods) beginning after May 23, 2008. Except for those disclosures, earlier application is not permitted. The Company is evaluating the impact of the adoption of SFAS 161 and believes there will be no material impact on our consolidated financial statements or financial condition.
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two-year unsecured promissory note in an amount tied to ATI’s working capital of $150,000. These amounts are payable to the former selling shareholder of ATI who was appointed President of ATI at the acquisition closing date. The amount of common stock consideration paid to the selling shareholder of ATI is subject to adjustment (or the payment of additional cash in lieu thereof at the option of the Company) if the trading price of the Company’s common stock does not reach a minimum price of $4.87 per share during the two years following the closing date. The value of this guarantee on the initial shares issued to the selling shareholder of ATI has been included in the Company’s determination of the purchase price of the ATI acquisition.
These shares are subject to the same adjustment as the initial shares already paid (or the payment of additional cash in lieu thereof at the option of the Company) if the trading price of the Company’s common stock does not reach a minimum price of $4.87 per share during the two years following the closing date. This payment could result in a material change to the Company’s financial statements.
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Total amounts and notes payable to related party | $ | 400 | ||
Common stock (initial 308,079 shares issued at closing) | 1,500 | |||
Direct acquisition related costs | 40 | |||
Total consideration | $ | 1,940 |
Liabilities assumed in excess of net assets acquired | $ | (43 | ) | |
Goodwill | 1,800 | |||
Customer relationships | 183 | |||
Total purchase price | $ | 1,940 |
Cash | $ | 459 | ||
Accounts receivable | 767 | |||
Other current assets | 10 | |||
Total current assets acquired | 1,236 | |||
Net fixed assets | 42 | |||
Total assets acquired | 1,278 | |||
Accounts payable | 590 | |||
Accrued liabilities | 731 | |||
Total current liabilities assumed | 1,321 | |||
Liabilities assumed in excess of net assets acquired | $ | (43 | ) |
June 30, 2008 | December 31, 2007 | |||||||
(Unaudited) | ||||||||
Employee advances | $ | 106 | $ | 66 | ||||
Federal excise tax receivable | — | 109 | ||||||
Prepaid expenses | 335 | 158 | ||||||
Other current assets | $ | 441 | $ | 333 |
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September 30, 2008 | December 31, 2007 | ||||||
(unaudited) | |||||||
Employee advances | $ | 106 | $ | 66 | |||
Federal excise tax receivable | - | 109 | |||||
Prepaid expenses | 308 | 158 | |||||
Other current assets | $ | 414 | $ | 333 |
June 30, 2008 | December 31, 2007 | |||||||
(Unaudited) | ||||||||
Telecommunications equipment | $ | 3,218 | $ | 3,218 | ||||
Computer equipment | 174 | 174 | ||||||
Telecommunications software | 107 | 107 | ||||||
Leasehold improvements, office equipment and furniture | 86 | 86 | ||||||
Total property and equipment | 3,585 | 3,585 | ||||||
Less: accumulated depreciation and amortization | (3,030 | ) | (2,648 | ) | ||||
Property and equipment, net | $ | 555 | $ | 937 |
September 30, 2008 | December 31, 2007 | ||||||
(unaudited) | |||||||
Telecommunications equipment | $ | 3,251 | $ | 3,218 | |||
Computer equipment | 174 | 174 | |||||
Telecommunications software | 107 | 107 | |||||
Leasehold improvements, office equipment and furniture | 86 | 86 | |||||
Total property and equipment | 3,618 | 3,585 | |||||
Less: accumulated depreciation | (3,145 | ) | (2,648 | ) | |||
Property and equipment, net | $ | 473 | $ | 937 |
2008.
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June 30, 2008 | December 31, 2007 | |||||||
(Unaudited) | ||||||||
Amounts due under equipment agreements | $ | 1,158 | $ | 1,394 | ||||
Commissions, network costs and other general accruals | 1,419 | 1,125 | ||||||
Deferred payroll and other payroll related liabilities | 502 | 525 | ||||||
Interest due on convertible promissory notes and other debt | 85 | 5 | ||||||
Payments due to third party providers | 393 | 470 | ||||||
Accrued expenses | $ | 3,557 | $ | 3,519 |
September 30, 2008 | December 31, 2007 | ||||||
(unaudited) | |||||||
Amounts due under equipment agreements | $ | 1,163 | $ | 1,394 | |||
Commissions, network costs and other general accruals | 1,329 | 1,125 | |||||
Deferred payroll and other payroll related liabilities | 522 | 525 | |||||
Interest due on convertible promissory notes and other debt | 209 | 5 | |||||
Payments due to third party providers | 345 | 470 | |||||
Accrued expenses | $ | 3,568 | $ | 3,519 |
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January 16, 2008 | |||||
Risk-free interest rate | 2.98% | % | |||
Expected lives (in years) | 12 | ||||
Dividend yield | % | ||||
Expected volatility | 81.2% | % | |||
Forfeiture rate | % |
March 31, 2008 | |||||
Risk-free interest rate | 2.98% | % | |||
Expected lives (in years) | 9 | ||||
Dividend yield | % | ||||
Expected volatility | 100.1% | % | |||
Forfeiture rate | % |
April 30, 2008 | |||||
Risk-free interest rate | 2.98% | % | |||
Expected lives (in years) | 12 | ||||
Dividend yield | % | ||||
Expected volatility | 81.2% | % | |||
Forfeiture rate | % |
June 16, 2008 | |||||
Risk-free interest rate | 2.98% | % | |||
Expected lives (in years) | 12 | ||||
Dividend yield | % | ||||
Expected volatility | 81.2% | % | |||
Forfeiture rate | % |
September 30, 2008 | ||||
Risk-free interest rate | 2.98% | % | ||
Expected lives (in years) | 12 | |||
Dividend yield | % | |||
Expected volatility | 81.2% | % | ||
Forfeiture rate | % |
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Securities and Exchange Commission which was declared effective on May 10, 2007. Any employee or director of, or consultant for, us or any of our subsidiaries or other affiliates will be eligible to receive awards under the 2007 Plan. We have reserved 8,903,410 shares of common stock have been reserved for awards under the 2007 Plan.
Number of Shares | Price per Share | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||||||
Options outstanding at December 31, 2007 | 7,756,742 | $ | — | $ | 0.18 | 7.56 | $ | 821,508 | ||||||||||||
Granted | — | — | — | |||||||||||||||||
Exercised | 1,232,320 | — | 0.04 | 135,847 | ||||||||||||||||
Forfeited/expired | 523,734 | — | 0.04 | |||||||||||||||||
Options outstanding at June 30, 2008 | 6,000,688 | 0.21 | 7.50 | 1,809,679 | ||||||||||||||||
Options vested and expected to vest in the future at June 30, 2008 | 6,000,688 | 0.21 | 7.50 | 1,809,679 | ||||||||||||||||
Options exercisable at June 30, 2008 | 4,821,223 | 0.19 | 7.18 | 1,542,444 |
Number of Shares | Price per Share | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||
Options outstanding at December 31, 2007 | 7,756,742 | $ | — | $ | 0.18 | 7.56 | $ | 821,508 | ||||||||
Granted | — | — | — | |||||||||||||
Exercised | 1,232,320 | — | 0.04 | 135,847 | ||||||||||||
Forfeited/expired | 523,734 | — | 0.04 | |||||||||||||
Options outstanding at September 30, 2008 | 6,000,688 | 0.21 | 7.25 | 1,461,838 | ||||||||||||
Options vested and expected to vest in the future at September 30, 2008 | 6,000,688 | 0.21 | 7.25 | 1,461,838 | ||||||||||||
Options exercisable at September 30, 2008 | 4,976,134 | 0.20 | 6.98 | 1,288,611 |
Options Outstanding | Options Exercisable | |||||||||||||||||||
Exercise Prices | Number of Shares | Average Remaining Contractual Life (in Years) | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | |||||||||||||||
$0.04 | 1,478,748 | 5.50 | $ | 0.04 | 1,478,748 | $ | 0.04 | |||||||||||||
0.04 | 154,039 | 5.75 | 0.04 | 154,039 | 0.04 | |||||||||||||||
0.04 | 431,307 | 6.00 | 0.04 | 431,307 | 0.04 | |||||||||||||||
0.04 | 123,231 | 6.50 | 0.04 | 123,231 | 0.04 | |||||||||||||||
0.22 | 277,269 | 7.25 | 0.22 | 221,815 | 0.22 | |||||||||||||||
0.25 | 2,350,000 | 9.25 | 0.25 | 1,468,753 | 0.25 | |||||||||||||||
0.27 | 338,884 | 7.25 | 0.27 | 254,163 | 0.27 | |||||||||||||||
0.41 | 643,879 | 7.50 | 0.41 | 520,033 | 0.41 | |||||||||||||||
0.81 | 110,908 | 7.50 | 0.81 | 76,711 | 0.81 | |||||||||||||||
0.97 | 92,423 | 7.75 | 0.97 | 92,423 | 0.97 | |||||||||||||||
6,000,688 | 4,821,223 |
19
Options Outstanding | Options Exercisable | |||||||||||||||
Exercise Prices | Number of Shares | Average Remaining Contractual Life (in Years) | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | |||||||||||
$0.04 | 1,478,748 | 5.25 | $0.04 | 1,478,748 | $0.04 | |||||||||||
0.04 | 154,039 | 5.50 | 0.04 | 154,039 | 0.04 | |||||||||||
0.04 | 431,307 | 5.75 | 0.04 | 431,307 | 0.04 | |||||||||||
0.04 | 123,231 | 6.25 | 0.04 | 123,231 | 0.04 | |||||||||||
0.22 | 277,269 | 7.00 | 0.22 | 235,679 | 0.22 | |||||||||||
0.25 | 2,350,000 | 9.00 | 0.25 | 1,566,669 | 0.25 | |||||||||||
0.27 | 338,884 | 7.00 | 0.27 | 271,108 | 0.27 | |||||||||||
0.41 | 643,879 | 7.25 | 0.41 | 540,674 | 0.41 | |||||||||||
0.81 | 110,908 | 7.25 | 0.81 | 82,256 | 0.81 | |||||||||||
0.97 | 92,423 | 7.50 | 0.97 | 92,423 | 0.97 | |||||||||||
6,000,688 | 4,976,134 |
20
December 31, 2006 | March 31, 2007 | May 31, 2007 | ||||||||||
Risk-free interest rate | 4.7% | 4.5% | 4.8% | |||||||||
Expected lives (in years) | 3.6 years to 5.4 years | 3.5 years to 5.3 years | 2.8 years to 4.5 years | |||||||||
Dividend yield | 0% | 0% | 0% | |||||||||
Expected volatility | 84% – 101% | 77% – 93% | 65% – 92% |
December 31, 2006 | March 31, 2007 | May 31, 2007 | ||||||||
Risk-free interest rate | 4.7 | % | 4.5 | % | 4.8 | % | ||||
Expected lives (in years) | 3.6 years to 5.4 years | 3.5 years to 5.3 years | 2.8 years to 4.5 years | |||||||
Dividend yield | 0 | % | 0 | % | 0 | % | ||||
Expected volatility | 84%-101 | % | 77%-93 | % | 65%-92 | % |
$1,500,000 such access increased to $2,000,000 per Amendment No. 1 to the Agreements (the “Amendment”) dated September 10, 2008.
21
June 30, 2008 | September 30, 2008 | ||||||
Risk-free interest rate | 2.63 | % | 2.42 | % | |||
Expected lives (in years) | 3.5 years | 3.1 years | |||||
Dividend yield | 0 | % | 0 | % | |||
Expected volatility | 74.0 | % | 74.0 | % | |||
Forfeiture rate | 0 | % | 0 | % |
22
or results of operations. Management reviews available information and determines the need for recording an estimate of the potential exposure when the amount is probable, reasonable and estimable based on SFAS 5, “Accounting for Contingencies.”
Consulting Agreement. On or about December 29, 2006,
June 30, 2008 | December 31, 2007 | |||||||
(Unaudited) | ||||||||
Current assets and liabilities: | ||||||||
Current assets and liabilities: | ||||||||
Deferred revenue | $ | 28 | $ | (58 | ) | |||
Accrued expenses | 108 | (9 | ) | |||||
136 | (67 | ) | ||||||
Valuation allowance | (136 | ) | 67 | |||||
Net current deferred tax asset | $ | — | $ | — | ||||
Non-current assets and liabilities: | ||||||||
Depreciation and amortization | $ | 19 | $ | 53 | ||||
Net operating loss carryforward | 15,486 | 13,966 | ||||||
15,505 | 14,019 | |||||||
Valuation allowance | (15,505 | ) | (14,019 | ) | ||||
Net non-current deferred tax asset | $ | — | $ | — |
September 30, 2008 | December 31, 2007 | ||||||
(unaudited) | |||||||
Current assets and liabilities: | |||||||
Current assets and liabilities: | |||||||
Deferred revenue | $ | 87 | $ | (58 | ) | ||
Accrued expenses | (116 | ) | (9 | ) | |||
(29 | ) | (67 | ) | ||||
Valuation allowance | 29 | 67 | |||||
Net current deferred tax asset | $ | — | $ | — | |||
Non-current assets and liabilities: | |||||||
Depreciation and amortization | $ | 6 | $ | 53 | |||
Net operating loss carryforward | 16,168 | 13,966 | |||||
16,174 | 14,019 | ||||||
Valuation allowance | (16,174 | ) | (14,019 | ) | |||
Net non-current deferred tax asset | $ | — | $ | — |
23
For the Six Months Ended June 30, | ||||||||
2008 | 2007 | |||||||
(Unaudited) | ||||||||
Federal statutory tax rate | (34 | )% | (34 | )% | ||||
State and local taxes | (6 | ) | (6 | ) | ||||
Valuation reserve for income taxes | 40 | 40 | ||||||
Effective tax rate | — | % | — | % |
For the Nine Months Ended September 30, | |||||||
2008 | 2007 | ||||||
(unaudited) | |||||||
Federal statutory tax rate | (34 | )% | (34 | )% | |||
State and local taxes | (6 | ) | (6 | ) | |||
Valuation reserve for income taxes | 40 | 40 | |||||
Effective tax rate | — | % | — | % |
Six Months Ended June 30, | ||||||||
2008 | 2007 | |||||||
(Unaudited) | ||||||||
Cash paid: | ||||||||
Interest | $ | 110 | $ | 173 | ||||
Non-cash information: | ||||||||
Issuance of common stock for cashless exercise of warrants | $ | 165 | $ | — | ||||
Cancellation of debt due to loan modification | $ | 600 | $ | — | ||||
Equipment obtained under capital leases | $ | — | $ | 233 | ||||
Fair value of debt discount (net of put liability) | $ | 1,506 | $ | — | ||||
Stock issued on cashless exercise of common stock purchase options | $ | 1 | $ | — |
24
Nine Months Ended September 30, | |||||||
2008 | 2007 | ||||||
(unaudited) | |||||||
Cash paid: | |||||||
Interest | $ | 168 | $ | 209 | |||
Non-cash information: | |||||||
Issuance of common stock for cashless exercise of warrants | $ | 165 | $ | — | |||
Cancellation of debt due to loan modification | $ | 600 | $ | — | |||
Equipment obtained under capital leases | $ | — | $ | 233 | |||
Fair value of debt discount (net of put liability) | $ | 1,214 | $ | — | |||
Stock issued on cashless exercise of common stock purchase options | $ | 100 | $ | — |
(a) | volatility or decline of our stock price; |
(b) | potential fluctuation in quarterly results; |
(c) | our failure to earn revenues or profits; |
(d) | inadequate capital and barriers to raising capital or to obtaining the financing needed to implement our business plans; |
(e) | changes in demand for our products and services; |
(f) | rapid and significant changes in markets; |
(g) | losses from litigation with or legal claims and allegations by outside parties; |
(h) | insufficient revenues to cover fixed network costs, operating costs and other costs; |
(i) | the possibility we may be unable to manage our growth; |
(j) | extensive competition; |
(k) | loss of members of our senior management; |
(l) | our dependence on local exchange carriers; |
(m) | our need to effectively integrate businesses we acquire; |
(n) | risks related to acceptance, changes in, and failure and security of, technology; |
(o) | regulatory interpretations and changes; |
(p) | malfunction of equipment or other aspects of VoIP |
(q) | inability to repay indebtedness and other defaults. |
25
the accounting acquirer in the business combination. Accordingly, the historical financial statements presented and the discussion of financial condition and results of operations prior to December 29, 2006 below are those of InterMetro Delaware and do not include the Company’s historical financial results. All costs associated with the business combination were expensed as incurred.
We currently estimate that this expansion will allow us to provide approximately 10.2 billion minutes of additional voice services per year on our VoIP infrastructure, based on 60% utilization of the equipment we have connected via dedicated circuits to switches operated by local exchange carriers.
26
27
We generally bill our customers on a weekly or monthly basis with either a prepaid balance required at the beginning of the week or month of service delivery or with net terms determined by the customers’ creditworthiness. Factors that affect our ability to increase revenue include:
Our voice services are sold on a price per minute basis. The rate per minute for each customer varies based on several factors, including volume of voice services purchased, a customer’s creditworthiness, and, increasingly, use of our SS-7 based services, which are priced higher than our other voice transport services.
· | Changes in the average rate per minute that we charge our customers. | |
Our voice services are sold on a price per minute basis. The rate per minute for each customer varies based on several factors, including volume of voice services purchased, a customer’s creditworthiness, and, increasingly, use of our SS-7 based services, which are priced higher than our other voice transport services. |
Our ability to increase revenue is primarily based on the number of carrier customers and retail distribution partners that we are able to attract and retain, as revenue is generated on a recurring basis from our customer base. We expect increases in our customer base primarily through the expansion of our direct sales force and our marketing programs. Our customer retention efforts are primarily based on providing high quality voice services and superior customer service. We expect that the addition of SS-7 based services to our network will significantly increase the universe of potential customers for our services because many customers will only connect to a voice service provider through SS-7 based interconnections.
We increase the revenue generated from existing customers by expanding the number of geographic markets connected to our VoIP infrastructure. Also, we are typically one of several providers of voice transport services for our larger customers, and can gain a greater share of a customer’s revenue by consistently providing high quality voice service.
· | Increasing the net number of customers utilizing our VoIP services. | |
Our ability to increase revenue is primarily based on the number of carrier customers and retail distribution partners that we are able to attract and retain, as revenue is generated on a recurring basis from our customer base. We expect increases in our customer base primarily through the expansion of our direct sales force and our marketing programs. Our customer retention efforts are primarily based on providing high quality voice services and superior customer service. We expect that the addition of SS-7 based services to our network will significantly increase the universe of potential customers for our services because many customers will only connect to a voice service provider through SS-7 based interconnections. |
We expect to expand our revenue base through the acquisition of other voice service providers. We plan to continue to acquire businesses whose primary cost component is voice services or whose technologies expand or enhance our VoIP service offerings.
We expect that our revenue will increase in the future primarily through the addition of new customers gained from our direct sales and marketing activities and from acquisitions.
· Increasing the average revenue we generate per customer. We increase the revenue generated from existing customers by expanding the number of geographic markets connected to our VoIP infrastructure. Also, we are typically one of several providers of voice transport services for our larger customers, and can gain a greater share of a customer’s revenue by consistently providing high quality voice service. · Acquisitions. SS-7 based interconnection costs.During the first nine months of 2006, we added a significant amount of capacity, measured by the number of simultaneous phone calls our VoIP infrastructure can connect in a geographic market, by connecting directly to local phone companies through SS-7 based interconnections purchased on a monthly recurring fixed cost basis. As we expand our network capacity and expand our network to new geographic markets, SS-7 based interconnection capacity will be the primary component of our fixed network costs. Until we are able to increase revenues based on our SS-7 services, these fixed costs significantly reduce the gross profit earned on our revenue.Other fixed costs.Other significant fixed costs components of our VoIP infrastructure include private fiber-optic circuits and private managed IP bandwidth that interconnect our geographic markets, monthly leasing costs for the collocation space used to house our networking equipment in various geographic markets, local loop circuits that are purchased to connect our VoIP infrastructure to our customers and usage
28
based vendors within each geographic market. Other fixed network costs include depreciation expense on our network equipment and monthly subscription fees paid to various network administrative services.
· | SS-7 based interconnection costs. During the first nine months of 2006, we added a significant amount of capacity, measured by the number of simultaneous phone calls our VoIP infrastructure can connect in a geographic market, by connecting directly to local phone companies through SS-7 based interconnections purchased on a monthly recurring fixed cost basis. As we expand our network capacity and expand our network to new geographic markets, SS-7 based interconnection capacity will be the primary component of our fixed network costs. Until we are able to increase revenues based on our SS-7 services, these fixed costs significantly reduce the gross profit earned on our revenue. |
· | Other fixed costs. Other significant fixed costs components of our VoIP infrastructure include private fiber-optic circuits and private managed IP bandwidth that interconnect our geographic markets, monthly leasing costs for the collocation space used to house our networking equipment in various geographic markets, local loop circuits that are purchased to connect our VoIP infrastructure to our customers and usage based vendors within each geographic market. Other fixed network costs include depreciation expense on our network equipment and monthly subscription fees paid to various network administrative services. |
In order to provide services to our customers in geographic areas where we do not have existing or sufficient VoIP infrastructure capacity, we purchase transport services from traditional long distance providers and resellers, as well as from other VoIP infrastructure companies. We refer to these costs as “off-net” costs. Off-net costs are billed on a per minute basis with rates that vary significantly based on the particular geographic area to which a call is being connected.
· | Off-net costs. In order to provide services to our customers in geographic areas where we do not have existing or sufficient VoIP infrastructure capacity, we purchase transport services from traditional long distance providers and resellers, as well as from other VoIP infrastructure companies. We refer to these costs as “off-net” costs. Off-net costs are billed on a per minute basis with rates that vary significantly based on the particular geographic area to which a call is being connected. |
The SS-7 based interconnection services that are purchased from the local exchange carriers, include a usage based, per minute cost component. The rates per minute for this usage based component are significantly lower than the per minute rates for off-net services. The usage based costs for SS-7 services continue to be the largest cost component of our network as we grow revenue utilizing SS-7 technology.
· | SS-7 based interconnections with local carriers. The SS-7 based interconnection services that are purchased from the local exchange carriers, include a usage based, per minute cost component. The rates per minute for this usage based component are significantly lower than the per minute rates for off-net services. The usage based costs for SS-7 services continue to be the largest cost component of our network as we grow revenue utilizing SS-7 technology. |
Our customers utilize our services in identifiable fixed daily and weekly patterns. Customer usage patterns are characterized by relatively short periods of high volume usage, leaving a significant amount of time during each day where the network components remain idle.
Our ability to attract customers with different traffic patterns, such as customers who cater to residential calling services, which typically spike during evening hours, with customers who sell enterprise services primarily for use during business hours, increases the overall utilization of our fixed-cost network components. This decreases our overall cost of operations as a percentage of revenues.
· | Efficient utilization of fixed-cost network components. Our customers utilize our services in identifiable fixed daily and weekly patterns. Customer usage patterns are characterized by relatively short periods of high volume usage, leaving a significant amount of time during each day where the network components remain idle. Our ability to attract customers with different traffic patterns, such as customers who cater to residential calling services, which typically spike during evening hours, with customers who sell enterprise services primarily for use during business hours, increases the overall utilization of our fixed-cost network components. This decreases our overall cost of operations as a percentage of revenues. |
Our ability to purchase the appropriate amount of fixed-cost network capacity to (1) adequately accommodate periods of higher call volume from existing customers, (2) anticipate future revenue growth attributed to new customers, and (3) expand services for new and existing customers in new geographic markets is a key factor in managing the percentage of fixed costs we incur as a percentage of revenue.
From time to time, we also make strategic decisions to add capacity with newly deployed technologies, such as the SS-7 based services, which require purchasing a large amount of network capacity in many geographic markets prior to the initiation of customer revenue.
We expect that both our fixed-cost and usage-based network costs will increase in the future primarily due to the expansion of our VoIP infrastructure and use of off-net providers related to the expected growth in our revenues.
· | Strategic purchase of fixed-cost network components. Our ability to purchase the appropriate amount of fixed-cost network capacity to (1) adequately accommodate periods of higher call volume from existing customers, (2) anticipate future revenue growth attributed to new customers, and (3) expand services for new and existing customers in new geographic markets is a key factor in managing the percentage of fixed costs we incur as a percentage of revenue. From time to time, we also make strategic decisions to add capacity with newly deployed technologies, such as the SS-7 based services, which require purchasing a large amount of network capacity in many geographic markets prior to the initiation of customer revenue. We expect that both our fixed-cost and usage-based network costs will increase in the future primarily due to the expansion of our VoIP infrastructure and use of off-net providers related to the expected growth in our revenues. |
Increasing the volume of services we purchase from our vendors typically lowers our average off-net rate per minute, based on volume discounts. Another factor in the determination of our average rate per minute is the mix of voice services we use by carrier type, with large fluctuations based on the carrier type of the end user which can be local exchange carriers, wireless providers or other voice service providers.
29
· | Fluctuations in per minute rates of off-net service providers. Increasing the volume of services we purchase from our vendors typically lowers our average off-net rate per minute, based on volume discounts. Another factor in the determination of our average rate per minute is the mix of voice services we use by carrier type, with large fluctuations based on the carrier type of the end user which can be local exchange carriers, wireless providers or other voice service providers. |
Our ability to sell services connecting our on-net geographic markets, rather than off-net areas, affects the volume of usage based off-net services we purchase as a percentage of revenue.
We expect to continue to make acquisitions of telecommunications companies. As we complete these acquisitions and add an acquired company’s traffic and revenue to our operations, we may incur increased usage-based network costs. These increased costs will come from traffic that remains with the acquired company’s pre-existing carrier and from any of the acquired company’s traffic that we migrate to our SS-7 services or our off-net carriers. We may also experience decreases in usage based charges for traffic of the acquired company that we migrate to our network. The migration of traffic onto our network requires network construction to the acquired company’s customer base, which may take several months or longer to complete.
· · JuneSeptember 30, 2008 and 2007 Three Months Ended
June 30, 2008 2007 Net revenues 100 % 100 % Network costs 91 108 Gross profit 9 (8 ) Operating expenses: Sales and marketing 7 11 General and administrative 23 60 Total operating expenses 30 71 Operating loss (21 ) (79 ) Gain/(loss) on option and warrant liability — — Interest expense 9 — Loss before provision for income tax (30 ) (79 ) Net loss (30 )% (79 )%
30
Three Months Ended September 30, | |||||||
2008 | 2007 | ||||||
Net revenues | 100 | % | 100 | % | |||
Network costs | 91 | 98 | |||||
Gross profit | 9 | 2 | |||||
Operating expenses: | |||||||
Sales and marketing | 6 | 8 | |||||
General and administrative | 21 | 30 | |||||
Total operating expenses | 27 | 38 | |||||
Operating loss | (18 | ) | (36 | ) | |||
Gain/(loss) on option and warrant liability | — | — | |||||
Interest expense | 10 | 3 | |||||
Loss before provision for income tax | (28 | ) | (39 | ) | |||
Net loss | (28 | )% | (39 | )% |
Nine Months Ended September 30 , | |||||||
2008 | 2007 | ||||||
Net revenues | 100 | % | 100 | % | |||
Network costs | 93 | 108 | |||||
Gross profit | 7 | (8 | ) | ||||
Operating expenses: | |||||||
Sales and marketing | 7 | 10 | |||||
General and administrative | 22 | 41 | |||||
Total operating expenses | 29 | 51 | |||||
Operating loss | (22 | ) | (59 | ) | |||
Gain of forgiveness of debt | — | — | |||||
Gain/(loss) on option and warrant liability | — | (35 | ) | ||||
Interest expense | 8 | 2 | |||||
Loss before provision for income tax | (30 | ) | (96 | ) | |||
Net loss | (30 | )% | (96 | )% |
31
The following table sets forth, for the periods indicated, the results of our operations expressed as a percentage of revenue:
Six Months Ended June 30, | ||||||||
2008 | 2007 | |||||||
Net revenues | 100 | % | 100 | % | ||||
Network costs | 94 | 114 | ||||||
Gross profit | 6 | (14 | ) | |||||
Operating expenses: | ||||||||
Sales and marketing | 7 | 11 | ||||||
General and administrative | 23 | 47 | ||||||
Total operating expenses | 30 | 58 | ||||||
Operating loss | (24 | ) | (72 | ) | ||||
Gain of forgiveness of debt | 1 | — | ||||||
Gain/(loss) on option and warrant liability | — | (55 | ) | |||||
Interest expense | 7 | 1 | ||||||
Loss before provision for income tax | (30 | ) | (128 | ) | ||||
Net loss | (30 | )% | (128 | )% |
Net Revenues. Net revenues increased $2.4 million, or 23.2%, to $12.5 million for the six months ended June 30, 2008 from $10.1 million for the six months ended June 30, 2007. We have been acquiring new customers which contributed approximately $2.2 million in additional revenues in the six months ending June 30, 2008 and have also had increasing revenue from existing customers. This increase was partially offset by a $218,000 reduction in revenues attributable to the loss of a customer due to an acquisition as well as a reduction in revenues for several large customers.
Network Costs. Network costs increased $170,000, or 1.5%, to $11.7 million for the six months ended June 30, 2008 from $11.6 million for the six months ended June 30, 2007. Included within total network costs, variable network costs increased by $474,000 to $10.4 million (83.0% of revenues) for the six months ended June 30, 2008 from $9.9 million (97.6% of revenues) for the six months ended June 30, 2007, primarily from increased revenue, while fixed network costs decreased by $302,000 to $1.3 million for the six months ended June 30, 2008 from $1.6 million for the six months ended June 30, 2007, with the decrease coming primarily from the elimination of legacy network components that were not yet removed from the network in the three months ended June 30, 2007 while the SS-7 replacement components were concurrently being expensed. There were no significant fixed network expenses added during the three months ended June 30, 2008. Through the migration of existing customers to the SS-7 based infrastructure and the addition of new customers, the Company expects to generate improved gross margins as it increases the utilization of its SS-7 network infrastructure.
Gross margin increased to 6% for the six months ended June 30, 2008 from a gross margin of (14)% for the six months ended June 30, 2007. This increase in gross margin was attributable to the increasing utilization of capacity and fixed costs, deployment of SS-7 based technology in the network and the continued migration of customers related to the ATI acquisition to our network from third party networks. The Company expects to continue to generate improved gross margins as it increases the utilization of its SS-7 network infrastructure in the future through increased sales.
Depreciation expense included within network costs for the six months ended June 30, 2008 was $368,000 (2.9% of net revenues) as compared to $504,000 (5.0% of net revenues) for the six months ended June 30, 2007.
Sales and Marketing. Sales and marketing expenses decreased $231,000, or 20.8% to $877,000 for the six months ended June 30, 2008 from $1.1 million for the six months ended June 30, 2007. Sales and marketing expenses as a percentage of net revenues were 7.0% and 10.9% for the six months ended June 30, 2008
32
and 2007, respectively. The Company’s efforts to minimize expenses in sales and marketing resulted in decreased expenses for advertising, consulting, outsourced customer service and promotions, partially offset by an increase in compensation expense. Sales and marketing expenses included stock-based charges related to warrants and stock options of $21,000 for the six months ended June 30, 2008 and 2007.
General and Administrative. General and administrative expenses decreased $1.9 million or 40.3% to $2.9 million for the six months ended June 30, 2008 from $4.8 million for the six months ended June 30, 2007. General and administrative expenses as a percentage of net revenues were 22.7% and 47.0% for the six months ended June 30, 2008 and 2007, respectively. General and administrative expenses included stock-based charges related to warrants and stock options of $159,000 and $1.1 million for the six months ended June 30, 2008 and 2007, respectively. The six months ended June 30, 2007 included a $819,000 non-recurring charge related to warrants. The additional approximate $1.1 million decrease in general and administrative expenses for the six months ended June 30, 2008 is primarily attributable to a $795,000 reduction in professional service fees and a $434,000 reduction in payroll related expenses due to reduction in workforce. Certain professional service fees in the six months ended June 30, 2007 were non-recurring fees attributable to becoming a publicly traded company.
Interest Expense, Net. Interest expense, net increased $762,000 to $902,000 for the six months ended June 30, 2008 from $140,000 for the six months ended June 30, 2007. Interest expense for the six months ended June 30, 2008 includes $355,000 amortization of debt discountinterest and $50,000 related to an addendum to a vendor agreement. Interest expense for the three months ended JuneSeptember 30, 2007 includes a $90,000 non-recurring credit related to renegotiation of a fixed asset purchase agreement.
2007
:There were no purchases of property and equipment in the six months ended June 30, 2008.
$33,000 and $79,000, respectively.
33
modification and $1.4$2.0 million proceeds from an asset based line of credit. This was partially offset by payments made for capital lease obligations and to a related party. Net cash for the sixnine months ended JuneSeptember 30, 2007 included the receipt of approximately $10.2 million in gross proceeds from our sale of common stock in December 2006 (proceeds were held in escrow at December 31, 2006) partially offset by the repayment of our related party credit facilities of $1.1 million.
34
35
applying the “modified prospective transition method” under which we continue to account for non-vested equity awards outstanding at the date of adoption of SFAS 123(R) in the same manner as they had been accounted for prior to adoption, that is, we would continue to apply APB 25 in future periods to equity awards outstanding at the date we adopted SFAS 123(R).
Replacement for Grants Made During Quarter Ended | Number of Options Granted | Weighted- Average Exercise Price | Weighted- Average Intrinsic Value per Share | Weighted- Average Fair Value per Share | ||||||||||||
March 31, 2004 | 3,635,304 | $ | 0.041 | $ | — | $ | 0.041 | |||||||||
September 30, 2004 | 554,536 | $ | 0.041 | $ | 0.171 | $ | 0.212 | |||||||||
September 30, 2005 | 277,273 | $ | 0.220 | $ | 0.592 | $ | 0.811 | |||||||||
December 31, 2005 | 338,885 | $ | 0.268 | $ | 0.624 | $ | 0.893 | |||||||||
March 31, 2006 | 797,924 | $ | 0.453 | $ | 0.521 | $ | 0.974 | |||||||||
June 30, 2006 | 110,895 | $ | 0.974 | $ | 0.745 | $ | 1.718 | |||||||||
September 30, 2006 | — | $ | — | $ | — | $ | — | |||||||||
December 31, 2006 | — | $ | — | $ | — | $ | — | |||||||||
March 31, 2007 | — | $ | — | $ | — | $ | — | |||||||||
June 30, 2007 | — | $ | — | $ | — | $ | — | |||||||||
September 30, 2007 | — | $ | — | $ | — | $ | — | |||||||||
December 31, 2007 | 2,350,000 | $ | 0.250 | $ | 0.000 | $ | 0.110 | |||||||||
March 31, 2008 | — | $ | — | $ | — | $ | — | |||||||||
June 30, 2008 | — | $ | — | $ | — | $ | — |
Replacement for Grants Made During Quarter Ended | Number of Options Granted | Weighted-Average Exercise Price | Weighted-Average Intrinsic Value per Share | Weighted-Average Fair Value per Share | |||||||||
March 31, 2004 | 3,635,304 | $ | 0.041 | $ | — | $ | 0.041 | ||||||
September 30, 2004 | 554,536 | $ | 0.041 | $ | 0.171 | $ | 0.212 | ||||||
September 30, 2005 | 277,273 | $ | 0.220 | $ | 0.592 | $ | 0.811 | ||||||
December 31, 2005 | 338,885 | $ | 0.268 | $ | 0.624 | $ | 0.893 | ||||||
March 31, 2006 | 797,924 | $ | 0.453 | $ | 0.521 | $ | 0.974 | ||||||
June 30, 2006 | 110,895 | $ | 0.974 | $ | 0.745 | $ | 1.718 | ||||||
September 30, 2006 | — | $ | — | $ | — | $ | — | ||||||
December 31, 2006 | — | $ | — | $ | — | $ | — | ||||||
March 31, 2007 | — | $ | — | $ | — | $ | — | ||||||
June 30, 2007 | — | $ | — | $ | — | $ | — | ||||||
September 30, 2007 | — | $ | — | $ | — | $ | — | ||||||
December, 31 2007 | 2,350,000 | $ | 0.250 | $ | 0.000 | $ | 0.110 | ||||||
March 31, 2008 | — | $ | — | $ | — | $ | — | ||||||
June 30,2008 | — | $ | — | $ | — | $ | — | ||||||
September 30,2008 | — | $ | — | $ | — | $ | — |
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and by reviewing significant past due balances for individual collectibility. If estimated allowances for uncollectible accounts subsequently prove insufficient, additional allowance may be required.
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Payments Due by Period (Dollars in Thousands) | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 Year | 1 – 3 Years | 3 – 5 Years | More than 5 Years | |||||||||||||||
Capital lease obligations | $ | 201 | $ | 138 | $ | 63 | — | — | ||||||||||||
Operating lease obligations | 197 | 197 | — | — | — | |||||||||||||||
Total | $ | 398 | $ | 335 | $ | 63 | $ | — | $ | — |
Payments Due by Period (Dollars in Thousands) | ||||||||||||||||
Contractual Obligations | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | |||||||||||
Capital lease obligations | $ | 173 | $ | 141 | $ | 32 | — | — | ||||||||
Operating lease obligations | 131 | 131 | — | — | — | |||||||||||
Total | $ | 304 | $ | 272 | $ | 32 | $ | — | $ | — |
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· | While we have implemented control procedures for reviewing all material financial reporting items and test these control processes, certain of our control procedures are not sufficient to prevent the risk that a potential material misstatement of the financial statements would occur without being prevented or detected, specifically with regards to dispute reserves for accounts payable, accruals for third party charges and certain equity accounts. In each case, the Company does not have adequate staffing to ensure that the monitoring processes mitigate risks that external information used is correct and, in the case of equity accounts, that the Company has personnel with adequate understanding of the applicability of accounting principles. | |
· | We have not maintained sufficient evidence to support that certain of our internal controls over financial reporting activities were performed on a timely basis, specifically related to confirmation testing of disputes of information received from our vendors, variance analysis, accounts receivable analyses and equity accounts. |
· | Due to the small size of our Company, we have not adequately divided, or compensated for, functions among personnel to reduce the risk that a potential material misstatement of the financial statements would occur without being prevented or detected with regards to certain of our equity accounts. Specifically, with regards to equity awards, at times information used in our financial reporting is not able to be given to additional competent staff to mitigate the risk of erroneous or inappropriate actions. |
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· | We plan to improve our monitoring processes and add additional staff resources to monitor our dispute reserves, accruals for third party charges and equity reporting activities. | |
· | We intend on developing specific policies and procedures around the nature and retention of evidence of the operation of controls. For example, where other forms of sign-off and evidence of timeliness do not exist, reviews will be evidenced via sign-off (including signature and date). |
· | We are considering re-assigning roles and responsibilities in order to improve segregations of duties with regards to control activities for our equity accounts. |
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Exhibit Number | Description of Exhibits | |
3.1* | Amended and Restated Articles of Incorporation | |
3.3** | Amended and Restated Bylaws | |
31.1 | Rule 13a-14(a) Certification of Principal Executive Officer | |
31.2 | Rule 13a-14(a) Certification of Principal Accounting Officer | |
32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350 | |
32.2 | Certification of Principal Accounting Officer pursuant to 18 U.S.C. 1350 |
* | Incorporated by reference to the Schedule 14C Information Statement filed with the Securities and Exchange Commission dated May 9, 2007. |
** | Incorporated by reference to the Form 8K filed with the Securities and Exchange Commission dated June 28, 2007. |
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INTERMETRO COMMUNICATIONS, INC.
INTERMETRO COMMUNICATIONS, INC. | ||
Dated: | By: |
/s/ Charles Rice |
Charles Rice, Chairman of the Board, | ||
Chief Executive Officer, and President |
Dated: | By: |
/s/ Vincent Arena |
Vincent Arena | ||
Chief Financial Officer and Director |
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