ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BASIS OF DISCUSSION AND ANALYSIS
The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, as amended, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosures of contingent liabilities. On an ongoing basis, management evaluates its estimates, including those that relate to income tax contingencies, revenue recognition, and litigation. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Although we believe our judgments and estimates are appropriate, actual future results may be different; if different assumptions or conditions were to prevail, the results could be materially different from our reported results. If actual results significantly differ from management's estimates, the Company's financial condition and results of operations could be materially impaired.
SAFE HAROR FOR FORWARD-LOOKING STATEMENTS
This Form 10-QSB contains forward-looking statements as defined by federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements concerning plans, objectives, goals, strategies, expectations, intentions, projections, developments, future events, performance or products, underlying (express or implied) assumptions and other statements which are other than historical facts. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expects," "intends," "plans," "anticipates," "contemplates," "believes," "estimates," "predicts," "projects," and other similar terminology or the negative of these terms. From time to time we may publish or otherwise make available forward-looking statements of this nature. All such forward-looking statements, whether written or oral, and whether made by us or on our behalf, are expressly qualified by the cautionary statements described in this Form 10-QSB, including those set forth in Section 1A entitled "Factors That May Affect Future Results." In addition, we undertake no obligation to update or revise any forward-looking statement to reflect events, circumstances, or new information after the date of this Form 10-QSB or to reflect the occurrence of unanticipated or other subsequent events, and we disclaim any such obligation.
RESULTS OF OPERATIONS
Comparison of Six Month period Ended June 30, 2005 and June 30, 2004
During the six months ended June 30, 2005, we recorded $1,805,291 as Net revenues. This compares to the six months ended June 30, 2004 when we recorded $2,169,716 as Net revenue.
During the six months ended June 30, 2005, our Cost of revenues was $1,643,805, which resulted in a Gross margin as a percentage of Net revenues of approximately 8.9%. This compares to the six months ended June 30, 2004 when our Cost of revenues was $1,908,609, which resulted in a Gross margin percentage of Net revenues of approximately 12%. Competitive conditions, product and sales mix, and technology trends impacted our gross margin in both of these years.
During the six months ended June 30, 2005 we incurred $1,719,131 in General and administrative expenses. This compares to the six months ended June 30, 2004 when we incurred $1,929,992 in General and administrative expenses. The decrease of approximately 10% from the six months ended June 30, 2004 to the six months ended June 30, 2005 was due primarily to the cost containment measures implemented by management during the six months ended June 30, 2005. Overall, General and administrative expenses were primarily made up of wages and salaries, office expenses, fees and costs incurred for legal and accounting services, and other administrative costs.
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During the six months ended June 30, 2005 we had Bad debt recovery of $18,352 compared to the six months ended June 30, 2004, when we had $6,213 in Bad debt expense. During the six months ended June 30, 2005 we recorded an Equity loss from unconsolidated subsidiaries of $14,213 compared to the six months ended June 30, 2004, when we recorded $0. In addition, during the six months ended June 30, 2005 we recorded a benefit of $254,833 for Recovery of purchased intangibles compared to the six months ended June 30, 2004, when we recorded a charge of $4,488,238. The Recovery of purchased intangibles (net of impairment expense) recognized during the six months ended June 30, 2005 resulted from the annual evaluation of purchased intangibles based on the discounted cash flow analysis of Mid-Atlantic ($244,000) and Adoria ($31,000) during the first quarter offset by a $529,833 recovery of purchased intangible upon the settlement and termination of the Brasil LLC acquisition. The impairment during the six months ended June 30, 2004 was based on the initial discounted cash flow model upon the acquisitions of Adoria and Brasil LLC.
During the six months ended June 30, 2005, we incurred an operating loss of $1,298,672 compared to an operating loss of $6,163,336 during the six months ended June 30, 2004. The decrease in the amount of the loss in the six months ended June 30, 2005 was due primarily to the decreased impairment of purchased intangibles and, to a lesser extent, the reduction in General and administrative expenses offset in part by reduced Gross margin.
During the six months ended June 30, 2005, we incurred Interest expense of $54,476 compared to $42,726 in Interest expense during the six months ended June 30, 2004.
As a result, during the six months ended June 30, 2005 we had a Net loss of $1,353,145 compared to the six months ended June 30, 2004, when we had a Net loss of $6,219,133.
Basic loss per share for the six months ended June 30, 2005 was $.01 compared to the six months ended June 30, 2004, when we had a Basic loss per share of $.07. During the six months ended June 30, 2005, we had 126,436,414 of Weighted average shares outstanding. By comparison, during the six months ended June 30, 2004 we had 91,960,147 of Weighted average shares outstanding.
IMPACT OF INFLATION
Because of the nature of its services, the Company does not believe that inflation had a significant impact on its sales or profits.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2005, we had $74,036 in Cash. At the same time, we had $127,709 in net accounts receivable, $6,426 in Inventories, and $189,828 in Other current assets, for a total of $401,999 in Total current assets. In contrast, as of June 30, 2005, our Total current liabilities were $2,073,419, which consisted primarily of the following material amounts: $671,984 in Accounts payable, $207,383 in Accrued liabilities, $744,757 in related party obligations, $126,502 in Deferred revenues, $237,989 in Short term debt, and $81,380 in Stock subscription deposits.
During the six months ended June 30, 2005, our cash needs were met primarily by the sale of common stock and loans from certain of our shareholders. We cannot be assured that we can continue to obtain funds from these or any other sources to meet our need for additional capital resources.
Net working capital as of June 30, 2005 was ($1,671,420). Overall, the company’s access to capital is very limited. The Company continually evaluates its cash needs and anticipates seeking additional equity or debt financing in order to achieve its overall business objectives. However, no commitment for additional financing has been obtained and there can be no assurance that such financing will be available, or, if available, at a price or in a form that is acceptable to the Company. We may be limited to loans and other cash infusions from officers, directors, existing stockholders, and persons affiliated or associated with one or more of them. In addition, if any financing should be obtained, existing stockholders will likely incur substantial, immediate, and permanent
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dilution of their existing investment. Failure to generate sufficient revenues, raise additional capital or reduce certain discretionary spending could have an adverse impact on the Company’s ability to achieve its business objectives.
NextPhase Wireless, Inc. is trading on the OTC BB under the symbol NXPW. The Company owns 4,000,000 “restricted” common shares of NextPhase, which has had a recent trading range of $0.24 to $1.39. The 4,000,000 common shares of NextPhase were pledged (“Pledged Stock”) as collateral on behalf of NextPhase for a $350,000 promissory note (“Note”). In early May 2005, the Note was paid in full and the Pledged Stock is being released to the Company. During August the Company will be eligible to request an exemption (as noted below) to commence selling shares of the NextPhase “restricted” common stock to raise capital for the Company.
The term “restricted” refers to common stock represented by certificate(s) that have not been registered under the Securities Act of 1933, as amended (the “Act”), or under certain state securities laws. No public sale or transfer of these shares may be made in the absence of (a) an effective registration statement under the Act or (b) an opinion of counsel acceptable to the issuing company that registration under the Act or under applicable state securities laws is not required (an exemption) in connection with such proposed sale or transfer. An exemption is typically limited to i) stock owned for a minimum of twelve months and ii) a maximum number of shares to be offered for sale, during any rolling three month period, limited to 1% of the issuing company’s total number of shares issued and outstanding.
As of June 30, 2005, the Company expects that it will need at least $1,000,000 to cover its anticipated operating expenses for the twelve month period thereafter.
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and the reported amount of revenues and expenses during the reporting periods. We are required to make judgments and estimates about the effect of matters that are inherently uncertain. Although, we believe our judgments and estimates are appropriate, actual future results may be different; if different assumptions or conditions were to prevail, the results could be materially different from our reported results.
On an on-going basis, we evaluate our estimates, including, but not limited to, those related to bad debts, product returns, warranties, inventory reserves, long-lived assets, income taxes, litigation, and other contingencies. We base our estimates on historical experience and various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.
The Company recognizes revenues and the related costs for voice, data and other services along with product sales when persuasive evidence of an arrangement exists, delivery and acceptance has occurred or service has been rendered, the price is fixed or determinable, and collection of the resulting receivable is probable and not contingent. Service revenue from monthly and per minute fee agreements is recognized gross, consistent with Emerging Issues Task Force (EITF) No. 99-19 “Reporting Revenues Gross as a Principal Versus Net as an Agent”, as the Company is the primary obligor in its transaction, has all credit risk, maintains all risk and rewards, and established pricing. Service revenue from fixed-price agreements is allocated between periods using the percentage-of-completion method, which includes revenues recognized as costs are incurred, in accordance with Statement of Position (SOP) 81-1 "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." Total estimated costs are based on management’s assessment of the hours and costs to complete the project and on an evaluation of the level of work achieved and the hours and costs expended to date. Combined product and service agreements are allocated consistent with EITF No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables” with the multiple deliverables divided into separate units of accounting. Revenue is allocated among the separate units of accounting based on their relative fair value. Support and maintenance sales
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are recognized over the contract term. Amounts invoiced or collected in advance of product delivery or providing services are recorded as deferred revenue. The Company accrues for warranty costs, sales returns, bad debts and other allowances based on its historical experience.
The Company’s property and equipment and purchased intangible assets represent a significant component of our consolidated assets. We depreciate property and equipment on a straight-line basis over the estimated useful life of the assets. Changes in the remaining useful lives of assets as a result of technological change or other changes in circumstances, including competitive factors in the VoIP market, can have a significant impact on asset balances, recoverability, or depreciation expense. Purchased intangible assets with indefinite useful lives are not amortized but are evaluated for impairment at least annually, as required by Statement of Financial Accounting Standards, No.142 “Goodwill and Other Intangible Assets”. Any impairment loss is determined by comparing the fair value of the Intangible Assets with the carrying value. Fair value is estimated using discounted future cash flows. There is inherent subjectivity involved in estimating discounted future cash flows, which can have a material impact on the amount of any impairment.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS 151, Inventory Costs – an amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that “… under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges…” This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This Statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption is not expected to have a material effect on the Company’s results of operations or financial conditions.
In December 2004, the FASB issued SFAS No. 152, “Accounting for Real Estate Time-Sharing Transactions—an amendment of FASB Statements No. 66 and 67” (“SFAS 152). This Statement amends FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005, with earlier application encouraged. The adoption is not expected to have a material effect on the Company’s results of operations or financial conditions.
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) published Statement of Financial Accounting Standards No. 123 (Revised 2004), Shared-Based Payment (“SFAS 123R). SFAS 123R requires that compensation cost related to share-based payment transactions be recognized in the financial statements. Share-based payment transactions within the scope of SFAS 123R include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans. The provisions of SFAS 123R are effective as of the first interim period that begins after June 15, 2005. Accordingly, the Company will implement the revised standard in the third quarter of fiscal year 2005. Currently, the Company accounts for its share-based payment transactions under the provisions of APB 25, which does not necessarily require the recognition of compensation cost in the financial statements. Management is assessing the implications of this revised standard, which may materially impact the Company’s results of operations in the third quarter of fiscal year 2005 and thereafter.
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ITEM 3. FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company’s business organization, the Company’s reliance upon certain technology and third parties, competitive trends in the marketplace, and other factors all involve elements of substantial risk. In many instances, these risks arise from factors over which the Company will have little or no control. Some adverse events may be more likely than others and the consequence of some adverse events may be greater than others. No attempt has been made to rank risks in the order of their likelihood or potential impact. In addition to those general risks enumerated elsewhere, any purchaser of the Company's Common Stock should also consider the following factors.
1. Continued Operating Losses. |
The Company has incurred $1,353,145 in losses during the six months ending June 30, 2005 and cumulative losses of $12,424,821 since the Company’s inception through June 30, 2005. The Company may well incur significant additional losses in the future as well and there can be no assurance that the Company will be successful or that it will be profitable in the future. |
2. Current Financial Structure, Limited Equity, Limited Working Capital & Need for Additional Financing. |
While the Company’s management believes that its financial policies have been prudent, the Company has relied, in large part, upon the use of common stock financing to provide a substantial portion of the Company’s financial needs. The Company anticipates that it will need to raise significant additional capital to implement its business plan. While the Company believes that it will be successful, the Company has had only limited discussions with potential investors and there can be no guarantee that the Company will receive additional capital from any investor or, if it does receive sufficient additional capital, that it can obtain additional capital on terms that are reasonable in light of the Company’s current circumstances. Further, the Company has not received any commitments or assurances from any underwriter, investment banker, venture capital fund, or other individual or institutional investor. |
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3. Auditor's Opinion; Going Concern. |
The Company’s independent auditors, Armando C. Ibarra, CPA, P.C., have expressed doubt about the Company's ability to continue as a going concern; there exists only a limited history of operations. |
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4. Subordinate to Existing and Future Debt & Authorized But Unissued Preferred Stock. |
All of the Common Stock is subordinate to the claims of the Company's existing and future creditors and the holders of the Company's existing preferred stock and any that may be issued in the future. |
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5. Dependence & Reliance Upon Others. |
Some of our products and services may rely upon hardware, software, and communications systems provided by others. For this reason we may become dependent upon third parties which may materially and adversely affect our ability to offer distinct products and services, this may result in adverse pricing pressures on our products, with resulting adverse impact on our profits, if any. |
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6. Recent Acquisitions & Limited History of Operations. |
During the six months ending June 30, 2005, we generated $1,805,291 in net sales revenues. We will need to further increase our revenues and successfully develop and implement our business strategy in an ever-changing and challenging marketplace if we are to succeed. In the event that we are not able to successfully develop and implement our business strategy, we may be subject to continuing significant risks and resulting financial volatility. Our limited history and the continuing technological and competitive challenges that we face are beyond our ability to control. For these and other reasons we may incur continuing and protracted losses with the result that an investor may lose all or substantially all of its investment. |
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7. Losses Due to Customer Fraud. |
Customers have obtained access to the Company’s service without prepaying for the service (minutes) by submitting fraudulent credit card information. Losses from unauthorized credit card transactions and theft of service totaled $24,393 during the six months ending June 30, 2005. We have implemented new anti-fraud procedures in order to control losses relating to unauthorized credit card use, but these procedures may not be adequate to effectively limit our exposure in the future to customer fraud. If our procedures are not effective, consumer fraud and theft of service could be significant and have a material adverse effect on our business and operating results. |
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8. Price Competition on Certain Services. |
The products and services that we intend to offer may, through changing technology and cost structures, become commodities which result in intense price competition. While we believe that we will be able to distinguish our products and services from competing products, services, and technologies offered by others, if we fail to distinguish ourselves from others, this could hinder market acceptance of our services, force reductions in contemplated sales prices for our products and services, and reduce our overall sales and gross margins. Potential customers may view price as the primary distinguishing characteristic between our products and services and those of our competitors. This could result in the Company incurring significant and protracted losses. Further, we are selling into a market that has a broad range of desired product characteristics and features which may make it difficult for us to develop products that will address a broad enough market to be commercially viable. |
9. Absence of Barriers to Entry & Lack of Patent Protection. |
Our planned products and services are not unique and others could easily copy our strategy and provide the same or similar services since there are no significant barriers to entering the business of providing Internet telephone services or VoIP networks and no significant barriers to entry are expected in the future. In addition, we do not hold and do not expect to hold any patent protection on any of our planned products or services. For these reasons we may face continuing financial losses. |
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10. Limited Customer Base. |
While we seek to implement our plans, we have a limited customer base of approximately 17,000 active accounts using our suite of VoIP products (as of June 30, 2005) and there can be no assurance that we will grow and develop a sufficient customer base that generates sufficient sustainable revenues that provide stable profit margins. The absence of growth at pricing levels that can provide for sustainable revenues and profit margins may greatly inhibit our ability to attract additional capital and otherwise lead to volatile results from operations with consequent adverse and material impact on our financial condition. |
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11. Customers, Technology/Feature Options & Commercial Viability. |
If we are able to implement our business plan, we will be selling our products and services into a marketplace that is experiencing a convergence of competing technologies. Typically, telecommunications providers desire extremely robust products with the expectation of a relatively long effective life. As a result and depending on the outcome of unknown trends in technology, market forces, and other variables, we may not attract a broad enough customer base to achieve commercial viability. |
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12. New Technologies May Be Developed. |
New products or new technologies may be developed that supplant or provide lower-cost or better-performing alternatives to our planned products and services. This could negatively impact our financial results. |
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13. Absence of Brand Name Recognition: Limited Ability to Promote. |
The market for telecommunications services is intensely competitive; brand name recognition is critical to success. Many companies offer products and services like ours and many have a well established presence in major metropolitan centers. We may not be able to compete successfully with these companies and others that may enter the market. Some of them also have substantially greater financial, distribution, and marketing resources than we do. If we do not succeed in this competitive marketplace, we will lose customers and our revenue will be substantially reduced and our business, financial condition, and results of operations may be materially and adversely affected. |
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14. Government Regulation. |
Our planned operations will likely be subject to extensive telecommunications-based regulation by United States and foreign laws and international treaties. In the United States we are subject to various Federal Communications Commission ("FCC") rules and regulations. Current FCC regulations suggest that VoIP products and services will not be unduly burdened by new and expanded regulations. However, there can be no assurance that the occurrence of regulatory changes will not significantly affect our operations by restricting them or increasing the opportunity of our competitors. In the event that government regulations change, there can be no assurance that the costs and burdens imposed on us will not materially and adversely impact our planned business. |
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15. Loss of Equipment. |
Equipment located in a foreign country with a developing or emerging economy may be materially adversely affected by possible political or economic instability. The risks include, but are not limited, to rapid political and legal change, terrorism, military repression, or expropriation of assets. In the event that equipment is damaged or lost our ability to service to our customers will be substantially reduced and our business, financial condition, and results of operations may be materially and adversely affected. |
16. Control. |
Our officers and directors directly and indirectly hold an aggregate of 38,024,833 shares of the Company’s common stock (before including any shares issuable upon exercise of any options). This represents approximately 28.5% of the Company’s total outstanding shares as of June 30, 2005 and thereby allows the Company’s officers and directors to retain significant influence over the Company. |
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17. Prior Filing of Form 10-SB. |
In June of 2001 we prepared and filed a registration statement on Form 10-SB with the U.S. Securities and Exchange Commission (the "SEC"). Subsequently, our then legal counsel delivered a letter (dated November 15, 2001) to the SEC, which, by its terms, stated that the SEC had agreed to allow us to withdraw the registration statement. At the time the Company’s management believed, in reliance upon assurances from the Company’s then legal counsel, that the Company had been allowed to withdraw the registration statement, notwithstanding that the Securities Exchange Act of 1934 (the "Exchange Act") provides that any withdrawal of a Form 10-SB registration statement (at any time after 60 days from the date at which it is originally filed) requires that the registrant: (a) file Form 15 with the SEC; (b) meet certain requirements that allow the registrant to file Form 15 to terminate the registration of the securities that were previously registered on Form 10-SB; and (c) file such other periodic reports as required to ensure compliance with Section 13(a) of the Exchange Act up to the date at which the Form 15 is filed. Subsequently, in September 2004, the Company received a letter from the SEC (the "SEC Letter") informing the Company that the Company had not satisfied its obligations to file periodic reports required under Section 13(a) of the Exchange Act. While we believed that we had reasonably relied upon the assurances from our legal counsel (that we had effectively withdrawn the Form 10-SB registration statement), we are determined to complete all past and current periodic filings and to comply with the SEC Letter as expeditiously as possible. However, we have not received any assurances from the SEC that we will not be subject to any adverse enforcement action by the SEC. While we did not seek to avoid our obligations under the Exchange Act in any way, our prior actions in mistakenly believing that we had no obligation to file periodic reports required by the Exchange Act exposes us to risk of liability for significant civil fines and the SEC could, among other enforcement actions, suspend trading in our Common Stock. Further, we offered and sold securities in reliance upon exemptions that were predicated on our mistaken belief that the registration statement had been withdrawn. For these and other reasons we may be exposed to liability. We intend to continue a dialogue with the staff of the SEC and, as information is collected and documents are prepared, to complete all filings needed to demonstrate that we are fulfilling our obligations under the Exchange Act with due care and in full observance of our obligations as a "reporting company" thereunder. |
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18. Dependence Upon Key Personnel and New Employees. |
We believe that our success will depend, to a significant extent, on the efforts and abilities of James R. Balestraci, John L. Castiglione, Farid Shouekani, Jason A. Sunstein, and Ronald G. Weaver, Sr. the loss of the services of any of them could have a material and continuing adverse effect on the Company. Our success also depends upon our ability to attract and retain qualified employees. Hiring to meet our anticipated operations will require that we assimilate significant numbers of new employees during a relatively short period of time. |
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19. Absence of Key Man Insurance. |
We currently do not maintain any key man life insurance on the life of any of our officers or directors and there are no present plans to obtain any such insurance. In the event that any one or more of them are unable to perform their duties, the Company's business may be adversely impacted and our results of operations and financial condition would be materially and adversely impacted for a protracted period. |
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20. Lack of Independent Evaluation of Business Plan & Proposed Strategy. |
We have not obtained any independent or professional evaluation of our business plan and our business strategy and we have no present plans to obtain any such evaluation. There can be no assurance that we will successfully increase revenues, or if we do, that we can do so at levels that will allow us to achieve or maintain profitability. If we are unsuccessful, our results of operations and financial condition would be materially and adversely impacted and investors would likely lose all or a significant portion of their investment. |
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21. No Planned Dividends. |
We do not anticipate that we will pay any dividends on our Common Stock. Any profits that we may generate, if any, will be reinvested. |
22. Potential Dilution. |
Funding of our planned business is likely to result in substantial and on-going dilution of our existing stockholders. While there can be no assurance that we will be successful in raising additional capital, if we are successful in obtaining any additional capital existing stockholders may incur substantial dilution. |
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23. Matter of Public Market and Rule 144 Stock Sales. |
As of December 31, 2004, there were 86,351,874 shares of the Company’s Common Stock that were “restricted securities” and which may be sold pursuant to Rule 144. Since September 16, 2002, we have had a limited public trading market for our Common Stock in the “Pink Sheets” market. Since that date trading volumes have been volatile with sporadic liquidity levels. Further, our Common Stock is (as of the date of the filing of this Report) a “Penny Stock” and for this reason we face continuing difficulties in our efforts to gain a liquid trading market and there can be no assurance that any liquid trading market will ever develop or, if it does develop, that it can be maintained. In the event that we are able to complete the filing of all periodic reports (the “Periodic Reports”) required by Section 13(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), we may be able to avoid any significant adverse enforcement action by the SEC arising out of our lack of compliance with the Exchange Act. Rule 144 provides that a person holding restricted securities for a period of one year may thereafter sell in brokerage transactions an amount not exceeding in any three month period 1% of our outstanding Common Stock. Further, unless the Company can complete all of the required Periodic Reports and remain current in the filing of all future Periodic Reports, persons holding restricted stock will not be able to avail themselves of the safe harbor provisions of Rule 144. Persons who are not affiliated with the Company and who have held their restricted securities for at least two years are not subject to the volume limitation. In any trading market for our Common Stock, possible or actual sales of our Common Stock by present shareholders under Rule 144 may have a depressive effect on the price of our Common Stock even if a liquid trading market develops. |
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24. General Risks of Low Priced Stocks. |
In any trading market for our Common Stock, we anticipate that our Common Stock will be deemed a "Penny Stock" which will limit trading and liquidity and thereby the retail market for the Common Stock. The limitations are primarily due to the burdens that are imposed on brokers whose customers may wish to acquire our Common Stock. |
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ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that current disclosure controls and procedures are effective as of the end of the period covered by this quarterly report on Form 10-QSB.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-QSB that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
DISCLOSURE CONTROLS AND INTERNAL COMTROLS
Our management, including the Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), have the responsibility for establishing and maintaining adequate disclosure and internal controls over our financial reporting. Disclosure Controls are procedures that are designed with the objective of providing reasonable assurance that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this Quarterly Report on Form 10-QSB, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Disclosure Controls are also designed with the objective of providing reasonable assurance that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal controls are procedures that are designed with the objective of providing reasonable assurance that our transactions are properly authorized, our assets are safeguarded against unauthorized or improper use, and our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
Our management, including the CEO and CFO, does not expect that our disclosure controls or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. In addition, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Our disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching our desired control objectives.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
VIPER NETWORKS, INC. vs GREENLAND CORP.
On June 11, 2004 the Company filed an action in Superior Court seeking, among other things, rescission of an April 25, 2003 agreement with Greenland Corp. The Company considers the contract it entered into with Greenland (wherein Greenland was to receive 2,500,000 common shares of the Company) to have been obtained by fraud. Greenland made numerous false statements and material omissions regarding its financial condition, and failed to disclose investigations and litigation pending or threatened which would impair its value. Indeed, subsequent to entering into this transaction, the Company discovered that Greenland had undisclosed tax liabilities nearing $2,000,000. The Internal Revenue Service had imposed tax liens against the property owned by Greenland. The Company also recently learned that at the time of the contract, Greenland Corp.’s majority shareholder and controlling Board of Directors transferred (“up-streamed”) roughly $1,300,000 from Greenland Corp.
It is unfortunate that this transaction resulted in litigation, but it is imperative that the Board of Directors of Viper Networks fulfill its fiduciary responsibility and protect its’ shareholders best interests. As such, we intend to take any and all action necessary to protect the rights of our shareholders. In order to minimize legal fees, as of the date of this filing, this case is in Arbitration. Unfortunately, Greenland has been seeking other forums to force the sale of the Viper stock it holds outside of arbitration (which, to date, the Company has thwarted). The Company feels confident that all matters will be resolved in the Company’s favor, and the 2,500,000 common shares will be returned to treasury.
HILLS OF BAJAMAR
During September 1998, we entered into an agreement with a related party to purchase 50 acres of real property known as the Hills of Bajamar, located in Ensenada, Mexico. The property was valued at a predecessor cost of $125,000. At the time, we intended to sell lots for residential development and build a communications facility for residents in the surrounding area. The Company's current management team and Board of Directors has determined that the goals for use of the Mexico property and construction of telecommunications facilities to the Hills of Bajamar are not within the Company's current capabilities.
As consideration for the land, the Company issued 3,000,000 shares of our Series B Preferred Stock. On June 30, 2001, all of the Series B Preferred Stock was converted into 400,000 shares of our Common Stock. As of June 30, 2005, the Company had still not received documented title to the land. Since consideration for the agreement (documented title) has never been received, the Company is in the process of attempting to rescind the original transaction, cancel the 400,000 common shares and return the shares to treasury.
The Company's officers and directors are aware of no other threatened or pending litigation, which would have a material, adverse effect on us. From time to time we are a defendant (actual or threatened) in certain lawsuits encountered in the ordinary course of its business, the resolution of which, in our opinion, is not likely to have a material adverse effect on our financial position, results of operations, or cash flows.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In January 2005, the Company issued 1,500,000 shares of the Company’s Common Stock to one purchaser in exchange for the Company’s receipt of an aggregate of $50,000 in cash. All of the shares were offered and sold by the Company’s management without the use of an underwriter or NASD registered broker-dealer and no commissions were incurred by the Company in connection with this transaction. All of the shares were offered and sold under a claim of exemption provided by Section 4(2) of the Securities Act of 1933. Each purchaser was sophisticated and experienced in financial, business, and investment matters and otherwise able to evaluate the merits and risks associated with the purchase of the Company’s securities.
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In February 2005, the Company issued 1,500,000 shares of the Company’s Common Stock to one purchaser in exchange for the Company’s receipt of an aggregate of $180,000 in cash. All of the shares were offered and sold by the Company’s management without the use of an underwriter or NASD registered broker-dealer and no commissions were incurred by the Company in connection with this transaction. All of the shares were offered and sold under a claim of exemption provided by Section 4(2) of the Securities Act of 1933. Each purchaser was sophisticated and experienced in financial, business, and investment matters and otherwise able to evaluate the merits and risks associated with the purchase of the Company’s securities.
In February 2005, the Company entered into five stock subscription agreements for an aggregate of 33,333,335 shares of the Company’s Common Stock in exchange for $5,000,000 in US Treasury Bonds, with both the Company’s shares and the $5,000,000 being placed into escrow. On August 8, 2005, by mutual agreement, the five subscription agreements and all associated agreements (as described below) were rescinded; the escrow was closed with the 33,333,335 shares of the Company’s Common Stock and the $5,000,000 in US Treasury Bonds returned to the Company and the five subscribers, respectively. Concurrent with the execution of the agreements, the Company purchased from Cogent Capital for $1 a call option to repurchase at the end of two years 80% of the shares of Common Stock sold at the then current market price. Also concurrent with the agreements, the Company entered into an equity swap arrangement with Cogent Capital for $50,000 and 3,333,333 shares of the Company’s Common Stock that entitles the Company to receive and obligate the Company to pay the price return of 75% of the shares issued in two years, or sooner if the shares are registered for sale under the Securities Act of 1933. The equity swap also provides for the exchange of certain cash flows, as defined in the agreement. All of the shares were offered and sold under a claim of exemption provided by Section 4(2) of the Securities Act of 1933 and the shares were offered and sold by the Company’s management without the use of an underwriter or NASD registered broker-dealer and no commissions were incurred by the Company in connection with the transaction. Each purchaser was sophisticated and experienced in financial, business, and investment matters and otherwise able to evaluate the merits and risks associated with the purchase of the Company’s securities.
In March 2005, the Company issued a total of 300,000 shares of the Company’s Common Stock to Paul Atkiss, an officer and director of the Company, in payment for services. All of the shares were offered and sold by the Company’s management without the use of an underwriter or NASD registered broker-dealer and no commissions were incurred by the Company in connection with this transaction. All of the shares were offered and sold under a claim of exemption provided by Section 4(2) of the Securities Act of 1933. Each purchaser was sophisticated and experienced in financial, business, and investment matters and otherwise able to evaluate the merits and risks associated with the purchase of the Company’s securities.
In March 2005, the Company issued 55,173 shares of the Company’s Common Stock to IBC Radio in payment for six month of advertising services. All of the shares were offered and sold by the Company’s management without the use of an underwriter or NASD registered broker-dealer and no commissions were incurred by the Company in connection with this transaction. All of the shares were offered and sold under a claim of exemption provided by Section 4(2) of the Securities Act of 1933. Each purchaser was sophisticated and experienced in financial, business, and investment matters and otherwise able to evaluate the merits and risks associated with the purchase of the Company’s securities.
In March 2005, the Company issued 1,250,000 shares of the Company’s Common Stock to Rhino Capital in payment for twelve months of business consulting services. All of the shares were offered and sold by the Company’s management without the use of an underwriter or NASD registered broker-dealer and no commissions were incurred by the Company in connection with this transaction. All of the shares were offered and sold under a claim of exemption provided by Section 4(2) of the Securities Act of 1933. Each purchaser was sophisticated and experienced in financial, business, and investment matters and otherwise able to evaluate the merits and risks associated with the purchase of the Company’s securities.
In May 2005, the Company issued 1,400,000 shares of the Company’s Common Stock to two purchases in a cashless exercise of previously issued Common Stock Purchase Warrants (“Warrants”) in a prior private placement. The Warrants were exercised at a price of $0.195 each. All of the shares were offered and sold by the
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Company’s management without the use of an underwriter or NASD registered broker-dealer and no commissions were incurred by the Company in connection with this transaction. All of the shares were offered and sold under a claim of exemption provided by Section 4(2) of the Securities Act of 1933. Each purchaser was sophisticated and experienced in financial, business, and investment matters and otherwise able to evaluate the merits and risks associated with the purchase of the Company’s securities.
In May 2005, the Company issued a total of 25,000 shares of the Company’s Common Stock to Uzi Yair, an Advisory Board member of the Company, in payment for services. All of the shares were offered and sold by the Company’s management without the use of an underwriter or NASD registered broker-dealer and no commissions were incurred by the Company in connection with this transaction. All of the shares were offered and sold under a claim of exemption provided by Section 4(2) of the Securities Act of 1933. Each purchaser was sophisticated and experienced in financial, business, and investment matters and otherwise able to evaluate the merits and risks associated with the purchase of the Company’s securities.
In May 2005, the Company issued a total of an aggregate of 150,000 shares of the Company’s Common Stock to HF Solutions and CEO Solutions, consultants for the Company, in payment for services. All of the shares were offered and sold by the Company’s management without the use of an underwriter or NASD registered broker-dealer and no commissions were incurred by the Company in connection with this transaction. All of the shares were offered and sold under a claim of exemption provided by Section 4(2) of the Securities Act of 1933. Each purchaser was sophisticated and experienced in financial, business, and investment matters and otherwise able to evaluate the merits and risks associated with the purchase of the Company’s securities.
In June 2005, the Company issued 3,055,554 shares of the Company’s Common Stock to four purchasers in exchange for the Company’s receipt of an aggregate of $275,000 in cash. All of the shares were offered and sold by the Company’s management without the use of an underwriter or NASD registered broker-dealer and no commissions were incurred by the Company in connection with this transaction. All of the shares were offered and sold under a claim of exemption provided by Section 4(2) of the Securities Act of 1933. Each purchaser was sophisticated and experienced in financial, business, and investment matters and otherwise able to evaluate the merits and risks associated with the purchase of the Company’s securities.
All of the shares were offered and sold under a claim of exemption provided by Section 4(2) of the Securities Act of 1933 and the shares were offered and sold by the Company’s management without the use of an underwriter or NASD registered broker-dealer and no commissions were incurred by the Company in connection with the transaction. Each purchaser was sophisticated and experienced in financial, business, and investment matters and otherwise able to evaluate the merits and risks associated with the purchase of the Company’s securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
CHANGE IN OFFICERS AND DIRECTORS
On August 26, 2005, the Board of Directors pursuant to the power conferred it by the Corporation’s Bylaws determined that the exact number of authorized directors of the Corporation should be three (3), effective immediately, until such time as the number is changed in accordance with the Corporation’s Bylaws.
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The Corporation also announced that Farid Shouekani is elected to serve as a director of the Corporation, his term of office to commence immediately and continue until his successor is duly elected and qualified; and, as previously announced, is appointed to serve as President and Chief Executive Officer of the Corporation, in accordance with the terms and conditions contained in the Employment Agreement, dated August 26, 2005.
The Board of Directors also accepted the resignation of Ron Weaver, as President and CEO, and the resignations of John Castiglione and Jason Sunstein, leaving the Board of Directors with the following members: Farid Shouekani, Ronald Weaver and Paul Atkiss.
REDUCTION OF COMMON STOCK
In an effort to reduce the Corporation’s total issued and outstanding common stock, the Corporation’s officers have agreed to return all bonuses previously paid in the form of common stock in exchange for an equal amount of common stock purchase warrants at a price of $.25 and a Promissory Note for all unpaid loans, salaries and expenses. The following bonuses have been cancelled and returned to treasury, warrants issued, and promissory notes issued.
Officer | | Bonus Amount Returned | | $0.25 Warrants | | Promissory Notes |
| | | | | | | |
Ronald Weaver | | 4,400,000 common shares | | 4,400,000 | | $ | 53,119.97 |
Jason Sunstein | | 4,400,000 common shares | | 4,400,000 | | $ | 208,445.54 |
John Castiglione | | 4,400,000 common shares | | 4,400,000 | | $ | 211,894.68 |
Farid Shouekani | | 2,200,000 common shares | | 2,200,000 | | $ | 330,000.00 |
James Balestraci | | 1,100,000 common shares | | 1,100,000 | | $ | 35,590.07 |
CANCELLATION OF COGENT CAPITAL PRIVATE PLACEMENT
In February 2005, the Company entered into five stock subscription agreements (the “Subscribers”) for an aggregate of 33,333,335 shares of the Company’s Common Stock in exchange for $5,000,000 in US Treasury Bonds, with both the Company’s shares and the $5,000,000 being placed into escrow. Concurrent with the execution of the agreements, the Company purchased from Cogent Capital for $1 a call option to repurchase at the end of two years 80% of the shares of Common Stock sold at the then current market price. Also concurrent with the agreements, the Company entered into an equity swap arrangement with Cogent Capital for $50,000 and 3,333,333 shares of the Company’s Common Stock that entitled the Company to receive and obligate the Company to pay the price return of 75% of the shares issued in two years, or sooner if the shares are registered for sale under the Securities Act of 1933. The equity swap also provided for the exchange of certain cash flows, as defined in the agreement.
Due to the recent volatility of the Company’s common stock, on August 8, 2005, this transaction was mutually rescinded. All $5,000,000 in US Treasury Bonds, including accumulated interest, were returned to the Subscribers and the 36,666,668 shares of common stock issued by the Company in connection with this transaction have been cancelled and returned to the Company’s treasury.
CANCELLATION OF STOCK IN THE VIPER NETWORKS, INC. EMPLOYEE COMPENSATION FUND
In July 2005, the Company cancelled and returned 10,450,000 common shares previously issued and reserved for the Viper Networks, Inc. Employee Compensation Fund.
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ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K
(a). The following Exhibits are attached:
EXHIBIT
NUMBER | DESCRIPTION |
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23.1 * | Auditor’s Consent |
31.1* | Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2* | Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1* | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2* | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
| * Filed herewith. |
(b). The Company filed the following Reports on Form 8-K during the six months ended June 30, 2005:
Form 8K on January 27, 2005, February 4, 2005, February 17, 2005, March 14, 2005, March 16, 2005, August 22, 2005, and September 2, 2005
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| VIPER NETWORKS, INC. |
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Date: December 28, 2005 | By: | /s/ FARID SHOUEKANI |
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| | FARID SHOUEKANI, CHIEF EXECUTIVE OFFICER |
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Date: December 28, 2005 | By: | /s/ PAUL E. ATKISS |
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| | PAUL E. ATKISS, CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) |
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