UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2009
r TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-51384
InterMetro Communications, Inc.
(Exact Name of Registrant as Specified in its Charter)
Nevada | 88-0476779 |
(State of Incorporation) | (IRS Employer Identification No.) |
2685 Park Center Drive, Building A,
Simi Valley, California 93065
(Address of Principal Executive Offices) (Zip Code)
(805) 433-8000
(Registrant’s Telephone Number, 0Including Area Code)
Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes □ No x
Indicate by check mark whether the registrant is a large accelerated file, an accelerated file, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer □ Accelerated Filer □ Non-accelerated filer □ Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
State the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:
As of May 15, 2009 there were 69,563,901 shares outstanding of the registrant’s only class of common stock.
TABLE OF CONTENTS
Page | ||
Part I. Financial Information | ||
Item 1. | 3 | |
3 | ||
4 | ||
5 | ||
6 | ||
7 | ||
Item 2. | 19 | |
Item 3. | 27 | |
Item 4T. | 27 | |
Part II. Other Information | ||
Item 1. | 28 | |
Item 2. | 28 | |
Item 4. | 28 | |
Item 5. | 28 | |
Item 6. | 29 | |
30 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INTERMETRO COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, except par value)
March 31, 2009 | December 31, 2008 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Cash | $ | 329 | $ | 171 | ||||
Accounts receivable, net of allowance for doubtful accounts of $150 and $125 at March 31, 2009 and December 31, 2008, respectively | 2,994 | 2,333 | ||||||
Deposits | 145 | 150 | ||||||
Other current assets | 396 | 101 | ||||||
Total current assets | 3,864 | 2,755 | ||||||
Property and equipment, net | 285 | 377 | ||||||
Goodwill | 900 | 900 | ||||||
Other intangible assets | 73 | 82 | ||||||
Other long-term assets | 2 | 36 | ||||||
Total Assets | $ | 5,124 | $ | 4,150 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
Accounts payable net of dispute reserve of $3,890 and $3,402 at March 31, 2009 and December 31, 2008, respectively | $ | 10,964 | $ | 10,395 | ||||
Accrued expenses | 5,121 | 4,049 | ||||||
Bank overdraft | 244 | 562 | ||||||
Deferred revenues and customer deposits | 622 | 602 | ||||||
Note payable to equipment leasing vendor | 325 | — | ||||||
Borrowings under line of credit facilities net of debt discount of $122 and $487 at March 31, 2009 and December 31, 2008, respectively (in default) | 2,475 | 2,112 | ||||||
Amount due to Former ATI shareholder (in default) | 75 | 75 | ||||||
Capital lease obligations | — | 133 | ||||||
Advances including $375 and $310 from related parties at March 31, 2009 and December 31, 2008, respectively | 462 | 310 | ||||||
Secured promissory notes, including $500 from related parties net of debt discount of $209 and $392 at March 31, 2009 and December 31, 2008, respectively (in default) | 1,711 | 1,528 | ||||||
Liability for common stock put feature | 288 | — | ||||||
Liability for warrant put feature | 250 | 250 | ||||||
Total current liabilities | 22,537 | 20,016 | ||||||
Liability for warrant put feature | — | 78 | ||||||
Total liabilities | 22,537 | 20,094 | ||||||
Commitments and contingencies (Note 10 ) | ||||||||
Stockholders’ Deficit | ||||||||
Preferred stock — $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at March 31, 2009 and December 31, 2008 | — | — | ||||||
Common stock — $0.001 par value; 150,000,000 shares authorized 69,533,901 and 65,643,901 shares issued and outstanding at March 31, 2009 and December 31, 2008, respectively | 70 | 66 | ||||||
Additional paid-in capital | 28,467 | 28,333 | ||||||
Accumulated deficit | (45,950 | ) | (44,343 | ) | ||||
Total stockholders’ deficit | (17,413 | ) | (15,944 | ) | ||||
Total Liabilities and Stockholders’ Deficit | $ | 5,124 | $ | 4,150 |
The accompanying notes are an integral part of these condensed consolidated financial statements
INTERMETRO COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31, | ||||||||
2009 | 2008 | |||||||
Net revenues | $ | 6,126 | $ | 6,387 | ||||
Network costs | 4,682 | 6,132 | ||||||
Gross profit | 1,444 | 255 | ||||||
Operating expenses | ||||||||
Sales and marketing (includes stock based compensation of $11 each for the three months ended March 31, 2009 and 2008) | 585 | 477 | ||||||
General and administrative (includes stock based compensation of $49 and $79 for the three months ended March 31, 2009 and 2008, respectively) | 1,245 | 1,410 | ||||||
Total operating expenses | 1,830 | 1,887 | ||||||
Operating loss | (386 | ) | (1,632 | ) | ||||
Interest expense, net (includes stock-based charges of $834 and $91 for the three months ended March 31, 2009 and 2008, respectively) | 1,246 | 376 | ||||||
Gain on forgiveness of debt | (25 | ) | (92 | ) | ||||
Net loss | $ | (1,607 | ) | $ | (1,916 | ) | ||
Basic and diluted net loss per common share | $ | (0.02 | ) | $ | (0.03 | ) | ||
Shares used to calculate basic and diluted net loss per common share | 67,401 | 59,754 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
INTERMETRO COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
(Dollars in Thousands)
(Unaudited)
Common Stock | ||||||||||||||||||||
Shares | Amount | Additional Paid-InCapital | Accumulated Deficit | Total Stockholders’Deficit | ||||||||||||||||
Balance at January 1, 2009 | 65,643,901 | $ | 66 | $ | 28,333 | $ | (44,343 | ) | $ | (15,944 | ) | |||||||||
Amortization of stock-based compensation | — | — | 60 | — | 60 | |||||||||||||||
Cashless warrants exercise relating to secured promissory notes | 3,840,000 | 4 | (4 | ) | — | — | ||||||||||||||
Reclassification of warrants put liability to equity | — | — | 78 | — | 78 | |||||||||||||||
Stock issued to equipment vendor | 50,000 | — | — | — | — | |||||||||||||||
Net loss for the three months ended March 31, 2009 | — | — | — | (1,607 | ) | (1,607 | ) | |||||||||||||
Balance at March 31, 2009 | 69,533,901 | $ | 70 | $ | 28,467 | $ | (45,950 | ) | $ | (17,413 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
INTERMETRO COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended March 31, | ||||||||
2009 | 2008 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (1,607 | ) | $ | (1,916 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 102 | 219 | ||||||
Stock based compensation | 60 | 90 | ||||||
Amortization of debt discount | 834 | 91 | ||||||
Provision for doubtful accounts | 25 | — | ||||||
Gain on forgiveness of debt | (25 | ) | (92 | ) | ||||
(Increase) decrease in assets: | ||||||||
Accounts receivable | (686 | ) | (195 | ) | ||||
Deposits | — | 20 | ||||||
Other current assets | (296 | ) | (191 | ) | ||||
Increase (decrease) in liabilities: | ||||||||
Accounts payable | 826 | 1,061 | ||||||
Accrued expenses | 1,071 | 272 | ||||||
Deferred revenues and customer deposits | 20 | 92 | ||||||
Net cash provided by (used in) operating activities | 324 | (549 | ) | |||||
Cash flows from financing activities: | ||||||||
Proceeds from secured notes | — | 1,370 | ||||||
Cancellation of debt due to loan modification | — | (600 | ) | |||||
Payment of amounts to related party | — | (70 | ) | |||||
Advances, including $65 from related parties | 152 | — | ||||||
Bank overdraft | (318 | ) | (19 | ) | ||||
Principal payments on capital lease obligations | — | (43 | ) | |||||
Net cash (used in) provided by financing activities | (166 | ) | 638 | |||||
Net increase in cash | 158 | 89 | ||||||
Cash at beginning of period | 171 | 277 | ||||||
Cash at end of period | $ | 329 | $ | 366 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
INTERMETRO COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1 — Nature of Operations and Summary of Significant Accounting Policies
Company Background - InterMetro Communications, Inc., (hereinafter, “InterMetro” or the “Company”) is a Nevada corporation which, through its wholly owned subsidiary, InterMetro Communications, Inc. (Delaware) (hereinafter, “InterMetro Delaware”), is engaged in the business of providing voice over Internet Protocol (“VoIP”) communications services. The Company owns and operates state-of-the-art VoIP switching equipment and network facilities that are utilized to provide traditional phone companies, wireless phone companies, calling card companies and marketers of calling cards with wholesale voice and data services, and voice-enabled application services. The Company’s customers pay the Company for minutes of utilization or bandwidth utilization on its national voice and data network and the Company’s calling card marketing customers pay per calling card sold. The Company’s business is located in Simi Valley, California.
Basis of Presentation - The accompanying unaudited interim condensed consolidated financial statements and information have been prepared in accordance with accounting principles generally accepted in the United States and in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these condensed consolidated financial statements contain all normal and recurring adjustments considered necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The results for the three month period ended March 31, 2009 are not necessarily indicative of the results to be expected for the full year. These condensed consolidated statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2008 which are included in Form 10-K filed by the Company on April 15, 2009.
Going Concern - The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and settlement of obligations in the normal course of business. The Company incurred net losses of $1,607,000 and $1,916,000 for the three months ended March 31, 2009 and 2008, respectively. In addition, the Company had total shareholders’ deficit of $17,413,000 and a working capital deficit of $18,673,000 as of March 31, 2009. The Company anticipates it will not have sufficient cash flows to fund its operations through fiscal 2009 without the completion of additional financing. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. There are many claims and obligations that could ultimately cause the Company to cease operations. The report from the Company’s independent registered public accounting firm states that there is substantial doubt about the Company’s ability to continue as a going concern.
As discussed in Note 9, the Company entered into agreements with Moriah Capital, L.P. (“Moriah”) under which it could borrow up to $2,400,000. At March 31, 2009, the Company had borrowed $2,400,000. These agreements include financial and other covenants that the Company needed to maintain at March 31, 2009. The availability of loan amounts under the agreements expired on April 30, 2009. The Company was not in compliance with certain covenants as of March 31, 2009, and accordingly, Moriah can call the loan immediately payable at any time. The Company is currently in negotiation with Moriah regarding all aspects of this loan including extension of the maturity date. The Company has other significant matters of importance, including: other contingencies such as vendor disputes and lawsuits discussed in Note 10 and covenant defaults on the secured notes as discussed in Note 6 that could cause an acceleration of those amount due. There can be no assurance that the Company will be successful in causing the defaults to be waived. These matters, individually or in the aggregate, could have material adverse consequences to the Company’s operations and financial condition at any time.
Management believes that the recent losses are primarily attributable to costs related to building out and supporting a telecommunications infrastructure, and the requirement for continued expansion of the customer base and the resultant increase in revenues, in order for the Company to become profitable. The Company continues to require outside financing until such time as it can achieve positive cash flow from operations. In November and December 2007, the Company received $600,000 and in the period from January to June 2008 the Company received an additional $1,320,000 pursuant to the sale of secured notes with individual investors for general working capital and advances of an additional $462,500 from November 2008 to February 2009. The terms of the secured notes are 18 months maturity (beginning in June 2009) with an interest rate of 13% per annum due at the maturity date. The secured notes are secured by substantially all of the assets of the Company. The Company is also required to pay an origination fee of 3.00% and documentation fee of 2.50% of the principal amount of the secured notes at the maturity date. Prepayment of the credit facilities requires payment of interest that would have accrued through maturity, discounted by 20%, in addition to principal, accrued interest and fees. The Company can continue to sell similar secured notes up to a maximum offering of $3 million. In addition, the Company entered into a revolving credit agreement with Moriah, effective on April 30, 2008 (See Note 9) and expiring on April 30, 2009, pursuant to which the Company could access funds up to $2,400,000. The Company is currently in negotiations with Moriah regarding an extension of the maturity date and an increase to advance rates under the revolving credit agreement. There can be no assurance that the Company will be successful in completing this required financing (or other financing) or that it will continue to expand its revenue. Should the Company be unsuccessful in this financing attempt or other financings, material adverse consequences could occur should the Company be unable to secure alternate financing.
The Company will be required to obtain other financing during the next twelve months or thereafter as a result of future business developments, including any acquisitions of business assets or any shortfall of cash flows generated by future operations in meeting the Company’s ongoing cash requirements. Such financing alternatives could include selling additional equity or debt securities, obtaining long or short-term credit facilities, or selling operating assets. No assurance can be given, however, that the Company could obtain such financing on terms favorable to the Company or at all. Any sale of additional common stock or convertible equity or debt securities would result in additional dilution to the Company’s stockholders.
Principles of Consolidation - The consolidated financial statements include the accounts of InterMetro, InterMetro Delaware, and InterMetro Delaware’s wholly owned subsidiary, Advanced Tel, Inc. (“ATI”). All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates - In the normal course of preparing financial statements in conformity with U.S. generally accepted accounting principles, management is required 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 amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition - VoIP services are recognized as revenue when services are provided primarily based on usage. Revenues derived from sales of calling cards through retail distribution partners are deferred upon sale of the cards. These deferred revenues are recognized as revenue generally at the time card minutes are expended. The Company recognizes revenue in the period that services are delivered and when the following criteria have been met: persuasive evidence of an arrangement exists, the fees are fixed and determinable, no significant Company obligations remain and collection is reasonably assured. Deferred revenue consists of fees received or billed in advance of the delivery of the services or services performed in which collection is not reasonably assured. This revenue is recognized when the services are provided and no significant Company obligations remain. Management of the Company assesses the likelihood of collection based on a number of factors, including past transaction history with the customer and the credit worthiness of the customer. Generally, management of the Company does not request collateral from customers. If management of 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.
Accounts Receivable - Accounts receivable consist of trade receivables arising in the normal course of business. The Company does not charge interest on its trade receivables. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company reviews its allowance for doubtful accounts monthly. The Company determines the allowance based upon historical write-off experience, payment history and by reviewing significant past due balances for individual collectibility. If estimated allowances for uncollectible accounts subsequently prove insufficient, additional allowance may be required. An additional bad debt allowance of $25,000 was recorded in the three months ended March 31, 2009.
Network Costs - The Company’s network costs consist of telecommunication costs, leasing collocation facilities and certain build-outs, and depreciation of equipment related to the Company’s network infrastructure. It is not unusual in the Company’s industry to occasionally have disagreements with vendors relating to the amounts billed for services provided between the recipient of those services and the vendor. As a result, the Company currently has disputes with vendors that it believes did not bill certain network charges correctly. The Company’s policy is to include amounts that it intends to dispute or that it has disputed in a reserve account as an offset to accounts payable if management believes that the facts and circumstances related to the dispute provide probable support that the dispute will be resolved in the Company’s favor.
Advertising Costs - The Company expenses advertising costs as incurred. Advertising costs included in sales and marketing expenses were $0 and $2,000 for the three months ended March 31, 2009 and 2008, respectively.
Depreciation and Amortization - - Depreciation and amortization of property and equipment is computed using the straight-line method based on the following estimated useful lives:
Telecommunications equipment | 2-3 years | |
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 |
Maintenance and repairs are charged to expense as incurred; significant betterments are capitalized.
Impairment of Long-Lived Assets - The Company assesses impairment of its long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets.” An impairment review is performed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered by the Company include:
· | 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. |
When management of the Company determines that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, an estimate is made of the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, an impairment loss is recognized in the amount by which the carrying amount of 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.
Goodwill and Intangible Assets - The Company records goodwill when consideration paid in a business acquisition exceeds the fair value of the net tangible assets and the identified intangible assets acquired. The Company accounts for goodwill and intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS 142 requires that goodwill and intangible assets with indefinite useful lives not be amortized, but instead be tested for impairment at least annually or whenever changes in circumstances indicate that the carrying value of the goodwill may not be recoverable. SFAS No. 142 also requires the Company to amortize intangible assets over their respective finite lives up to their estimated residual values. At March 31, 2009, there is no impairment in the value of Goodwill and intangible assets with indefinite useful lives.
Vendor Disputes - The Company’s policy is to include amounts that it intends to dispute or that it has disputed in a reserve account as an offset to accounts payable if management believes that the facts and circumstances related to the dispute provide probable support that the dispute will be resolved in the Company’s favor.
Stock-Based Compensation - Effective January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payments,” which revises SFAS 123, “Accounting for Stock-Based Compensation” issued in 1995. The Company adopted SFAS 123(R) applying the “modified prospective transition method” under which it continues to account for nonvested 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, it would continue to apply APB 25 in future periods to equity awards outstanding at the date it adopted SFAS 123(R), unless the options are modified or amended.
Concentration of Credit Risk - - 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 $250,000. 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.
The Company had one customer which accounted for 14% or more of net revenue for the three months ended March 31, 2009 and no customers which accounted for more than 10% or more of net revenue for the three months ended March 31, 2008.
One customer had an outstanding accounts receivable balance which accounted for 31% and 21% of the total accounts receivable at March 31, 2009 and December 31, 2008, respectively.
Income Taxes - The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using presently enacted tax rates in effect. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
Effective October 1, 2007, the Company adopted Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires the recognition in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position.
Segment and Geographic Information - The Company operates in one principal business segment primarily in the United States. All of the operating results and identified assets are located in the United States.
Basic and Diluted Net Loss per Common Share - Basic net loss per common share excludes dilution for potential common stock issuances and is computed by dividing net loss by the weighted-average number of common shares outstanding for the period. As the Company reported a net loss for all periods presented, the exercise of stock options and warrants were not considered in the computation of diluted net loss per common share because their effect is anti-dilutive.
Recent Accounting Pronouncements - In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The statement is effective for the fiscal years beginning after November 15, 2007. The Company adopted SFAS 157 as of January 1, 2008 and has determined that the adoption of this statement did not have an impact on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS 159 as of January 1, 2008 and has determined that the adoption of this statement did not have an impact on the consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” (“SFAS No. 141(R)” ). SFAS No. 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS 141(R) is effective for business combinations which occur in fiscal years beginning on or after December 15, 2008. The adoption of SFAS 141(R) will impact the accounting for business combinations completed, if any, by the Company on or after January 1, 2009.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51.” SFAS No. 160 amends ARB No. 51 ("SFAS No. 160") to establish accounting and reporting standards for noncontrolling interests in subsidiaries and for the deconsolidation of subsidiaries. It 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. The requirements of SFAS 160 do not currently apply to the Company.
In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS 133.” ("SFAS No. 161") This statement requires enhanced disclosures about derivative instruments and hedging activities within an entity by requiring the disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It provides more information about an entity's liquidity by requiring disclosure of derivative features that are credit risk related, and it requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption permitted. The adoption of SFAS 161 did not impact the Company.
2 — Acquisition and Intangible Assets
In March 2006, the Company acquired all of the outstanding stock of Advanced Tel, Inc. (“ATI”), a switchless reseller of wholesale long-distance services, for a combination of shares of its common stock and cash. The Company acquired ATI to increase its customer base, to add minutes and revenue to its network and to access new sales channels. The initial portion of the purchase price included 308,079 shares of the Company’s common stock, a payable of $250,000 to be paid over the six-month period following the closing and a $150,000 two-year unsecured promissory note. These amounts were payable to the former selling shareholder of ATI who was appointed President of ATI at the acquisition closing date. As of March 31, 2009, $75,000 remained unpaid to the selling shareholder. The fair value of the shares issued was based on the guaranteed price of $4.87 per share. The number of shares of common stock consideration paid to the selling shareholder of ATI was subject to an 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 did not reach a minimum price of $4.87 per share during the two years following the closing date. The selling shareholder of ATI was also entitled to contingent consideration of common shares and cash during the two succeeding years from the acquisition date upon meeting certain performance targets tied to revenue and profitability. In December 2008, the Company issued 4,089,930 shares of common stock, with a fair value of $611,043, as payment of the contingent consideration.
3 — Other Current Assets
The following is a summary of the Company’s other current assets (in thousands):
March 31, 2009 | December 31, 2008 | |||||||
(unaudited) | ||||||||
Employee advances | $ | 44 | $ | 40 | ||||
Deferred loan costs | 21 | — | ||||||
Prepaid expenses | 331 | 61 | ||||||
Other current assets | $ | 396 | $ | 101 |
4 — Property and Equipment
The following is a summary of the Company’s property and equipment (in thousands):
March 31, 2009 | December 31, 2008 | |||||||
(unaudited) | ||||||||
Telecommunications equipment | $ | 3,257 | $ | 3,257 | ||||
Computer equipment | 174 | 174 | ||||||
Telecommunications software | 107 | 107 | ||||||
Leasehold improvements, office equipment and furniture | 86 | 86 | ||||||
Total property and equipment | 3,624 | 3,624 | ||||||
Less: accumulated depreciation and amortization | (3,339 | ) | (3,247 | ) | ||||
Property and equipment, net | $ | 285 | $ | 377 |
Depreciation expense included in network costs was $89,070 and $200,217 for the three months ended March 31, 2009 and 2008, respectively. Depreciation and amortization expense included in general and administrative expenses was $3,594 and $9,876 for the three months ended March 31, 2009 and 2008, respectively.
The Company entered in an agreement with a vendor to provide certain network equipment. Under the terms of this agreement, the Company can obtain telecommunications equipment with a total purchase price of approximately $5.2 million to expand its current operations. Repayment for these assets is based on the actual underlying traffic utilized by each piece of equipment, plus the issuance of a warrant to purchase shares of the Company’s common stock at an exercise price of the Company’s most recent financing price per share. For certain assets that can be purchased under this agreement, the Company has an option to issue a predetermined warrant to purchase shares of the Company’s common stock at an exercise price of the Company’s most recent financing price per share as full payment. In March 2008, through an addendum to the agreement, the vendor exercised 635,612 of its warrants with a cash exercise value of $165,936 in a cashless exchange for a $258,304 reduction in amounts due to the vendor resulting in a $92,368 gain on forgiveness of debt. As of March 31, 2009, the Company had purchased telecommunications equipment under this agreement totaling $1,439,222, of which approximately $376,000 and $386,000 remained to be paid at March 31, 2009 and December 31, 2008, respectively.
The Company entered into a strategic agreement with Cantata Technology, Inc. (“Cantata”), a VoIP equipment and support services provider. Under the terms of this agreement, the Company obtained VoIP equipment to expand its operations. Payments were scheduled to be based on the actual underlying traffic utilized by each piece of equipment or fixed cash payments. As of March 31, 2009, the Company had purchased VoIP equipment under this agreement totaling $691,000. The value of the equipment was based on the present value of future scheduled payments. As more fully explained in Note 11, the Company was sued by Cantata for breach of contract and lack of payment. As of March 31, 2009, the Company had accrued $1,096,000 due to Cantata, which is equal to the undiscounted future scheduled payments.
In March 2009, the Company entered into a loan and security agreement with a vendor that is a significant lessor of network equipment to the Company. As part of the agreement, the Company signed a promissory note to the vendor in the amount of $328,976 with an interest rate of 12.011% per annum to be paid in eighteen (18) monthly installments through October 2010. The Company also issued 50,000 shares of its common stock valued at $0.01 per share. As a result of this loan and security agreement, the Company recorded a $24,500 gain on forgiveness of debt during the three months ended March 31, 2009.
5 — Accrued Expenses
The following is a summary of the Company’s accrued expenses (in thousands):
March 31, 2009 | December 31, 2008 | |||||||
(unaudited) | ||||||||
Amounts due under equipment agreements (in default) | $ | 1,178 | $ | 1,170 | ||||
Commissions, network costs and other general accruals | 2,497 | 1,798 | ||||||
Deferred payroll and other payroll related liabilities | 532 | 503 | ||||||
Interest due on convertible promissory notes and other debt | 670 | 315 | ||||||
Payments due to third party providers | 244 | 263 | ||||||
Accrued expenses | $ | 5,121 | $ | 4,049 |
6 — Secured Promissory Notes and Advances
In November and December 2007, the Company received $600,000 in advance payments, pursuant to the sale of secured notes with individual investors, including $330,000 from related parties. During the twelve months ended December 31, 2008, the Company received an additional $1,320,000, including $170,000 from related parties, pursuant to the sale of additional secured notes with individual investors for a total of $1,920,000 and the Company may continue to sell similar secured notes up to a maximum offering of $3 million. The secured notes mature 13 to 18 months after issuance and bear interest at a rate of 13% per annum due at the maturity date. The notes contained an origination and documentation fee equal to 3% and 2.5%, respectively, of the original principal amount of the note that is due on the date the Company makes its first prepayment or the maturity date. The Company accrued $107,000 related to these fees and recorded related interest expense of $86,000 during the three months ended March 31, 2009. The holder of each note has the right upon the occurrence of a financing equal to or greater than $10 million, to convert the entire principal plus accrued interest and origination and documentation fee, or any portion thereof, into either securities sold in the financing at the price sold or common stock by dividing the conversion amount by $1.00. The secured notes are collateralized by substantially all of the assets of the Company.
In connection with the notes, the Company issued two common stock purchase warrants for every dollar received or 3.84 million common stock purchase warrants with an exercise price of $1.00, 1.92 million of which expire on January 16, 2013 (the “Initial Warrants”) and 1.92 million of which expire on February 1, 2014 ( the “Additional Warrants”). With respect to the 1.92 million Initial Warrants issued in this financing, if such warrants were still held by the lenders at February 1, 2009, the lenders were entitled to receive a payment (the “Reference Payment”) to the extent that the volume weighted average price per share for the 30 trading days ending January 30, 2009 (the “Reference Price”) was less than $1.00. The Reference Payment was equal to the difference between $1.00 and the Reference Price. The Company, in its sole discretion, had the right, but not the obligation, to make this payment by issuing Common Stock, in lieu of cash, but in no event will the amount of stock issued be more than one share per dollar invested by the lenders. If the Company elected to make the above payment by issuing Common Stock any time after the maturity date of the note until the first anniversary of the date thereof the holder may submit the Common Stock to the Company for $0.15 per share of Common Stock. The Company has offered to make the Reference Payment by issuing one share of common stock per dollar invested.
With respect to the remaining 1.92 million Additional Warrants issued in this financing that expire on February 1, 2014, if such warrants were still held by the lenders at February 1, 2009, the lenders were entitled to receive a payment (the “Second Reference Payment”) to the extent that the volume weighted average price per share for the 30 trading days ending January 30, 2009 (the “Second Reference Price”) was less than $2.00. The Second Reference Payment was equal to the difference between $2.00 and the Second Reference Price up to a maximum value of $1.00. The Company, in its sole discretion, had the right, but not the obligation, to make this payment by issuing Common Stock, in lieu of cash, but in no event will the amount of stock issued be more than one share per dollar invested by the lenders. The Company has offered to make the Second Reference Payment by issuing one share of common stock per dollar invested.
In regards to the Reference Payment and Second Reference Payment, the Company exercised its right to make the payments by issuing Common Stock in lieu of cash and 13 of the 15 warrant holders have provided the Company with shares requests and have been issued shares of the Company’s Common Stock. A total of 2,640,000 shares of Common Stock have been issued as payment. The remaining 1,200,000 shares for the 2 warrant holders who have not formally requested shares are deemed to be issued and have been recorded as such. These shares represent the maximum shares allowed to be issued in connection with the notes, therefore, the warrants have in effect been exercised for Common Stock at $0.01, the market price at the date of issuance.
Also in connection with the issuance and deemed issuance of stock for warrants, the Company recognized an additional $201,000 of interest expense as a result of expensing the full amount of the remaining unamortized debt discount related to the warrants.
At December 31, 2007, the advance payments carried a 10% interest rate. These funds were received prior to the closing of the sale of the secured notes and grant of stock warrants, which occurred on January 16, 2008 and the holders of the notes did not have the legal rights or recourse to the secured notes, warrants or other related features included in these agreements entered into in January 2008. As a result, the advance payments for notes were recorded at their total amount of $600,000 at December 31, 2007.
Upon the closing of the sale of the secured notes and grant of the warrants on January 16, 2008, the Company accounted for the transaction in accordance with the provisions of Emerging Issues Task Force Issue No. 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments.” Management determined that the present value of the cash flows under the terms of the new debt instrument were at least 10% different from the present value of the remaining cash flows under the terms of the original instrument, resulting in a debt modification. Due to the substantial modification of terms, the Company accounted for the transaction as a debt extinguishment. As a result, the original $600,000 recorded as of December 31, 2007 was extinguished on January 16, 2008 and the new notes were recorded.
The Company allocated the proceeds received between the notes and warrants in accordance with EITF Issue No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios.” The Company engaged an independent third party to perform the valuation of the warrants on the respective issuance dates for warrants issued during the three months ended March 31, 2008 and used the valuation for the warrants issued January 16, 2008 to determine the value of warrants issued in the three months ended June 30, 2008. Rather than re-engaging an independent third party to perform new valuations at the April 30, 2008 and June 16, 2008 warrant issuance dates, the Company determined that the closing stock price of $0.25 at January 16, 2008 along with all other assumptions used for the January 16, 2008 warrant valuation were materially representative of the assumptions and resultant valuations that would be used for the warrant issuances in the three month period ending June 30, 2008. On this basis, the value associated with all the warrants totaled $975,000 and was recorded as an offset to the principal balance of the secured notes and is being amortized into interest expense using the effective interest method. The total expense recorded by the Company was $392,000 (including additional expense related to fully amortizing the original debt discount) and $91,000 for the three months ended March 31, 2009 and 2008, respectively. As of March 31, 2009, the net amount of the notes was $1,711,000.
The Initial Warrants also contain a put feature (not included in the Additional Warrants), which gives the holder the option to put the warrant back to the Company for $0.15 per share. The holder can exercise its put option after the maturity date and has the ability to do so for one year. In addition, if the Company pays stock out for the warrants at the maturity date, the holder would have the right to put the common stock issued back to the Company for $0.15 per share. In both instances, the Company has determined that the put option associated with the Initial Warrants causes the instrument to contain a net cash settlement feature. As a result, in accordance with SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” the put option in the Initial Warrants requires liability treatment. Additionally, in accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” the Company will continue to report the fair value of the put option until either the liability is paid or the option is expired. Any changes in the fair value of the put liability will be recorded as a gain or loss. A put warrant liability of $78,000 was originally recorded related to the Initial Warrants using the same valuation methodology as described in detail in the preceding paragraph in regards to the warrant valuation for the twelve months ended December 31, 2008. Also in connection with the issuance and deemed issuance of stock for warrants, the Company reclassified to equity the original $78,000 put liability related to the warrants and recorded a new $288,000 put liability and debt discount for the $0.15 put price of the 1,920,000 Initial Warrants. The Company recognized $79,000 of interest expense from the amortization of this debt discount in the three months ended March 31, 2009.
The warrants and put feature associated with the $1,920,000 promissory notes from the period ended December 31, 2008 were valued using the Black Sholes formula.
At March 31, 2009, the Company was in default of certain non-payment related items under the secured notes agreements. The Company is working with the note holders to remedy these defaults.
In November and December 2008, two related party secured note holders advanced an additional $310,000 and during the three months ended March 31, 2009 there were advances of an additional $152,500 from existing note holders, including $65,000 from related parties, paying 13% interest per annum. No additional terms have been defined.
7 — Common and Preferred Stock
Common Stock - As of March 31, 2009, the total number of authorized shares of common stock, par value $0.001 per share, was 150,000,000 of which 69,533,901 shares were issued and outstanding.
Holders of common stock are entitled to receive any dividends ratably, if declared by the board of directors out of assets legally available for the payment of dividends, subject to any preferential dividend rights of any outstanding preferred stock. Holders of common stock are entitled to cast one vote for each share held at all stockholder meetings for all purposes, including the election of directors. The holders of more than 50% of the common stock issued and outstanding and entitled to vote, present in person or by proxy, constitute a quorum at all meetings of stockholders. The vote of the holders of a majority of common stock present at such a meeting will decide any question brought before such meeting. Upon liquidation or dissolution, the holder of each outstanding share of common stock will be entitled to share equally in our assets legally available for distribution to such stockholder after payment of all liabilities and after distributions to preferred stockholders legally entitled to such distributions. Holders of common stock do not have any preemptive, subscription or redemption rights. All outstanding shares of common stock are fully paid and nonassessable. The holders of the common stock do not have any registration rights with respect to the stock.
Preferred Stock - On May 31, 2007, the Company filed Amended and Restated Articles of Incorporation authorizing 10,000,000 shares of preferred stock, par value $0.001 per share, none of which are issued and outstanding.
8 — Stock Options and Warrants
2004 Stock Option Plan - Effective January 1, 2004, the Company’s Board of Directors adopted the 2004 Stock Option Plan for Directors, Officers, and Employees of and Consultants to InterMetro Communications, Inc. (the “2004 Plan”). A total of 5,730,222 shares of the Company’s common stock had been reserved for issuance at March 31, 2009 and December 31, 2008. Upon shareholder ratification of the 2004 Plan pursuant to the definitive Information Statement on Schedule 14C filed with the Securities and Exchange Commission on March 6, 2007, the Company froze any further grants of stock options under the 2004 Plan. Any shares reserved for issuance under the 2004 Plan that are not needed for outstanding options granted under that plan will be cancelled and returned to treasury shares.
As of March 31, 2009, the Company has granted a total of 5,714,819 stock options under the 2004 Plan to the officers, directors, and employees, and consultants of the Company, of which 308,077 expired in September 2007. In the three months ended March 31, 2008, the Company issued 1,143,165 shares of common stock on the cashless exercise of 1,232,320 stock purchase options. Of the remaining, 3,296,404 vest as follows: 20% on the date of grant and 1/16 of the balance each quarter thereafter until the remaining stock options have vested and 878,018 of which vest as follows: 50% on the date of grant and 50% at one year after the date of grant. These stock options are exercisable for a period of ten years from the date of grant and are exercisable at exercise prices ranging from approximately $0.04 to $0.97 per share.
Omnibus Stock and Incentive Plan – Effective January 19, 2007, our Board of Directors approved the 2007 Omnibus Stock and Incentive Plan (the “2007 Plan”) for directors, officers, employees, and consultants. Our shareholders ratified the 2007 Plan pursuant to the Schedule 14C Information Statement filed with the Securities and Exchange Commission which was declared effective on May 10, 2007. Any employee or director of, or consultant for, us or any of the Company's subsidiaries or other affiliates will be eligible to receive awards under the 2007 Plan. The Company has reserved 8,903,410 shares of common stock for awards under the 2007 Plan.
In November 2007, InterMetro granted 2,350,000 stock options to purchase shares of common stock under the 2007 Plan at an average exercise price of $0.25 per share to employees and directors. 1,095,000 of the shares granted were immediately vested at date of grant. In October 2008, InterMetro granted 600,000 stock options to purchase shares of common stock under the 2007 Plan at an average exercise price of $0.25 per share to employees and directors. 30% vested at date of grant with the remaining vesting 1/12 per subsequent quarter over the succeeding 3 years expiring 5 years from date of grant. No options to purchase shares of common stock were granted under the 2007 plan in the three months ended March 31, 2009.
The following presents a summary of activity under the Company’s 2004 and 2007 Plans for the three months ended March 31, 2009 (unaudited):
Number of Shares | Price per Share | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | ||||||||||||||||
Options outstanding at December 31, 2008 | 6,600,688 | $ | — | $ | 0.18 | 7.16 | $ | 0.0 | ||||||||||||
Granted | — | — | — | |||||||||||||||||
Exercised | — | — | — | |||||||||||||||||
Forfeited/expired | — | — | — | |||||||||||||||||
Options outstanding at March 31, 2009 | 6,600,688 | 0.21 | 6.91 | 0.0 | ||||||||||||||||
Options vested and expected to vest in the future at March 31, 2009 | 6,600,688 | 0.21 | 6.91 | 0.0 | ||||||||||||||||
Options exercisable at March 31, 2009 | 5,535,955 | 0.20 | 6.64 | 0.0 |
The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company’s closing stock price on the last day of the three month period ended March 31, 2009 and the exercises price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2009.
Additional information with respect to the outstanding options at March 31, 2009 is as follows:
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 | 4.75 | $ | 0.04 | 1,478,747 | $ | 0.04 | ||||||||||||||
0.04 | 154,038 | 5.00 | 0.04 | 154,038 | 0.04 | |||||||||||||||||
0.04 | 431,307 | 5.25 | 0.04 | 431,307 | 0.04 | |||||||||||||||||
0.04 | 123,231 | 5.75 | 0.04 | 123,231 | 0.04 | |||||||||||||||||
0.22 | 277,269 | 6.50 | 0.22 | 263,405 | 0.22 | |||||||||||||||||
0.25 | 2,950,000 | 8.50 | 0.25 | 2,012,502 | 0.25 | |||||||||||||||||
0.27 | 338,884 | 6.50 | 0.27 | 304,996 | 0.27 | |||||||||||||||||
0.41 | 643,880 | 6.75 | 0.41 | 581,957 | 0.41 | |||||||||||||||||
0.81 | 110,908 | 6.75 | 0.81 | 93,347 | 0.81 | |||||||||||||||||
0.97 | 92,423 | 7.00 | 0.97 | 92,423 | 0.97 | |||||||||||||||||
6,600,688 | 5,535,955 |
For option grants during the years ended December 31, 2008 and 2007, the compensation cost was determined based on the fair value of the options and is being recognized over the applicable vesting period.
As of March 31, 2009, there was $150,000 of total unrecognized compensation cost related to unvested share based compensation arrangements granted under the 2004 and 2007 option plans. The cost is expected to be recognized over a weighted average period of approximately 2 years.
Warrants – Historically, the Company has issued warrants to providers of equipment financing. For a detailed description of the warrants issued in connection with equipment financing arrangements, see Note 4. In the three months ended March 31, 2008 a vendor of network equipment exercised 635,612 of its warrants with a cash exercise value of $165,936 in a cashless exchange for a $258,304 reduction in payables due to the vendor that resulted in a $92,368 gain on forgiveness of debt.
9 — Credit Facilities
ATI Bank Lines of Credit – ATI has two $100,000 lines of credit. The line of credit with Bank of America has an interest rate of 7.13% per annum. The line of credit with Wells Fargo Bank has an interest rate of 6.50% per annum. The lines of credit are personally guaranteed by the former stockholder of ATI.
Revolving Credit Facility - The Company entered into agreements (the “Agreements”), effective as of April 30, 2008 (the “Closing Date”), with Moriah Capital, L.P. (“Moriah”), pursuant to which the Company could borrow up to $2,400,000 per Amendments No. 1 and No. 2 to the Agreements (the “Amendments).
Pursuant to the Agreements, the Company was permitted to borrow an amount not to exceed 80% of its eligible accounts (as defined in the Agreements), net of all discounts, allowances and credits given or claimed. Pursuant to the Amendments, from September 10, 2008 through November 4, 2008 this borrowing base increased to 110% of eligible accounts, from November 5, 2008 through December 15, 2008 increased to 135% of eligible accounts, from December 16, 2008 to January 15, 2009 decreases to 120% of eligible accounts, from January 16, 2009 through February 15, 2009 decreased to 110% of the eligible accounts, from February 16, 2009 to March 15, 2009 decreased to 100% of eligible accounts and thereafter was reduced to 85%. As of March 31, 2009, the Company has borrowed $2,400,000. The Company's obligations under the loans are secured by all of the assets of the Company, including but not limited to accounts receivable; provided, however, that Moriah’s lien on the collateral other than accounts receivable (as such terms are defined in the Agreements) are subject to the prior lien of the holders of the Company’s outstanding secured notes. The Agreements include covenants that the Company must maintain, including financial covenants pertaining to cash flow coverage of interest and fixed charges, limitations on the ratio of debt to cash flow and a minimum ratio of current assets to current liabilities. As of March 31, 2009, the Company was not in compliance with all of the covenants and the availability of loan amounts under the Agreements expires on April 30, 2009. The Company is currently in active negotiation in regards to the terms of an extension of the Agreements.
Annual interest on the credit facitlty is equal to the greater of (i) the sum of (A) the Prime Rate as reported in the “Money Rates” column of The Wall Street Journal, adjusted as and when such Prime Rate changes plus (B) 4% or (ii) 10%, and was to be payable in arrears prior to the maturity date, on the first business day of each calendar month, and in full on April 30, 2009. (See Note 1.)
In accordance with the agreement, the outstanding amount of the loan at any given time may be converted into shares of the Company's common stock at the option of the lender. The conversion price is $1.00, subject to adjustments and limitations as provided in the Agreements.
The Company has also agreed to register the resale of shares of the Company's common stock issuable under the Agreements and the shares issuable upon conversion of the convertible note if the Company files a registration statement for its own account or for the account of any holder of the Company’s common stock.
Subject to certain conditions and limitations, the Company can terminate the ability to fund loans under the Agreements at any time if there are no loans outstanding.
As part of the original transaction, Moriah received warrants to purchase 2,000,000 shares of the Company’s common stock with an exercise price of $1.00 which expire on April 30, 2015. As part of the Amendments No.1 and No. 2, Moriah received warrants to purchase an additional 1,000,000 and 3,000,000 shares, respectively, of the Company’s common stock under the same terms as the original 2,000,000 warrants. 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 warrants were valued using the Black-Scholes option-pricing model using the assumptions noted in the table below. The value associated with the 6,000,000 warrants was $928,000 and was recorded as an offset to the principal balance of the revolving credit facility and is being amortized on a straight-line basis over the term of the Agreement. As discussed below, the put option liability was $250,000 and the $678,000 difference was credited to Additional Paid in Capital. The expense recognized by the Company in the three months ended March 31, 2009 from the amortization of the debt discount was $364,000. The Company calculated the fair value of the warrants using the following assumptions:
June 30, 2008 | September 30, 2008 | December 31, 2008 | |||||
Risk-free interest rate | 2.63 | % | 2.42 | % | 1.63 | % | |
Expected lives (in years) | 3.5 years | 3.5 years | 3.5 years | ||||
Dividend yield | 0 | % | 0 | % | 0 | % | |
Expected volatility | 74.0 | % | 74.0 | % | 74.0 | % | |
Forfeiture rate | 0 | % | 0 | % | 0 | % |
The Company has also granted Moriah an option as part of the Agreements and Amendment pursuant to which Moriah can sell the warrants back to the Company for $250,000 at any time during the 30 day period commencing on the earlier of the prepayment in full of all loans or April 30, 2009. The Company has determined that the put option associated with the warrants causes the instrument to contain a net cash settlement feature. In accordance with SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” the put option requires liability treatment. As a result, the put warrant liability was recorded at the warrant purchase price of $250,000 as of March 31, 2009.
.
10 — Commitments and Contingencies
Vendor Agreements – The Company has entered into agreements with its network partners and other vendors for various services which are, in general, for periods of twelve months and provide for month to month renewal periods.
Vendor Disputes – It is not unusual in the Company’s industry to have disagreements with vendors relating to the amounts billed for services provided between the recipient of those services and the vendor, or in some cases, to receive invoices from companies that the Company does not consider a vendor. The Company currently has disputes with vendors and other companies that it believes did not bill certain charges correctly or should not have billed any charges at all. The Company’s policy is to include amounts that it intends to dispute or that it has disputed in a reserve account as an offset to accounts payable if management believes that the facts and circumstances related to the dispute provide probable support that the dispute will be resolved in the Company’s favor. As of March 31, 2009, there were approximately $3.9 million of disputed payables. The Company is in discussion with the significant vendors, or companies that have sent invoices, regarding these charges and it may take additional action as deemed necessary against these vendors in the future as part of the dispute resolution process. Management does not believe that any settlements would have a material adverse effect on the Company’s financial position 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.”
In April 2008, the Company entered into a settlement agreement with a significant provider of network services to the Company. The settlement agreement included a payment arrangement for past due amounts of approximately $3.0 million with full repayment due prior to December 31, 2008. The settlement agreement also provided a separate credit to the Company of approximately $1.4 million for past disputes. As of March 31, 2009, the Company was not in compliance with the payment terms of the agreement and, therefore, was at risk of losing the $1.4 million credit and service termination. The Company currently owes $2.4 million, net of the $1.4 million credit, and is in discussions with the vendor. The Company has not received a notice of default. The resulting potential termination of the related service and collection proceedings would have a material adverse impact on the Company’s operating results, financial condition, and business performance.
The Company has periodically received “credit hold” and disconnect notices from major telecommunications carriers. Suspension of service by any major carrier could have a material adverse effect on the company’s operations and financial condition. These disconnect notices were generated primarily due to the non-payment of charges claimed by each carrier, including some amounts disputed by the Company. Service has been maintained with each carrier, although further notices are possible if the Company is unable to make timely payments to its counterparties or to resolve the disputed amounts. Such payments would be in addition to current charges generated with such carriers.
The Company has received notices from regulatory and taxing authorities in 27 states regarding its failure to file certain documents including but not limited to annual reports, articles of incorporation, and foreign corporation status. Additionally, the Company is in discussions with state-level regulatory and taxing authorities regarding amounts that may be due to them including minimum corporate taxes, registered corporation fees, sales and use taxes, as well as penalties and interest. The majority of these matters pertain to the Company’s wholly-owned subsidiary ATI, and the amounts at issue in most states are de minimis and have been reserved. The Company has provided documentation to the various state authorities in connection with these inquiries and is actively cooperating with their investigations.
Legal Proceedings – On January 15, 2008, a telecommunications carrier filed a lawsuit against the Company asserting unpaid invoices. The carrier is also one of the Company’s customers. On January 13, 2009, the parties entered into a settlement agreement whereby the Company will credit the carrier’s account in the amount of $20,000 each month for 18 months against which the carrier’s use of the Company’s services will be charged, for a total credit of $360,000. Included in accounts payable as of March 31, 2009, is $360,000 of amounts due to the carrier, which will be reduced by $20,000 per month.
Blue Casa Communication, Inc. – On December 12, 2007, Blue Casa Communications, Inc. (“Blue Casa”) filed a complaint against the Company asserting various causes of action, including breach of contract, breach of implied contract and unjust enrichment. Blue Casa claims that the Company owes Blue Casa payment of access charges in the amount of $300,000. The Company denies that it owes Blue Casa payment of access charges. On March 9, 2009, the Court renewed the stay for an additional 180 days.
Cantata Technology, Inc. – On August 12, 2008, Cantata filed a lawsuit against the Company asserting a breach of contract claim arising out of the parties’ term sheet dated May 2, 2006. Cantata is seeking $1.1 million together with interest costs, and attorney fees. Cantata is also seeking $63,000 for support services provided during the second year of the parties’ relationship. As discussed in Note 4, the Company has accrued $1,096,000 due to Cantata as of March 31, 2009. The Company has filed a counterclaim against Cantata and a third party claim against its parent company, Dialogic. The Company is vigorously asserting its claims against Cantata and Dialogic and a ruling against the Company could have a material adverse impact on its operating results, financial condition and business performance.
Hypercube/KMC – On April 30, 2007, the Company initiated litigation against KMC Data, LLC and its affiliate Hypercube, LLC (collectively referred to herein as “KMC”), or (the “KMC Litigation”). KMC, in turn, filed various counterclaims against the Company. The KMC Litigation concerns the issue of whether or to what extent the Company is obligated to pay KMC fees related to the transmission and routing of wireless communications traffic, and if so, what rates would be appropriate. As of March 31, 2009, there are approximately $1.2 million of charges that the Company disputes. As of March 31, 2009, the Company has recorded the $1.2 million in accounts payable, with a corresponding offset to unresolved disputed amounts. On August 6, 2007, the Court stayed the KMC Litigation pending referral of certain issues in the case to the Federal Communications Commission under the doctrine of primary jurisdiction. The case is currently stayed. The Company cannot predict the outcome of these proceedings at this time or how long the Court’s stay will remain in place. A ruling against the Company could have a material adverse impact on its operating results, financial condition and business performance.
In addition, the following vendors, carriers and customers have sent written notice of their intent to file suit against the Company:
A Local Exchange Carrier – A local exchange carrier (LEC) invoiced the Company access charges in connection with certain wireless originated calls of a third party provider. During the period from November 2008 through February 2009, the Company paid the LEC’s invoiced charges in connection with these wireless originated calls. During this time frame, the Company submitted disputes to the LEC for the wireless call charges equaling approximately $337,000. The LEC has denied the disputes submitted by the Company. The Company has withheld payment to the LEC asserting that it has overpaid for services. To date, the Company and the LEC have not resolved the dispute.
An Interexchange Carrier – An interexchange carrier (IXC) asserts to the Company that it is owed approximately $1.1 million in past due disputed and undisputed charges. The carrier has threatened to disconnect services to the Company and to initiate litigation against the Company. The carrier and the Company have been engaged in discussions to resolve these payment issues. If the carrier suspends its provision of services to the Company or initiates litigation against the Company, it could have a material adverse impact on the Company’s operating results, financial condition and business performance.
Federal Communications Commission - On November 26, 2008, the Company received letters of inquiry from the Federal Communications Commission (“FCC”) in connection with nonpayment of fees and surcharges required pursuant to the FCC’s regulations. The Company has provided documentation to the FCC in connection with these inquiries and is actively cooperating with the FCC’s investigations.
Universal Service Administrative Company – The Universal Service Administrative Company (USAC) administers the Universal Service Fund (USF). The Company may not have made all of the payments claimed by the USAC in a timely manner, including payments owed pursuant to agreed upon payment plans with the Company. The USAC has transferred some of these unpaid amounts to the Federal Communications Commission (FCC) for collection. The FCC may transfer the unpaid amounts to the Department of the Treasury. If the amounts are not resolved, they may then be transferred to the Department of Justice for collection action. With each transfer, additional fees, surcharges and penalties are added to the amount due. As of February 28, 2009, USAC and the FCC have claimed approximately $410,000 is due and payable in connection with the USF. The Company is working with USAC and the FCC to resolve these amounts.
Consulting Agreement – Commencing in December 2006, the Company entered into a three-year consulting agreement with an affiliate of a stockholder and debt holder pursuant to which the Company received services related to strategic planning, investor relations, acquisitions, and corporate governance. The Company was obligated to pay $13,000 a month for these services, subject to annual increases. In June 2008, the parties orally agreed to cancel the agreement and any future obligation. Included in accounts payable is $182,000 at March 31, 2009 for unpaid amounts.
11 — Income Taxes
At March 31, 2009, the Company had net operating loss carryforwards to offset future taxable income, if any, of approximately $19.1 million for Federal and State taxes. The Federal net operating loss carryforwards begin to expire in 2021. The State net operating loss carryforwards begin to expire in 2008.
The following is a summary of the Company’s deferred tax assets and liabilities (in thousands):
March 31, 2009 | December 31, 2008 | |||||||
(unaudited) | ||||||||
Current assets and liabilities: | ||||||||
Current assets and liabilities: | ||||||||
Deferred revenue | $ | 108 | $ | 20 | ||||
Bad Debt | 25 | — | ||||||
Accrued expenses | 97 | 335 | ||||||
230 | 355 | |||||||
Valuation allowance | (230 | ) | (355 | ) | ||||
Net current deferred tax asset | $ | — | $ | — | ||||
Non-current assets and liabilities: | ||||||||
Depreciation and amortization | $ | 12 | $ | 31 | ||||
Net operating loss carryforward | 19,132 | 17,736 | ||||||
19,144 | 17,767 | |||||||
Valuation allowance | (19,144 | ) | (17,767 | ) | ||||
Net non-current deferred tax asset | $ | — | $ | — |
The reconciliation between the statutory income tax rate and the effective rate is as follows:
For the Three Months Ended March 31, | ||||||||
2009 | 2008 | |||||||
(unaudited) | ||||||||
Federal statutory tax rate | (34 | ) | (34 | )% | ||||
State and local taxes | (6 | ) | (6 | ) | ||||
Valuation reserve for income taxes | 40 | 40 | ||||||
Effective tax rate | — | — | % |
Management has concluded that it is more likely than not that the Company will not have sufficient taxable income of an appropriate character within the carryforward period permitted by current law to allow for the utilization of certain of the deductible amounts generating the deferred tax assets; therefore, a full valuation allowance has been established to reduce the net deferred tax assets to zero at December 31, 2008 and March 31, 2009.
12 — Cash Flow Disclosures
The table following presents a summary of the Company’s supplemental cash flow information (in thousands):
Three Months Ended March 31, | ||||||||
2009 | 2008 | |||||||
(unaudited) | ||||||||
Cash paid: | ||||||||
Interest | $ | 73 | $ | 67 | ||||
Non-cash information: | ||||||||
Issuance of common stock for cashless exercise of warrants | $ | 4 | $ | 165 | ||||
Note payable replacing equipment capital leases | $ | 329 | $ | — | ||||
Fair value of debt discount (net of put liability) | 288 | 627 | ||||||
Reclassification of warrants put liability to equity | 78 | — | ||||||
Stock issued on cashless exercise of common stock purchase options | $ | — | $ | 1 |
Item 2. Management’s Discussion and Analysis
Cautionary Statements
This Report contains financial projections and other “forward-looking statements,” as that term is used in federal securities laws, about our financial condition, results of operations and business. These statements include, among others: statements concerning the potential for revenues and expenses and other matters that are not historical facts. These statements may be made expressly in this Report. You can find many of these statements by looking for words such as “believes,” “expects,” “anticipates,” “estimates,” or similar expressions used in this Report. These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied by us in those statements. The most important facts that could prevent us from achieving our stated goals include, but are not limited to, the following:
(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) | litigation with or legal claims and allegations by outside parties; |
(h) | insufficient revenues to cover operating 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; and |
(o) | regulatory interpretations and changes. |
We caution you not to place undue reliance on the statements, which speak only as of the date of this Report. The cautionary statements contained or referred to in this section should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on behalf of us may issue. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with our condensed consolidated financial statements and notes to those statements.
Background
InterMetro Communications, Inc., (hereinafter, “we,” “us,” “InterMetro” or the “Company”) is a Nevada corporation which through its wholly owned subsidiary, InterMetro Communications, Inc. (Delaware) (hereinafter, “InterMetro Delaware”), is engaged in the business of providing voice over Internet Protocol (“VoIP”) communications services.
General
We have built a national, private, proprietary voice-over Internet Protocol, or VoIP, network infrastructure offering an alternative to traditional long distance network providers. We use our network infrastructure to deliver voice calling services to traditional long distance carriers, broadband phone companies, VoIP service providers, wireless providers, other communications companies and end users. Our VoIP network utilizes proprietary software, configurations and processes, advanced Internet Protocol, or IP, switching equipment and fiber-optic lines to deliver carrier-quality VoIP services that can be substituted transparently for traditional long distance services. We believe VoIP technology is generally more cost efficient than the circuit-based technologies predominantly used in existing long distance networks and is easier to integrate with enhanced IP communications services such as web-enabled phone call dialing, unified messaging and video conferencing services.
We focus on providing the national transport component of voice services over our private VoIP infrastructure. This entails connecting phone calls of carriers or end users, such as wireless subscribers, residential customers and broadband phone users, in one metropolitan market to carriers or end users in a second metropolitan market by carrying them over our VoIP infrastructure. We compress and dynamically route the phone calls on our network allowing us to carry up to approximately eight times the number of calls carried by a traditional long distance company over an equivalent amount of bandwidth. In addition, we believe our VoIP equipment costs significantly less than traditional long distance equipment and is less expensive to operate and maintain. Our proprietary network configuration enables us to quickly, without modifying the existing network, add equipment that increases our geographic coverage and calling capacity.
We enhanced our network’s functionality by implementing Signaling System 7, or SS-7, technology. SS-7 allows access to customers of the local telephone companies, as well as customers of wireless carriers. SS-7 is the established industry standard for reliable call completion, and it also provides interoperability between our VoIP infrastructure and traditional telephone company networks. While we expect to continue to add to capacity, as of March 31, 2009 and 2008, the SS-7 network expansion was a fully operating and revenue generating component of our VoIP infrastructure. We believe that increasing voice minutes utilizing our network expansion will ultimately generate gross margins approximating those generated prior to the network expansion. A key aspect of our current business strategy is to focus on sales to increase these voice minutes.
Overview
History. InterMetro began business as a VoIP on December 29, 2006 and began generating revenue at that time. Since then, we have increased our revenue to approximately $25.1 million for the year ended December 31, 2008.
Trends in Our Industry and Business
A number of trends in our industry and business could have a significant effect on our operations and our financial results. These trends include:
Increased competition for end users of voice services. We believe there are an increasing number of companies competing for the end users of voice services that have traditionally been serviced by the large incumbent carriers. The competition has come from wireless carriers, competitive local exchange carriers, or CLECs, and interexchange carriers, or IXCs, and more recently from broadband VoIP providers, including cable companies and DSL companies offering broadband VoIP services over their own IP networks. All of these companies provide national calling capabilities as part of their service offerings, however, most of them do not operate complete national network infrastructures. These companies previously purchased national transport services exclusively from traditional carriers, but are increasingly purchasing transport services from us.
Merger and acquisition activities of traditional long distance carriers. Recently, the three largest operators of traditional long distance service networks were acquired by or have merged with several of the largest local wireline and wireless telecommunications companies. AT&T Corp. was acquired by SBC Communications Inc., MCI, Inc. was acquired by Verizon Communications, Inc. and Sprint Corporation and Nextel Communications, Inc. engaged in a merger transaction. While we believe it is too early to tell what effects these transactions will have on the market for national voice transport services, we may be negatively affected by these events if these companies increase their end user bases, which could potentially decrease the amount of services purchased by our carrier customers. In addition, these companies have greater financial and personnel resources and greater name recognition. However, we could potentially benefit from the continued consolidation in the industry, which has resulted in fewer competitors.
Regulation. Our business has developed in an environment largely free from regulation. However, the Federal Communications Commission (“FCC”) and many state regulatory agencies have begun to examine how VoIP services could be regulated, and a number of initiatives could have an impact on our business. These regulatory initiatives include, but are not limited to, proposed reforms for universal service, the intercarrier compensation system, FCC rulemaking regarding emergency calling services related to broadband IP devices, and the assertion of state regulatory authority over us. Complying with regulatory developments may impact our business by increasing our operating expenses, including legal fees, requiring us to make significant capital expenditures or increasing the taxes and regulatory fees applicable to our services. One of the benefits of our implementation of SS-7 technology is to enable us to purchase facilities from incumbent local exchange carriers under switched access tariffs. By purchasing these traditional access services, we help mitigate the risk of potential new regulation related to VoIP.
Our Business Model
Historically, we have been successful in implementing our business plan through the expansion of our VoIP infrastructure. Since our inception, we have grown our customer base to include over 200 customers, including several large publicly-traded telecommunications companies and retail distribution partners. In connection with the addition of customers and the provision of related voice services, we have expanded our national VoIP infrastructure.
Revenue. We generate revenue primarily from the sale of voice minutes that are transported across our VoIP infrastructure. In addition, ATI, as a reseller, generates revenues from the sale of voice minutes that are currently transported across other telecom service providers’ networks. However, we have migrated a significant amount of these revenues on to our VoIP infrastructure and continue to migrate ATI’s revenues. We negotiate rates per minute with our carrier customers on a case-by-case basis. The voice minutes that we sell through our retail distribution partners are typically priced at per minute rates, are packaged as calling cards and are competitive with traditional calling cards and prepaid services. Our carrier customer services agreements and our retail distribution partner agreements are typically one year in length with automatic renewals. 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:
· | 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.
· | 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.
· | 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. |
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.
Network Costs. Our network, or operating, costs are primarily comprised of fixed cost and usage based network components. In addition, ATI incurs usage based costs from its underlying telecom service providers. We generally pay our fixed network component providers at the beginning or end of the month in which the service is provided and we pay for usage based components on a weekly or monthly basis after the delivery of services. Some of our vendors require a prepayment or a deposit based on recurring monthly expenditures or anticipated usage volumes. Our fixed network costs include:
· | 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.
The usage-based cost components of our network include:
· | 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.
· | 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 fixed-cost network components generally do not experience significant price fluctuations. Factors that affect these network components include:
· | 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.
· | 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.
Our usage-based network components costs are affected by:
· | 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.
· | Sales mix of our VoIP infrastructure capacity versus off-net services. |
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.
· | Acquisitions of telecommunications businesses. |
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.
Sales and Marketing Expense . Sales and marketing expenses include salaries, sales commissions, benefits, travel and related expenses for our direct sales force, marketing and sales support functions. Our sales and marketing expenses also include payments to our agents that source carrier customers and retail distribution partners. Agents are primarily paid commissions based on a percentage of the revenues that their customer relationships generate. In addition, from time to time we may cover a portion or all of the expenses related to printing physical cards and related posters and other marketing collateral. All marketing costs associated with increasing our retail consumer user base are expensed in the period in which they are incurred. We expect that our sales and marketing expenses will increase in the future primarily due to increases in our direct sales force.
General and Administrative Expense . General and administrative expenses include salaries, benefits and expenses for our executive, finance, legal and human resources personnel. In addition, general and administrative expenses include fees for professional services, occupancy costs and our insurance costs, and depreciation expense on our non-network depreciable assets. Our general and administrative expenses also include stock-based compensation on option grants to our employees and options and warrant grants to non-employees for goods and services received.
Results of Operations for the Three Months Ended March 31, 2009 and 2008
The following table sets forth, for the periods indicated, the results of our operations expressed as a percentage of revenue:
Three Months Ended March 31, | ||||||||
2009 | 2008 | |||||||
Net revenues | 100 | % | 100 | % | ||||
Network costs | 76 | 96 | ||||||
Gross profit | 24 | 4 | ||||||
Operating expenses: | ||||||||
Sales and marketing | 10 | 7 | ||||||
General and administrative | 20 | 22 | ||||||
Total operating expenses | 30 | 29 | ||||||
Operating loss | (6 | ) | (25 | ) | ||||
Gain on forgiveness of debt | 0 | (1 | ) | |||||
Interest expense | 19 | 6 | ||||||
Net loss | (25 | )% | (30 | )% |
Net Revenues. Net revenues decreased $261,000, or 4.1%, to $6.1 million for the three months ended March 31, 2009 from $6.4 million for the three months ended March 31, 2008. Though we have continued to increase new customers, this has been offset by a reduction in offering third party low margin services and attributable to both decreasing revenues from existing customers in certain areas and the loss of certain customers.
Network Costs. Network costs decreased $1.4 million, or 23.6%, to $4.7 million for the three months ended March 31, 2009 from $6.1 million for the three months ended March 31, 2008. Included within total network costs, variable network costs decreased by $1.2 million to $4.2 million (68.5% of revenues) for the three months ended March 31, 2009 from $5.4 million (84.6% of revenues) for the three months ended March 31, 2008, even as revenues decreased by only 4.1% as a result of increased efficiency in network utilization. Fixed network costs decreased by $203,000 to $526,000 for the three months ended March 31, 2009 from $729,000 for the three months ended March 31, 2008, with the decrease coming primarily from the elimination of underutilized network components that were in operation during three months ended March 31, 2008. There were no significant fixed network expenses added during the three months ended March 31, 2009. 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 23.6% for the three months ended March 31, 2009 from a gross margin of 4.0% for the three months ended March 31, 2008. This increase in gross margin was attributable to the increasing utilization of capacity and decreased fixed network costs. 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 three months ended March 31, 2009 was $89,000 (1.5% of net revenues) as compared to $200,000 (3.1% of net revenues) for the three months ended March 31, 2008.
Sales and Marketing. Sales and marketing expenses increased $108,000, or 22.6% to $585,000 for the three months ended March 31, 2009 from $477,000 for the three months ended March 31, 2008. Sales and marketing expenses as a percentage of net revenues were 9.6% and 7.5% for the three months ended March 31, 2009 and 2008, respectively. The increase is attributable to commission programs for higher margin services. Sales and marketing expenses included stock-based charges related to warrants and stock options of $11,000 for the three months ended March 31, 2009 and 2008.
General and Administrative. General and administrative expenses decreased $165,000 or 11.7% to $1.2 million for the three months ended March 31, 2009 from $1.4 million for the three months ended March 31, 2008. General and administrative expenses as a percentage of net revenues were 20.3% and 22.1% for the three months ended March 31, 2009 and 2008, respectively. General and administrative expenses included stock-based charges related to warrants and stock options of $49,000 and $79,000 for the three months ended March 31, 2009 and 2008, respectively. The decrease in general and administrative expenses for the three months ended March 31, 2009 is primarily attributable to a reduction in professional service fees.
Interest Expense, net. Interest expense, net increased $784,000, or 208.5%, to $1.2 million for the three months ended March 31, 2009 from $376,000 for the three months ended March 31, 2008. Interest expense for the three months ended March 31, 2009 includes $364,000 from the amortization of debt discount related to the Moriah credit facility that was not present in the March 31, 2008 quarter. Interest expense related to the secured promissory notes was $545,000 for the three months ended March 31, 2009 as compared to $91,000 for the three months ended March 31, 2008.
Liquidity and Capital Resources
At March 31, 2008, we had $329,000 in cash and a bank overdraft of $244,000. The Company’s working capital position, defined as current assets less current liabilities, has historically been negative and was negative $18.3 million at March 31, 2009 and negative $17.3 million at December 31, 2008. Included in current liabilities at March 31, 2009 was $1.2 million due under strategic equipment agreements used to finance equipment purchases. The Company has agreements with vendors that allow for significantly longer terms than the terms for payment offered to the majority of its customers. This difference in payment terms has been a significant factor in the Company reporting negative working capital as part of its ongoing operations, and the Company expects this difference to continue.
Significant changes in cash flows from March 31, 2009 as compared to March 31, 2008:
Net cash provided by operating activities was $324,000 for the three months ended March 31, 2009 as compared to net cash used in operating activities of $549,000 million for the three months ended March 31, 2008. The most significant use of cash in operating activities was our net loss for the three months ended March 31, 2009 of approximately $1.3 million. The most significant change in cash flow from operations was the reduction in the loss for the period to 1.5 million. Significant adjustments increasing cash from operating activities in 2009 were amortization of debt discount of $834,000, an increase in accounts payable and accrued expenses from December 31, 2008 of $1.8 million and the add-back of non-cash depreciation and amortization of $102,000. The primary offset that that decreased cash provided by operating activities was an increase in accounts receivable from December 31, 2008 of 661,000.
There were no purchases of property and equipment in the three months ended March 31, 2009 and 2008.
Net cash used in financing activities for the three months ended March 31, 2009 was $166,000 as compared to cash provided by financing activities of $638,000 for the three months ended March 31, 2008. Net cash used in financing activities for the three months ended March 31, 2009 included a 318,000 bank overdraft as a use of funds and $152,000 borrowings from related parties as a source of funds. Net cash provided by financing activities for the three months ended March 31, 2008 was primarily attributable to the receipt of $1.4 million from the issuance of secured notes offset by $600,000 cancellation of debt due to loan modification. This was partially offset by payments made for capital lease obligations and to a related party.
The Company incurred net losses of $1,607,000 and $1,916,000 for the three months ended March 31, 2009 and 2008, respectively. In addition, the Company had total shareholders’ deficit of $17,413,000 and a working capital deficit of $18,673,000 as of March 31, 2009. The Company anticipates it will not have sufficient cash flows to fund its operations through fiscal 2009 without the completion of additional financing. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. The report from the Company’s independent registered public accounting firm states that there is substantial doubt about the Company’s ability to continue as a going concern. There are many claims and obligations that could ultimately cause the Company to cease operations. The report from the Company’s independent registered public accounting firm states that there is substantial doubt about the company’s ability to continue as a going concern.
As discussed in Note 9, the Company entered into agreements with Moriah Capital, L.P. (“Moriah”) under which it could borrow up to $2,400,000. At March 31, 2009, the Company had borrowed $2,400,000. These agreements include financial and other covenants that the Company needed to maintain at March 31, 2009. The availability of loan amounts under the agreements expires on April 30, 2009. The Company was not in compliance with certain covenants as of March 31, 2009, and accordingly, Moriah can call the loan immediately payable at any time. The Company has other significant matters of importance, including: other contingencies such as vendor disputes and lawsuits discussed in Note 10; obligations with respect to warrants issued in connection with the secured promissory notes discussed in Note 6, and covenant defaults on the secured notes as discussed in Note 6 that could cause an acceleration of those amount due. These matters, individually or in the aggregate, could have material adverse consequences to the Company’s operations and financial condition at any time.
Management believes that the recent losses are primarily attributable to costs related to building out and supporting a telecommunications infrastructure, and the requirement for continued expansion of the customer base and the resultant increase in revenues, in order for the Company to become profitable. The Company continues to require outside financing until such time as it can achieve positive cash flow from operations. In November and December 2007, the Company received $600,000 and in the period from January to June 2008 the Company received an additional $1,320,000 and an additional $462,500 from November 2008 to February 2009 pursuant to the sale of secured notes with individual investors for general working capital. The terms of the secured notes are 18 months maturity (beginning in June 2009) with an interest rate of 13% per annum due at the maturity date. The secured notes are secured by substantially all of the assets of the Company. The Company is also required to pay an origination fee of 3.00% and documentation fee of 2.50% of the principal amount of the secured notes at the maturity date. Prepayment of the credit facilities requires payment of interest that would have accrued through maturity, discounted by 20%, in addition to principal, accrued interest and fees. The Company can continue to sell similar secured notes up to a maximum offering of $3 million. In addition, the Company entered into a revolving credit agreement, effective on April 30, 2008 (See Note 9) and expiring on April 30, 2009, pursuant to which the Company could access funds up to $2,400,000 per Amendment no. 2 to the agreement in November 2008. The Company is in negotiations with the lender regarding an extension and an increase to the revolving credit agreement. There can be no assurance that the Company will be successful in completing this required financing or that it will continue to expand its revenue. Should the Company be unsuccessful in this financing attempt or other financings, material adverse consequences could occur should the Company be unable to secure alternate financing.
The Company will be required to obtain other financing during the next twelve months or thereafter as a result of future business developments, including any acquisitions of business assets or any shortfall of cash flows generated by future operations in meeting the Company’s ongoing cash requirements. Such financing alternatives could include selling additional equity or debt securities, obtaining long or short-term credit facilities, or selling operating assets. No assurance can be given, however, that the Company could obtain such financing on terms favorable to the Company or at all. Any sale of additional common stock or convertible equity or debt securities would result in additional dilution to the Company’s stockholders.
Credit Facilities
Revolving Credit Facility – In April 2008, the Company entered into a convertible revolving credit agreement with Moriah pursuant to which the Company may access funds up to $1.5 million. In September 2008, the Company entered into Amendment No. 1 to the agreement which increased the access to $2.0 million and in November 2008 the Company entered into Amendment No 2 to the agreement which increased the access to $2.4 million. As of March 31, 2009, the Company is permitted to borrow an amount not to exceed 100% of its eligible accounts receivable. As of March 31, 2009, the Company has borrowed $2.4 million. The Company's obligations are secured by all of the assets of the Company. The availability of loan amounts under the revolving credit agreement expires on April 30, 2009 and the Company is in active negotiations with the lender regarding terms for extending the credit agreement. Annual interest on the loans is equal to the greater of (i) the sum of (A) the Prime Rate (B) 4% or (ii) 10%, and shall be payable in arrears prior to the maturity date, on the first business day of each calendar month, and in full on April 30, 2009. (See Note 9 to the Consolidated Financial Statements for detailed discussion.)
Legal Proceedings.
See Note 10 to the Consolidated Financial Statements.
Critical Accounting Policies and the Use of Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that 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. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
We believe that the following accounting policies involve the greatest degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition.
We recognize our VoIP services revenues when services are provided, primarily on usage. Revenues derived from sales of calling cards through related distribution partners are deferred upon the sale of the cards. These deferred revenues are recognized as revenues generally when all usage of the cards occurs. We recognize revenue in the period that services are delivered and when the following criteria have been met: persuasive evidence of an arrangement exists, the fees are fixed and determinable, no significant performance obligations remain for us and collection of the related receivable is reasonably assured. Our deferred revenues consist of fees received or billed in advance of the delivery of the services or services performed in which cash receipt is not reasonably assured. This revenue is recognized when the services are provided and no significant performance obligations remain or when cash is received for previously performed services. We assess the likelihood of collection based on a number of factors, including past transaction history with the customer and the credit worthiness of the customer. Generally, we do not request collateral from our customers. If we determine that collection of revenues are not reasonably assured, we defer the recognition of revenue until the time collection becomes reasonably assured, which is generally upon receipt of cash.
Stock-Based Compensation.
Effective January 1, 2006, we adopted SFAS No. 123(R), “Share-Based Payments.” Since January 1, 2006, our stock-based compensation has been based on the balance of deferred stock-based compensation for unvested awards at January 1, 2006, using the intrinsic value as previously recorded under APB 25, and the fair value of the awards on the date of grant for awards after January 1, 2006. The adoption of SFAS No. 123(R) has resulted and will continue to result in higher amounts of stock-based compensation for awards granted after January 1, 2006 than would have been recorded if we had continued to apply the provisions of APB 25. For the options granted prior to January 1, 2006, the intrinsic value per share is being recognized as compensation expense over the applicable vesting period (which equals the service period). For those options granted January 1, 2006 and thereafter, compensation expense was determined based on the fair value of the options and is being recognized in our Consolidated Statement of Operations over the applicable vesting period (which equals the service period). We estimated the fair value of each option award on the date of grant using the Black-Scholes option-pricing model using various assumptions. Expected volatility is based on the historical volatility of a peer group of publicly traded entities. The expected term of options granted is derived from the average midpoint between vesting and the contractual term, as described in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107, “Share-Based Payment.” The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
We account for equity instruments issued to non-employees in accordance with the provisions of SFAS 123(R), “Accounting for Stock-Based Compensation,” and Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.” All transactions involving goods or services as 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.
Accounts Receivable and the Allowance for Doubtful Accounts
Accounts receivable consist of trade receivables arising in the normal course of business. We do not charge interest on our trade receivables. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We review our allowance for doubtful accounts monthly. We determine the allowance based upon historical write-off experience, payment history and by reviewing significant past due balances for individual collectibility. If estimated allowances for uncollectible accounts subsequently prove insufficient, additional allowance may be required.
Impairment of Long-Lived Assets
We assess impairment of our other long-lived assets in accordance with the provisions of SFAS 144, Accounting for the Impairment or Disposal of Long-lived Assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered by us include:
· 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. |
When we determine that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, an estimate is made of the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, an impairment loss is recognized in the amount by which the carrying amount of 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, we have not had an impairment of long-lived assets and are not aware of the existence of any indicators of impairment.
Goodwill
We record goodwill when consideration paid in a business acquisition exceeds the fair value of the net tangible assets and the identified intangible assets acquired. The Company accounts for goodwill and intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS 142 requires that goodwill and intangible assets with indefinite useful lives not be amortized, but instead be tested for impairment at least annually or whenever changes in circumstances indicate that the carrying value of the goodwill may not be recoverable. SFAS No. 142 also requires the Company to amortize intangible assets over their respective finite lives up to their estimated residual values. In December 2008, the Company determined that circumstances indicated that the full carrying value of the Company’s goodwill was not recoverable and took a charge for the impairment of goodwill. As of March 31, 2009, we are not aware of the existence of any indicators of additional impairment.
Accounting for Income Taxes
We account for income taxes using the asset and liability method in accordance with SFAS 109, Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of the assets and liabilities. We periodically review the likelihood that we will realize the value of our deferred tax assets and liabilities to determine if a valuation allowance is necessary. We have concluded that it is more likely than not that we will not have sufficient taxable income of an appropriate character within the carryforward period permitted by current law to allow for the utilization of certain of the deductible amounts generating deferred tax assets; therefore, a full valuation allowance has been established to reduce the deferred tax assets to zero at March 31, 2009 and 2008. In addition, we operate within multiple domestic taxing jurisdictions and are subject to audit in those jurisdictions. These audits can involve complex issues, which may require an extended period of time for resolution. Although we believe that our financial statements reflect a reasonable assessment of our income tax liability, it is possible that the ultimate resolution of these issues could significantly differ from our original estimates.
Net Operating Loss Carryforwards
As of March 31, 2009 and December 31, 2008, our net operating loss carryforwards for federal tax purposes were approximately $19.1 million and $17.7 million, respectively. These net operating losses occurred subsequent to our business combination in December 2006.
Contingencies and Litigation
We evaluate contingent liabilities including threatened or pending litigation in accordance with SFAS 5, “Accounting for Contingencies” and record accruals when the outcome of these matters is deemed probable and the liability is reasonably estimable. We make these assessments based on the facts and circumstances and in some instances based in part on the advice of outside legal counsel.
It is not unusual in our industry to occasionally have disagreements with vendors relating to the amounts billed for services provided. We currently have disputes with vendors that we believe did not bill certain charges correctly. While we have paid the undisputed amounts billed for these non-recurring charges based on rate information provided by these vendors, as of March 31, 2009, there is approximately $3.9 million of unresolved charges in dispute. We are in discussion with these vendors regarding these charges and may take additional action as deemed necessary against these vendors in the future as part of the dispute resolution process.
Contractual Obligations
Our major outstanding contractual obligations relate to our capital lease obligations related to purchases of fixed assets, amounts due under our strategic equipment agreement, operating lease obligations, and other contractual obligations, primarily consisting of the underlying elements of our network. There are no significant provisions in our agreements with our network partners that are likely to create, increase, or accelerate obligations due thereunder other than changes in usage fees that are directly proportional to the volume of activity in the normal course of our business operations. We have no capital lease obligations at March 31, 2009 and an extension on the operating lease for our corporate offices expires June 30, 2009. In March 2009, the Company entered into a loan and security agreement with a vendor that was a significant lessor of network equipment to the Company.
The following table reflects a summary of our contractual obligations at March 31, 2009:
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 | $ | — | $ | — | $ | — | — | — | ||||||||||||
Operating lease obligations | 66 | — | — | — | — | |||||||||||||||
Total | $ | 66 | $ | — | $ | — | $ | — | $ | — |
Recent Accounting Pronouncements
For a discussion of the impact of recently issued accounting pronouncements, see the subsection entitled "Recent Accounting Pronouncements" contained in Note 1 of the Notes to Condensed Consolidated Financial Statements under "Item 1. Financial Statements".
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Market Risks. We currently do not have significant exposure to foreign currency exchange rates as all of our sales are denominated in U.S. dollars.
Interest Rate Market Risk. Our cash is invested in bank deposits and money market funds denominated in U.S. dollars. The carrying value of our cash, restricted cash, accounts receivable, deposits, other current assets, trade accounts payable, accrued expenses, deferred revenue and customer deposits, and current portion of long-term capital lease obligations approximate fair value because of the short period of time to maturity. At March 31, 2009, the carrying value of the capital lease obligations approximate fair value as their contractual interest rates approximate market yields for similar debt instruments.
Item 4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15(e) and 15d-15(e) under the Exchange Act, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer.
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Based upon their evaluation as of the end of the period covered by this report, the Company’s Chief Executive Officer and Chief Financial Officer were not able to conclude that, the Company’s disclosure controls and procedures are effective to ensure that information required to be included in the Company’s periodic Securities and Exchange Commission filings is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Therefore, under Section 404 of the Sarbanne’s-Oxley Act of 2002, the Company must conclude that these controls and procedures are not effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended March 31, 2009 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
See Risk Factors in the Form 10-K filed by the Company on April 15, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit Number | Description of Exhibits |
3.1* | Amended and Restated Articles of Incorporation |
3.3** | Amended and Restated Bylaws |
31.1 | |
31.2 | |
32.1 | |
32.2 |
* | 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. |
In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INTERMETRO COMMUNICATIONS, INC. | ||
Dated: May 20, 2009 | By: | \s\ Charles Rice Charles Rice, Chairman of the Board, |
Chief Executive Officer, and President | ||
Dated: May 20, 2009 | By: | \s\ David Olert David Olert |
Chief Financial Officer and Director |